The Equity Index Universal Life (EIUL) policy is a popular permanent life insurance product and is often seen as the star of the life insurance market. This type of policy offers the potential for stock market gains without the risk of loss. The insurance carrier often credits the policy with the positive return of an index (usually the S&P 500), subject to a cap, which is the maximum credited rate that is not guaranteed. At the same time, a floor is set at typically 0% to limit downside risk. However, the policy’s cash value may still decrease. After the market downturn in 2008-09, many people holding Variable Universal Life (VUL) policies tied to the equity market suffered losses and sought replacement policies, with some opting for the perceived safer option of EIUL policies.
While EIUL policies have a decent place in estate planning, they can often be misunderstood, and many policies are designed with unrealistic expectations. This can be a problem for TOLI (Trust-Owned Life Insurance) trustees, who may need to ask grantors to gift more to the trust if the policy underperforms. Several factors can lead to a policy not performing as projected in sales illustrations. Illustrations may assume crediting rates that are too high, such as 8%, which is not realistic when dividends are not included. Although a guaranteed crediting rate limits the downside, cap limits restrict the policy’s upside.
TOLI trustees should be aware of these issues before accepting an EIUL policy. They should review and understand policy illustration assumptions to avoid misinterpretation.