I was talking with a life insurance agent friend of mine the other day. He had called to ask me about my ongoing research and interest in the infinite banking or being your own banker concept. He thought there was another route I might want to look at.
This agent suggest that instead of using dividend paying whole life insurance, that a person had a chance of doing much better (accumulating more cash value) if they used an indexed universal life insurance policy. After all, he said, indexed UL’s were illustrating interest rates around 8%, higher than the 5%-6% dividends that the best of the whole life insurance companies were paying.
I suggested we pick at it a little. The first test for me is always the guaranteed basis test. Anyone can illustrate interest or dividends, but at some point there needs to be a reality check. Not too long ago I was looking at an indexed UL that had a guaranteed 1% interest rate and an assumed interest rate of 8.2%. Who in their right mind really believes that you can assume you will make 8.2% over the life of your policy. I’m hard pressed at this point in time to believe that the policy will ever pay 8.2% in any given year, let alone for the life of the policy.
So, let’s consider the basis of infinite banking. You buy a whole policy and use dividends to buy paid up insurance. You fund the policy as close to a MEC as possible which will allow you to have most of the premium going toward paid up additions. The base policy is an interest earning whole life policy with a term blend to keep the cost of insurance lower, so it builds cash value at a guaranteed rate of 3%-4% depending on the company. It’s the engine at the front of the train. Now, paid up additions are really kind of neat. They are the rest of the train.
Let’s say you are funding your policy with $5000 extra dollars every year above the base policy. I’ll use approximate figures from a policy that a client just put in force. That $5000 a year buys about $18,000 of paid up life insurance, so in the case of this policy it started with a face amount of $250,000 and at the end of the first year it has a face amount of $268,000 and because of the extra $5000 used to purchase the paid up $18,000, it has immediate cash value of very $4960. So, the small amount of cash value in the base policy is building interest and the additional $4960 is now building interest too. Different companies have different names for the additional cash that goes into the paid up additions, but for honesty sake let’s just call it over funding.
Before long, because of modest compounding interest, the over funding starts building cash value, guaranteed that is, well, impressive. Is it a get rich quick scheme? Not even close. If you’re not in to the policy and concept for at least 20 years, it won’t work to its’ optimum.
So back to my first test, guarantees. I ran an illustration for the client above using a dividend rate of 0% for the life of the policy and the guaranteed 4% interest rate and the policy just kept right on growing. A worst case scenario and it still did well.
I tried the same thing with an indexed UL. The worst case there is that you over fund the UL up to the MEC limit and then letting it run at a worst case scenario of 1%. Because it is all UL with no term blend, more money goes into the cost of insurance which leaves less cash to accrue at 1%. Since the idea is the build enough cash value to become your own banker, it seems something of a no brainer to use the train that has more cash going into the interest bearing pot at a higher guaranteed rate, dividend paying whole life.
I can hear the screams from my friend already. “But that IUL will do better than 1%. You know that!” OK. Just for a minutes let’s pretend that it does as good as the whole life. Let’s say 5%. That means they both performed better than their guarantee. But you still have more cash going into the interest accruing train with the dividends running at 1/3 of what they are currently paying. Given the same interest rate the whole life wins again.
Bottom line. The thing I don’t like about indexed UL’s is the same thing I didn’t like about universal life in the 80’s. The assumptions aren’t sustainable and people are going to be hurt down the road because of that. If you have any questions or think I’m a nutcase, call or email me directly. Let’s talk.
My 20 years of experience give me the knowledge and leverage to find reasonably-priced life insurance for people who have been declined or are paying more than they need to.
Good article Ed.I also hear many agents swearing on Indexed universal policies.
Another thing I don’t like about IULs is that most of the offering options I have read about are based on the S&P500 performance, which has been pitiful these past 11 years. And the early years are the ones you really want performance out of. A company might find a strong market niche if they were to offer a IUL with more index choices that the policy holder can switch between. But then they would be getting into some of the “trading” situations that they try to discourage in their VUL products. Happy New Year.
Great Article – Yes – I see a lot of agents pitching IUL.
Here is my problem. They are illustrating at 8%. That means, they need to hit that 8% each and every year to at least replicate those assumptions.
What if you hit a floor of 0% for a couple years? What rate of return to do have to hit the next year to bring it up to an 8% average? Probably more than the Cap?? You probably have to have at least a couple years of hitting the Cap? What are the probabilities?
I think most agents out there don’t realize you need to hit those assumptions year after year! That’s what killed variable life products!
Thanks for writing this article – hopefully agents and advisors will stick to what works good – Traditional UL and Whole Life.
I think if you agree the concept that over the long run that the stock market will have more good years than bad years, then you will feel comfortable with the Global Index Universal Life. The guarantee of 0% to 1% is to protect your net from decreasing during the down years, and then resume taking advantage during the good years. That’s why they come up with the AVG of 8% (usually there is top ceiling % limit during really good years). Every type of investment has it’s risk. But in a relatively safe scenario, if you expect over the course of 30 years (20 are good years and 10 are bad years), at least you will have a pretty not bad gain from the Global index funds. But let’s say if you invest on your own and enjoyed 20 good years, but you didn’t balance your risk and is still leaving majority of your assets expose to general market movement. The bad years come around your retirement time, you will get crushed. But the scenario of Global Index Universal Life will protect you due to the 0% or 1% guarantee rate. I think it’s worth to consider allocating a portion of income in this type of product.
