Pros and Cons of Indexed Universal Life Revealed - Learn How IUL Works
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Is Indexed Universal Life Insurance Good or Bad? Pros and Cons of IUL Thoroughly Examined

What Are The Pros and Cons of Indexed Universal Life Insurance?

Whether Indexed Universal Life (IUL) is good or bad depends on your unique facts, circumstances, and desires. Just like with any financial product, there are pros and cons to Indexed Universal Life. Inherently IUL is neither good or bad, since the product functions just as it was designed by the companies that offer it.

This extensive article will explain exactly how Indexed Universal Life works so you can learn if you want to use IUL for retirement and cash value accumulation. Ultimately only you can decide if using Indexed Universal Life will be a good fit for your retirement and pre-retirement wealth-building goals.


How to Use this Page: You can skip directly to any of IUL’s specific pros and cons by clicking any of the headers directly below in the (clickable) Table of Contents. Or if you have some time on your hands, you can scroll past the Table of Contents to read the MOST comprehensive article ever written on Indexed Universal Life in one coherent flow.


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(Clickable) Table of Contents

What you commonly find when searching about Indexed Universal Life (IUL)
Why I Wrote This Article on Indexed Universal Life Insurance
Why Listen to Me
The Truths About How IUL’s Growth Works
IUL’s Unique Annual Reset Feature
Facts About How the S&P Index Moves

All the Common IUL Crediting Criticisms

#1: “Indexed crediting does not include dividends payable from the companies that make up the S&P Index.”
#2: “The Insurance Company puts a cap on my S&P Index crediting probably because they’re keeping the excess profits.”
#3: “The Insurance Company can squash their caps at any time.”
#4: “Insurance agents selling IUL often exaggerate the average crediting rate in their illustrations.”
#5: “Agents are afraid to show the actual wild fluctuations of the S&P Index and would rather show you a smooth and steady average to cook the books in their favor.”
#6: “If you have a 0% year or multiple consecutive 0% years, then the average crediting rates being shown are unrealistic.”

IUL Cost Criticism

#1: “IUL is expensive”
#2: “The cost per unit of insurance will increase inside IUL.”
[Pro Tip] Your escape hatch if IUL’s increasing insurance cost per unit becomes too high
[Dirty little secret] How agents will improve a Whole Life policy’s performance by making it more like IUL’s cost structure
#3, “The dreaded guaranteed column in IUL is something to legitimately fear.”

IUL General Myths

#1: “Late Premiums kill guarantees in an IUL.”
#2: “Many UL Policies sold in the 1980’s imploded like IUL will going forward
From a Crediting Standpoint: Why Whole Life underperformed Universal Life during the 1980’s
From a Cost Standpoint: Why Whole Life underperformed Universal Life during the 1980’s
If Universal Life turned out to be a bad choice during a declining interest rate environment, what does that mean now that interest rates are near historic lows?
[Pro-Tip] Little Known Sweet-Spot with IUL Loans.

Closing Thoughts

 


What you commonly find when searching about Indexed Universal Life (IUL):

When searching on the subject of Index Universal Life (IUL), I consistently find extremely biased information from one of these 3 sources:

  1. Life insurance agents who strongly favor IUL, that only seem to share the good and the pros of the Indexed Universal Life.
  2. Life insurance agents who strongly favor Whole Life (vs. IUL), that only exaggerate the bad and cons of Indexed Universal Life to suit their agenda.
  3. Random bloggers and/or pundits of Wall Street, who aren’t even licensed to represent IUL, offering their own strong opinions and biases based on bad facts and misinformation regarding Indexed Universal Life.

All of this results in complete confusion for the consumer. Rather than truly understanding how Indexed Universal Life works, they are left to tally up the various opinions they find, and hope they are siding with the right camp.

Chances are after reading this article, you will know more about how Indexed Universal Life works than most of the sources you will come across while searching on the internet.

 

 

Why did I write this article on Indexed Universal Life Insurance?

My goal in writing this article is to balance the myriad of skewed and biased opinions out there with cold hard facts. That way consumers reading this article can take opinions out of the equation, enabling them to make an informed choice whether to use Indexed Universal Life Insurance for their retirement and wealth-building plans.

I also realize that many practicing life insurance agents will be reading this page as well. My sincere hope is that my contribution here will inject more truth into the life insurance marketplace as a whole.

Note: Keep in mind that this article discusses Indexed Universal Life (IUL) assuming that the primary goal of the policyholder is NOT permanent death benefit, but rather:

  • Cash value accumulation
  • Tax-free retirement withdrawals (and tax-exempt loans)
  • Tax-free access to liquidity along the way
Indexed Universal Life (IUL) for retirement is ideal. This is because IUL allows for tax-free withdrawals up to basis and tax-exempt policy loans.

IUL allows for tax-free withdrawals up to basis and tax-exempt policy loans.

 

 

Who is John “Hutch Hutchinson? Why listen to me?

With my background, I am uniquely qualified to set the record straight on Indexed Universal Life. I intend to dispel all the common myths and replace them with indisputable facts and critical thinking when looking at the pros and cons of Indexed Universal Life.

I am an independent life insurance agent who personally owns a plethora of different life insurance products covering 6 family members. I own multiple Indexed Universal Life (IUL) policies from different companies as well as multiple Whole Life (WL) policies from different companies. This is important because, unlike the majority of agents, I clearly understand both types of permanent insurance products and see their relevance in multi-generational family wealth planning. It’s worth noting too that I also still own some term insurance on myself and my wife, but each of these polices has a guaranteed conversion privilege to either IUL or WL from highly-rated companies.

For the record, I am also licensed as a registered investment advisor and am part owner in a boutique Registered Investment Advisor (RIA) firm. I have money in the stock market of my own as well as client money under management. So unlike many of the polarized camps weighing in on IUL, I don’t believe this needs to be an “either/or conversation” between insurance and investments. At my core I am a planner – I see the value of both insurance and investment vehicles complimenting each other with their unique features to create optimal family wealth planning.

As a well-rounded and educated planner, I have professional accreditations in the following subjects:

You can click any of the links above to learn more about each certification. I think you will agree that I have a much more comprehensive background than many of the other online sources weighing in on this subject.

The Truth about How IUL’s Growth Works

There are a number of either straight-up myths or overblown half-truths about how cash value growth in an Indexed Universal Life policy works. The prevailing tone in most of similar articles is:

  • That IUL is not good for retirement
  • That crediting strategies are inherently bad for policyholders
  • The product is structured in a way that is meant to benefit the companies that offer IUL much more than the policyholder.

In the next section, I start with the truth of how indexed crediting works with an Indexed Universal Life policy. Along the way, I will also dismantle the most opinionated and inaccurate claims, and replace them with facts.

Click here or on the video below to see an in-depth video explaining a number of IUL’s various growth strategies.

