Allianz LIRP - Historical Stress Test

September 24, 2022

Putting an Allianz IUL Under the Microscope–Historical Stress Tests

Aside from Roth accounts (Roth IRAs (including conversions) and Roth 401Ks), the only other tax-free planning tool for retirement purposes is what is commonly referred to as a Life Insurance Retirement Plan or LIRP1. The majority of the time, this refers to a maximum funded Index Universal Life (IUL) contract. Reviewing our extensive article on LIRPs, including various types, proper structure, costs, pitfalls, and a multitude of uses, will be helpful. Here, we will focus on its potentially powerful use in producing tax-free retirement distributions. 

I am fond of saying “let the math guide”. My own internal due diligence on LIRPs/IULs is more rigorous than other advisors (who barely look beyond an illustration). I have done this for years to satisfy myself, and will here share some of those summary findings. In full disclosure, I own 3 LIRPs and have experienced better than illustrated results. Does that mean that will always be the case? No, of course not.

So, in diving in, we’re going to let math dictate, not emotion or what other people "say". 

The vast majority of objections by some pundits and gurus regarding a LIRP have to do with what they perceive as high fees that, they claim, will ultimately cause the policy to perform poorly and a far cry from what the official illustration projects. Cynically, many talking heads that object to the use of a LIRP do so because their talkshow isn’t sponsored by LIRP companies, or their firm doesn’t sell them. Setting the cynicism aside, let’s examine the high fee and poor performance claim by stress testing a few Index Universal Life policies properly structured as a LIRP. In doing so, we will take the “guts” of an IUL (all fees and expenses) along with cap rates, par rates, and guaranteed floors, and create a proxy for the IUL in order to simulate and stress test the parameters that compose the IUL. This “proxy” will be referred to as a Theoretical Synthetic Asset (TSA). 

The Big Red Ball

Recently, physicist Cary Forest led a team at the University of Wisconsin-Madison that created a device called the Big Red Ball. This aptly named device simulates the magnetic field of the sun and allows scientists (and students) to learn close up how the sun’s magnetic field likely operates. Of course, it is not the sun; but is it helpful in understanding the sun and the properties of its magnetic field? Does it create insight and understanding on a meaningful level? You bet. 

This is how the TSA (a proxy) can be helpful in gaining insight into how a LIRP may have performed from a historical point of view. 

Significant legislation over the past several years has tempered insurance illustrations, limiting insurance companies from showing the potential positive effects of arbitrage when borrowing from a LIRP using an index/participating loan2. Further, many LIRP companies utilize “performance multipliers” (through the use of options on equity markets) to potentially enhance the account value and distributions (a very real potential), but illustrations are no longer allowed to show the potential positive effects of those multipliers if they are performance based. If the insurance company pays a flat credit/bonus, that can be shown. 

Illustrations, in general, are now more conservative than they have arguably ever been. While it’s hard to fault a conservative stance, these limitations also can mislead clients by not exposing the full advantages that LIRPs have the power to potentially deliver. I fully understand the intent of this limiting legislation, but, in my opinion, it is an overreach. It is important to show a range of possible outcomes. This is what our simulations attempt to do. 

An inherent weakness of insurance illustrations is that they typically show a flat rate of return (6%, for example). This is the assumed return every year. This may be a realistic average (based on cap and par rates), but will a LIRP, tied to the positive performance of an index (or indexes) give a constant, flat return? Of course not. This is another element the simulations will expose, using the raw returns of the index allocations. These returns fluctuate year to year, of course, and is an important factor to consider. This is something called “sequence of return” risk. 

To minimize internal fees, the death benefit will be dynamically managed to its lowest allowable amount under IRS guidelines.

Finally, just to add stress to the simulations, we will inflate the costs of insurance 15% above the actual current costs of the policy. This will add tens of thousands of dollars in fees over the lifetime of the client that don’t actually exist in the illustration. Additionally, we will increase the borrowing cost for loans by 10% above the actual borrowing costs (unless the borrowing cost is contractually guaranteed). 

In other words, we will use actual raw, volatile returns from equity indexes and increase the costs of the LIRP policy to add handicaps to the simulation. In general, if we have the opportunity to be more conservative by adding stress, we take it. 

Methodology of Analysis

Many times, advisors show historical returns as if a client started investing right on Jan 1st of a year and held. They tout average rates of return based on that history. But how many people do you know that only contribute on New Year’s Day? While it shows a particular possible outcome, this type of look-back is not telling the full story. If you had started on April 3rd, or September 27th, the results will be different (sometimes drastically so). 

