Does Kai-Zen Work When Interest Rates are Rising?

People have been asking if the Kai-Zen insurance strategy (indexed universal life insurance + leverage) will work when interest rates are rising.

Rising interest rates is one of the risks with this type of leveraged wealth-building strategy. We will cover how interest rates affect investments, what banks look for and how Kai-Zen stands up in stress tests.

Quick Summary

Kai-Zen allows high-income earners to use premium financing to augment their more traditional retirement plans while minimizing substantial tax ramifications. Rising interest rates in the early years of the policy loans can affect the future income from the cash value.

However, NIW Corp. (creator of Kai-Zen) designed the Kai-Zen strategy to withstand the use of leverage in high-interest environments without destroying the cash accumulation.

What Rising Interest Rates Mean for Kai-Zen [VIDEO]

Watch this video to get an in-depth look at how Kai-Zen can protect your money even during a period of rising interest rates.

Kai-Zen Overview

Kai-Zen adds leverage (3 to 1) to your dollars, so you have much more money going into a tax-free retirement vehicle. 

In brief terms, the bank pays 75% of the premiums over the first ten years. In year 15, the bank is paid back from the cash value of the life insurance contract. The policy is the sole collateral for this loan.

You do not need to personally guarantee this loan nor complete any loan documents.

After the bank is paid back, you are in control of this policy. You then have access to a much larger bucket of tax-free dollars than you would without using leverage. 

This policy is also protected from stock market risk. You will not lose principal from stock market losses. 

In summary, you get your contribution increased 3x, which will provide you with 60% to 100% more tax-free retirement income. This money is also protected from stock market risk. A tax-free death benefit and living benefits are included if something unexpected happens.

Read an in-depth explanation of Kai-Zen insurance here.

What Banks Look for in an Investment

Banks are fussy about getting a good return on their investment. Especially after the housing market disaster of ‘08, they have more regulations and stricter policies about what products make a good investment and who can qualify for them. 

Is Kai-zen a good investment?

First, banks look for probabilty of repayment. How secure is the investment? 

Kai-Zen offers the banks a secure investment because the loan repayment comes from the product’s cash value, not your pocket. 

There is always enough cash in the policy to reimburse the bank. Therefore, the bank doesn’t have to worry about a customer losing their job or something else happening to affect repayment of the loan.

Second, banks look for easy valuation

There are some great financial products out there, but you need to be one of the brightest mathematical minds in the world to understand them. Banks don’t like that. 

Instead, Kai-Zen works with established lenders who already have good working relationships. They understand how the product works and can base their valuation on the same prospectus you get when you first get a Kai-Zen insurance quote. 

Third, banks like easy administration

Administration costs time and money (employee labor) for the bank. The less administrative work a potential investment offers, the more a bank will like it. 

Kai-Zen has little to no administrative tasks for either you or the bank.

How Interest Rates Affect Investments

Interest rates are currently at a historic low range, even after the Fed has raised interest rates this year. 

There comes the point when interest rates cannot reasonably go any lower for the economy to work in its current form. Raising interest rates also provides an avenue for the federal government to curb inflation – which is currently much higher than average. 

I’m sure you’ve noticed. 

When the company behind Kai-Zen set up the plan, its goal was to make it a long-term wealth generator. It’s not a get-rich-quick scheme. It takes 15 years to build up the cash value to pay off the bank loan. After the bank is paid back, the policy can create a tax-free cash stream for you. 

Long-term planning like this accounts for unfavorable growth environments – like rising interest rates. NIW created Kai-Zen with rising interest rates in mind. At historic lows, there is little room to go anywhere but up.

What does this have to do with the Cash Value Growth?

The big worry with rising interest rates is: will the interest rate on the bank loan outpace the rate of return on the cash value growth? 

Interest rates suddenly jumping while rates of return remain the same over a prolonged period is another way of saying the entire global economy just collapsed. 

That’s an unlikely scenario. 

The more likely scenario is a series of small jumps in interest rates while the rate of return tends to lag a couple of years behind. 

We’re about to get technical, so if you aren’t confident in understanding how an indexed universal life policy builds cash value, read this article first.

The cap rates on an IUL go up when interest rates go up. (We will cover why carriers raise their cap rates in the section on failsafes.) They still lag, but you’ll be able to capture more of the market in subsequent years. You also have a 0% interest floor to protect you. Even if the market tanks for a year or longer, you’ll still have a 0% growth floor and won’t have to start from a lower position.

