In what I call “The Life Insurance Efficient Frontier”, the two extremes on either side are Whole Life insurance and Variable Universal Life (VUL).

At one extreme we have Whole Life with all of its rock-solid guarantees. The carrier absorbs all the risk and promises the policyholder steady guaranteed growth with the opportunity of earning additional non-guaranteed dividends.

Click here to understand how Whole Life promises guaranteed growth

At the other extreme, we have Variable Universal Life (VUL), in which the client bears all the market risk needed to grow their policy’s cash value. The client also bears the additional expense risk if the insurance company happened to misprice their product, or if a market crash erases a big chunk of cash value needed to support the policy.

The combination of a market crash resulting in increased policy charges will further erode your cash value, which can lead to a vicious downward spiral inside a VUL product.

Enter Indexed Universal Life to fill the void in between this huge divide.

In the late 1990’s the insurance industry manufactured a way where the client could choose on an annual basis to forego their right to a steady fixed interest rate in hopes of participating in double-digit market returns with no downside market risk.

Indexed Universal Life was born, but was hardly a big seller yet.

Click here to learn the mechanics behind how IUL carriers offer this unique growth strategy.

Throughout the “Dot-Com Era” the S&P 500 more than tripled in value between 1995-1999 and the Nasdaq quintupled during the same period. The pure uncapped participation offered by VUL offered seemed to be a much more attractive insurance choice than IUL.

“Why cap your upside in the teens when markets increase by 20%-30% every year?”

“Who needs a 0% floor? Why when the market only goes up?”

Once the Tech-Bubble started popping in 2000 followed by the terrorist attacks on September 11, 2001, we saw every major market index lose somewhere around half of its value or more.

Indexed Universal Life suddenly looked a lot more appealing once the risk of major market losses came front and center again. Throughout the mid-2000s IUL sales started steadily increasing. In 2008-2009 the Great Recession delivered a second knock-out blow to markets (as well as investor complacency).

VUL fell firmly out of favor, and IUL quickly became the product of choice for those looking to use life insurance for retirement and cash value accumulation.

Click here to thoroughly understand all the pros and cons of Indexed Universal Life insurance.

All of this was fine and good until we entered a multi-year environment with historically low yields.

Even the top IUL carriers were forced to keep scaling back their fixed-crediting rates as well as the caps on their different indexed crediting strategies. IUL’s caps are created with S&P 500 Index options purchased by the insurance company’s bond yield. Therefore, you will find a direct relationship between prevailing bond yields and IUL caps. A few carriers have even decided to cover the shortfall by raising their internal costs of insurance (even though people are living longer due to advances in modern medicine).

To Pacific Life’s credit, they have actually gone the other way and passed on 125 different pricing improvements to Universal Life policyholders since 1985.

Click here to read more details from Pacific Life about these 125 different pricing improvements and the savings they passed on to consumers.

Pacific Life’s “What’s Good for the Goose is Good for the Gander” Stance for Policyholders

Unlike many carriers, Pacific Life staunchly maintains a “what’s good for the goose is good for the gander” philosophy when it comes to offering the exact same caps and indexed crediting strategies for both old and new products. This is a rarity in our industry.

The truth is, all permanent life policies are “trust me” products to some degree.

• Sure, Whole Life insurance has a guaranteed premium supporting a guaranteed death benefit. But if robust dividends aren’t paid regularly, then Whole Life can hardly function as an income vehicle in retirement.
• Traditional Indexed Universal Life insurance products have contract language stating they can lower their IUL caps all the way down to 4% and triple their internal cost structure with the stroke of a pen.

Click here to understand how a policyholder can better manage and offset this risk if any IUL carrier decides to increase their charges and cost structure within an Indexed Universal Life policy.

Keep in mind that if any carrier did either of the above, they would essentially sign the death warrant for the entire life insurance industry. Other insurance companies would likely step in to absorb a company contemplating this kind of radical move, as has been done in the past.

