Life insurance is an umbrella term for multiple types of policies – term life, whole life, guaranteed universal life, indexed universal life, etc. For someone who isn’t familiar with the topic, this can seem overwhelming and complicated. So he or she seeks a professional for help.
Unfortunately, not all life insurance agents are created equal. Some work directly with a life insurance company, while others work for a brokerage and work with multiple companies.
Among those, there are agents who will try to sell you Indexed Universal Life insurance. This is why you shouldn’t buy it, along with 5 scams related to this sub-type of insurance.
Quick Article Guide:
- What is Indexed Universal Life Insurance?
- IULs Don’t Count Stock Dividends
- Cap Rates
- Policy Complexity
- Increases in Cost
- Net Amount of Risk
- The Bottom Line
Indexed Universal Life, also known as IUL, is a type of permanent life insurance that’s tied to a stock market index, such as the S&P 500. As a policyholder, your cash accumulation account is credited based on the benchmark provided by the stock market.
With this type of policy, you are essentially “participating” without being fully invested. There are maximum and minimum percentages on your return; the ideal situation is that over time, you’d see a higher return than you would on a traditional universal policy, which only credits using the insurance company’s benchmarks rather than the stock market.
Unfortunately what agents don’t tell you is that there is a very real market risk involved with IUL. Typically when people life insurance, they do so to protect their family or a specific life event, such as a mortgage. When you add investment to life insurance, it’s adding a whole other level of risk, which is almost never worth it.
We typically only recommend investing with life insurance to the extremely wealthy (i.e. those making $300,000 or more a year), and even then, we still suggest going with a safer option if possible.
When you speak to an agent who is trying to get you to purchase life insurance, they’ll say things such as:
- “You can send your kids to college on it.”
- “You can borrow from it.”
- “You can retire on it.”
- “It’s a no-brainer.”
However, don’t let them fool you! We’re here to tell you the truth. On that note, without further ado, here are 5 scams to watch out for when thinking about purchasing and IUL policy.
When talking to a life insurance agent in regards to an IUL policy, he might tell you that the stock market returns 10% in the long run. He’s not technically wrong – on a non-inflation-adjusted basis, this is somewhat true.
However, this figure includes stock dividends, not just the change in the index value. With IUL policies, they only pay you based on the index change; they don’t account for the dividends as well.
This matters because currently, dividends -even at a historically low yield of 2% – account for one-fifth of the market return. So if your index mutual fund does indeed increase by 10%, you’d only be credited 8%. And that’s if the dividend continues to stay low at 2%.
Another thing that agents won’t tell you is that IULs typically have cap rates, or a maximum amount you can receive on your return.
Essentially, this means that if the stock market does really well one year – say, an index return of 25% or 30% – your return won’t reflect that. Typically, the cap is in the 10-15% range. In short, even if the stock market does well, you won’t reap all the benefits.
Indexed Universal Life policies are not for the faint of heart. They have many moving parts, which can make them very difficult to understand. If you don’t fully understand your life insurance policy, then you’re in for a rude awakening should your policy investments not go the way you had in mind. Because IULs are so complex, they don’t have many competitors, meaning life insurance companies can make them as expensive as they’d like.
When it comes to life insurance, complexity does not mean better, in fact – quite the opposite. If you can’t understand the guidelines when your agent is explaining it to you, it might not be the right policy for you.
In the life insurance world, there’s a term we use called “level.” This means that for the duration of your policy, your premiums will remain the same, and won’t increase over time. It’s pretty common for policies like term life and guaranteed universal life insurance to have level premiums.
However, IUL policies do not have level premiums. This means that every year your policy is in force, your premiums increase. So while it may be cheap to start with, 10 years from now, that won’t be the case.
Because these policies become so expensive, many people can’t afford to pay them, and just end up letting their policies lapse. If your life insurance agent tries to sell you an IUL policy without mentioning the increasing cost, that should raise a huge red flag.
Typically on IUL policies, the death benefit is equivalent to the original insured amount minus the cash value accumulation. So for example, if you originally purchased a $750,000 policy, and had a cash value of $200,000, your beneficiaries would only receive $750,000, not $950,000. The life insurance company would only have to pay out $550,000 after your passing, due to the $200,000 cash value accumulation.
Like stated above, your premiums increase as you age. If you end up having a few bad years in the beginning of the policy, you may not have enough cash value to compensate for the increasing cost of your policy, which is not what we want!
IUL policies can be very tricky to understand, and most of the time just aren’t worth the effort. Luckily, there are a multitude of other life insurance options, and we’re here to help you figure out which one will best suit your needs.
JRC Insurance Group is an independently-owned life insurance agency that is licensed in every state and our shopping services are free. Our agency offers decades of collective experience and every one of our agents offers multiple years of experience.
We have helped thousands of individuals, businesses, and families with their life insurance and we can help you too. Give us a call toll-free at 855-247-9555 to speak with a licensed agent who can advise you of your best option.
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