 

The 3 Main Factors Behind IUL Crediting:

The three main factors that make the power of indexed crediting inside an Indexed Universal Life policy so unique and powerful are as follows:

 

1. IUL Has a Guaranteed 0% Floor in Bad Market Years. 
In other words “zero is your hero”*. What this means is that with IUL you can participate in up to double-digit returns in good years, yet give back no ground to market losses during bad years. Imagine being able to stay confidently exposed to market volatility at all times without the fear of losing one-quarter, one-third, or even one-half of your account value to stock market losses? Now to be fair to the critics, your cash value will decrease somewhat during those 0% years because of the policy charges and cost of insurance. However, these charges can often be greatly reduced by simply funding your policy to the maximum allowable limit within the first 5-7 years (more on this within the section about IUL Cost Criticisms)

Indexed Universal Life (IUL) has a zero-percent floor which guarantees you no market losses

IUL has a zero-percent floor which guarantees you no market losses

2. IUL Has An Annual Reset Feature.
Wouldn’t it be great if, after a bad year in your investment portfolio, you could replace the loss with a zero, hit the reset button, and start over the next year from that new lower market position? You can do exactly that with Indexed Universal Life Insurance! Let’s just say that the S&P 500 drops from 2,500 to 2,000 in one particular year. Imagine that your policy cash value simply receives no crediting that year rather than seeing a 20% drop in your 401(k) account value.

Here’s where the annual reset feature really matters. Once a year passes, your IUL cash value starts tracking its growth from that new lower 2,000 level in the S&P 500, despite the fact that your policy cash value incurred no market losses on its way down from 2,500 to 2,000. Since sharp bounce-back market rallies often follow plummeting corrections, Indexed Universal Life insurance can be an amazingly powerful financial tool to harness that volatility in a positive way.

Whereas market fluctuations may keep you up at night when thinking about your 401(k) or investment portfolio, you might even start to welcome stock market volatility once you allocate funds to an IUL policy. Unlike with traditional investing, cumulative gains in the S&P 500 do not matter. What I mean is that the S&P 500 does not need to end up at new all-time highs to get growth on your policy cash value. In fact, with Indexed Universal Life the S&P 500 can crash and then continue bouncing up and down in a range indefinitely. Whereas your investment portfolio will never recover from the early wounds, your IUL cash value can earn crediting in every year when the index ends up higher than where it was 12 months prior.

 

3. Actual Market Fluctuations.
With your investment portfolio, major market fluctuations can be a perilous risk factor to your retirement. However, since IUL is suited to harness this upside movement while eliminating any downside free-falls, volatility now becomes your friend. Here are 5 facts about the S&P Index that explains exactly why:

 

Most Indexed Universal Life (IUL) policies track the S&P 500 Index on it's way up without realizing any losses from market downturns

Most Indexed Universal Life (IUL) policies track the S&P 500 Index on it’s way up without realizing any losses from market downturns

 

  • S&P Index Fact #1:

    The market has experienced annual gains more than three times as often as it sustained annual losses. Put another way, the S&P Index has gone up annually 76% of the time in the last 80 years. I’m referring specifically to a 80-year study period from 1937-2016 where the S&P Index has experienced 61 up-years and only 19 down-years.**

  • S&P Index Fact #2:

    Those up-years in the S&P were 3x as likely to give you double-digit crediting than single-digit crediting. If we look at those 61 distinct positive years referenced above, the market gained more than 10% in 47 of those years and less than 9% (but greater than 0%) in the other 14 years.**

  • S&P Index Facts #3-5:

    Fact #3: there were only two instances where the market had three consecutive negative years during that entire 81-year time period. The S&P Index had three losing years in a row from 1939-1941 and not again until 2000-2002.

    Fact #4: there was only one other instance where the S&P Index even had two consecutive negative years from 1973-1974.**

    Fact #5: What’s interesting is that all three of these time periods were immediately followed up by a rebound year that produced at least a double-digit advance from the new lower starting value. Although your investment portfolio may not have gotten even after this first bounce, there’s a good chance that your IUL’s cash value may pull way ahead after that first double-digit rebound (since it only paid policy charges during the consecutive 0% years).**

    Click here to see the 80-year study on the S&P Index.

Ever heard the term “fail fast?” That’s what the stock market seems to do. When it has a significant correction, it plummets quickly. Whereas when the market rallies, it is usually a steady ascent over a prolonged period of time. One of my favorite sayings about the market is that “Stocks tend to take the stairs up, but they take the window down.”

On that note here are two questions for you:

  1. Do you believe that the stock market will continue to have corrections and recessions, but still produce more up-years than down-years over the next 30-60 years of your life?
  2. Do you believe that the majority of those up-years will continue to produce gains in excess of 10% (even if they happen to follow some harsh down-years)?

If you answered yes, then how is the unique crediting methodology of IUL a bad thing? Where else can you confidently channel the volatility of the stock market in this manner?

Indexed Universal Life (IUL) helps harness volatile market movements into net gains without the guessing games.

IUL helps harness volatile market movements into net gains without the guessing games.

 

With that, here are some questions you should be asking yourself:

  • What better way is there to protect my account value, lock-in the lion’s share of my past gains, while still staying confidently invested without worrying about when the next crash will happen?
  • Other than hiding money under my bed while waiting for a crash, how can I truly take advantage of the great buying opportunities that economic corrections provide? How else can I do this when all of the investment strategies available are in some way exposed to major market’s losses?
  • What portion of my assets would I be willing to forgo any upside above 11%-13% annual crediting so that I can completely erase the possibility of downside market risk?
Indexed Universal Life (IUL) can help turbo-charge your safe-money savings

Indexed Universal Life (IUL) can help turbo-charge your safe-money savings.

 

Now that you have a basic understanding of how Indexed Crediting works, let’s dissect the common crediting criticisms and see if they indeed have any validity. This way you can understand the real pros or cons of IUL’s cost structure and see how you feel about using Indexed Universal Life for your retirement and pre-retirement wealth-building goals.

Click here or on the video below to see the different way that IUL’s safe growth strategies can help your retirement (both during and before).

 

 

All of the Common IUL Crediting Criticisms(Cons)

IUL Crediting Criticism #1: “Indexed crediting does not include dividends payable from the companies that make up the S&P Index.”

Actually, this is 100% true. However, this fact is often presented in a distorted manner to support a biased opinion and distract from Indexed Universal Life’s unique value proposition for retirement and cash accumulation. The reason IUL policyholders don’t receive dividends from the underlying stocks that make up the S&P 500 Index is not for some malicious reason like “Aha, the insurance company is keeping the dividends for their own profits.” It has nothing to do with greed, manipulation, or some hidden agenda on the part of the insurance companies that offer Indexed Universal Life.

The reason why S&P dividends are not paid in an Indexed Universal Life policy is simply because of the options-hedging strategy that the insurance companies offering IUL must use to create this unique crediting strategy. Remember, the S&P 500 index is not an investment itself, but simply a tracking benchmark by which to measure other investments. Insurance companies buy options on the S&P 500 index that profit ONLY if the overall movement of the index is up. Even If you invested directly in S&P 500 index options yourself you would not earn dividends since options only track the movement of the index and not dividend payouts.

You can certainly buy any number of mutual funds that track the S&P 500 index and receive dividends. But keep in mind that unlike the options strategy used by the companies that offer Indexed Universal Life insurance, mutual funds will also track all the downside movement of the S&P 500 index giving you considerably more exposure to losses.

