For many years, life insurance was primarily seen as a protective tool—a way to secure your family’s financial future when the unexpected happens. Today, however, innovative strategies are transforming it into a wealth-building instrument. In this video discussion, Chris Kirkpatrick (Life190) and Caleb Guilliams (BetterWealth) explore the intricacies of Indexed Universal Life (IUL) insurance. They provide a technical breakdown of how IULs work, discuss why they’ve created the “IUL Challenge,” and share insights on how the product’s mechanics affect long-term performance.

Their conversation is a must-watch for anyone interested in understanding not only the benefits of IULs but also the pitfalls that come with changing cap rates, participation rates, and other moving parts. Let’s dive into the details.

Meet the Experts

Chris Kirkpatrick – The IUL Guru from Life190

Chris Kirkpatrick is renowned for his deep knowledge of life insurance products—especially IULs. In the video, he explains the technical mechanisms that allow an IUL to participate in a market index without directly investing your money in the market. He describes how the product uses options to capture upside potential while providing downside protection. Chris is passionate about transparency; he stresses that prospective buyers must understand the product’s levers (like cap rates, participation rates, and spread charges) to see how their money truly grows.

Caleb Guilliams – The Wealth-Building Strategist from BetterWealth

Caleb Guilliams brings a wealth-building perspective to the table. Although he acknowledges that he’s been labeled as “biased” or even as an IUL critic in the past, Caleb clarifies that his challenge is not with the concept of IUL itself but with the way it’s sold and represented. He points out that many of the illustrations do not match real-world performance. Caleb emphasizes that if used properly, life insurance—particularly IUL—can be a powerful tool in your financial arsenal, offering tax-deferred growth, liquidity, and long-term savings potential.

Understanding Indexed Universal Life (IUL) Insurance

What Is an IUL?

An Indexed Universal Life insurance policy is a type of permanent life insurance that provides a death benefit along with a cash value component. Unlike term life insurance—which is designed solely for protection—an IUL has an investment element. The cash value grows based on a formula tied to a market index (commonly the S&P 500), yet your money is not directly invested in the market. Instead, the insurance company uses an “options budget” to capture a portion of the index’s gains while protecting you from market downturns.

The Dual Nature: Protection and Asset Building

Both Chris and Caleb emphasize that the real value of an IUL comes from its dual purpose:

• Protection: The death benefit ensures that your loved ones are financially secure.
• Asset Building: The cash value component accumulates over time on a tax-deferred basis. This cash value can later be accessed through policy loans or withdrawals, making the IUL a flexible savings vehicle.

For many, this combination makes IULs an attractive alternative to traditional savings or investment vehicles—if only the product were sold with more transparency.

The Mechanics Behind IUL: Options, Cap Rates, and More

One of the most technical—and often misunderstood—aspects of IULs is how they capture market gains. Chris breaks it down in clear terms:

The Role of the Options Budget

• Options Budget Creation:
  Imagine your policy has a cash value of $10,000. If the general fund (the pool of money that the insurer uses to manage your policy’s interest crediting) earns, say, 4%, then your “options budget” is $400 (4% of $10,000). This $400 is what the insurance company uses to buy call options.
• Call Options to Capture Upside:
  The company uses this budget to buy a call option on an index. If the index rises, the option “in the money” will yield a gain up to a predetermined cap. If the index doesn’t perform, the option expires worthless—but you’re protected by a floor (usually 0%), meaning you won’t lose your principal.

Understanding Cap Rates and Participation Rates

• Cap Rate:
  The cap rate is the maximum credited interest rate you can earn from the index. For example, if your policy has a 10% cap rate, even if the index gains 15%, you won’t earn more than 10% on your cash value.
  – Historically, cap rates were as high as 16.5% when IULs first became popular in 2009.
  – Over time, however, these cap rates have been reduced—by 2022, new policies typically illustrate cap rates between 9% and 10%.
• Participation Rate (Par Rate):
  The participation rate determines the percentage of the index gain that is credited to your policy. A 100% participation rate means you receive 100% of the gains (up to the cap). Some policies may offer a participation rate above 100% (like 125%), while others may lower it, which effectively reduces the credited interest.

Chris explains that these levers—cap rate, participation rate, and spread charges (additional fees that reduce the credited interest)—are what determine how well an IUL performs. Unfortunately, these values can be adjusted over time by the insurance company, sometimes resulting in lower returns than what was originally illustrated.

The IUL Challenge: A Critical Look at Performance

What Is the IUL Challenge?

In the video, Chris Kirkpatrick (who is clearly passionate about transparency) mentions the “IUL Challenge.” He explains that despite some of the hype around high-performing IUL illustrations during the last bull run, most real-world policies have underperformed relative to their original illustrations. For example:

• Historical Cap Rate Shifts:
  When IULs were first sold in 2009, they could be illustrated with cap rates as high as 16.5%. Nowadays, new business is being sold with cap rates between 9% and 10%.
• Generational Differences:
  Older policies (Generation 1 IULs) might have had higher cap rates when sold but are later “adjusted” down, while new policies are sold with lower cap rates. This discrepancy can lead to significantly different performance between old and new business.