In an effort to alleviate this, we will analyze rolling periods of time (15 years, 30 years, 40 years, etc) beginning on the 1st and 15th of every month. This creates dozens to hundreds of analyzed periods to consider, showing a vast array of potential outcomes historically. 

Using the average return of the allocation strategies chosen, we will compare the actual current illustration results to the TSA’s most recent, worst, median, and best periods analyzed. 


The Case

Let’s look at an Allianz IUL and structure it as a LIRP. This is quite a popular choice among advisors, so it makes sense we analyze it. We’ll start with what they refer to as a Standard Index choice:

  • 60 Year Old Male
  • Contribution Amount: $50,000 Years 1-5 (Ages 60-65)
  • Distributions: Years 15-30 (Ages 75-90)
  • Distribution Frequency: Monthly
  • Rolling Time Periods Analyzed: 30 Years
  • Allocation: Allianz Blended Index Option (35% DJIA, 35% US Aggregate Bond; 20% EuroStoxx 50; 10% Russell 2000)
  • Illustration Annual Rate of Return: 6.60%
  • Annual Cap: 14.25%
  • Floor: 0%
  • Performance Multiplier: N/A
  • Flat Credit/Bonus: N/A
  • Health Rating: Standard

Notice that with a Standard index allocation, there are no frills. Respectable cap rate, the floor, no multipliers. If we plug that into Allianz’s illustration software, what are the current values of the illustration?

Projected annual tax-free distributions: $29,664

This is without using any type of multiplier or flat credit/bonus. Allianz does offer a flat credit/bonus of 0.9% per year, which we can illustrate because the bonus is not based on index performance. They refer to this as the Classic index option. You notice the cap rate takes a hit to have that credit/bonus apply. However, having that credit above and beyond the return earned from the index allocation can prove profitable.

  • Illustration Annual Rate of Return: 5.56% (effective 6.46% with the 0.9% credit)
  • Annual Cap: 8.75%
  • Floor: 0%
  • Performance Multiplier: N/A
  • Flat Credit/Bonus: 0.9%

Projected annual tax-free distributions: $31,524

So, we get a bit of a boost thanks to that flat credit (Classic index option) despite the lower cap rate. 

Now, we also have an index option called the Select index option. This option provides a performance multiplier of 40% above whatever return is achieved in the policy (guaranteed), but comes with a 1% additional fee. I will say, it’s hard for me to call this a true fee because what Allianz is actually doing is taking that money and buying additional options for you in order to enhance the potential return. In other words, the company doesn’t profit from that “fee”. 

  • Illustration Annual Rate of Return: 6.60%
  • Annual Cap: 9.75%
  • Floor: 0%
  • Performance Multiplier: 40%
  • Multiplier Fee: 1%
  • Flat Credit/Bonus: N/A

Projected annual tax-free distributions: $29,076

Wait, that’s the lowest income projection despite the performance multiplier? What gives? Here’s the deal: the recent legislation mentioned before does not allow those actual guaranteed bonuses3 to be illustrated if the bonus/multiplier is based on index performance. So, the fee is taken into account for this bonus on the illustration, but not the bonus…because they aren’t allowed to show it. Would it make a big difference if they could show that multiplier bonus? You bet. 

That’s where some of the historical simulations will really come into play. Let’s now compare the distribution projections for each index option Allianz offers (Standard, Classic, and Select) using the TSA Simulations and the blended index. 

Historical Simulations

This is quite revealing. In analyzing 138 historical 30-year periods, we find in each index option, the worst rolling 30-year period performs better than the values on the illustration, despite the 15% increase in fees in the simulations. This handicap added over $20,000 in fees that do not actually exist–and yet, the historical simulations uncover significant potential value above the illustrated values. 

How much better are the results without inflating the fees? Well, a fair amount better :) 

It is insightful that the Classic index options tend to have the best official illustration numbers but underperform the other two index options when simulated despite the guaranteed credit of 0.9% per year above and beyond the positive index movement (subject to the cap). 

Grouping the data by rolling time period presents a different view.

While the Select index option (featuring a guaranteed 40% bonus in exchange for a 1% fee) performs better than other two index options, we find the Standard index option a close second (featuring a higher cap without the 1% fee). Is the 1% fee worth it for the 40% bonus? The data analyzed says yes, but it’s a close call. 