So, although the objection that “IULs don’t pay S&P dividends” is completely true, it is often overblown by members of the investment community as well as agents that prefer Whole Life. They use it to vilify the product and to distract from the true value proposition that makes IUL crediting so unique and powerful.

Indexed Universal Life (IUL) when tracking the S&P 500 does not pay dividends like the actual index.

 

Whether or not you earn S&P dividends is far less significant than the combination of the following 3 IUL features when determining your overall growth:

  • The 0% guaranteed floor, which protects your cash value from down-years in the stock market
  • The ability to earn double-digit growth in up-market years
  • IUL’s Annual reset feature that allows you to start from the new lower S&P 500 index value when determining your next year’s index earnings (even though you realized no market losses on the way down to that new lower index tracking point).

The lack of dividends in indexed crediting shouldn’t matter that much since that 80-year S&P Index study between 1937-2016 was comprised solely from the movement of the index itself, NOT including dividend payments. Most of the bullish years with double-digit index gains would have easily hit today’s IUL caps even without including S&P dividend payments.

So if the S&P Index rises by 12% or more without including dividend payments, and the cap on your IUL crediting is 12% that year, does it matter that the 500 companies making up the S&P Index paid an additional 2% dividend? Conversely, if the S&P Index was losing 15-30% in a single year, would receiving an additional 2% dividend payment make you feel anywhere near as good as having a contractual 0% floor against market losses?

So because of the cap and floor strategy of an IUL, dividend payments would actually have little to no effect on an IUL’s growth during most of the years seen in that 80-year study period.

Click here to revisit the 80-year study of the S&P Index.

 

 

IUL Crediting Criticism #2: “The Insurance Company puts a cap on my S&P Index crediting probably because they’re keeping the excess profits.”

This is another distorted fact that is often overblown by biased sources to suit their own agenda and undermine Indexed Universal Life. The reason behind growth caps has nothing to do with the insurance companies that offer IUL keeping all the S&P Index gains over and above the annual cap.

People wrongly assume that IUL caps on the S&P Index means companies that offer Indexed Universal Life are keeping the excess gains as profit.

People wrongly assume that IUL caps on the S&P Index means companies that offer Indexed Universal Life are keeping the excess gains as profit.

 

It is again due to the mechanics of how this particular options-hedging strategy works behind IUL. In a nutshell, S&P 500 options that last an entire year can be extremely expensive. In order to keep the cost of this options strategy affordable, the insurance company must cap the amount of growth that can be earned within a year. By limiting the amount of growth potential in the options strategy, the insurance company brings down the net cost of this strategy to the point where it is economically viable for them to offer you.

Let’s take a step back and discuss the economics of how insurance companies that offer Indexed Universal Life provide this unique growth strategy without the risk of market losses.  It’s actually really simple once dissected. You see, in addition to indexed crediting, all IUL products also offer you an option where you can simply grow your cash value using a fixed rate of interest (like the original UL products). This fixed crediting rate fluctuates with the trend of prevailing interest rates. Most carriers currently offer a fixed crediting rate in the 3%-4% range. This fixed crediting rate offered by insurance companies was higher in the recent past when prevailing interest rates were higher.  Their fixed crediting rates will most likely rise again when prevailing interest rates rise in the future.

As an IUL policyholder, you can choose to take either this 3%-4% fixed crediting rate, or you can forgo the fixed rate and instead shoot for a higher crediting rate by choosing any of the indexed crediting strategies offered by your Indexed Universal Life insurance policy. By forgoing this fixed 3%-4% interest rate (that you would have been entitled to anyway), the insurance company uses it to pay for this options strategy.

Hence, by forgoing the fixed crediting rate of 3%-4% allows you to track the annual growth of the S&P 500, usually with a floor of 0% and a cap somewhere in the low double-digit range (11%-13%). The reason why the 0% floor of an IUL is guaranteed is because the insurance company is never risking more on the options strategy than the 3%-4% fixed interest rate that they were prepared to pay you in the first place. The max loss you can experience when buying options is the cost you pay for the options themselves.

Some people ask, “Couldn’t I make this options play myself?”

Of course you could, but because the companies that offer Indexed Universal Life have the law of large numbers on their side, they can hire specialized institutional managers to do it for a fraction of the cost. Also, since life insurance provides a social good in the eyes of federal and state governments, you get special tax treatment on your cash value growth when letting them manage this strategy for you inside your Indexed Universal Life insurance policy.

Indexed Crediting is not too good to be true. Nor is it overly complicated to understand when explained properly. It’s not an attempt to rob you of the potentially higher growth of the actual S&P 500 Index, nor is it a scheme to rob you of your dividends. Most importantly, since S&P options are so heavily traded to hedge portfolios by institutional money managers worldwide, these options are very liquid. That makes indexed crediting a sustainable strategy that insurance companies can continue to offer regardless of what the stock market and prevailing interest rates do in the future.

 

 

IUL Crediting Criticism #3: “The Insurance Company can squash their caps at any time.”

So this is a true statement, but also frequently exaggerated as a manipulative sales technique. This is most often overstated by Whole Life agents using fear-based tactics to steer clients towards their preferred product offering. These agents will highlight the fact that companies that offer Indexed Universal Life retain the right to lower index caps as if it’s an inevitable trap for consumers. They paint the picture that the insurance company can’t wait to sell enough IUL policies to soon spring the trap and rob policyholders of any reasonable opportunity for growth.

Let’s talk about fact vs. fiction.

Insurance companies do in fact reserve the right to lower caps so they can adjust them with steadily falling interest rates like we’ve seen over the last couple decades. It’s really not any different than companies offering Whole Life lowering their dividend interest rates over the same time period. As interest rates fluctuate, Indexed Universal Life caps rates have and will likely continue to trend with prevailing interest rates.

Companies that offer Indexed Universal Life insurance (IUL) reserve the right to lower their caps as interest rates decline, not to trick or trap consumers.

Companies that offer Indexed Universal Life insurance (IUL) reserve the right to lower their caps as interest rates decline, not to trick or trap consumers.

 

Obviously, IUL caps will have to decrease if prevailing interest rates do, since the insurance company would have less of an options budget to buy up a higher S&P cap. It’s conceivable that as interest rates rise again in the future, then the corresponding IUL caps should also rise since the insurance companies would then have a larger options budget to work with. That said, the cost of options in the new interest rate environment will also need to be considered.

Here’s what has actually happened with IUL cap rates:

  • Most companies have only lowered caps by relatively small increments over time in an attempt to stay competitive with the rest of the marketplace.
  • However, we have seen a few companies drop their caps more dramatically. Usually, these are lower rated insurance companies or smaller companies that have been bought out by larger companies. The new controlling company therefore has less loyalty to the old absorbed company’s block of policyholders.
  • The other thing we have seen from stronger companies is that they will lower caps and then subsequently raise caps as interest rates have temporarily ticked back upward. That is why we recommend sticking with highly rated, financially solvent companies that have stable histories. Mutual companies are also recommended since their only obligation is to long-term solvency so it can maintain its promise to policyholders.

Click here to learn more about mutual companies vs. stock companies.