To Brad,
BTW, I think it’s better not to think that the market need to constantly grow 8% per year. You should think that the more likely scenario is you will have more some good years of gain at the top end (11% to 13%), some at (4% to 7%), and some bad years (which the 0% to 1% is to protect your net from growing down). In a way, you have to believe and feel comfortable that in the long run, there are more spurs of BULL’s years, than BEAR’s years.
Ren,
Sorry. I don’t feel any more comfort in going to a Global Index IUL than I do dreaming of 8% returns on the S&P.
What you are missing in the IUL is look at the history of just say the S&P 500. Take a spreadsheet and look at each year. Then take a carrier with their cap and plug in for that year what the return would have been (ex. 0% in loss years and say a cap of 14% in positive years). You will notice that in the last 20-50 years you would average 8%/yr. During the 2000-2010 one of the IUL with a 14% cap averaged 7% during that time and if you added in 2011 it was 6.59%. Going from 2011 to 1982 it would have averaged 9.2%. I believe in the IUL’s but I agree in not showing 8% on illustrations. I typically will show 7% and tell my client to use that as a base to figure out how much you need to put in in order to get to what income you want.
Tom,
Thanks for your input. Historically really doesn’t mean squat to me. Historically we weren’t a global economy. Historically when someone in Greece or Italy sneezed our market didn’t freak out. Going forward is all about a global economy that is teetering on the edge of collapse. Going forward is the US trying to deal with $16 trillion in debt. It isn’t going to be pretty. If you can’t guarantee it you shouldn’t quote it.
Ed, I am just looking at transitioning into selling the IUL products as a retirement alternative to traditional planning. It has seemed to me a no brainer, but is the whole life a better approach if you are being honest with the customer/client? please advise. Thanks.
Ed, it’s pretty obvious that you don’t truly understand the benefits of an IUL. Of course they are all different depending on the carrier. Our primary business is with the IUL and the majority of our clients have received the cap in the last 4 years. The product also offers a 2% floor. The return is tied to the S&P 500, so your statement that you are “hard pressed to think that you could receive an 8.2% in a year”, means that you don’t believe the market can have that return in a year, which is false. Also remember this is a year point to point design so your gains are locked in each year and then reset. Also we have the benefit of a DCA account that is currently paying 5%, which would make it impossible to earn the 2% guarantee.
For clarification we don’t design these for death benefit. They are designed for tax-free cash accumulation and distribution. You failed to mention how much it would cost you to pull out money if needed. That should raise a big concern. Also the IUL is tied to a fixed account that is paying 4.35% and you can move in and out of that as much as you want. If interest rates go up that will be paying higher.
Brian,
Sorry it took so long to respond. I had to look up all the meanings of benefit so I could be sure I wasn’t missing something obvious.
You did catch me saying that I doubted that an 8.2% return could be had (in this economy) in any given year. With a point to point concept that was pretty lame. I think you could almost get away with saying that there is some point to point in almost every calendar year where 8.2% could have been the crescendo.
with the S&P hitting an all time high yesterday I suspect that people whose anniversary, end point, was yesterday hit it big.
I am interested in learning and if it leads to it, being set straight so you have access to my forum to prove your point, at least until we’ve sufficiently beat it to death and can’t agree. This is going to take a little homework on your part, but I think worth it.
I need you to provide me an in force illustration of the product you’re talking about that shows an 8.2% return 2008 to 2012. Of course you can delete any personal information, but it has to be an in force illustration. That will be the easy part. I then need you to give me a breakdown, using annual point to point, of the policy anniversaries in the last 4 years that would have worked for and which point to point periods it wouldn’t have worked for.
I’ll concede that the DCA account is currently paying 5%, because currently is today, not tomorrow. I’ll concede that you have a 2% floor and that all gains are carried over and that you can go to a fixed account that “is paying 4.35%”. I suspect that is current and not for the life of the policy also.
My blog is open to your response as long as you are willing to peel back the onion based on my requirements. If you aren’t willing to do that I am willing to post your reason for not wanting to do it.
I am a licensed financial professional in Florida. Reading the rationale of those that do not believe that Equity Index Life Insurance is an excellent option is exactly why the majority of Americans either don’t have any coverage or don’t have enough or the right kind for them. There is no cookie cutter policy. We as professionals MUST assess each client’s stage of life and their current and future needs. With that being said, EIULs have AVERAGED 8.5% – 8.8% OVER THE LAST YEARS 12 YEARS. I must admit when I first learned about EIUL I was very skeptical. After learning and researching IRC7702 which is provided by the US Government, I know that they are very good tools for the appropriate client. I educate my clients first based on their objectives and needs, then create a solution for them. TO ALL OF AMERICA, WORK WITH AN AGENT THAT HAS ACCESS TO EIUL, IUL, TERM, & WHOLE LIFE.
