Indexed Universal Life Insurance: A Rip-Off with a Fancy Name

×
'Document entitled life insurance, a pen and glasses on a desk. Close up image. This is an exclusive image and it can only be fo
Getty Images
How would you like to put money into a financial product that lets you benefit from market gains, but never feel the pain of its losses? The money and growth inside the policy will be 100 percent tax-free for life. That's the seductive pitch often used to tout an investment called indexed universal life insurance.

Based on that sales pitch, it would be no wonder if your response were, "Sign me up for that right away!" Unfortunately, all that glitters is not gold. The sales materials for your IUL policy will almost always be illustrated with unrealistic compounded rates of return. But as we all know, stock market growth does not simply compound over time. Sure, you can measure an "average rate of return," but in the real world, prices oscillate, and performance can be a creature of timing much more than investing.

In fact, an indexed universal life insurance policy will almost always leave you holding the bag.

Let me clarify first that these are entirely different investments than the "properly designed whole life policies" that I wrote about back in March. When you invest money inside an IUL policy, you're setting up a life insurance policy with an annual renewable term cost of insurance. The extra money placed in the policy goes into sub accounts, and those funds will generally follow an index (or indices) in some form when that index increases in value. This structure will cause the cost of insurance to rise every year, which is why most people let these policies lapse in later years.

One Man's $50,000 Premium

A retired neurosurgeon at one of my seminars told me about his IUL nightmare. He invested substantial money in an indexed universal life insurance policy when he was 49. He funded this policy for 20 years, and the projected profits never seem to materialize. Among the reasons why:
  • The projections that were illustrated for him were not realistic.
  • The expenses of the insurance and many other hidden fees come out daily.
  • The guaranteed growth of 3 percent was only payable at policy cancellation.
Much worse was the bill when he turned 70. This policy was structured with a 20-year guaranteed term policy for the death benefit, and his premium hit almost $50,000 -- and not one nickel was going into any cash value.

Surely, something must be wrong, you say? He assumed it was clerical error until he called the carrier and was told that is how those types of policies are built. In the 21st year of the policy, the premium was supposed to be almost 100 times the first year's premium, and it was only going to rise further, since term insurance gets more expensive as people age. This man closed the policy down, which meant he no longer would receive the death benefit, and even the pitiful gains his investment had realized were now taxable because he'd lost the umbrella of the insurance policy tax structure.

Lousy Ideas, Without Clear Numbers

Welcome to the wonderful world of indexed universal life insurance. I can't wait to see in this articles comments that somehow, one of you knows about a "special product" that has a "no lapse" guarantee or some other new (and yet old) wrinkle that allegedly makes these lousy policies better. These dogs with fleas are generally sold to those with high incomes, such as doctors, as a way to put loads of money away in a tax-free environment instead of the limitations of an individual retirement account or 401(k). The illustrations are not realistic and fail to speak plain English as to what is going to happen with these policies.

If you have been sold one of these policies, examine the illustration you were shown and notice the cost of insurance cannibalizing the cash value in the later years of the policy. Study the cost of insurance, which will never be plainly spelled out in dollars and cents (your first clue something is amiss) but rather in decimal points. Watch how that number grows in the later years.

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.

John Jamieson is the best selling author of "The Perpetual Wealth System." For more free training and information on this topic, watch our video of the week and get free downloads.

Increase your money and finance knowledge from home

Intro to different retirement accounts

What does it mean to have a 401(k)? IRA?

View Course »

Understanding Credit Scores

Credit scores matter -- learn how to improve your score.

View Course »

Add a Comment

*0 / 3000 Character Maximum

26 Comments

Filter by:
Samuel Howe

Wanted to follow up with some facts regarding the interest rate projection associated with IUL, which the author labels here as "unrealistic".

Most IUL illustrations project somewhere right around 8% annual compounding interest being credited to the policies, give or take a few tenths of a percentage point depending on company and product. The way the insurance companies come up with these projected interest rates is by looking back over the last 29 years and working out exactly how today's policy as it exists now would have performed over that 29 year span, then averaging out the rate of return. Through the ups and downs of the last 29 years (the dot com bubble, the ensuing bubble burst, the 2008 recession, the ensuing recovery -- all of it), the average return on an IUL was right around 8%. If there is a more reasonable method for projecting how the product might perform in the future, I'd like to hear it.

As to the lack of "guarantees" that the author laments throughout the article: it's true, there aren't any guarantees that your IUL will perform at the illustrated rates. The actual results could be better than projected, or they could be worse. The problem is, since IUL is a life insurance policy, the insurance companies are required by law to show a "guaranteed" column somewhere in the illustration, along with the current illustrated rates. It's best to think of the "guaranteed" column as the "worst-case scenario" column. These guaranteed columns literally show what the performance of the policy would be in a *worst-case* scenario, and what would happen to the policy if the market dropped every year for 30-50 years straight. I think we'd all agree that it's not even possible for the market to drop 30 years straight, but the insurance companies are required to show what that would look like. Simple-minded critics seize on this guaranteed column as if it's some sort of fine-print admittance of a shoddy product, without realizing that if mutual funds, stock accounts, IRAs, or any other product were required to show such a column in every performance projection, theirs would look even worse (at least the IUL has a 0% floor, which guarantees that you can't lose cash value if the market drops, where those other accounts would cause a loss).

