How to evaluate IUL's values against its costs?
The best metric for this evaluation is to calculate the IUL's Internal Rate of Return (IRR) - it calculates the product's return after subtracting all the costs.
Let's look at the best case and worse case scenarios, respectively.
The best case scenario
If the insured dies very young, this IUL product would have the best IRR, that's because the power of life insurance is at play here. For example, if the insured dies at year 2, the IRR would be 330% ($277,953 death benefit to beneficiaries).
The worst case scenario
The worst case scenario happens if the insured dies very old. Let's see if the insured dies at age 100 - after putting in $200,000 premiums.
He would have taken out tax-free policy loans of $629,930 ($17,998 times 35 years). The IRR would be 4.56% or a taxable equivalent of 6.81% assuming he was in the 33% tax bracket.
Where are the Costs?
We assumed 5% return for this policy, why IRR is only 4.56%? That's because all the costs.
Given the average mutual fund expense ratio of 1%+, the expense of 0.44% is not really high.
Furthermore, this 0.44% expense buys the life insurance over the insured's lifetime, so if he should die young in the early years, his heirs would get multiples of what he puts in, i.e. leverage. If he dies old, the leverage has burnt off, but the 0.44% expense is still not too bad given the expenses in other investment options.
Another way to look at IUL's value
Another way to look at an IUL's value is to check its IRRs under cash surrender values in year 20, 30, etc. If the difference between the IRR and the illustrated rate is less than 1%, it's still a not too bad option when compared with other investment choices.