Hi Michael,
Thanks for your observations and input. I agree that we must assess each client’s needs and advise appropriately.
I think as professionals we should stay away from generalizing about assumptions and products. Saying that EIUL’s have averaged 8.5% to 8.8% over the last 12 years is a little like saying that cars have averaged 30.2 miles per gallon for the last 12 years. I keep mileage logs on my car which happens to be a 2000 Toyota Solara and it has in fact averaged 30.2 mpg for 12 years. Great car. I could sell that to someone and tell them what the mileage has been and probably will continue to be, but I’m not going to sell it based on a future assumption of 30.2. You said, “EIULs have AVERAGED 8.5% – 8.8% OVER THE LAST YEARS 12 YEARS”. Cars haven’t averaged 30.2 mpg and I am willing to bet my car that EIUL’s as a product have not averaged 8.5% over the last 12 years.
I too have read IRC 7702 and I really have to wonder what you pulled out of there that convinced you that EIUL’s are very good tools for appropriate clients. 7702 is a definition of cash value policies and guideline premiums.
So, let’s cut to the chase. Just like the guy before you and the one before him, I will allow you to post on my blog an in force illustration of an EIUL that has actually produced an internal gain of 8.5% for the last 12 years. If you can I will admit that it can happen. Again, I am not looking for someone to show me what the S&P did or what would happen if a person just at the right point of an annual point to point. I am looking for a real live client who is banking 8.5% and an illustration that clearly shows that it is an in force policy.
If we get that far I would like you to pick your favorite company and have them provide a spreadsheet that shows, out of the 1700 or so days in the last 5 years, how many annual point to point dates produced an 8.5% internal return in their policies.
And lastly, get over the attacks on IUL policies. Mine or anyone else’s willingness to call them out is not the reason people don’t have life insurance. If you’ve been in the business for more than a year you know that.
So, let me see if I can do this right. TO ALL OF AMERICA, UH, I CAN SELL ALL OF THOSE PRODUCTS AND THERE IS A REASON I DON’T.
Ed,
Thanks for the follow up. I want to address the questions you presented, which I will, but some other things are taking priority right now. Bare with me.
Thanks
Ed,
if you want guarantees then you should just stay with your whole life policy. if you can tolerate more risk then IUL is a great tool to supplement retirement. i have been writing IUL for the past 10+ yrs and i got to say every one of the policies that i have written in the past 10 yrs has averaged at least 8% (during one of the worst decade) actually my own policy got 18% in the past yr (i use monthly point to point, not annual point to point)
based on your comment it shows me that you really have no idea what you are talking about. you are only looking at the return. another thing to consider is the cost of insurance. IUL has alot less policy expense than a whole life. so that allows for more cash value accumultion.
James,
So you say, “every one of the policies that i have written in the past 10 yrs has averaged at least 8%”? You should be the perfect person to prove me wrong then. And there shouldn’t be any need to cross out names on an in force illustration because we already know your name is James.
So, let’s cut to the chase. Just like the guy before you and all of them before him, I will allow you to post on my blog annual statements of an IUL that has actually netted an average gain in cash value of at least 8% over the past 10 years. Use any crediting method you want. If you can I will admit that it can happen. Again, I am not looking for someone to show me what the S&P did or what would happen if a person just at the right point of an annual point to point or monthly point to point. I am looking for a real live client who is banking at least 8.0% average annual increase in cash value and annual statements that clearly shows that it is an in force policy.
If we get that far I would like you to pick your favorite company and have them provide a spreadsheet that shows, out of the 3600 or so days in the last 5 years, how many annual or monthly point to point dates produced an 8.0% average gain in cash value.
I am willing to say that I don’t know what I am talking about and that you do. I hope that you are just another IUL agent out there that is all defense and no offense. Bring it on James.
P.S. Congratulations on that 18%. You almost don’t have to show anything for the other 9 years to partly shut me up.
By the way. Accusing me of only looking at the return was kind of weird. Return is exactly the IUL pitch. I also find it hard to believe that you have been in the business 10 years and don’t know better than to generalize in policy comparison. Provide me two illustrations that show IUL policy expense to be “alot” less than whole life.
and what do i get out of it? if i have to prove to every single person out there that IUL is a great policy for a right person, then i need to hire a full staff just to keep up. im super happy with my policy. same with my clients. why should i waste all my time proving to you something that you are 100% against it. also i have a wole life policy and have nothing against it. again, there is no best policy for everyone.
if you dont like IUL, thats great. keep it to yourself. dont tell the entire world that IUL sucks.
James,
Just so I understand this, your concern with ponying up with the facts is that you will be so successful that you might have to create jobs? You’re funny.
I’ll tell you what. You come through with the proof and I will partner with you and provide the staff at my cost.
