The Motley Fool recently added more fuel to the fire that will, a lot of us believe, leave indexed universal life insurance in the same historical pile of ashes and rubble that variable universal life and traditional universal life started. I’ve asked over and over why no one is screaming with joy about how good IUL’s actually perform, as opposed to what customers were told to expect based on assumptions when they bought. The truth is that in a low interest environment that keeps the policy performance near their “no loss floor”, the floor actually does lose because the costs inherent in the policy continue to increase with each new year.
In an interview with Jack Bogle, founder of Vanguard funds, Motley Fool tapped his expertise in an area that he essentially invented, indexed funds. His take on indexed funds, the same funds that support indexed universal life insurance, is that we should expect about a “2% annual growth over the next 10 years”, anemic at best. For products like IUL’s that include life insurance and indexed funds the formula becomes more complicated because weighing on that 2% is the cost of the life insurance and any management costs. As Motley Fool co founder David Gardner puts it, “Ick!”.
I think it’s important to discuss how the old universal life and the newer indexed universal life insurance are presented at the point of sale, agent to client. Both the old and the new products have guaranteed values that the policy will not go below and they also have assumed or non guaranteed values which are based on nothing more than what the life insurance company believes it takes to excite the customer to buy. These assumed returns on the cash value in the policy make it appear that not buying the product will be blowing off riches and early retirement and vacations and yachts. Back in the high interest days of the 80’s and 90’s the agent could look you in the eyes and claim that there was no reason to believe that the high interest wealth won’t just keep on coming.
Well, it didn’t and when the interest rates plummeted, so did the cash value in their life insurance and the results in countless traditional life insurance policies is that clients lost all of the money they put into the policies and they lost their life insurance as well. No one ever told them that the guaranteed interest rates weren’t enough to sustain the policy. Now, in a low interest environment, indexed universal life insurance agents are running around telling everyone that the assumed 8-11% returns in their policies should happen because the S&P has always performed so well. What they don’t explain is that no one has ever measured how the S&P performs with a life insurance policy strapped to its’ back. They offer a guaranteed floor of 0-2%, but just like the guarantees in a traditional universal life policy, they won’t sustain the policy over the long haul, some times not even for the short haul. ICK!
Bottom line. For those hoping to make their estate swell by buying universal life insurance, indexed or not, look at the guarantees and not the assumptions. If you don’t like what the guarantees promise, don’t buy it. If the life insurance agent really pushes on assumptions and soft pedals the guarantees, show them the door and tell them to forget the address. And keep in mind that no one, and I mean no one is out there gushing over the success of indexed universal life. If you have any questions or have purchased an indexed universal life policy and are concerned about it, call or email me directly. My name is Ed Hinerman. Let’s talk.