Indexed Universal Life Insurance: Understand the Risk

Risks of investing with Life Insurance

“Is life insurance a good investment?”   It’s one of the most common questions life insurance agents hear. Time and time again, clients will ask about the latest “hot product”—a no-brainer investment that will surely yield a high return.   Unfortunately, there’s a lot more to investing with life insurance than simply buying a cash accumulating policy.

Like with any investment, there is an inherent risk that you may fail to see a return, or worse, wind up losing money. Let’s take a look at who is most fit for using life insurance as an investment vehicle. Then, we’ll talk about the latest buzz in the industry: indexed universal life insurance (IUL).

Quick Article Guide

  1. Investing with life Insurance
  2. The Risk is Real
  3. A Brief Introduction to Indexed Universal Life
  4. What Agents Will Tell You 5. What You Need to Know
  5. Buy Term and Invest the Difference
  6. Work with an Independent Agent

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Investing with Life Insurance: Best Saved for the Ultra-Wealthy

There’s no one-size-fits-all answer to the question we led this article with. Whether or not life insurance is a good investment for you will depend on numerous factors, such as your age, your health, and your financial standing.

But, there is indeed a blanket statement to be made: for the general population of working class Americans, life insurance is not a sound investment. At our independent agency, we typically only advise the ultra-wealthy (as in, $300k per year and up) to consider investing with life insurance, mainly as a tax shelter. Even then, many experts will still tell you to steer clear.

The Risk is Real

The problem isn’t necessarily that life insurance is a bad investment; it’s that most people don’t understand that it is an investment. Life insurance agents, naturally, will sell the upside of investing with a cash accumulating policy. They’re not doing anything unethical by downplaying the dangers, but their sales pitches can sometimes lull consumers into the false assumption that they’re simply buying themselves future money.

If you take away one point from this article, let it be this: When investing with life insurance, there is always a risk involved. The cost of insurance is not fixed in a policy that builds cash, meaning it’s entirely possible that your cash accumulation account could eventually dry up if either or both of the following occur:

  • The index your policy is linked to does not perform well over an extended period of time.
  • The cost of your premium (which increases with each year you age) exceeds your cash accumulation income.

The financial risk is compounded by the fact that this can all happen without you realizing until it’s too late, in which case you might find yourself both unable to pay your premium and unable to secure new coverage.

A Brief Introduction to Indexed Universal Life (IUL)

The hottest life insurance product over the past few years has been indexed universal life (IUL).

Investipodia offers the following definition:   “An indexed universal life insurance policy gives the policyholder the opportunity to allocate cash value amounts to either a fixed account or an equity index account. Indexed policies offer a variety of popular indexes to choose from, such as the S&P 500 and the Nasdaq 100.” InvestmentNews relates it to being a cousin of traditional universal life insurance coverage, permanent life insurance that permits clients to pay flexible premiums,” adding:   “Unlike variable universal life insurance, clients aren’t directly investing in the market. Rather, their cash value reflects the performance of an index subject to caps and floors.”   With IUL, you are basically “participating” in a stock market index, with a cap on both the upside and downside percentages.

What Agents Will Tell You

IUL is frequently immortalized by agents. They might say things like:

  • “You can borrow from it.”
  • “You can use the return to send your kids to college.”
  • “You can retire on it.”
  • “You can’t lose.”

What You Need to Know

The truth is that while IUL is certainly an attractive investment on paper, it is not without its drawbacks. In fact, in 2014, the State of New York’s insurance regulator probed 134 insurers on how they market such policies out of concern that they were exaggerating the potential gains to consumers. After continued scrutiny, IUL was hit in 2015 with regulations that the Wall Street Journal called, “A Dose of Reality for a Hot-Selling Insurance Product.”   Overall, IUL is exceedingly complex and carries magnified risks being that it is tied to the stock market. Also note that in any cash accumulating policy:

  • You will usually have to “overfund” the policy on the front end in order to offset the annual cost of insurance increase.
  • You pay interest on the money you borrow.
  • The cash value is not a death benefit. When you die, your beneficiary will not see that money.

Buy Term and Invest the Difference

Instead of investing with universal life, many financial experts will repeat the age old mantra:

“Buy term and invest the difference.”

When you buy term life insurance, you can take the money that you would have been investing in universal life and put it toward a more straightforward investment, such as stocks, bonds, or mutual funds.

For sample quotes and more details on term life insurance check out our guide here.

Work with an Independent Agent

When shopping for any type of life insurance, the key is to work with an independent agent who can provide a high level of consultancy and shop multiple carriers. Most importantly, be extremely cautious when considering investment strategies with life insurance. Give us a call today, Toll Free (855) 247-9555, and one of our agents will be happy to show you all of your options.

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Cliff Pendell

VP of Marketing at JRC Insurance Group
Cliff is a licensed life insurance agent and one of the owners of JRC Insurance Group. He has helped thousands of families of businesses with their life insurance needs since 2012 and specializes with applicants who are less than perfect health. In his spare time he enjoys spending time with family, traveling, and the great outdoors.
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