In front of me is an Index Universal Life Insurance (IUL) illustration. A prospect emailed it to us because his agent had promised he could receive $31,000 a year in retirement income annually for the rest of his life if he would pay a total of $183,000 in premium over the next twenty years.
Here is the problem with this agent’s promise: It is completely false! This IUL illustration only guarantees a 0.10% rate of return on premiums paid in excess of the cost of insurance. After the 6% annual premium fee is taken out of the annual premiums paid over 20 years, this person will lose $10,980, leaving only $172,020 that is really used for purchasing life insurance. But pathetically even this $172,020 never has the opportunity to earn even the meager 0.10% that is guaranteed in this IUL policy due to the way the contract is designed.
The death benefit of this policy varies from $314,000 to $367,000 over the next 20 years, but there is a guarantee that is doesn’t have to be more than $0.00 beginning in year 20 and anytime thereafter. So, the promise that this prospect can access $31,000 annually for the rest of his life from this IUL policy if he pays $183,000 of premium, is FALSE. There can be no such promises made because there exists only a possibility that if the investment portion of the policy performs better than the guaranteed portion of the policy there will be some sort of accumulated cash value that can be drawn upon in the future. In fact, in the small print of this IUL illustration is this specific disclaimer,
Wow! That’s a far cry from the $31,000 annual income promised by this IUL agent to his client. Because nobody can predict the future, you must protect yourself from these schemes by realizing that historical data can help make projections based on past performances but can never predict the future.
So, here’s what the historical S&P 500 data from the last 20.8 years (January 1998 to October 2018) looks like. The average return was 5.45% [i]
But remember all IULs, as does the one in front of me as I write this blog, have capped return rates. The cap rate for this particular policy is 10%. Looking at the last 20.8 years of the S&P 500, you can see that 10 times the cap rate would have reduced your potential earnings anywhere from 1.39% in 2014 to 19.6% in 2013. Yet, only 7 times in the past 20.8 year would the 0.10% guarantee in the IUL contract have saved you from losing money.
A quick observation proves that the money you could have earned, had your earnings not been capped, is significantly greater than the 0.10% you are guaranteed to earn when the market performs at 0.00% or less. And that is why the life insurance companies are so excited to have agents sell you IUL policies. The insurance company’s make money by doing so! It’s not that those capped earnings where you lost out on a 1.39% to 19.6% gain were lost, those gains simply went into the pockets of the insurance company.
Today as I write this blog, the S&P 500 has given up all its earnings for the year. In fact, it is now a losing investment for 2018. The DOW has erased all its gains for this year. And the Nasdaq has lost 88 points while the Russell 2000 Index is down 1%.
All this implies that IUL products are not living up to the performances that agents who sell them are promising you. This isn’t anything new to the insurance industry. When interest rates were high back in the 1970’s, 80’s and early 90’s, life insurance agents pushed Universal Life products because of the high interest rates you could earn on any excess premiums that were paid over and above the cost of the insurance and fees the insurance company needed to provide the coverage. Agents showed prospects how such high interest rates could provide them a huge tax advantaged retirement fund. The problem was interest rates collapsed, and so did those Universal Life Insurance policies. Hundreds of thousands of policy holders lost their money AND their coverage as a result…because the policies didn’t perform beyond their guaranteed values. Lawsuits were filed and Congress passed new laws in an attempt to protect policyholders in the future.
Today the cousin of those collapsed and collapsing Universal Life policies is being sold to unsuspecting consumers. This cousin is called IUL, and it is being sold today to the gullible public. IUL is built upon the same premise that Universal Life was built upon in the 1970’s, 80’s and 90’s which was; by overpaying for your insurance coverage today you can expect that extra payment to grow enough to overcome the cost of the ever-increasing cost of insurance which will be required in the future on your IUL policy.
This didn’t work for Universal Life Policies of the past, and it won’t work for the IUL policies being sold today. The reason is at some point in time the cost of your insurance will overcome the growth you have accumulated on the invested portion of your overpaid premiums. Then bingo, just like that, you will be out money and out coverage right at the time you most need both of them. Remember this particular illustration is guaranteed that there doesn’t have to be any value or death benefit at year 20 or after.
History repeats itself and those who are astute realize that and take necessary precautions. The best precaution you can take to protect your money and your future life insurance coverage is to purchase participating whole life insurance today. Unlike Universal products, participating whole life products provide high guaranteed cash values. In addition, participating whole life insurance (PWLI) provides you with the advantage of earning dividends based on the profitability of the insurance company that issued your policy. Finally, the growth that you do experience in a participating whole life insurance policy is guaranteed against loss, not by a meager 0.10% guaranteed return like in this IUL in front of me, but by the historical performance of the insurance company itself. This provides an absolute guarantee that you will have money and the coverage you planned on having for the rest of your life.
So, instead of exposing yourself to the inherent risk of an IUL contract that you might pay $183,000 into over the next 20 years while being guaranteed $0.00 cash value and $0.00 death benefit, you can secure a guarantee of having both money and a death benefit in the future, when you purchase a PWLI from any of us here at Life Benefits.