Truth be told though, there is no guarantee that says insurance companies that offer IUL have to raise caps as prevailing interest rates rise. Similarly, there is also no guarantee that Whole Life carriers will ever raise dividend rates in the future or even continue to pay dividends for that matter. However, all insurance companies are incentivized to remain competitive to sustain long-term business and keep a solid reputation in the industry. Contrary to how they are sometimes portrayed, insurance companies are often trying to do just that, and not trying to rip-off consumers.

Keep in mind too that insurance companies offering Indexed Universal Life also know that policyholders can surrender or transfer their policy cash value at any time if they sense unfair treatment. When you start an IUL policy for maximum cash accumulation, it’s advisable to pay a lifetime’s worth of premiums in the first 5-7 years to maximize both early and long-term growth. If for some strange reason, your particular insurance company decided it no longer wanted to be competitive, it’s likely that most to all of your principal (and quite possibly more) will be available to surrender if you have fully funded your policy within the first 5-7 years.

 

 

IUL Crediting Criticism #4, “Insurance agents selling IUL often exaggerate the average crediting rate in their illustrations.”

This may have been true in the past with some agents, who naturally have a tendency to over-promise and under-deliver. However, a set of industry-wide regulations called AG-49 (Actuarial Guideline-49) took effect starting September 1st, 2015. These mandates set forth uniform standards for all insurance companies and agents to follow when illustrating Indexed Universal Life insurance.

In fact, AG-49 forces insurance companies that offer IUL to look back and average every single 25-year rolling period the S&P 500 Index experienced within the last 65 years using that particular company’s current cap and floor. By taking the average of every one of those individual 25 periods, the companies that offer Indexed Universal Life then averages this data to determine the maximum illustrated rate for each unique Index Crediting Strategy they offer. This way a carrier can’t simply cherry pick one very favorable look-back period to justify an abnormally high illustrated crediting rate.

Not coincidentally, the push for AG-49 came from a handful of carriers that don’t offer any sort of Indexed Universal Life product. They felt that companies that offered IUL were getting too much market share and were stealing clients from their preferred product offering, mainly Whole Life Insurance. If you do hear this particular argument about cherry picking averages from any agent, blog post, or video, it just simply is not true.

Click here to learn more about Actuarial Guideline XLIX (AG-49) directly from the National Association of Insurance Commissioners (NAIC).

 

 

IUL Crediting Criticism #5, “Agents are afraid to show the actual wild fluctuations of the S&P Index and would rather show you a smooth and steady average to cook the books in their favor.”

This argument really upsets me because prior to AG-49, this was absolutely an untrue statement. (You can read the clip above to learn more about AG-49).

I used to be able to illustrate an Indexed Universal Life policy through past recessionary periods using a particular premium schedule and whatever index crediting strategy I wanted  That way clients could see the effects of turbulent market conditions while accumulating cash value as well as seeing the effect of taking withdrawals and/or loans through different market cycles.

You see, many IUL carriers offered an illustration feature (prior to AG-49) where rather than showing some smooth average like 6% or 7% every year, you could simulate whatever policy design the client wanted through different historical periods. For example, I could show a client putting in $10,000 of annual premium for 7 consecutive years and run those premiums through a policy showing the last 40 years of the S&P 500 performance using that particular company’s cap, floor, and insurance charges. Some companies even offered these types of back-tested illustrations for the last 20 years, 30 years, 40 years, 50 years, and even 60 years.

Even if the client was not expected to live that long, It was good for them to see the range of what could happen to their policies through different turbulent periods. The client could also see the effect of using Indexed Universal Life for retirement income as their cash value hit the cap, the floor, and everything in between while taking policy loans.

The uniform standards of AG-49 outlawed this practice because almost every back-tested time period produced a better long-term result than the maximum illustration rate allowed by the new formulaic constraints. This is because when you earn that double-digit crediting on your balance that experiences no losses in the 0% years, it has a much more profound effect on your cash value than even a linear 7% average.

When illustrating an Indexed Universal Life (IUL), agents are mandated to show a smooth and steady average return rather than simulate actual historical fluctuations.

When illustrating an Indexed Universal Life (IUL), agents are mandated to show a smooth and steady average return rather than simulate actual historical fluctuations.

 

It’s unfortunate because having the client observe the cash value being stress-tested through different time periods was invaluable to framing expectations for the type of volatility they may experience. There is no period in the S&P 500’s history that went up every year by 6% or 7% for 25 straight years. In my mind, showing multiple back-tested time periods is much more compliant than picking some average, even if that average is regulated.

Ironically, the call for these new AG-49 standards originated from a handful of insurance companies that primarily sold Whole Life Insurance. They claimed that IUL was being misrepresented by agents, which was certainly true in some cases. Unfortunately, these new regulations subsequently outlawed one of the most powerful tools available for illustrating potential turbulence in an IUL policy.

Click here to learn more about Actuarial Guideline XLIX (AG-49) directly from the National Association of Insurance Commissioners (NAIC).

 

 

IUL Crediting Criticism #6, “If you have a 0% year or multiple consecutive 0% years in an IUL, then the average crediting rates being shown are unrealistic.”

Some argue that if you have a zero year, then you will have a very hard time actually earning long-term averages in the 6%-7.5% range, which are commonly being shown in today’s relatively low cap environment. Let’s reference the facts again by citing that 80-year year study of the S&P Index we looked at in the last section. Past performance is no indication of future returns, but isn’t 80 years of the S&P a large enough sample size to inject some factual basis into this assertion?

Since the inception of stock investing, when the market goes down it eventually bounces back to those previous highs and at some point makes new highs. As far as multiple 0% years, didn’t we see in the 80-year S&P Index study that there were only two instances where the market lost for three consecutive years and only one more instance where it lost for two consecutive years? All three of these extended losing periods were immediately followed by at least one double-digit year that would have easily hit today’s IUL cap rates. This strong rebound year would have bolstered your average crediting rate and helped to make up for the prior two or three years that got 0% crediting.

Keep in mind that there were at least two and a half decades between each one of these multi-year losing periods. During the entire 80-year study there were 3 times as many up years than down years. When we isolate the 61 up years during the 80-year study, there were 3 times as many double-digit up years than single-digit up years. For the last 80 years, this is how the market has moved through good times, bad times, recessions, corrections, world wars, inflation, deflation, and so on. Why then is it conceivable to think that a long-term average of 6%-7.5% is unrealistic, even if consecutive 0% years are experienced at some point?

Click here if you would like to revisit the 80-year study of the S&P Index.

Now if for some reason the market doesn’t bounce back from a multi-year bear market in the future, don’t we all have bigger problems than the type of insurance policy or investments we own? If some kind of ongoing global systemic issue hit, how could Whole Life carriers somehow be immune to these same economic problems?

I mention this because this argument is often brought by operations favoring Whole Life insurance vs Indexed Universal Life Insurance. Don’t get me wrong, I own several Whole Life policies, and I recommend Whole Life insurance over IUL for clients wanting rock-steady guaranteed growth every year rather than the potential for greater upside growth in any given year.