Pacific Life has a consistent history of doing the right thing for their policyholders. This certainly makes it easier to trust them over some of the other companies offering indexed universal life. The fact that they are one of the largest companies offering Indexed Universal Life and also very highly rated makes it even easier. The current (and relatively young) management regime has adamantly expressed their continued commitment to policyholders and mutuality.

Click here to learn the difference between mutual vs. stock insurance companies.

If for some bizarre reason Pacific Life’s honorable philosophy were to change in the future, we will be discussing the contractual safeguards available to PDX policyholders in this article below.

In this low-yield environment, Pacific Life had a real dilemma on their hands. They knew that the other IUL carriers offering significantly higher caps were defying the math. Pacific Life did not want to go down that road at the expense of compromising their long-term commitment to equal treatment to their entire block of business.

So, they lowered their caps identically on all their IUL policies including the new offerings.

To be honest, Pacific Life’s Indexed Universal Life product fell out of favor for a couple of years until…

Enter the Pacific Discovery Xelerator (PDX).

The PDX’s special sauce (and source of all the criticism) is its mysterious multiplier effect known as the “Performance Factor.” It can multiply any of the Pacific Discover Xelerator’s index crediting strategies well beyond their stated caps. This multiplier effect, however, comes with substantial additional charges that exceed those of every other IUL on the market.

Obviously, when multiple down-market years occur in a row, these extra charges can erode your cash value more so than other Indexed Universal Life products. That is why we placed the PDX to the right of IUL but left of VUL on the “risk axis” below.

However, PDX’s 0% floor plus indexed crediting with a multiplier effect doesn’t put it that far off from VUL on the “return axis” above. One could even argue that the Pacific Discovery Xelerator may outperform VUL in good years if the Performance Factor kicked in while choosing either of PDX’s uncapped indexed strategies.

In this schematic above we are assuming that the policyowner would take a more diversified approach to blending different indexed crediting strategies (including the fixed-interest crediting strategy), which is why it sits below VUL on the return axis.

Pacific Life’s PDX Has Different Indexed Crediting Strategies (Capped and Uncapped) to Choose From

Every single one of these 5 indexed crediting strategies described below have the traditional guaranteed 0% floor like most indexed universal life policies on the market today.

Pacific Life has a 2-year S&P 500 strategy with a 30% cap. They also have a one of a kind 5-Year uncapped strategy that tracks the S&P 500 with a 110% participation rate. That means, whatever growth the S&P 500 index gets over the course of 5 years will be multiplied by 1.1 and applied to your cash value allocated to this strategy.

(Note: This hypothetical 20-year backtest below represents annualizing the two different multi-year indexed crediting strategies described above with no Performance Factor applied.)

Remember, any one of Pacific Life’s indexed crediting strategies can be multiplied to return well beyond their stated caps by the Performance Factor.

Pacific Life also has a number of different 1-year S&P 500 strategies with varying caps and participation rates.  Best of all there is a 1-year uncapped S&P 500 strategy where you can track the S&P 500’s growth above the first 5%. For international exposure, there is also a capped 1-year strategy that blends the performance from the Euro Stoxx, Hang-Sang, and Emerging Markets indexes.

(Note: This hypothetical 20-year backtest below represents the different crediting percentages that would have been applied given Pacific Life’s current 1-year caps, floors, and participation rates with no Performance Factor applied.)

Keep in mind that with the Pacific Discovery Xelerator you can mix and match any combination of these strategies together. You also have the ability to rebalance and reallocate at the completion of each indexed segment.

So What’s With This Whole “Performance Factor” Thing Anyway?

After reading from critical online sources that the PDX was the worst kind of “trust me” product relying on some sort of mysterious “black box,” I knew there must be more to the story, and that I needed to learn more. Thankfully, having placed sizable cases with Pacific Life in the past, they granted me some privileged meetings with executives and product design specialists to help me understand what was really going on with the new Pacific Discovery Xelerator.

You can click here for a link to Pacific Life’s explanation of how the Performance Factor applies additional crediting to a PDX policy.

Frankly, this piece alone didn’t get me to a place of full understanding with the product. Below, I drill even deeper into the guts of the so-called “black box” than even Pacific Life’s marketing piece does.

