Is Indexed Universal Life Insurance a Good Investment?

Are you looking to purchase an indexed universal life (IUL) policy? Read this article first. IUL is one of the hottest-selling products in life insurance, but many agents are taking the hype too far with skewed claims that downplay the risk in owning an IUL policy.

“You can use the return on your investment to send your kids to college!” They’ll say. “Or retire on it! You can’t lose.”

An IUL policy that performs well can certainly yield a nice return. However, the truth is that the majority of these policies perform poorly due to economic conditions and consumer misconceptions about the product. Most consumers don’t realize the risk involved in owning an IUL because agents rarely educate their clients about them. Before you move forward with buying indexed universal life insurance, you should be able to answer “Yes” to these five questions:

Quick Article Guide:

  1. Are you making at least $250k per year?
  2. Is your income stable?
  3. Are all of your other investments maxed out?
  4. Do you have a high tolerance for risk in your investments?
  5. Are you willing to take a risk with your life insurance?
  6. Indexed Universal Life Pros and Cons
  7. Options Besides IUL
  8. Get Advice and Assistance from an Independent Life Insurance Agent

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  1. Are you making at least $250k per year?

Indexed universal life is not designed for a middle-class or novice investor. At our independent agency, we typically only recommend IUL for the top echelon of earners. Since IUL is tied to a stock market index such as the S&P 500—thus the name, “indexed”—there is a very real risk that you can lose significant money (not to mention your life insurance) if you purchase an IUL policy and the market does not perform well.

  1. Is your income stable?

If you are in a bubble market, or if your income could drop substantially, IUL is not the type of investment you want to be making. It is very expensive, with many variables and the aforementioned risk. Someone with an IUL policy should be making a steady, reliable $250k per year and up for the foreseeable future.

  1. Are all of your other investments maxed out?

If you are an avid and savvy investor, a meeting with your financial advisor will likely lead you to safer and better investments than an IUL policy. The Motley Fool writes:

“Before buying complicated insurance products like universal and indexed universal life insurance, make sure you’re taking full advantage of other tax-deferred investing alternatives such as traditional or Roth IRAs, combined with stand-alone term life insurance first. For most people, this will be a more affordable choice, and potentially a better long-term value.”

  1. Do you have a high tolerance for risk in your investments?

Can you emotionally handle seeing the stock index and/or real estate market perform poorly with your current investments? Many people find themselves extremely stressed and anxious during economic downturns. IUL could easily be your riskiest investment yet, so if you do not have a strong shell as an investor, it might not be for you.

  1. Are you willing to take a risk with your life insurance?

Lastly—and this is the one that deters even the wealthiest investors—is life insurance something that you are willing to attach a market risk to? After all, the whole point of life insurance is to protect your family.

If you are purchasing life insurance as a means to peace of mind that your loved ones will be able to sustain financially after you die, there are policies that can provide just that, minus the uncertainty.

Indexed Universal Life Pros and Cons

Whether you answered “Yes” to all of the questions above or have a lingering curiosity about indexed universal life despite answering “No” to any of them, you should take some time to fully understand IUL and the options out there. No need to run another Google search; we’ve got plenty more info and insight to offer on IUL right here, right now, starting with the pros and cons.

Pros of IUL

  • Cash value growth is tax-deferred
  • Higher return potential compared to other universal life and whole life policies
  • High degree of policy flexibility and customization
  • Lower risk than actually investing in the stock market
  • Capital gains are tax-free
  • Tax-free borrowing from cash accumulation

Cons of IUL

  • Poor performance can negate contributions and dwindle cash value down to zero
  • Many variables subject to change by the insurance company
  • Maximum “participation rates” are typically well below 100 percent (cap on returns)
  • No dividends, just a credit to your account
  • Loans from cash accumulation are subject to interest
  • The policy is not guaranteed, meaning the investment can flop and the policy can become unaffordable
  • *The Nelson Nast Institute elaborates on IUL drawbacks in an article titled, “The Top 10 Reasons Not to Buy Equity Indexed Universal Life Insurance.”

Options Besides IUL

The problem with IUL isn’t necessarily that it’s a bad investment; it’s that most people don’t understand that it is an investment. And 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 such as IUL that comes with “cash accumulation,” meaning it’s possible that your “cash value” 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. For the uncut truth about cash accumulation in life insurance, we recommend reading this article. You might be surprised to learn that the money in cash value life insurance is never really yours.

IUL, in particular, is very complex, and very involved. As we mentioned, it’s also not for the faint of heart, or those who have difficulty relinquishing control of their investments’ performance. The Motley Fool echoes our advice:

“Universal life insurance plans, including indexed universal life, frankly, aren’t good choices for the vast majority of people. There are some tax benefits, but they are almost only of real value for high-wealth/high-income earners or business owners, and often come at too high a cost with too low of potential returns for the tax benefits they provide.”

So, if IUL isn’t for you, what type of life insurance is? There are two really great options that provide everything you want in a life insurance policy (namely predictable payments and affordable protection for your family) without a market risk.

“Buy Term and Invest the Difference.”

Instead of investing with universal life, many financial experts will say, “Buy term and invest the difference.” This mantra refers to term life insurance, which offers guaranteed coverage for a set number of years.

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, like bonds, mutual funds, or actual stocks.

The benefits of term life insurance include:

  • Affordable coverage
  • Flexible options
  • A fixed rate for a set period of time
  • No startup costs
  • No surrender charge
  • No hidden fees
  • The freedom to cancel or change your policy at any time 

Term life insurance is ideal for those who are looking to insure their family for a mortgage, children’s college tuition, or income loss protection. Learn more about term life here.

Guaranteed Universal Life Insurance

At JRC, we are strong proponents for the risk-free counterpart to IUL: guaranteed universal life insurance (GUL). A GUL policy is a hybrid between term life and universal life that can enable you to leave a legacy behind, tax-free. Most clients in their 50s and 60s choose GUL over term life because GUL lasts up to a specific age—rather than a set number of years—that can be well into their 100s.

The benefits of GUL include:

  • Your cost of insurance will not change, even as you get older or if your health changes.
  • Your coverage isn’t tied to an investment. You pay for the life insurance protection only, just like term life insurance.
  • You aren’t pouring extra money into your policy. Trust the financial experts on this. You’re better off putting your money into a savings, or perhaps paying down your mortgage.
  • You will pay less up front. Guaranteed universal life insurance is a fraction of the cost of non-guaranteed universal life.
  • You don’t run the risk of losing coverage from unfavorable investments or changes in the market.

For an in-depth comparison between non-guaranteed and guaranteed universal life insurance, click here.

Get Advice and Assistance from an Independent Life Insurance Agent

The savviest investors know to seek advice from experts. Before you buy any life insurance policy, you should speak to an independent insurance agent who can align your life insurance with your financial goals and shop the market accordingly on your behalf. We have no personal vendetta against IUL and will gladly help you find an IUL policy if it truly suits your needs, but the chances are that you will be better off with either term life insurance or guaranteed universal life insurance. You’ll free up more money for better investments that don’t put your family’s future at risk.

For genuine, unbiased life insurance advice, give JRC a call, toll-free at: 855-247-9555. You can also request instant quotes directly from one of our agents by clicking the button below.

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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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