I’m not sure what your real background is James, but as for me, if I believe something to be true I don’t keep it to myself. You know. This is actually starting to sound like my blog got to one of your clients and they want you to come clean too. If you have the proof, no problem. If you don’t it seems like you’re kind of in a bad position.
Title for my next blog post was inspired by you. “Wake Up World. IUL Sucks Big Time!”
James,
What do you get out of it?
You could clear your name. You have made yourself look a little foolish so far. If clearing your name isn’t enough, I offered a partnership to you that, if you’re right about IUL, could make us both a lot of money. And again, I’ll pay for the staff so there is no risk on your part. I already have that staff in place and they are excited and experienced. And if that’s not enough you get to be the first IUL agent to whack me and I am willing to put the proof on my blog along with your email address so you get leads.
Very glad I came across this article. One of my buddies is currently on an emotional high with the new IUL policy he recently signed up for claiming it to be “the best decision he has ever made.” His scenario: 23 years old, 150k death benefit @ $100 a month and he swears he will have accumulated $800k+ by the time he is 55 years old. I just do not see how this is possible. As much as I try to explain that projections are not guarantees he swears by everything his agent told him.
Any advice or pointers that you could offer so i can help this kid see the light?
Hi Dan,
It’s tough once they’ve been dazzled by big numbers at his age. As you can see I’ve tried to get an IUL agent to quit the sales stuff and show me the proof. I would sell it myself if anyone could prove to me that the big numbers are the norm and not the exception.
The agents would like you to believe that their favorite point to point crediting just works well all the time, but none of them will show me a policy that’s been in force 5 or 10 years where the actual cash value gain has averaged 8%-10%.
Until I’m proven wrong I stand on the premise that those kind of returns are possible, but not likely because 1. The actual date you start your policy determines your future in point to point crediting. Wrong date. Wrong results. 2. Anyone who really believes that past trends can be used to predict future trends in this century is, well, young and doesn’t realize how much our world has and is changing and it’s not in our favor. 3. If an insurance company really believes that 8% is likely or probable, why do they have a guarantee of 3% or less? Now follow this. If the company really believes they can gain an average of 8% annually, they would be putting their own money in IUL’s. Not the agent who probably owns one, but the company. It’s not happening.
Ed, you cannot find long term IUL policy performance because no such data exists in meaningful numbers.
IULs have been around only for 15 yrs or so, and neither insurers nor agents market them as the potentially sound retirement vehicle it COULD be. Sadly, IULs are sold by agents that don’t understand them to people who don’t have a clue. As a result,
1. IUL persistency rate is terrible,
2. IULs don’t perform well because they are overloaded with fees and commissions and woefully underfunded with premiums – a deadly combination.
3. Agents and clients wrongly assume illustrations are projections when they are only a meaningless snapshot of a static set of assumptions.
Illustrating IULs at a rate above 6-6.5% is silly at best, misleading at worst. If it doesn’t make sense at 6%, the policy is structured badly and is not suitable for anybody.
I should have added the obvious: it is nonsensical to EXPECT, project, let alone illustrate equity-like returns from an IUL when, as an option-driven instrument, it carries a LOWER RISK. Golden Rule: returns are ALWAYS risk adjusted by the market place.
Well Hunbaron,
And people think I’m opinionated. “you cannot find long term IUL policy performance because no such data exists in meaningful numbers.” Why do you think 6-6.5% is a feasible net return on cash value if 8% isn’t. If there’s not enough data to back up 8% how can there be enough data to back up anything but the guarantee?
Past performance does not indicate future results. Anyone? Bueller? Bueller? Mind you, there is a history with similar results, sure, but is less than 100 years of history really a large enough sample size? I agree with Ed that current conditions (world economy especially) are different than they have ever been before and to be slightly defensive (best offense is a good defense) is better than out right offensive. I always hate to generalize, but I have run into more IUL policies sold to people not as a PART of their portfolio, but THE portfolio. This does not mean a firm no, but typically a proceed with caution. I’ve found it’s typically sold in cultural markets by young agents who have little grasp of the market as it doesn’t require any education outside of a life license. One of my biggest gripes is that the companies I have seen are not always of utmost financial strength and are stock companies leaving me to ask when times get tough, who is getting the short end of the stick? Shareholders or policyholders? I’ve got my bet placed. A product 15 years old that is based on history is a good product? How’s that UL from the 80’s working for ya pal? You bought a young insurance product called Long Term Care whose premiums have often drastically changed while in force as companies didn’t know the long term effects? What’s IUL’s shelf life again? IF, and I strongly say IF, the company did not have an adjustable participation rate and cap rate I’d possibly play ball with the idea, but as long as a company has the company and share holder’s best interest in mind, and has their hands on the wheel, I’m out.
Thank you.
Ed … A couple things …
1) I illustrate my IUL’s at 6.25%. With a cap of 13+% and a floor of 3%, the numbers translate impressively and conservatively for both tax free retirement ‘income’ or surrender value (and DB, of course) with a guaranteed variable loan rate not to exceed 6%. Most are S&P annual point-to-point with a participation rate of 100% (sometimes 90%).