However, one of my unique gifts that God has given me is to make complex concepts simple to understand.

So before we head into the weeds with algebraic formulas, this schematic below is how I was able to mentally simplify the Pacific Discovery Xelerator’s Performance Factor and wrap my head around it. Let’s see if my “chicken-scratch” can help your comprehension.

All the other top IUL carriers are competing vertically, meaning who has the highest cap?

Some are at 11%, 12%, 13%, even 14% (as of March 2018). Pacific Life knew that given the state of bond yields, they could not support that high of a cap for their entire book of business.

So what did Pacific Life decide to do since they had one of the lower 1-year S&P 500 caps in the industry?

They thought outside the box and decided to add value horizontally instead of vertically. Rather than offer one singular silo of indexed crediting, Pacific Life decided to multiply the number of silos that a client could earn indexed crediting with.

The extra silos depicted in blue represent additional indexed crediting potential from the Performance Factor

Rao Garuda, one of my friends and colleagues in the business has a saying that I love:

“It’s not too good to be true, but it’s too good to be FREE.”

Hence, the Pacific Discovery Xelerator’s extra charges.

Keep in mind that just because we used the simple 1-year S&P 500 cap as an example, the Performance Factor can multiply whichever of Pacific Life’s indexed crediting options you choose in your PDX policy.

So if you choose the 2-year S&P 500 indexed crediting strategy capped at 30%, you have the opportunity to earn multiple silos of crediting up to 30% over the 2-years. If you choose either the 1-year uncapped S&P 500 option or the 5-year uncapped S&P 500 option, there’s no telling how much indexed crediting you can earn, especially during a jolting bounce-back rally following a market crash.

Unfortunately, as agents we can’t even illustrate the true power of this performance factor due to the constraints of Actuarial Guideline XLIX (aka AG-49). Otherwise, we could show you how the PDX can really benefit from market volatility.

Click here to learn more about the uniform standards for crediting rates that all IUL carriers and agents must comply with.

How Does PDX’s Performance Factor Really Work?

Pacific Life has a patent pending on their Performance Factor (P.F.), so they are reluctant to reveal the exact details of their special sauce. However, I was told by multiple sources that the crux of the mysterious black box works like this:

“It was my understanding there would be no math.” – Chevy Chase impersonating Gerald Ford on SNL

All kidding aside, with a 9^th grade education we can see the two most meaningful factors that kick-start the multiplier effect of the Performance Factor are:

• When your PF charges increase
• When your cash value decreases

Apparently, Pacific Life purposely designed the Performance Factor to really kick in after down-market years because they don’t want your insurance policy to implode. They understand that the S&P 500 index has gone up much more often than it has gone down, and after deep market crashes, there have historically been very steep rebound rallies.

Designing their PDX Performance Factor in this way gives your policy cash value the opportunity to overcome (and then some) the additional Performance Factor charges experienced in down years.

If you believe that markets will continue to have bucking-bronco volatility like they have over the last 81 years through depressions, recessions, world wars, hyperinflation, deflation, etc.. then the Pacific Discovery Xelerator may be the ideal vehicle to channel that volatility into tax-exempt retirement income.

Click here to see a telling 81-year study of the S&P Index movements from a third party financial company.

Since you’re essentially paying additional charges for these extra silos of options (which is not meant to be a profit center for them), Pacific Life wants the Performance Factor to be a winning proposition to keep your policy alive and kicking. That way, your cash value can cover the ongoing cost of insurance lasting a lifetime. That is how Pacific Life earns their keep.

Although the Performance Factor’s exact details remain confidential for the time being, hopefully this simplified explanation removes some of the mystery and makes it more of a “light gray box.”

Ok, What are my 5 Safeguards or Exit Strategies if PDX’s Performance Factor Doesn’t Work Out How I’d Hoped?

This was the $64,000 question for me. I sure liked the sound of the sizzle, but I needed to know more about the steak.

Thankfully, Pacific Life Regional Vice President Evan Ohs and Field Representative Elijah Robles gracefully took the flack as 12 elite agents from my study group skeptically lobbed a barrage of loaded questions at them.

