Two and half years ago when indexed universal life seemed to be taking over the life insurance landscape I spent considerable time studying the products and then posted my thoughts in this forum. In particular I took great exception to the fact that agents were running a muck claiming that IUL was the answer to any question about life insurance you had. It was so dynamic and flexible that it literally could be structured to meet any need that you had. The problem I had with it then and even more so today was the fact that it is being sold based on outrageous assumptions and the only guarantee in the policy is a lame guarantee that if your crediting method loses money it won’t come out of your pocket like it would in a variable universal life.
That seems to be a soothing mantra to clients who are so enamored with the interest rates they are being shown, rates that go anywhere from 8% to 13%, that to know there is so much upside with no downside completely takes the downside out of the equation. Agents get you to think about retirement bucks and bucks to borrow and infinite banking (which requires consistently large cash value accumulation and favorable loan structures) and suddenly you are not talking about life insurance, but a road paved with gold that you can buy at well below the market rate.
I’ve never admitted this, but when IUL’s first came out I sold one to a customer. I was looking for the best price on a guaranteed no lapse UL to age 120 and it happened to be an IUL. I didn’t even look at the assumptions because all this customer wanted was a level premium policy that would stay in force until he died. In the guaranteed column of the illustration it showed level premiums to age 100 and a level death benefit to age 120 and everything that had to do with cash value was rows of zeros. It was like this North American IUL I just ran an illustration on except much better. This North American product must have something to do with evolution. Forgive my technical difficulties on the 8.3% interest column, but I think you can get the gist of what I’m talking about. A 50 year old in great health pays $2373 a year into a $250,000 policy. Oh, and the one I did sell? It continues to be a good no lapse policy that hasn’t built squat for cash value, exactly what I sold but certainly not in keeping with all the hype that IUL is getting.
First page goes pretty well. Level premium and death benefit on the guaranteed side and for those that care, it builds $26k in the 8.3% column. Page 2 is when things really start looking a little fishy. In the guaranteed column you are done in year 16. There is no death benefit, cash value or smile on your face. So let’s go over a column and look at the mystery of a 3% rate assumption where, arghh, you’re out of insurance in year 32. Of course there is always the ever rosy 8.3% column where the cash just grows and grows. By the way, so you don’t think I am trying to hide anything, after age 100 the account value, surrender value and death benefit are all the same. Kind of makes me wonder why 3% guaranteed only buys you 15 years of insurance when 3% assumed buys you 30 years worth. Suffice it to say that anything less than 8.3% is going to crater at some point.
A lady called one day and asked if I would review the IUL illustration her Nationwide Insurance agent was proposing to her. Even IUL lovers will get a kick out of this, but hear me. A licensed life insurance agent working for one of the most recognized company names out there actually presented this to a potential customer. She was told that she was looking at a policy that would be $132 a month for 14 years and in year 23 she could start taking $20,000 a year out and party down. That was the impression the agent left her with. But as I pointed out 1. The premium jumps from $1584 a year to $10,000 a year in the sixth year. 2. In the 15th year, as soon as she stops shoveling money into this thing, the cash value starts dropping. 3. The first year after the party starts the pot of money goes dry and the policy lapses.
Now, I understand that those three things are illustrated at 0% interest, but dang, she would have been better off a 30 year term policy for a few hundred dollars a year and put that other $100,000 under her mattress and done better. So let’s move over to the 4. 7% column. That’s where the big bucks hide right? That is where the IUL bible is written. So this cash cow grows to $160,000 by year 23 when the party starts and 5. The drain plug is pulled and the party money starts getting sucked down. Now she didn’t send me the next page, but I would give this thing another six or seven years and by the time she’s in her mid 50’s she is out of cash and insurance. What a great way to spend your money? She could have purchased a no lapse guarantee UL for $70 a month that would have never gone south on her and actually had life insurance instead of an overpriced risky investment.
I saw an interesting article by an actuary who actually helped structure many of the top IUL’s on the market today, Jason Konopik. While he does believe the right IUL for the right reason can be a great financial tool, he also goes on the essentially say buyer and agent beware. His article is long and full of ammunition for and against IUL’s (this guy helped create them). He stated that the product and the agents that sell them can all to easily be, “making promises … that will never be realized”.
Bottom line. I’ve been called every kind of uneducated dirt ball for going on three years now because of my stance that IUL’s are not what they are being sold as, and these days they don’t even make a competitive no lapse UL. Not one agent or company has stepped up to my challenge to prove me wrong. If you are being chased to purchase an indexed universal life policy and have reason to believe a second opinion might be helpful, call or email me directly. My name is Ed Hinerman. Let’s talk.