2) You can easily overcome the point-to-point concerns that you have stated by having the premiums paid by monthly ACH. This creates 12 point-to-point(s) basically and therefore after a couple years translates very closely to the published S&P annual result(s) year over year (January 1). There really is no reason to pooh-pooh a look back during the last 30 years of more than 8% (it’s 7.6% over the last 40 years). During the last 5 years the S&P with index protection has returned 6.8% (Ave). During the last 10 years the S&P with index protection has averaged 6.6%. By contrast, after nearly five years, my small business owners are just getting back to even right now on their IRA’s and who’s to say that we won’t have a 20% down year again this year or next (see: 3% floor and index protection). For someone in his 30’s or 40’s, achieving more than 7% should be expected with the right company as long as they fund it correctly and fully. Some companies just don’t offer a good IUL product, IMO — expense ratio too high.
3) Not sure which company that you’re promoting but I’ve 1035’d a few 20 year old WL policies during the last few years from NML and Mass Mutual and Prudential that were lacking (to say the least) on dividend performance as compared to original projections. All ‘thought’ to be good, solid companies. Mass Mutual was the worst.
4) Many of the companies that stated that they would NEVER offer an IUL product are NOW offering an IUL product. This isn’t necessarily good, but an educated, discerning — independent — agent can easily steer his/her clients to the best companies, regardless of the target (and commissions). Example: Allianz has jumped into the fray and I’m NOT impressed. Same for PRU.
5) It’s true that many agents promoting the benefits of IUL’s don’t truly understand them. It’s also true that many agents promoting the so-called pitfalls of IUL’s don’t truly understand them. Best … JJ
Just so you know the product that you say sucks had more than 667 million invested between 2000-2005. Now after ten years of it being available we come to 2011 where the invested dollars almost hit 800 million in one year. So after ten years of it performing it continues to grow. This is a bandwagon you should think about getting on.
Thank You Ed, I learned a lot about IUL’s. And I feel you have grabbed the bull by the horns and stepped on some toes. Glad someone has the balls to speak the truth, and tell it as it really is. I almost made a big mistake. will contact you when I’m ready to make that investment. Feel free to contact me anytime.
Sincerely,
Steven Rossi
I have a real belief in Coaching families on the fundamentals of the money game. Get them out of debt first, then set up emergency savings. I think term is the cheapest way to protect young families and invest in more aggressive mutual funds. Thus “buy term and invest the difference”.
But I am having a real problem demonizing an EIUL product that promises a 0 floor(no risk) or 13% cap. I am confused on the tax benefits that they are selling. (But they sound damn good) They say it grows tax free and when your ready to retire you can take payments tax free also.
Then, when you die assuming you die before 100 ,your family gets the cash value. Lastly it has living benefits where if you get 1 of 7 major illnesses or disabilities ie heart attach, cancer; you will be able to collect 90% of the death benefit.
It seems expensive too but my friends are making $3000 up front on a $3600 premium.
Someone please shed the light on this for me. I am a new life agent working on my securities license and this product is very tempting to switch companies and sell…but I WILL NOT screw people.
Thanks
Rod
A
Rod,
“It seems expensive too but my friends are making $3000 up front on a $3600 premium.” In my personal opinion that is a statement that you should do some soul searching about. If your head is on what you make it is almost never on what’s best for your customer.
I’m a guaranteed kind of guy. Always have been. If you rewrite the above with only guarantees and read the language behind the living benefits and see what’s really there, see how you feel about it. Would you want to sell it to your mother?
Ask your friends if they are selling guarantees or assumptions when they sell EIUL. If your client isn’t comfortable with the guarantees it will absolutely come back to bite them and you.
Ed,
I’m with you on this one. It seems that every 10 years or so, some marketers come along with the bright idea of adding some sizzle to a product that is, for the most part, sizzle-deficient. After all, how exciting is selling death benefit?
I am also a big fan of guarantees and I sleep well at night, knowing my clients’ financial futures aren’t tied up in products they don’t fully understand (I have spoken to a few of the new breed of IUL-faithful and I now understand why their clients don’t understand the product.
Keep up the good work,Ed.
Ed,
Very interesting information. I’ve been attempting to digest illustration information on a proposed fixed index ULI policy for the past few weeks. The illustrations are being presented by an independent rep and were initially set at the 8% rate. I asked for a 6% illustration because I found the 8% just too hard to believe.
I hadn’t realized until now, after reviewing your blog, that perhaps the stated returns they have showed me on a hypothetical are based on the best possible point to point dates. I will ask the same questions as you are posing – I find it compelling that no one will post an in force policy proving otherwise. Thank you for the insight.
I just got an illustration for an IUL product for my 25 years old daughter. It has 0% guarantee and 12% cap. The agent said we do not have to pay it after 10 years. But on that illustration, it marked “lapse” at age 49. Can anyone help to explain it? Thanks.
The agent is a liar. He cannot back up that ten year statement with contractual guarantees.
Foremost Ed a big THANKYOU.