Here’s what we learned:

 1. The Pacific Discovery Xelerator product has a little-known enhanced termination credit.  This credit is just too darn favorable if Pacific Life’s desire was to extract all your premiums and leave you without a policy someday. This is a free provision that is automatically installed on every PDX policy. It’s a guarantee that contractually activates if your policy was about to lapse or if you choose to surrender it voluntarily at any time for any reason.

Here’s how the PDX product’s Termination Credit Works:

Regardless of the actual charges you’ve paid in your policy or how much crediting you’ve actually received, Pacific Life is always simultaneously running a hypothetical scenario right alongside your policy called the “Alternate Accumulated Value.”

At any point during your policy’s lifespan, your cash surrender value will always be the greater of your policy’s “actual cash value” or this “alternate accumulated value.” When calculating the Alternate Accumulated Value, NONE of the additional Performance Factor charges are ever assessed and Pacific Life hypothetically credits your cash value with steady 2% interest every year in this reduced-fee scenario.

Below is an example of the PDX earning 0% with its normal charges on an age 48 male with a standard non-tobacco rating (which is the fourth from the top).

Notice the crossover at year 3 between the actual cash value and the alternate accumulated value you would be entitled to if you were to terminate the policy. This policyholder could surrender the policy for over 92% of your premiums paid in 15 years when run at 0%.

These economics are very similar to a Whole Life policy run without dividends.

It is almost the same as buying term while building an emergency fund or saving to buy a house. Only this has the opportunity to grow (a lot actually), not to mention it may completely pay off a mortgage if you die.

Keep in mind that the only non-guaranteed element in this illustration is the charges. All companies that offer IUL reserve their right to increase their charges by more than triple. However, Pacific Life has never raised their charges above what was illustrated, nor have any of the top IUL carriers which are mainly mutual companies.

Click here to read how bad things would likely be in the world for your policy to simultaneously earn 0% and have the company raise the charges to level illustrated in the guaranteed column.

Regardless, this contractual “back-stop” that removes the PDX’s controversial extra charges and promises at least some sort of modest crediting made me feel a lot more comfortable about the Pacific Discovery Xelerator.

2. Every Pacific Life’s policy has an 8th-year exchange provision. This option allows you to do a tax-neutral no-commission exchange from whatever product you have to whatever product Pacific Life offers at that time. This option is only available in year 8, but I am not aware of any other company that has a provision like this.

3. I highly recommend that anyone who buys the PDX add Pacific Life’s very low cost “No-Lapse Guarantee” rider to the policy. Even if a guaranteed death benefit is not the reason you’re getting the policy, you will see that it’s a very small price to pay for an additional contractual safeguard.Below, is the same illustration side by side with and without the No-Lapse Guarantee Rider (NLG):

Notice how little the difference is in cash value and income between the exact same policy on a male age 48 with a standard rating when adding the Pacific Discovery Xelerator’s No-Lapse Guarantee rider.

Elijah said it best. The No-Lapse Guarantee rider allows you to “get off the mat” if for some reason the S&P 500 got pounded for several consecutive years early on in the life of the policy.” Needless to say, if the S&P 500 experiences an unprecedented string of five or more years of annual losses, we all will probably have much bigger problems than our paper assets.

However, safeguards are good, especially when they’re contractual.

Obviously having only a guaranteed death benefit with no cash value is far from ideal. If, however, for some crazy reason all you had was that guarantee, you could at least spend other retirement assets more aggressively while you’re alive knowing that the contractual death benefit would fill up the bucket for your surviving spouse.

Note: The No-Lapse Guarantee rider is dynamic based on age, health rating, premium amount, and length. Unlike with a traditional No-Lapse Guarantee UL policy, with PDX you can skip a premium and make it up to maintain the integrity of the rider. 

4. Allocating any portion of your cash value to the fixed-interest account rebates the additional charges for the Performance Factor back to your PDX policy as a dollar for dollar credit. So, if you didn’t want to try to shoot the moon with any of Pacific Life’s domestic or international indexed strategies in some years, you could park all or part of your cash value into their fixed-interest account. That pro-rata amount of the Performance Factor charges would then be credited back to your cash value.