Keep in mind though that although Whole Life offers very modest guaranteed growth provisions, dividends are not guaranteed to be paid to policyholders every year. If dividends are not paid, then Whole Life will not perform very well as a growth vehicle nor can it even function as an income vehicle. All of the cash value would be needed to support the guaranteed death benefit, and there would be little or no dividends to distribute as income.

 

IUL Common Criticisms Regarding Costs and Charges

IUL Cost Criticism #1, “IUL is expensive”

This common cry usually comes from the investment community or random bloggers that is unlicensed and often uninformed on how Indexed Universal Life works. In fact, the next time you hear this kind of blanket statement from someone, ask them to explain exactly how these charges are assessed in IUL. What’s ironic is that most members of the investment community don’t even understand all that IUL can do for clients, much less how the costs are assessed.

For eons, the investment industry has been competing with the insurance industry for the same client dollars, and they lean heavily on the common opinion “it’s too expensive” without having any factual grounding.

What’s interesting is that their best clients will buy expensive cars, houses, electronics, etc., all of which provide more benefits than a multitude of cheaper alternatives. So why then should their clients disregard the unique benefits that IUL can provide and base this one particular buying decision solely on what is cheapest? A more intelligent approach would be to discuss if the unique combination of benefits that only Indexed Universal Life can provide are indeed valuable to them. If they are, then do an analysis to discuss if the cost for these benefits would in fact be “too expensive.”

However, since most representatives of the investment community were trained by companies that don’t directly profit from insurance products, they will often lack the expertise to perform this kind of examination. In fact, most would be hard-pressed to list even half of the benefits that can be provided by IUL. Rather than have their comfortable business model be threatened and be forced into an intensive new learning curve, it’s much easier to throw around the common opinion that “IUL is too expensive.” This justifies their one-dimensional insurance analysis and also frees up more dollars for the financial products they actually can speak intelligently about as well as profit from.

A cost-benefit analysis of Indexed Universal Life (IUL) should be performed rather than simply parroting the common mantra that "IUL is expensive."

A cost-benefit analysis of Indexed Universal Life (IUL) should be performed rather than simply parroting the common mantra that “IUL is expensive.”

 

So IUL is expensive? Compared to what exactly… term insurance? Of course, IUL will cost more than a comparable term policy. IUL provides a unique combination of benefits that you can’t get in term insurance or any other investment product for that matter. These benefits include:

  • Tax-deferred growth
  • A unique way to capture growth from stock market volatility without stock market risk
  • Tax-exempt access to both your principal and growth even before age 59.5
  • A tax-free death benefit that doesn’t automatically expire after 20 years
  • Potential lifetime access to the death benefit in cases of chronic illness, critical illness, terminal illness, or certain situations requiring long term care
  • Protection from lawsuits and creditors in certain states

We have found that the higher the client’s income is, the more valuable these benefits become to that client when properly explained.

What if we said that IUL was no more expensive than decades of managed money, would you believe it?

For starters, most clients don’t even understand how much in aggregate they’ll actually pay for decades of professionally managed money on an increasing balance. It obviously depends on the exact facts and circumstances, but we have run multiple studies with IUL vs AUM (assets under management) where we even give AUM a better long-term rate of return. In many instances, especially where the client is in a higher tax bracket, we found that they will often pay considerably more in fees for AUM and yet still end up with less after-tax income during retirement and less money left behind for heirs at life-expectancy. This is because of the special tax perks offered to permanent life insurance.

Again, the relevant facts and circumstances will change with every fact pattern, but it is definitely not as cut and dry as the investment community would have you think. So, next time you hear that IUL is too expensive, ask compared to what. Ask them to explain their research or admit if it is just an ungrounded opinion. Ask your investment advisor how much they would charge to provide a cheaper investment alternative that can offer the exact same combination of benefits offered by Indexed Universal Life insurance.

Guess what, they can’t without using some sort of life insurance product.

 

 

IUL Cost Criticism #2, “The cost per unit of insurance will increase inside IUL.”

This is probably the most misunderstood aspect of Indexed Universal Insurance. It is over-sensationalized and touted like a ticking time bomb by agents who primarily sell Whole Life Insurance. As an independent, who takes an educational approach with clients to discover which product suits them best, I’m incredibly disturbed by this kind of hype. It’s really unfortunate because agents using fear-based half-truths to further their own sales process are in fact damaging the insurance industry as a whole.

The Truth Regarding Cost:

It is true that the cost per unit of insurance inside an Indexed Universal Life policy does indeed increase every year with age. As the insured ages, he/she is more likely to die, and therefore the insurance company charges more per unit of death benefit. However, this next little factoid of information is something that the critics conveniently omit in their attacks on IUL. That ever-escalating cost per unit of insurance is only levied upon the “net death benefit” or “net amount at risk” (the total death benefit minus how much you have in cash value).

Here is an example of what the insurance company calls “the net amount at risk.” If you have $600,000 of death benefit and $50,000 of cash value, you will only be charged for $550,000 of insurance since the $50,000 of cash value is already your equity.

Let’s say four years later that your cash value has grown to $300,000 after paying more premiums and getting index crediting. Even though the cost per unit of insurance has increased because you’re now 4 years older, you are will now only be charged for $300,000 of death benefit. This is because the insurance company is only risking $300,000 if you die ($600,000 total death benefit minus the $300,000 of cash value that is technically yours to take at any moment).

What sounded like one of IUL’s cons may actually be a pro.

The advantage to you with IUL’s increasing age-based cost structure is that you will actually have lower insurance costs during the early years of the policy. In fact, these initial insurance costs can be significantly lower at the onset of the policy compared to the same-sized Whole Life Insurance policy. Since you have more money working for you early on, and Index Universal Life provides crediting strategies with the opportunity to earn double-digit crediting, you can rack up substantial cash value during these early years. This compounding can propel your cash value toward the death benefit, which in turn can reduces the total amount of insurance you’re actually paying for.

So if you fund your policy properly even though the cost per unit of insurance increases because of age, you can be paying for substantially fewer units of insurance as you get older.

Most informed agents will tell you (even if they have a strong preference for Whole Life) that Indexed Universal Life can work very well through life expectancy as long as it has been funded properly. Remember that this article is discussing IUL in the context where cash accumulation is the main goal, and the policyholder’s intention is to fully fund a policy within 10 years or less (preferably 5-7 years for optimal performance).

 

 

Your escape hatch if IUL’s increasing insurance cost per unit becomes too high

If for whatever reason you can’t fund your IUL policy as expected, or it doesn’t get the cash value growth inside the policy as projected, you can simply just call the company and manually reduce the death benefit to minimum allowable level before the increasing cost per unit of insurance really starts to get too high. This often doesn’t happen until around retirement age.

If you fund your policy early and get reasonable crediting along the way, you most likely will not have to reduce the death benefit because the amount of cash value should already be getting much closer to the total death benefit number come retirement age. However, you always retain your right to lower your death benefit to the minimum allowable level, if this is your goal.

Maintaining a minimal amount of death benefit over and above your cash value will often create a situation where the amount of crediting you get from your compounding cash value should overshadow whatever charge the insurance company levies upon the much smaller amount of “net death benefit” remaining in the policy.