I about to SCREAM my brains out,but this way I’ll have lost too much!Foremost they say that if it’s too good to be true,think twice.These guys swang by my house about 2 months ago right after I had a term,whole life approved by some royal neighbor co.Before I knew it they had convinced me to dig in another more into IUL’s,register for a Kaplan producer class & the rest is history.I am an agent that sucks for allowing a few of my close friends to be scammed by these agents!
FACTS: 1)some of us are too new with these products, and unless you are a financial forensics,they have no business screwing the financial futures and trust of our loved ones.
2)They/we use hypothetical data and are quite evasive if you seem to question too much as a trainee.
3)All they seem to care about is their bottom line (commissions)rather than protection and security for families = callous given the fact that real lives are what we’re talking about
4)The IUL’s have very expensive operating costs that you have no clue about until you receive that first certificate as I did today.Agents typically avoid that detail and only sizzle you with the heaven-made pie.
To all of you my dear brethren who think that being an agent for this product is gerat,great for who?I agree its great commission for you, but how about your client?
Continue to educate us Ed & feel free to contact me. I’m quiting these guys but I have to first make it right with the few families I had strapped inti this spiral
Thank you Ed!
And let’s not forget about companies increasing their premium expense charge from 3% to 6% and lowering their caps… so much for the assumptions! What is the alternative for someone seeking safety and guarantees, growth potential and tax advantages?
Thanks Ed for the great post!
While I was reading an illustration of an IUL product, I found these unclear/hidden points that I want to fully understand before I make any purchase decisions. I wonder if somebody can shed some light.
1: Monthly deduction = cost of insurance + policy fee + expense charge + substandard premium class rating
I can’t find anywhere in the illustration how much the monthly deduction is or was. I simply don’t buy in the assumption that my account growth can cover all these expenses. I need to know the exact number.
2: Minimum monthly no lapse premium (MNLP) vs. premium outlay
All the tables in the illustration only lists the premium outlay that becomes 0 after the fifth year, implying that you only need to fund the policy for the first 5-7 years. However, I notice that there is MNLP. So I have to pay MNLP each month. It doesn’t matter I play this MNLP out of my pocket or use my account value. They are both my money.
Also, the No Lapse Period is 20 years, which means I have to pay a much higher monthly premium than MNLP after 20 years. If unfortunately, my account hit the floor (0.75% most of the time), I will end up owing money to this policy. I guess that, after 20 years, my monthly insurance of cost would be skyrocketing.
3: Caps to the index accounts are subject to change. I don’t feel comfortable about it.
These are my current understanding/questions about IUL. Please correct me if I’m wrong.
Lei,
If it sounds too good to be true then it most likely is. If it sounds all messed up then there’s no doubt it is. If you want to cross off your personal information and send the illustration I will be glad to post it in a blog and talk about how bad a deal you’ve been offered. I’m glad you looked into it before drank the poison. Far too many aren’t that cautious.
Jaime,
I never thought I would hear this coming from me, but whole life beats the pants off IUL.
Ed,
Can you explain how the investment part of IUL’s work?
My buddy swears his $150 contribution will be worth $600k in 30 years! I understand the hypothetical assumptions and I tried to explain to him that is very unlikely and he will be in for a major disappointment.
He swears all of his $150 premium gets invested. Correct me if I’m wrong but doesn’t portion of his premium cover the cost of his insurance plus any other fees? And the remaining balance gets invested?
Any clarification helps.
Thank You
Dan,
No idea how it works other than to say I don’t believe it does work. Your friend should be looking at guaranteed, not the 8%+ assumed values. Although the agent will be quick to point out that the S&P has grown at over an 8% average for the last 20 years he will not be able to show your friend an in force policy that has done the same.
Yes, a portion of the premium goes to the cost of insurance. The older he gets the higher that cost becomes. He’s seen the big numbers now so it may be hard to get him to see anything else. He drank the poison.
Tell him to ask the agent to cosign guaranteeing he will get $600k. When that doesn’t happen tell him to ask the agent what he is willing to sign to guarantee.
Because you admitted you have no idea about how the “investment part” of IULs work, I now understand and agree with your skepticism about IULs and why you don’t sell them. You are right not to sell a financial product you do not understand. It would be irresponsible to do so.
However, it is equally unprofessional to actively denigrate a product about which you apparently have not been educated. For example, one of the most basic elements of IUL contracts is that they do NOT have an “investment part”. Excess paid in premiums are NOT invested (i.e. the “principal” is not at risk of loss).
Instead, carriers contractually guarantee to pay compound interest at a “floating” rate with a low minimum guaranteed rate.
IULs are DESIGNED to be more risky than guaranteed products (but with higher potential returns), but less risky than VULs (but with lower potential returns).
I suggest you contact a top rated carrier that offered a competitive IUL product for many years (such as the Eclipse by MN Life). Have them explain their interest crediting formulas and how they worked over time. Most importantly, have them disclose their ACTUAL interest crediting rates as applied to their issued policies going back to the time they first offered them.
If, after you understand how IULs earn interest you still don’t like them, at least your opinion can be respected as that of someone knowledgeable on the subject.