5. Pacific Life offers something called an Overloan Protection RIder. This rider is meant to protect policyholders from their IUL policies imploding if their retirement loans (that they don’t intend to pay back) overtake the policy equity later in life. When this happened in the past, policyholders were left with a big tax bill once their policy lapsed from taking too much retirement income. This put egg on the face of the entire life insurance industry. Most of the top IUL carriers today have installed this type of feature inside their Indexed Universal Life products.

An Overloan Protection Rider essentially locks down what little cash value remains right before it gets eclipsed by the swelling loan interest. The insurance carrier also locks down a minimal amount of death benefit for your heirs to preserve the tax sanctuary of your lifetime distributions from the policy.

You won’t get any more income, and you can’t touch the cash, but your heirs will still get a nominal death benefit that ensures no tax bill for the income you took over your basis in the policy.

Note: Certain loan and withdrawal protocol needs to be followed within the PDX policy in order to qualify for the Overloan Protection Rider. 

Clarification on Pacific Life’s 2 Distinct Loan Options

Some critical pieces you’ll find on the internet about the PDX accurately state that Pacific Life does NOT have a locked loan that still allows you to fully participate in their 1-year indexed crediting strategies.

However, it is worth mentioning that Pacific Life at least has a guaranteed 7.5% cap on their participating loan. As of March 2018, their participating loan rate was 4.65% giving you plenty of room to achieve positive arbitrage even in today’s low cap environment.

Click here to learn how life insurance policy loans work and how they differ from traditional debt.

Also, Pacific Life’s fixed-interest loan is the lowest in the industry locked at 2.25% for the life of the policy. If you take a fixed loan during your first 5 policy years, the cash value backing the loans gets guaranteed crediting of 2%. This equates to a 0.25% net cost to borrow.

From policy year 6 and on, this loan becomes a wash loan. That means they will charge you 2.25% to borrow against your cash value, and simultaneously credit your cash value with…you guessed it – 2.25%. (Note: this spread between the crediting and loan rate is guaranteed to be never more than 0.25%).

With other IUL products, especially those with high caps and low participating loan rates locked in the 5%-6% range, it may be worth attempting to achieve long-term positive arbitrage using participating loans for retirement income. However, due to the extra charges of the Performance Factor coupled with a top-end participating loan rate of 7.5%, you should proceed with caution when trying to achieve the same effect with the PDX.

Although the Overloan Protection Rider may protect your policy from lapsing, a bad sequence of returns in retirement could reduce the amount of total income generated by the Pacific Discovery Xelerator.

Thankfully, Pacific Life is one of the top IUL carriers that allows you to essentially refinance your policy loan between the fixed and participating loans each year on the loan anniversary. That way, if you do choose to be tactical and try to capitalize off of an impending bull run using the PDX’s participating loan, you can easily switch it back to the more prudent fixed loan if the rally slows or the participating loan rate becomes too unattractive.

We have found in many situations that illustrations using the Pacific Discovery Xelerator’s wash loan still produces substantially more ongoing retirement income than other top performing IUL policies. In fact, the PDX often wins using their fixed loan against other companies’ participating loans (even when the participating loans are illustrated showing an ongoing 1% percent positive arbitrage on loaned money throughout retirement).

Three Potential Ways to maximize the Performance Factor inside the new Pacific Discovery Xelerator product

Now that you understand the bones of how Pacific Life’s proprietary Performance Factor formula works, let’s strategize on how to maximize its overall effect on cash value growth and future retirement distributions.

 1. Use an increasing death benefit. Pacific Life uses a higher schedule of charges at the onset of the policy if you elect an increasing death benefit. Even if you level out the death benefit as quickly as year 2, the higher schedule of charges remains in place. As you saw in the formula above, policy charges are the numerator of the formula which means that higher charges increase the Performance Factor. Obviously, you need to test and measure this on a case by case basis, but we found starting with an increasing death benefit to be a consistent way to increase illustrated retirement income.