The speaker’s frustration is clear: while the product is marketed with impressive numbers initially, the reality is that the variables—cap rate, participation rate, spread charges, and cost of insurance—can be adjusted in ways that reduce performance. He even refers to it as “criminal” and “dishonest” that new business is marketed with higher numbers while older policies are quietly adjusted downward.

The Impact of Market Conditions

Two key market factors affect IUL performance:

1. Interest Rates:
   The interest rates earned by the general fund (used to establish the options budget) have fallen over the years. Lower interest rates mean a smaller options budget, which in turn limits the upside potential.
2. Volatility and Options Cost:
   Higher market volatility increases the cost of options. When the cost of options goes up, it eats into the potential gains credited to the policy.

The combined effect of these factors is that even during periods of strong market performance, policyholders may not capture the full upside due to lower cap rates and higher options costs.

Transparency Is Key

Both Chris and Caleb stress that the multitude of moving parts in an IUL is something that policyholders have little to no control over. They advise that understanding these mechanics is crucial before purchasing an IUL. Advisors and consumers alike need to demand transparency regarding:

• How cap rates and participation rates might change over time.
• The impact of spread charges and cost of insurance on the policy’s cash value.
• The real-world performance versus the illustrated projections.

Integrating IUL into Your Financial Strategy

Despite the challenges, both speakers agree that IUL can be a valuable tool if used correctly. Here are some practical strategies to consider:

1. Define Your Goals

Before committing to an IUL policy, ask yourself:

• Protection vs. Growth:
  Is your primary need for family protection, or are you also looking to build long-term wealth?
• Risk Tolerance:
  Can you handle the potential variability in returns if cap rates or participation rates change?
• Legacy Planning:
  Would a tax-deferred, flexible savings component support your long-term financial goals?

2. Educate Yourself on the Mechanics

Take the time to learn about the key variables in an IUL:

• Options Budget and Call Options: Understand how your cash value is used to buy options.
• Cap Rates and Participation Rates: Know what these numbers mean and how they affect your returns.
• Spread Charges and Cost of Insurance: Look beyond the headline figures to see what fees may be deducted over time.

3. Consult with Professionals

Given the complexity of IUL products, professional guidance is essential:

• Financial Advisors: Work with advisors who have deep knowledge of IUL mechanics and can help you analyze product illustrations.
• Insurance Specialists: Consult experts who can explain the nuances of policy design and help ensure that the IUL fits into your broader financial plan.
• Estate Planners and Tax Professionals: Since IULs can also be used as part of a tax-efficient wealth transfer strategy, it’s wise to coordinate with professionals in these fields.

4. Consider a Hybrid Approach

For many consumers, a hybrid strategy—combining term life insurance for straightforward protection with a permanent product like IUL for asset building—may offer the best of both worlds. This approach allows you to:

• Secure low-cost, reliable protection.
• Build cash value on the side that can be accessed in the future.

5. Regularly Review Your Policy

Your financial needs and market conditions will change over time. It’s important to:

• Monitor Policy Performance: Keep an eye on how cap rates and other variables are adjusted.
• Stay Informed: Regularly review policy statements and compare them with initial illustrations.
• Adjust if Necessary: Work with your advisor to make changes if the product’s performance is not meeting your expectations.

Conclusion: Embrace Transparency and Informed Decision-Making

The discussion between Chris Kirkpatrick and Caleb Guilliams provides an in-depth look at the inner workings of Indexed Universal Life insurance. While IULs offer the enticing dual benefits of protection and wealth-building through tax-deferred growth, the reality is that many of the product’s variables—such as cap rates, participation rates, and spread charges—can be adjusted in ways that may limit performance over time.

The “IUL Challenge” highlighted in the video underscores a critical message: potential buyers must look beyond flashy illustrations and high initial cap rates. They need to understand the many moving parts that can affect their policy’s performance and demand full transparency from insurers.

At the same time, when structured properly and integrated into a well-diversified financial strategy, IUL can serve as a powerful asset. Its ability to offer downside protection while capturing some of the market’s upside—albeit within predetermined limits—makes it an attractive option for those looking to build a legacy over the long term.

Ultimately, whether you are drawn to IUL as a savings mechanism, a tax-advantaged investment, or simply as a means to provide lifelong protection for your family, the key is to be informed. Take the time to educate yourself, consult with professionals, and continuously review your policy. In doing so, you’ll be in a far better position to harness the full potential of life insurance as a dynamic and flexible tool in your financial portfolio.

If you found these insights helpful, feel free to share your thoughts in the comments below. For more expert advice on life insurance and innovative wealth-building strategies, be sure to subscribe to our blog and follow future updates from industry leaders like Chris Kirkpatrick and Caleb Guilliams.

By rethinking traditional life insurance and understanding the detailed mechanics of products like IUL, you can transform what was once seen solely as a safety net into a robust asset that supports long-term financial growth and legacy planning.