Peter,
The same challenge to you as all of those before you. Use your own clients or go to a respected company you represent and ask them to provide you with a ten years worth of in force statements on ten different policies that show an average 8.5% net gain in cash value annually. Delete the identity so we not giving away some wealthy people’s id. Send them to me and I’ll post them on my website and eat crow.
Great advertising opportunity for you and the company
Peter,
The same challenge to you as all of those before you. Use your own clients or go to a respected company you represent and ask them to provide you with a ten years worth of in force statements on ten different policies that show an average 8.5% net gain in cash value annually. Delete the identity so we are not giving away some wealthy people’s id. Send them to me and I’ll post them on my website and eat crow.
Great advertising opportunity for you and the company
I just met with a new adviser yesterday. He is suggesting to switch my Universal Variable Life that I have had since 2006 to the IUL. He also states that it also includes long term care insurance. I don’t see that any of the dialong has mentioned anything about long term care. First, is it wise for me to switch when there is zero surrender charges now that I have had this for a while. And, am I just being told the long term care is included, but really I’m just buying it separately?
Lisa,
I’ve heard some companies are tying a long term care component into life policies. There is always a cost of insurance so you are paying for it. If the agent says there is no charge, just part of the policy, get a second opinion without the rider. Another agent. Another company.
If the VUL is performing like you want there is no reason for the agent to replace it other than making another big commission. To speak to the whole picture I would have to see the proposed illustration and your last VUL annual statement.
I would be wary.
Hi Ed,
I’m a new life agent and actually have seen other agents in our company posting their clients’ illustrations showing high returns (while they were doing training for us) – some in recent years even capping at 13.5%, but I don’t have any of my own that I can show you. I have my own policy, but because it’s still new, it doesn’t really show much now. I would be interested to find out if the companies we broker for will actually provide me in force policies but it may be a while before I get around to looking into that.
I’m still learning more and more about the benefits of an IUL, and some of that I learned through The Retirement Miracle by Patrick Kelly. Have you read this book? It talks about some of the things that I want to comment on.
This isn’t one of them, but long term care is indeed being tied to life insurance policies, and for the companies that our company brokers for, they do add a minimal charge for a rider.
In terms of a VUL, it is a pretty risky product because, while it offers the full gains from the stock market, it also suffers the full losses from the market, so the cash value can drop. So while a policy can have performed the way you want it to in the past, there’s no guarantee that you won’t lose any money in the future. To be on the safe side, it would be wise to convert your policy into an IUL (unless of course you’re willing to risk the potential losses for the possibility of higher, uncapped gains).
If an illustration is run and it shows that the policy will lapse after a short number of years, then that means the agent is running the illustration wrong – they are indeed just trying to sell you anything. They need to run it through age 120 to make sure that the policy doesn’t lapse. Any ethical agent should be doing that.
In terms of the returns, actually, it seems like we’re throwing around 8% average as a “too good to be true” number. But here’s the thing – the product does indeed say average, but it offers the 0-1% floor and the 14% cap (depending on the company). That to me says that no given year would necessarily actually give you 8%. What it should show you is that, one year it might be 1% and another it may be 14% and yet another 5%. And so when you’ve taken the index or indices that the product (again depending on the company) uses (for the last 18 years or so because that’s how long this product’s been around), it does average out to 8% a year. And the main reason why you would end up with 8% average, even given year 2008, is because they do not have to factor in a negative return in this product. For stock markets and mutual funds, etc., their average returns and their actual returns may be different because of the negative return, but for the IUL, the average is indeed average because it doesn’t suffer losses from the market. In this case, even the VUL cannot boast that their average return is their actual (whereas the IUL can). And when you plug in even just basic numbers like in The Retirement Miracle book (like starting with $1000 over a period of years), it shows a huge difference in an account where you take in no losses and capped gains versus an account where you have unlimited gains and also unlimited losses.
As for whole life being better than IUL, I see a few problems with whole life. 1) Less flexibility on premium payments (which granted, isn’t as big a problem as the other two I’m talking about next). 2) The cash value you accumulate can be accessed by you only, but will not be passed on to your beneficiary if you die – IUL allows you to have an increasing death benefit amount for your beneficiary. 3) Whole life is currently being offered at around 2-4%, and with inflation currently at around 3.5%, the growth there will just barely beat inflation (and others won’t even be able to keep up with it), let alone really build much wealth.
How you feel about any cash value life policy as a retirement vehicle versus a 401k, IRA, or other qualified plans. Are you familiar with the name of Ed Slott? He’s a tax advisor who’s been mentioned on Wall Street Journal and other magazines, and there’s a 5min video on YouTube of his viewpoint on this subject (there isn’t a longer video because he’s currently being featured on KQED to help them fund raise for the station). Personally, I’ve found it to be very compelling.
What do you think of comments and points I’ve made and the questions I’ve raised?