 2. Take withdrawals rather than policy loans when optimal in retirement. With many of the top IUL carriers, their policies illustrate better when all retirement distributions are illustrated as policy loans rather than withdrawals. This is because you continue earning compounding on your entire cash value balance including the amount you borrow against. However, with the added variable of PDX’s Performance Factor, it appears that withdrawals may juice-up the Performance Factor more than the illustrated long-term positive arbitrage from the participating loan.

Remember, your policy’s cash value is in the denominator of the Performance Factor formula. So when cash value goes down, then a smaller number on the bottom of that formula should produce a greater multiplier effect that year.

Conversely, when you take any kind of policy loan, no cash value actually leaves your policy even though you got a cash distribution from the insurance company. Since your cash value technically doesn’t go down with a policy loan, this would obviously not influence the Performance Factor.

Pro-Tip: Pacific Life’s software cannot illustrate monthly income withdrawals from their IUL policies until the 15 policy year. So even though withdrawals are available sooner, you must illustrate policy loans until year 15. Once you have withdrawn your basis, policy loans again should be used if you want your retirement distribution to be tax-exempt.

 3. Choose Uncapped Options after Bad Years. There may be an argument for having some portion of your cash value allocated to one of Pacific Life’s 1-year uncapped option in all years. However, there’s an incredibly strong argument for tactically allocating even more to the 1-year uncapped option after:

• Corrections
• Recessions
• Dips
• Blips
• and Crashes.

Here’s why:

You now know that the when your cash value decreases the Performance Factor is more likely to multiply whatever crediting you get the following year.

Take a look at the most volatile periods we can find in that 81-year period tracking the S&P 500 in the column titled “Annual Return %.”

Right next to the raw returns of the S&P is a column titled “Limited Return %.” What’s being represented there is the hypothetical back-tested crediting of Pacific Life’s 1-year uncapped S&P 500 strategy where you earn 0% when the S&P 500 earns 5% or less in any given year. Anything over 5% growth in the S&P 500 index gets credited to your cash value at the end of the year.

Take a gander at these actual raw indexed returns that can no longer be run through Pacific Life’s illustration software.

Notice what often happens after bad spells in the S&P 500 index.

Imagine if you could get those returns multiplied…on a 6-figure cash value account.

Back-tested average of 7.05% for Pacific Life’s 1-Year Uncapped S&P 500 Strategy after the 5% threshold from 1937-1950

Back-tested average of 6.19% for Pacific Life’s 1-Year Uncapped S&P 500 Strategy after the 5% Threshold from 1962-1975

Back-tested average of 6.66% for Pacific Life’s 1-Year Uncapped S&P 500 Strategy after the 5% Threshold from 2000-2013

Prior to AG-49, an agent could illustrate actual S&P 500 return sequences through Pacific Life’s illustration software. That means you could apply these types of historical return sequences against the projected charges based on the exact PDX policy illustration you were considering.

I’m not sure why that was deemed bad for consumers, but we can no longer do that. We’re relegated to showing you a linear 6.21 or worse on their illustration software. Everyone knows that past performance is no promise of future returns, but I always thought it was more compliant to show the effect of good and bad return sequences during accumulation years and distribution years.

Thankfully, we’re still allowed to think critically, and so are you.

We spent a lot of this article discussing what happens if things go WRONG with the PDX. Take a moment to think of what could go RIGHT.

Review those sequence of returns above and think about how those uncapped indexed returns could get multiplied by the Performance Factor and translate to spurts of robust growth inside your cash value account.

And remember, these are the three worst periods I can find in the S&P 500’s last 81-years, and they’re not that bad (even without any Performance Factor).

What if we looked at the 3 best times?

No one knows exactly how or when, but I think we can all agree that will markets go up and go down…sometimes violently. When you can soften the blow of down-years with zeroes (minus charges), and you can sometimes multiply up-years, this may prove to be a winning proposition with less volatility than the actual market.

Most people usually have enough raw market exposure in their 401(k) or brokerage accounts anyway.