Keep in mind that whatever you are paying for that nominal amount of net death benefit will often be worth the maintaining for the ongoing tax sanctuary afforded to Indexed Universal Life. I’m sure you’d be happy to a pay for a nominal amount of life insurance to ensure that your cash value continues growing tax-deferred and you maintain your ability to take tax-exempt distributions from this policy while you are still alive.

 

 

Dirty little secret: How agents will improve a Whole Life policy’s performance by making it more like IUL’s cost structure

Often the same agents who insist that IUL’s increasing cost structure is too risky and should be avoided, are not practicing what they preach.

If one of their clients demands maximum early cash value or has a need for some premium flexibility, these same agents will quickly recommend blending a pure Whole Life Policy with a Supplemental Term Rider. This term rider allows for much more premium flexibility than Whole Life typically offers, and at the same time, the term rider permits the client to over-fund a Whole Life policy with double, triple, or quadruple the mandatory premium. This can increase early cash value buildup far beyond what is possible inside a pure Whole Life policy.

However, if you put any of these Supplemental Term Riders under an actuarial microscope, what you will see is that they are all Annual Renewable Term riders that function almost identically to the cost structure to Indexed Universal Life. It starts with a very low initial cost of insurance but increases every year with age. Sound familiar? Many Whole Life Insurance policies designed for maximum early cash value growth are blended so heavily with this kind of term rider, that the base Whole Life policy (which they insist is so much safer than Indexed Universal Life) will make up less than one-half or even one-third of the entire policy structure.

So why is a heavily blended Whole Life policy OK and pure Indexed Universal Life not?

They will tell you not to worry because your cash value will grow and reduce the amount of the rider you will be paying for on an ongoing basis. This is basically the same for IUL. With both Whole Life’s term rider and IUL, as the cash value approaches the death benefit, you are paying for fewer units of insurance, so even if the cost per unit of insurance increases, the total cost should be manageable and eventually minuscule.

I agree that blending this type of Supplemental Term Rider can be a very effective way to accumulate cash value for a Whole Life Policy. Thankfully the underlying structure of Indexed Universal Life is already designed the same way. Only with IUL you actually have a better opportunity for early growth, so there’s a good chance that the converging of the cash value upon the death benefit may happen even sooner with Indexed Universal Life vs. Whole Life. But if you want the certainty of having steady crediting every year, Whole Life may be the way to go. I let my clients’ preferences dictate the recommendation, rather than some rigid stance or preference of my own.

If for whatever reason your Whole Life policy with a Supplemental Term Rider doesn’t grow as expected, they will tell you that you can simply drop the rider and be left with a much smaller base Whole Life policy that is sustainable. With IUL you essentially have the same option of reducing the overall death benefit to the point where the remaining amount of death benefit is sustainable.

So why then are the same agents selling Whole Life with a Supplemental Term Rider simultaneously condemning Index Universal Life like it’s the devil incarnate? Often it is ignorance. They simply don’t know what they don’t know and are parroting the same fear-based propaganda that they have been fed by their preferred companies that only offer Whole Life. Many Whole Life agents have not bothered to investigate the facts beyond the harsh negative hype since they already have a product and sales process that they are very comfortable with.

Ironically, more of the old stalwart mutual companies that primarily sell Whole Life are starting to develop and release IUL products of their own.

 

 

IUL Cost Criticism #3, “The dreaded guaranteed column in IUL is something to legitimately fear.”

I’ll be the first to admit that the guaranteed column does look pretty scary. What you’ll see is steadily declining cash value shortly after you stop paying premiums. Eventually, you’ll see either the word “Lapse” or “End” followed by a big blank area on the page where your future cash value and death benefit should be printed.

Keep in mind that for the guaranteed column to actually occur, not one, but two horrible and extreme factors need to take effect:

  • Your IUL policy must get very little or no interest crediting at all…ever
  • The insurance company must raise their internal mortality charges to the absolute maximum allowable level (often more than triple the illustrated charges)

Let’s discuss what it would take for each leg of this horrible double-whammy to come true.

If Indexed Universal Life (IUL) performs like the guaranteed column shows, then you'll have much bigger problems than your retirement investments.

If Indexed Universal Life (IUL) performs like the guaranteed column shows, then you’ll have much bigger problems than your retirement investments. It means the stock market never has a positive year ever again and that mortality rates have gone off the rails.

 

For most IUL policies the guaranteed column means 0% crediting…ever. When I bring up how the “guaranteed column” of a 401k account would actually be a -100% return leaving you with $0, people will commonly reply, “Well that’s ridiculous because I have conservative and diversified mutual funds.” Even if the investments dip temporarily, they will eventually bounce back.”

I agree that in all likelihood this will be a true statement. If that’s the case then you certainly shouldn’t need to worry about 0%-2% crediting for perpetuity with an IUL tracking the S&P 500 index.

In fact, I did a little experiment using the Dow Jones Industrial Average from 1929-1953 (since the S&P 500 doesn’t have data that far back). This awful 25 year period in the stock market had 11 years with 0% growth or worse, and it wasn’t until the 26th year (1954) until that index finally broke above the pre-1929 highs. So if I isolate this atrocious period, and use a 0% floor and a paltry 11% cap, it produces an average crediting rate of 5.3%.

This is the worst period anyone can find in the stock market. But because the market still moves up and down along the way to breaking even over a period of more than two decades, this environment can still produce fairly decent ongoing crediting inside an IUL.

Regarding the maximum mortality charges, no company out there selling universal life has ever inflicted the guaranteed mortality assumptions on any block of policyholders. The maximum charges are often more than triple what the illustrated charges are. The only reason that companies offering Indexed Universal Life insurance maintain their right to raise their charges that high is in case some epidemic like the modern equivalent of the Bubonic Plague strikes America and modern medicine can’t handle it.

Most of the higher rated companies that offer IUL have never even raised their mortality charges above what was originally illustrated for the client. Even if you isolated the companies that have raised their mortality charges above what they originally illustrated, they didn’t even come close to charging the maximum possible charges shown in the guaranteed column. In order to raise their charges even a fraction above what they illustrated, these companies have faced regulatory hurdles as well as a slew of class-action lawsuits. So raising mortality charges is not some willy-nilly tactic that an insurance company employs whenever they simply want a bit more profit.

If you haven’t even bought an IUL policy yet, and are simply looking at an illustration, all of this perfect storm of negativity would have to commence directly after you write your first premium check for the guaranteed column to come true. As soon as one year goes by where you earn crediting, or the carrier doesn’t triple their charges, then the guaranteed column you see on that sales illustration suddenly becomes utter nonsense. Scary as it may have looked, it was as mythical as a fire-breathing dragon.

Let’s just say for a moment that you fully fund your IUL policy with the maximum allowable premiums in the first 5-7 years like you should to maximize cash value growth and retirement income. Let’s also say that you in fact earn an average of 5%-7% crediting over that period. Then after 5-7 years your particular insurance company suddenly decides that it must drastically raise their cost structure and/or lower their caps.

In the majority of cases, we find that most to all of the premiums you put into the policy would be available to withdraw (sometimes even more). It’s highly unlikely that you would be confronted with this kind of decision, but even if you were, all would not be lost as the fear-based propaganda would suggest.