Venus,
In the absence of proof I have to say that, like every agent before you that has drunk the poison, the IUL pitch is full of lies and deception. This discussion has been going on for 2 1/2 years in this forum with an open invitation to prove me wrong and just like politics all I ever get are talking points. I have promised not to block, touch or edit the facts if they are ever presented, but no one will do it. This is the UL of the 80’s all over again except that now there is no high inflation to even give credence to the high interest assumptions. I hope you’re still in the business when the customer calls start coming because the IUL didn’t do anything close to what you led your customer to believe was not just possible, but probable.
Ed,
Your quite abrasive nature nearly had me disregard this page, but there’s some good info in this thread. So here goes.
My wife & I are in our early 30’s. I will get a pension & we are maxing our Roth IRA’s. So what else to do for retirement wealth building? IUL?
What we are looking at with IUL:
Risky parts for me are adjustable Cap rates and/or adjustable participation rates. Depending on which indexing method I choose either of these are possibilities (risks).
Good parts for me are:
1) After tax investment monies (ala Roth) that can be used for retirement income to not be taxed when withdrawn in retirement
2) guaranteed cash value (will not loose value, excepting up-front fees)
3) Potential for higher gains as the market goes (> than the 5% or so from whole life or annuties
4) and a modest but reasonable fixed value death benefit rider that lasts to age 99.
One question I have is that these are being marketed in such a way that, as stated above, after 65yrs of age the cash value can be “withdrawn” tax free. This is of course with the obvious equivalent reduction in death benefit, but really who needs to leave millions in death benefit on a second-to-die, I don’t feel the need to make my children into trust fund babies unless I truly become a multi-millionaire in which case this policy is not so big of a deal even if it tanks.
Most of what I read talks about taking out “loans” against the cash value & if the “loan” is not repayed then there is a reduction in death benefit. Is this just sematics, is this different than the retirment income providing vehicle, or is there something more sinster here in the details (loan not repayed on death so other assets get siezed?)
My gut tells me YOU will use this question as a launching point for your “full of lies and deception” soap box, when really I’m just looking for technical answers rather than as you accuse so many of giving qualitative analysis.
Please TRY to be objective here, I’m not so certain these IUL’s are the big bad evil monster you are quick to make them into.
If you cannot be objective then I pose the counter point; show me some existing policy where someone is being “burned” by their IUL, ie rapidly increasing fee, lowering caps, lowering participation rates, etc.
As for your concern of point-to-point indexing (a concern I immediately shared), some indexing methods I’ve looked at take a daily average of the S&P over 365 days & compare to the previous year’s to elimiate the danger of short term highs/lows falling on your term anniversary.
The real danger here is not so much that one time of year is better/worse than another on a recurring basis, because honestly over 30years its gonna average out. The danger is that if your anniversary falls on an isolated low day of the market, then all those funds you contributed for the last year will not see any growth until the following year when (presumably) your anniversary does not coincide with another local low. If it would then on the third year when you fall on a more representative market average, well now you’ve just had two years worth of premiums that have had no return for their 1st&2nd and 1st years in the fund, respectively. I think the 365 day S&P average on a year-to-year basis would be quite effective at averaging this out.
Oh, and please stop acting like qualitative statements about the future of the economy & the S&P are any more valid anyone else’s qualitative statements about the past or IUL’s in general, just because we all know that NO ONE can produce any evidence on the future. Example: “Historically really doesn’t mean squat to me.” and “Anyone who… …is, well, young and doesn’t realize how much our world has and is changing and it’s not in our favor.” I submit that you don’t know this any better than any other qualitative assesment in this thread.
I read a lot of “high & mighty” narcissism here that betrays the times when you actually use facts, it also makes your repated “show me the money” pleas shallow.
Please accept my criticism as you seem to want others to accept yours.
Thanks.
“A mature person is one who is does not think only in absolutes, who is able to be objective even when deeply stirred emotionally, who has learned that there is both good and bad in all people and all things, and who walks humbly and deals charitably”
-Eleanor Roosevelt
Dan,
I don’t mind the criticism at all. I regret that all you’ve been able to pull from this two year long thread is my high and mighty narcissism.
Your assumption that I have been quick to make IUL’s a monster tells me you have read what you wanted and made assumptions that are as far off of reality as the assumptions in an IUL.
Forgive my brash nature, but I disagree with Eleanor in this one thing. In life I do act humbly and deal charitably, except when I am up against a foe that is hurting hundreds of thousands and lying their way to wealth.
Hi Ann,
Historically life insurance careers, 95% of them, last less than a year. Companies and agencies know this and recruit like crazy simply hoping that before each person gets out they will have written business on several friends and relatives.
There is nothing new or different about the product and I quoted an actuary that designs IUL’s the other day, not just saying buyer beware, but agent beware. It’s very easy with a product like this to lead someone down the wrong road and it isn’t small amounts of money they lose. It is relationship busting amounts of money.
Keep it in perspective. They really aren’t holding out a career building product for you to consider. They are holding a product out that will make them a lot of money in the hopes that you bite and sell it to a few people.
You can’t make it in insurance unless people are calling you and it takes years of success and hard work before that happens, if it ever does.