How Kai-Zen Creates a Win for All Parties

One of the things about a good deal is that all parties come away with something of value. 

In this case, the bank has a secure loan. They can count on getting their money back. Even if the insured passes on, the bank collects part of the death benefit amounting to their loan. 

The insurance company gets to sell a policy that they know someone will hold onto for a long time because it takes many years to build up a massive cash value. It’s low risk and low turnover for them. 

You get a large insurance policy, primarily paid for by the bank, and after years of accumulation, a policy designed for optimizing the cash value. That key component means you have access to cash that you can quickly access to take advantage of opportunities, fund other investments, or even use as a tax-free income stream in retirement to maintain your current lifestyle.

Kai-Zen Risks

Kai-Zen insurance has two major risk factors. Both of these were accounted for in the product design process and stress tested against extreme circumstances.

But good wealth building is about understanding products, so let’s examine these risks. 

First, what if loan rates increase faster than option budgets? 

Kai Zen account lag

The way that the carrier uses bonds to fund the 0% growth floor means that they replace their holdings when bonds mature – to maximize value. We are seeing interest rates increase. As interest rates increase, bond returns also increase – albeit with a slight lag. 

We dive into this in the next section on stress tests. 

Second, what happens if you have a high option budget, but the market goes into a depression? 

On average, the market has three bad years out of seven. We’ve seen depressions where the market recovers long before people recover. Without the growth floor, it can take several years for someone’s account value to recover after a market index downturn. 

With the growth floor, you get immediate growth on your locked-in cash value accumulation. No recovery time means faster overall growth. 

Kai-Zen Insurance Stress Tests – Do they hold up?

The first thing NIW built into the stress tests was an assumption that interest rates could jump from ~5% (where it roughly is now) to the highest point of the 1980s (15%) literally overnight. 

Note: this is incredibly unlikely. It would be catastrophic for the economy. 

The next assumption is that a Great Depression type scenario occurs.  This is one in which the policy would hit the 0% floor 9 out of the first 12 years of the policy.

The next assumption is that the account managers for the bond portfolio (how you get a 0% return floor on IULs) took a four-year vacation and didn’t purchase any bonds at any higher rate of return than they are now. 

Kai zen stress test

Further, they capped the bond rate at 5.5% forever. That puts an extreme squeeze on the premium. 

Even in this horrendous, world-ending economic scenario, Kai-Zen still performs as intended.  The bank is paid off in year 15, and you have a fully funded IUL.

Failsafes & Aligning Your Best Interests with the Carrier

The way that the insurance carrier keeps your money safe within the IUL cash value accumulation comes down to how they do their accounting. 

Because the majority of the carrier’s investment bucket is in bonds, and they hold those to maturity. They create a more stable investment (more predictable) where the bank has a better-guaranteed return on their money. 

In technical terms, the bank has a principally protected investment. 

The next question we typically get is: will (and why) carriers raise their cap rates? 

The carrier wants to protect its long-term survival. If a carrier doesn’t raise its cap rates, it can expect a mass surrender of IUL policies as policyholders decide competitors have better rates

The insurance companies know this, particularly the ones whose profitability depends on IUL policies. Their nightmares are of mass surrenders and their waking hours, double checking their risk of this happening and avoiding it. 

In this way, you can align your interest with the insurance company. The insurance company wants to keep the IUL block of business, and you want the cap rates to increase as interest rates do. 

It’s a mutually beneficial arrangement.


The risk of losses with high-interest rates is extremely unlikely. The designers took a proactive strategy with the bank financing to prevent losses that would mean a contract lapse. Even with a variable market and rising interest rates, this unique strategy can withstand both rising interest and the risk of market declines.

Every single Kai-Zen policy must pass the 2 Stress Tests mentioned above: The Great Depression return scenario and the 1980s High-Interest Rate Scenario. 

While your 401(k) and other investments will take a big hit, your Kai-Zen policy will provide protection for this portion of your portfolio.

How Abrams Insurance Solutions Can Help

At Abrams Insurance Solutions, we’re a family-owned independent agency focused on helping our clients find the best insurance at the lowest price. 

In cases like this, we help families find ways to create tax-free retirement income streams so they can retire with peace of mind that their money will outlive them. 

If you have questions about what a Kai-Zen policy might look like for your individual situation, call us at (858) 703-6178 today.