 

IUL General Myth #1, “Late Premiums kill guarantees in an IUL.”

Now this statement is actually completely false regardless of how you interpret it. I say this because there are a couple different ways you can this take comment.

One way is to acknowledge the fact that most of the best performing IUL policies on the market don’t even offer a guaranteed death benefit option. So late premiums don’t matter with IUL unlike with say a Guaranteed Universal Life product or even Whole Life, both of which have some sort of rigid mandatory premium structure.

People are often buying Indexed Universal Life for retirement and cash value growth as their main goals as opposed to highest guaranteed payout to heirs at death. It is the policyholder’s responsibility to make sure that their IUL policy is funded with enough premium and earning enough crediting to sustain the ongoing mortality charges. As discussed previously, the policyholder can always manually reduce their total benefit to reduce these charges and optimize cash value growth.

The benefit to the policyholder for bearing the full responsibility of maintaining however much death benefit they want is that IUL is a very flexible policy without any rigid premium structure. So looking at the “late premiums kill guarantees” comment through this particular lens, it is clearly false.

It’s worth mentioning that there are a few select companies that do offer an optional “No-Lapse Guarantee” rider that you can attach to your Indexed Universal Life policy.

As stated, most people don’t buy IUL for guaranteed death benefit, but if you do buy one of the IUL products or riders that does offer some sort of guaranteed death benefit, any late or missed premiums will not immediately kill the guaranteed death benefit. This is unlike a Guaranteed Universal Life product or even a Whole Life policy, where the policy can lapse or the guarantees be removed after a single missed or late premium.

If you make a late payment on an IUL policy with a “No-Lapse Guarantee” rider, you actually have the option of restoring the guarantees by paying back that premium at interest. Even if you choose not to do so, your guaranteed death benefit will often still be in place, only it may not last as long as when you originally started it. For example, the death benefit may only be guaranteed to age 88 after missing a premium rather than say age 95 or whatever age it was originally guaranteed to when you started the policy.

Again, any way you slice it, the statement about how “Late premiums kill guarantees in an IUL” is clearly not true.

 

 

IUL General Myth #2: “Many UL Policies sold in the 1980’s imploded like IUL will going forward

Oftentimes agents who sell mostly Whole Life Insurance will bring up the early history of Universal Life as evidence not to buy Indexed Universal Life today. Let’s discuss the historical background and why it actually may not be a con against Indexed Universal Life, but rather a pro for its validity in this current economic environment.

Many remember the rampant inflation during the 1980’s and as a result, the double-digit mortgage rates and even savings account rates. Because of the prospect of rapidly increasing interest rates, E.F. Hutton got a private letter ruling from the IRS to create a new type of permanent insurance product called Universal Life (UL). Inside this revolutionary new UL product, the cost of insurance was separate and completely unbundled from the growth of the cash value. That way consumers could more nimbly benefit from the rapidly rising interest rates.

Apparently, it was very popular, because droves of Whole Life policyholders quickly adopted this new type of life insurance and rolled their Whole Life cash values into Universal Life Insurance.

I was a young lad during that era, but I heard first hand from multiple veteran agents who remember this disruptive shift in the insurance industry. What they reported to me was that the Whole Life Policies at the time were indeed performing better than how they were originally illustrated (since dividend rates were now higher). However, the cash value growth inside Whole Life Insurance paled in comparison to what was possible with the newly un-bundled Universal Life product.

Let’s discuss why below.

 

 

From a Crediting Standpoint: Why Whole Life underperformed Universal Life during the 1980’s

The three factors that affect Whole Life cash value growth other than the annually declared dividend interest rate are:

  • Credits for favorable mortality experience by the insurance company (fewer people dying than expected)
  • Credits for the carrier managing the company more efficiently than expected
  • A contractually guaranteed internal policy growth rate (usually 4%) that is predetermined at the onset of the policy and therefore unaffected by higher interest rates in the future

Isn’t it interesting that a feature that sounds so good like “a guaranteed growth rate,” can actually turn out to be a bad thing if interest rates rise dramatically? So even if the dividend interest rate for a Whole Life policy reaches double-digits, the base growth rate of a Whole Life policy is GUARANTEED not to increase.

Also, as stated above, the dividend interest rate is simply one factor that determines how big your annual dividend will be. The other two factors that make up a Whole Life dividend (credits for favorable mortality experience and managing overall company expenses) did not increase anywhere near how the rapidly rising interest rates did in the 1980’s. So even though prevailing interest rates had more than doubled, there wasn’t twice as much efficiency running the insurance company’s operations, nor were twice as many policyholders living longer than expected, thereby paying premiums longer.

In contrast to these diverse factors that make up Whole Life crediting, the new higher interest rate environment of the 1980’s was the sole crediting component of these recently invented Universal Life policies.

Now, this doesn’t mean that Whole Life is a bad product vs. Indexed Universal Life. There are many times that a client’s preferences and risk tolerance dictate that they will be much more comfortable building cash value inside Whole Life vs. Indexed Universal Life. However, in an extremely high-interest rate environment, it’s probable that a Whole Life policy’s cash value won’t benefit as much from the increased rates as a comparable UL or IUL policy can because of the factors listed above.

 

 

From a Cost Standpoint: Why Whole Life Underperformed Universal Life During the 1980’s

(Note: I apologize in advance to any actuaries reading this for my oversimplified explanation below.)

For a whole life policy, the lifetime’s worth of mortality charges are essentially averaged throughout the life of the policy. This means that although you do not need to worry about exponentially increasing insurance charges inside a Whole Life policy as you get older, you essentially have pre-paid for these would-be charges by having less cash value at work for you during the early years of a Whole Life policy.

Let’s think critically for a moment. Do the Whole Life carriers have such vastly different mortality data or underwriting skills that allows them to offer some discount on permanent death benefit that a Universal Life carrier can’t? The famous musician Neil Young put it best, “They give you this, but you pay for that.” One of the things I always tell my clients is “There are no deals in insurance. Everything is priced perfectly. If for a moment some product is mispriced, jump on it, because it won’t last long.”

This is why you often see little or no cash value during the first two policy years of a pure Whole Life policy. As you learned earlier in this article, Universal Life on the other hand, has lower mortality costs in the early years, allowing more of your cash value to compound in your favor from the get-go. It’s true that in the later years of a Universal Life Policy that the policy charges can increase dramatically if:

  • Your policy’s cash value hasn’t performed well
  • You haven’t funded the policy properly
  • Or you haven’t made adjustments to lower the death benefit

However, there is obviously a benefit to having more working for you sooner. As discussed earlier in this article, you can combat the future rising cost per unit of insurance inside any UL or IUL policy in many different ways throughout the life of the policy.

So, going back to the debacle of the 1980’s. What happened is that agents started selling this new UL product as if interest rates would remain that high for perpetuity. The declared interest rate at the time, often a double-digit number, was projected forward each and every year throughout the policy illustrations. Using those assumptions, it appeared as if premiums only needed to be paid for a handful of years to support a lifetime’s worth of charges. Well, we all know now that interest rates have declined steadily ever since.