Let’s now take a look at Total Value (cumulative income plus remaining account value): 

Again, every index option, when historically simulated and stress tested, performs better than the actual illustration in the end…but not year by year, particularly with the Classic index option. This is the insight gained using historical, volatile returns rather than a flat return. Yes, values in a LIRP can go down in value despite the floor due to the fees (just like mutual funds or ETFs). This transparency is excellent. The data also reveals that while the Classic index option is the poorest performing when simulated (though still much better than the illustrations), the Classic index option illustrated values are the closest to the historically simulated values.

Is the Illustrated Income Trustworthy?

According to the historical time periods analyzed and stress test factors, yes, we can conclude that the illustration's current assumptions represent a conservative prediction. In each index option stress tested, the worst annual distribution was higher than the respective illustrations. But, what if the simulations showed a different story? What if we discovered the illustration to be overly optimistic? I would absolutely want to know that as well. 


How much more income, as a ratio, did the TSAs in each time period simulated provide over the actual illustrated values?

Viewing them as ratios helps to give us scale in the analysis. We can extrapolate in our own situations. The numbers in each simulated situation show a healthy overperformance above the illustrated potential income/distributions. The median case for each index option shows an overperofrmance of 15.78% on the low side to 78.84% on the high side. 

Did you catch that?

More than 15% overperformance on the low side, notwithstanding the fee inflation for the sake of adding stress. 

Guru's and Fees

Finally, let me return to where I started: fees. A typical mutual fund expense ratio (which does not include tax costs, brokerage costs, or trading costs) is 0.5%-0.75% per year4. Taxes tend add another 1-1.2% per year on average5 (something a LIRP/IUL does not have to deal with when set up properly), potentially bringing typical expenses for mutual fund investors to 1.5% to 1.95% per year. Yes, you can find lower and higher. 

In retirement plans, many find their total fees (record-keeping, fund fees, advisor fees, administrative fees, etc.) to be around 2.22%6, with a wide range on the low side of 0.2% to 5% on the high side. Taxes on distributions add even more cost. 

What about the fee ratios of this Allianz LIRP? For this comparison, I find it best to use the average fees compared to Total Value. 

If we let the math guide, we find competitive fee ratios even with the fees inflated for the sake of adding stress. The fee ratios would be even less had I used actual current fees. When put under the microscope, the mantra of “high fees” by “gurus” just doesn’t hold up. This was a standard health rating assumption. Should someone qualify health wise for a better rating, the fee ratios would be even better (lower). 

I won't spend much time on the qualitative attributes of a LIRP (I do that elsewhere), just what do we get for these fees inside the LIRP?

  • Floor against market loss
  • Annual lock-in of gains
  • No contribution limits
  • Creditor protection
  • Tax-free term insurance death benefit for your family
  • Ability to use the death benefit for long-term care if needed
  • Creditor protection
  • Arbitrage on distributions
  • Oh yeah, tax-free distributions 

All those features for about the same net fee ratio as any other professionally managed financial vehicle. How much of that list does an IRA or Roth IRA check off? 

I love Roth IRAs but I'm making a point. Moving on...

In The End

The purpose of this post is not to navigate which suite of index options are “better”. Each have their virtues, and clients are free to allocate among all or just one. While only the Blended Index (35% DJIA, 35% US Bond, 20% EuroStoxx 50, 10% Russell 2000) was analyzed in this post, there are other index options available as well (S&P 500, NASDAQ, Bloomberg and PIMCO indexes). In fact, when simulating an allocation of 34% Blended, 33% Bloomberg Dynamic, and 33% PIMCO Tactical within the LIRP, the results are far more impressive than those presented here, creating an even bigger divide between illustrated values and historical simulated results of the TSA as a proxy. This indicates that the results of a real world IUL/LIRP could be even better (by a large degree), but I’m just fine being conservative.

1 Some companies prefer Life Insurance in Retirement Planning or Life Insurance as Risk Planning as the long form of LIRP. Regardless, the acronym is used to describe a properly structured, fully funded (up to IRS guidelines) cash-value life insurance policy.

AG49-A limits the positive arbitrage to only 0.5% an annual basis.

The 40% bonus rate is guaranteed if the client pays the 1% fee for it. The company cannot contractually change the bonus rate later.

4 Last accessed 9-23-22 Last accessed 9-23-22