Equity indexed life illustrations can be very misleading if not carefully scrutinized. Beware of projections that show continuous cash value increases during periods when loans are taken.
When illustrating equity indexed life insurance, variable loans can be misused to show extraordinary cash value increases that are likely not realistic in any policy. Variable rate loans, available with several companies, offer the policyholder the option of maintaining loaned funds in the index account(s) while the funds are borrowed. A current variable market interest rate is charged on borrowed funds based on the Moody's Corporate Bond Yield Average. At the same time, the loaned funds continue to participate in the upward movement of the underlying index and will be credited with the actual index performance subject to the growth cap and participation rate. During periods where the underlying index is rising, variable rate loans may allow for cash value growth above and beyond the actual loan interest charged. As long as the index outperforms the Moody's Corporate Bond Yield Average, cash value will continue to grow.
The risk with variable loans is that index is flat or does not grow for a period of time and the actual index credits will be lower than the Moody's Corporate Bond Yield Average or the loan rate. In the latter case, loan interest is accruing at a faster rate than a simple fixed loan. If the trend contiues for any material time where the Moody's Corporate Bond Yield Average is greater than the underlying index, subtantial excess loan interest will accumulate. This excess loan interest will have a significant impact on the future amount of available loans and over a sustained period of time can even result in the policy lapsing causing significant tax consequences.
Variable rate loans should be carefully considered and realistic projections should be compared. The policy illustration provided by your agent is merely a sales tool and is no guarantee of future policy performance. Please make sure you have a clear understanding of the illustration and its variables before making any commitments. For more information on making the right equity index universal life policy choice see the link below.
Selecting the Right Equity Indexed Life insurance Policy
