I know this title may be somewhat alarming given all the negative rhetoric by the Infinite Banking and the Bank on Yourself communities. However, I think you owe it to yourself to put some facts behind these opinions about IUL which you may have adopted at face-value without really validating or stress-testing.
Even if Indexed Universal Life turns out not to be your cup of tea, wouldn’t you like to understand the other side? I personally remember all the peer-pressure against IUL that I felt from my friends and colleagues at a large Whole Life career agency. Even after going independent, I found that this same cult-like “zealousness” revering Whole Life still exists in a big way amongst the small but growing banking community.
It took me losing a sizeable case to a competing agent recommending IUL to the same business owner prospect I was working with. This other agent was promising upside potential that my beloved Whole Life policy didn’t offer, and the rock-steady guarantees I kept touting weren’t enough to sway the client in the end.
After that, I decided to put down the kool-aid and take a much closer look at Indexed Universal Life.
Check out this article if you really want to understand all the detailed pros and cons of Indexed Universal Life. This lengthy article has a clickable table of contents, so you can skip down to the particular issues you want more clarity on.
Nowadays, rather than stand firm on one side of the fence or the other, I understand both products thoroughly. I now offer either Whole Life or Indexed Universal Life, whichever is most appropriate given the hard and soft facts of the case.
Seeing the unique value proposition of each product type, I also happily own both product types on myself and other family members. Remember that these two distinct types of insurance can uniquely complement each other to provide a very powerful combination of wealth-building benefits for a family.
So, as we delve into the facts below, I would like to invite you to have an open mind when considering the facts. Most importantly, I’m asking you to put your predispositions aside for a moment and to think critically about what I’m sharing.
The Top 5 Reasons Why IUL May Make A Better Banking Policy
1. Locked Loan Rate
A handful of the top Indexed Universal Life carriers of 2018 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).
No Whole Life policy allows you to lock in your loan rate while still realizing the maximum growth potential on that loaned money. All Whole Life companies offering non-direct recognition loans (meaning they don’t reduce your dividend rate on loaned money) have a floating loan rate that has been considerably higher than the favorable 5% rate you hear of today. Expect these non-direct recognition loans of Whole Life to rise in the future with prevailing interest rates. Hopefully, they won’t go back to double-digits like they were for several years during the 1980’s.
No bank or brokerage account will let you lock in your margin loan rate or line of credit today for your entire life. You can, however, lock in a low lifetime loan rate with some of the of the top IUL carriers of 2018.
How low can you go?
There are mutual companies offering some of the best performing IULs that will lock in a 5% or 6% loan rate 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 11.5%-14% tracking the S&P 500 index, even on the amount of money you borrow to use for other opportunities and expenditures.
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 policy loans as tax-free retirement income
Locking in a lifetime loan rate now using today’s low 5%-6% policy loan rates is an amazing advantage, especially since your policy still has the opportunity to fully participate in your IUL’s growth tracking only the upside of the S&P 500 index.
Interest rates will rise again someday. Other than employing some advanced hedging techniques with swaps and other derivatives, it’s the only way to hedge against this risk.
2. Cash Working Sooner is Better (more capacity, lower initial costs, higher growth opps)
When it comes to participating in the miracle of compound interest, everyone knows that “more money working for you sooner is better.”
There are a few ways that an Indexed Universal Life policy has a leg up over Whole Life in this “more in sooner is better” department.
- The actuarial structure of an Indexed Universal Life policy often allows you to squeeze in more early premiums than a Whole Life policy does. When clients want to fully fund a policy in less than 7-years we have found this to consistently be the case.
- Because the unbundled cost of insurance inside IUL is cheaper when clients are younger, it means that more of your premium dollars can create compound interest for you early on. Whole Life on the other hand essentially averages out the lifetime cost of insurance evenly throughout the policy, meaning there’s a higher toll early on. Also, Whole Life often assesses the entire policy acquisition cost in the first two years of the policy, whereas most Indexed Universal Life policies will stagger these costs over the first 10 policy years. Having more of your early premium dollars at work in the policy growing early on can further subsidize these acquisition costs.
- The opportunity to have double-digit growth compounding inside a policy without market losses can have a tremendous effect on cash value growth. Take a look at the last two 10-year periods, which experienced the S&P 500 index losing around half its value. Look the annual differences between the actual S&P 500 returns right next to the hypothetical crediting rate of an IUL with a 12.5% cap.
Note: This reflects only crediting and does not take into account the IUL policy charges and costs of insurance. However, these costs can be minimized substantially by front-loading a policy with a lifetime’s worth of premiums paid in the first 4-7 years. Also, keep in mind that these pure S&P 500 returns do not account for embedded capital gains taxes, management fees, or fund fees.
This ability for your cash value to frequently earn double-digit crediting while eradicating market losses can substantially accelerate the growth of what you’re used to seeing in a life insurance policy.
The truth of the matter is that over the last 81-years, the S&P Index has gone down less than 25% of those years, and gone up more than 75% of those years. This study also shows that there were not very many stretches where the S&P Index goes down multiple years in a row.
When you have a vehicle that contractually guarantees 0% crediting when there would normally be market losses, it doesn’t matter how much the S&P 500 loses in those down years. In fact, if you had no other money in the market, you may actually be rooting for a bigger crash. Historically these drops have produced bigger and at times more extended rebound rallies.