Many of the consumers, who weren’t regularly reviewing their policies were under the impression that their policies would be fully paid-up until death since that was what they originally saw. However, since the cash value performance was substantially lower than originally projected due to steadily declining interest rates, the policyholder would need to either:

  1. Pay more premium
  2. Or they would have to manually drop the death benefit to reduce the ongoing charges.

Since a large block of policyholders failed to do either of those things, it left a stain on Universal Life and the life insurance industry in general. Had the agent reviewed the policy or the consumer had been proactive enough to reach out to the company for a policy review, they could have rectified the situation before it was too late. Unfortunately though, droves of agents who sold these policies left our high-turnover industry, and many policyholders took the “set it and forget it approach,” allowing the train wreck to unfold.

Does this mean that train travel is no longer safe for anyone? Does it mean that Universal Life is inherently a bad product? I think not. There are certain considerations and responsibilities that the policyholder must take on when buying any type of universal life product, including Indexed Universal Life. If they do, then they stand to receive a unique combination of policy features and benefits as a result.

If Universal Life turned out to be a bad choice during a declining interest rate environment, what does that mean now that interest rates are near historic lows?

Let’s discuss how this same set of circumstances MAY play out with Indexed Universal Life in the current economic environment and into the future. I say MAY because my hypothesis below is by no means a certain outcome or backed by any contractual guarantees. But if you think critically when approaching the facts, you may find that this could be the ideal economic environment to start a universal life policy, especially indexed universal life insurance.

Recall that the main reason Universal Life products from the 1980’s didn’t perform as planned was that they were illustrated during an exceptionally high-interest rate environment. From that point interest rates started a steady decline to the historic lows we find ourselves in today, right?

Let’s just say for a moment that you started just a basic Universal Life policy in today’s low-interest environment, a policy with no S&P Index crediting option and only a fixed crediting rate that fluctuates with prevailing interest rates. If you see an illustration that works in today’s low-interest rate environment, isn’t it probable that the actual results could be much more favorable if interest rates rise in the future? If interest rates increase over the next decade or two, shouldn’t actual results be much better than what you’re seeing illustrated today?

If you believe that interest rates can’t go much lower or can’t stay low indefinitely, then what we have today is the exact opposite of the UL train-wreck situation after the 1980’s, correct? In fact, if the critics citing the 1980’s UL debacle followed their own logic, they would see that this may be the ideal entry point for a universal life policy.

To take it a step further, it could be even better for an indexed universal life policy, where you have the option to toggle every year between a fixed interest rate or any of the indexed crediting strategies offered. So as the economic climate changes, you can choose every year how much of your cash value you want allocated to an index crediting strategy with a 0% floor and a double-digit cap, and how much of your cash value you want to earn a steady declared fixed-interest rate.

Of course, with every year that passes, you can revisit your options and reallocate your Indexed Universal Life’s cash value account as you see fit.

 

 

Little Known Sweet-Spot with IUL Loans:

A handful of insurance companies that offer Indexed Universal Life policies will actually lock in your policy’s loan rate FOR LIFE while still letting you fully participate in some or all of their policy’s indexed crediting strategies (even on loaned money).

Wait, what?!?

That’s right, many companies that offer IUL currently have a 5% or 6% loan option that would be locked-in for life as soon as you initiate one of these policies. This gives you a great opportunity to earn positive arbitrage because you can currently earn up to 12.5%-13.5% tracking the S&P 500 index, even on the amount of money you borrowed at 5%-6% to use for other things.

Many people plan on borrowing against their policy value someday to:

  • Acquire real estate
  • Lend money to their own business ventures
  • Buy vehicles
  • Send kids to college
  • Take tax-exempt loans as supplemental retirement income

If that’s the case, then locking in a rate now using today’s low 5%-6% policy loan rates is an amazing advantage. No Whole Life policy allows you to lock in your loan rate and still realize maximize growth potential on loaned money. No bank or brokerage account will let you lock in your margin loan rate today for the entire life of your account. Right now though, you can lock in a low lifetime rate on your IUL policy with a handful of highly-rated companies.

 

 

Closing Thoughts:

Most of the online slams you find against Indexed Universal Life (IUL) come from sources with a clear agenda to stir up hype and/or push their wares instead. The biased slander between the investment and insurance industries has gone on for years. So has the ongoing battle between insurance agents who primarily sell Whole Life vs. Indexed Universal Life.

It’s unfortunate because all of these financial products have validity in the context of long-term family wealth planning. True advisors should spend more time educating and discovering their clients’ true preferences to make the most appropriate product recommendation, rather than bashing products they are not familiar with. However, that would often entail that these biased sources spend some dedicated time to properly educate themselves first.

Like most other financial products, there have been negative occurrences in the past as well as professionals who taint the overall reputation of the product by misrepresenting it. However, most of these sad stories could have been averted with semi-regular reviews by the client, either with an ethical agent or directly with the carrier. The fact of the matter is, IUL as a product functions quite well if funded properly, reviewed regularly, and adjusted to meet the ever-evolving financial goals of the client.

All of this misinformation and negative propaganda causes confusion for consumers, many of whom may otherwise benefit from blending some IUL into their overall portfolio of investment and insurance products. Indexed Universal Life for retirement has unique risk-management, investment, tax, asset protection, estate planning, and lifetime liquidity characteristics that can’t be found in any other financial vehicle. The more affluent you are or intend to become, the more powerful these benefits can be for you.

If you want risk-managed, tax-sheltered growth, and ongoing accessible liquidity Indexed Universal Life can be a very attractive option.

Hopefully, this article will continue to be an ongoing beacon of factual clarity in the dense fog of biased opinions that appear for the public as they search for the pros and cons of Indexed Universal Life Insurance (IUL).

Sincerely,

John “Hutch” Hutchinson ChFC®, CLU®, EA, AEP®, CExP®

(Click here for Hutch’s bio or click the different Acronyms above to see what each of them mean.)

California Insurance License #0D29100.

John “Hutch” Hutchinson is the founder of BankingTruths.com, an educational site discussing how to maximize the lifetime benefits of both Whole Life Insurance and Indexed Universal Life Insurance by creating your own private family banking mechanism.

Information presented in this article by John “Hutch” Hutchinson is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities product, insurance products, financial services, or investment strategies. Be sure to first consult with a knowledgeable, ethical, and licensed insurance professional before implementing any strategy or product discussed herein.

*- “Zero is my Hero ®” is trademarked by Warren Steinborn, a life insurance agent and financial planner

**- See the attached called “Lessons in Long-Term Investing – Long-Term Investing Has Had Rewards” by Legg Mason Global Asset Management. Their Sources: Lipper, Thomson InvestmentView and Standard & Poor’s (S&P), a division of The McGraw-Hill Companies, Inc. Each calendar year listed in chart reflects average annual performance from December 31 of the prior year to December 31 of listed year. Returns prior to 1957 are representative of the S&P 90 Index, a value-weighted index based on 90 stocks. This chart is for illustrative purposes only and does not represent actual performance, past or future, of any investment. Past performance is no guarantee of future results. The S&P 500 Index (S&P 500) is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S. Performance does not reflect the impact of fees and expenses. Investors cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.