Read This Before Buying IUL Insurance
Are you about to buy indexed universal life insurance (IUL) in hopes of seeing a sizable return on your investment? Stop and read this article first.
Many sales-driven agents out there are pushing IUL as a means of sending your kids to college, retiring, or enjoying newfound financial freedom, but the truth is that IUL is one of the riskiest insurance products you can purchase.
While an purchasing an IUL might make sense for some people, for most of us, there are better options available.
To determine if an indexed universal life insurance policy is right for you, we've included a check list for the ideal IUL purchaser, an explanation of the risk involved, other expert's opinions, and information about an alternative form of permanent life insurance that doesn't require any investing.
Here’s what we'll cover in this post:
Quick Article Guide
Here’s what we'll cover in this post:
How Does IUL Work?
IUL is permanent life insurance tied to a stock market index, such as the S&P 500. The IUL policyholder’s cash accumulation account is credited based on the benchmark provided by the stock market. In IUL, you are essentially “participating” in the stock market without being fully invested.
There are maximum and minimum percentages on your return, and the idea is that over time, you will see a higher return than you would with a traditional universal life policy, which only credits using the insurance company’s benchmarks rather than the stock market.
InvestmentNews likens IUL to “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.”
What Does “Cash Accumulation” Mean?
An IUL policy comes with a “cash accumulation” account, or “cash value.” This component is one of the most misunderstood in life insurance. Your cash value in life insurance is held in a savings account that earns interest, separate from your face amount or death benefit, which is paid to your heirs upon your death. You can borrow against your cash value and contribute to it each month to grow your funds.
Sounds great, right? Not so fast. For starters, a permanent life insurance policy with cash accumulation typically costs 3 to 4 times more than a comparable guaranteed universal life or term life policy.
More importantly, most consumers don’t realize that the cash value is not a death benefit. If you die before you withdraw the cash value in your policy, your insurance company keeps the money. It is not paid out to your beneficiary or beneficiaries, and is essentially lost.
if you borrow from your cash value as many agents encourage, this amount is considered a "loan" to be paid back with interest. If you do not pay off the loan, the balance is subtracted from your death benefit, leaving your family with less money than expected.
To learn more about cash value in life insurance, click here.
What is the Risk Involved in IUL?
The cost of insurance is not fixed in a policy that builds cash such as IUL, meaning it’s very 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.
What Are Experts Saying About IUL?
Many financial experts are wary of IUL, and some outwardly disapprove of indexed policies altogether.
“There are inherent dangers with leading clients to believe they'll have high rates of return on this product. For instance, a client might slack off on funding the cash value, and if the policy doesn't perform as expected, this could lead to a lapse in coverage. Another danger: What if a client is taking policy loans from the cash value and paying interest, but the policy underperforms and the interest credited doesn't cover the costs of the loan?”
MD Magazine says:
“Like any insurance/investing hybrid product, you need to hold an IUL for the rest of your life to achieve even a low return, and you are far less likely to do this when it turns out you bought something that isn’t what you thought it was. Those who sell these commissioned products are highly trained, but not in finance. Their training is in sales, and they are generally very good at what they do.”
From Bank on Yourself:
“Indexed Universal Life insurance policies shift all the burden and risk of managing the policy from the insurance company to you, the policy owner. The insurance company gets its money, but you don’t necessarily get yours. You might very well find yourself having to pay skyrocketing premiums, just to keep the policy from lapsing—or risk losing everything you’ve paid into the policy over the years.”
AOL Finance goes as far as calling IUL “a rip-off with a fancy name” and offers the following advice to IUL policyholders:
“If you have the misfortune of having one of these policies, you might still have an option to roll into a 1035 tax-free exchange. It would allow you (assuming you qualify health-wise) to exchange your cash value in your IUL policy into a properly designed whole policy with solid guarantees and fixed costs all disclosed up front.”
This is only a small sampling of the negative reaction to IUL in the financial world and among independent insurance agents. It should also be noted that 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.”
Who Should Buy an IUL Policy?
Working-class Americans should generally steer clear of life insurance products that involve an investment. IUL, in particular, is exceedingly complex and not for novice investors. The Motley Fool writes:
“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.”
For those who might still be considering IUL, we’ve put together a quick and simple questionnaire to help you make your decision. If you are going to go through with buying an IUL policy, you should be able to answer “yes” to all of the following questions:
Are you making at least $250k per year?
At our independent agency, we typically only advise the ultra-wealthy to consider investing with life insurance, mainly as a tax shelter. Even then, many experts will still tell you to steer clear.
Is your income stable at that level?
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 a high level of risk.
Are you maxing out all of your other investment options?
The Motley Fool advises:
“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.”
Do you have a high risk tolerance?
Can you handle seeing the stock index perform poorly knowing that it directly affects your life insurance and your ability to protect you family from financial hardship after you die? This is the final gut check that deters even extremely wealthy investors from IUL.
Finding Low-Risk, High-Value Life Insurance
The goal in buying life insurance is to protect your family. If you’re feeling that IUL might bring a little more risk than you care to bargain for, JRC Insurance Group can point you in the right direction.
Term life insurance is ideal for people who are looking to insure their family against a mortgage, income loss, or other common financial responsibilities. It provides guaranteed coverage for a set period of time, with no investment attached. Another product called guaranteed universal life insurance acts as a hybrid between term life and whole life, enabling you to secure lifelong coverage without any bells and whistles.
Let JRC help you find the life insurance that’s right for you. As an independent agency, we are able to shop 63+ top-rated insurers to find you the best rates. Our services are completely free of charge to you, and there are no obligations whatsoever.
Why take a risk on an IUL policy you don’t fully understand? We’re here to provide all the consultancy and support you need to safeguard your family’s financial future. Call us today, toll-free, at: 855-247-9555.
Managing Partner and Co-founder
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.