Pro-Tip: Keep in mind that some IUL policies have uncapped strategies that you can allocate all or a portion of your cash value to. You can also rebalance your allocation every year.
The fact that the S&P Index goes up a lot more often than it goes down bodes really well for IUL crediting. There’s a saying I love about the stock market that says “stocks take the stairs up and the window down,” meaning it generally rallies slower than it crashes.
3. Ultimate Flexibility
Oftentimes, the reason why clients are reluctant to initiate a Whole Life insurance policy designed for personal banking, is the rigid annual premium commitment they associate with life insurance in general. Even though Whole Life can be designed with term riders so that only 10%-30% percent of the maximum-allowable premium is required every year, this mandatory commitment can make some clients nervous.
Either they don’t take action at all, or they decide to start with a significantly smaller policy than what they should do. This only hurts them because compound interest is time-dependent. Obviously, the more contributions working in the policy earlier, the more exponential growth you’ll experience over time.
4. Stronger LTC
These days it seems that just about every company offering Indexed Universal Life has some sort of free Chronic/Critical Illness rider attached to their IUL policies. This is not always the case with Whole Life policies. Some Whole Life companies do have some sort of free Chronic Illness rider, but many offer it as a paid rider to have your policy also act as a hybrid Whole Life / Long Term Care insurance policy.
Some of the top IUL carriers of 2018 offer very comprehensive Chronic/Critical Illness riders for FREE on top of their best performing IUL policies. Depending on how your actual numbers look, you may find that these policies provide you with a sufficient hedge against Long Term Care while building an asset rather than paying an additional cost.
Note: If this is the main reason why you are considering an Indexed Universal Life policy, then you should definitely consider some of the pure Long Term Care policies as well as other hybrid life policies that are built more for maximum LTC protection as opposed to IUL for retirement or cash value performance.
If, however, you want one of the best performing IUL policies on the market that still offers some free protection for Chronic/Critical illness, then you have some worthy options available.
Pro Tip: These types of hybrid IUL / Long Term Care type-policies can be crucial when it comes to the small business planning strategies such as Buy-Sell Agreements and Key Person life insurance. Oftentimes, we find that entrepreneurs have outdated life insurance policies that only protect against premature death. However, the business is still at risk if a partner or key employee is too sick or hurt to keep working. Since people are less likely to die prematurely than to become chronically ill or critically injured, these types of hybrid Indexed Universal Life insurance policies can simultaneously help to protect entrepreneurs on both fronts.
5. Ability to Break Up the Death Benefit
Another unique feature that is offered exclusively by some of the top IUL carriers of 2018, is the ability to enhance long-term cash value performance and tax-exempt distributions by electing to have the death benefit paid to beneficiaries in a series of payments over time rather than all up-front.
Let’s first answer some of the FAQ’s I get about this unique feature:
- If the primary beneficiary dies before getting all the death benefit payments they’re entitled to, then these payments automatically get paid to the secondary beneficiaries.
- You get to choose at the onset of the policy how much of the death benefit will get paid out as a lump sum, and how much gets paid out in payments. Obviously the more you elect to be paid out in installments, the better it is for your cash value growth and retirement income.
- You also get to choose how long you want the payments to stretch out for (usually between 10-30 years). Obviously, the longer you stretch the payments, the better it is for your cash value growth and retirement income.
- Once chosen, this option is irrevocable.
The benefit of doing this is the company offering the indexed universal life policy will either reduce the ongoing cost of insurance or apply an offsetting credit inside the policy to cover the charges.
We find that for young healthy people this does not make a huge difference in cash value growth during the accumulation years. However, it can create a material increase in projected IUL policy income they plan to take during retirement.
Also, for insureds that are older or adversely-rated by the insurance company, we have found that this can make a huge difference in overall policy pricing and performance. So, if you thought you were too old, or unhealthy, or smoked too much to qualify for a competitively priced IUL policy, think again! This may be a very economically viable option for you.
Note: Before electing this option, make sure that you use some sort of Indexed Universal Life calculator to ensure that the amount of initial and ongoing death benefit will be enough to cover the legacy goals for your survivors.
Closing thoughts on why IUL may make the ideal banking policy for some
Hopefully understanding these five key IUL benefits helps to put a crack in the dam that may have been put up against Indexed Universal Life based solely on opinion. You may find that the sources of these opinions come from people that don’t fully understand the product or have a vested interest in selling a competing product.
This robust combination of benefits gives you the opportunity for:
- Opportunities for double-digit cash value growth (sometimes with no cap).
- A locked loan rate for LIFE while still fully participating in the above.
- Additional ongoing protection against chronic/critical illness. After all, bad things do happen to good people.
- Ultimate premium flexibility with the ability to skip multiple years if you fully fund the first year
It’s true that owning an IUL requires more responsibility than paying Whole Life on auto-pilot. Many of my clients have found that the additional responsibility is worth the reward of getting the benefits above.
Click here if you really want to understand all the detailed pros and cons of Indexed Universal Life. This lengthy article has a clickable table of contents, so you can skip down to the particular issues you want more clarity on.
Again, this does not mean we are against Whole Life! Quite the contrary. We see the value of both products, especially when used in conjunction with other wealth-building efforts.
John “Hutch” Hutchinson
ChFC®, CLU®, EA, AEP®, CExPs®