Generally speaking, any product that offers a "guaranteed" return is going to be way short on upside, and not a good vehicle for growth (the Whole Life products that the author is pushing are a perfect example). Those products are great for people who already have their nest egg intact and want to protect it from loss, but not so much for those of us trying to build our nest egg for retirement.

I have to say, I was shocked at the brazen nature with which this author spouted misinformed and outright false information when it comes to IUL. I hope that the site takes another look at what he posted here, and if they value the integrity and accuracy of their site's content, they'll remove it.

Wednesday at 6:57 PM Report abuse rate up rate down Reply
Samuel Howe

This article is dangerously and recklessly inaccurate from top to bottom. Shame on the author for spewing his uneducated, half-baked opinions about something he obviously knows very little about to others, and especially in such a brash manner. "Rip-off"? Are we talking about financial instruments, or used cars here?

I'm limited to 3000 characters, but the fatal flaw in his analysis of IUL as a tax-free retirement vehicle lies in the design of the policy. I'm fairly certain he invented his retired neurosurgeon's story out of thin air, but as another commenter posted, only an advisor that shares the author's elementary understanding of how these policies work and should be designed would ever design an IUL in the manner described in this article. If tax-free retirement (cash value accrual) is the goal, the IUL should be designed on a minimum death benefit/max cash value solve that minimizes the cost of life insurance and maximizes the percentage of premium going toward cash value accrual, according to MEC guidelines. If designed this way, the cost of insurance rising is *greatly* more than compensated for by the snowballing compound interest earned on the cash value side over the years.

When constructed to work the way they were designed to, IUL is a fantastic option for a family looking to take advantage of the tax-free advantages afforded to life insurance products to create a tax-free annual income stream, with a death benefit as a fantastic side benefit in case something should occur while that accrual is happening. Like any other product, it can be designed poorly and suffer as a result, but any advisor worth his salt would know the difference and how to design the plan properly (unlike the author, apparently).

Disinformation like this is reprehensible behavior for a professional working in our field. I would never speak so brashly about a product that I didn't specialize in or knew little about. Shame on the author, and I feel pity for anyone who trusts this guy with their finances.

Wednesday at 4:52 PM Report abuse rate up rate down Reply
micahfrankel

I'm all for investigative research & fact based arguments. DailyFinance should not have printed this article as the facts are incorrect and client testimonial fabricated. The debate over IUL should be had, but this is fiction & has no place here. Mr. Schepp, unpost & maintain the integrity of this periodical.

February 12 2015 at 1:11 AM Report abuse rate up rate down Reply
BraxtonBSU

First off, your "About" in your profile seems to sum up your entire article when it says: "John Jamieson has come a long way from his days of being a high school failure and a college dropout."

Your research is horrid! First, the IUL wasn't even introduced until the 2000's so your explanation about the guy paying into an IUL for 20 years at $50,000 is false. He was either funding a variable UL or a traditional UL.

Second, its as if you have no financial experience at all or know absolutely nothing about tax codes, specifically that of IRC Section 7702. Let me explain because saying that you are paying higher costs of insurance each year would be correct "IF" you have someone like yourself completely unknowledgeable structuring the IUL. You should be paying the guideline up to the MEC limit to buy the least amount of coverage. If you design this correctly, your cost of insurance (COI) should actually go down each year due to what I call "inverse asset." The liability to the insurance company or the COI to the insured/payor, would be the difference between the cash value and the death benefit. As your cash value rises, your COI goes down over time.

In correspondence to an advisor who charges you a fee to manage your money each year, the more money he makes you the more FEES for assets under management that you are paying him. (compound that over all the years he grows your money).

Your explanation seriously makes you look like a jackass as if you have no financial intelligence at all. It proves a point that anyone with a computer, login name, and fingers can publish something online.

So to sum this up, you need to do research and possible go back to school and not brag how you are successful, because your articles are more BS than what you write about!

BB

February 11 2015 at 7:28 PM Report abuse +1 rate up rate down Reply
James Mayer

John,
Are you being paid by Wall Street or are you in politics?? I didn't have unrealistic compounded rates of return on my policy. My index averaged 10.07% for the past 24 years and so I used 8% just to be on the safe side. Leaving one holding the bag is when you withdraw from your 401k/IRA and have to pay around 40% or so in taxes, gone. No risk of loss and no taxes, that is worth a lot more than 40% in my opinion. You must be receiving a lot in fees from those in Wall Street scammed 401ks/IRAs.

November 14 2014 at 3:41 PM Report abuse rate up rate down Reply
judghi

Trying to transfer plan to UL. The only reason I was put in this plan was so that they agent could make his high commission. They would put a 25 year old or a 75 year old in the same plan.

November 01 2014 at 6:11 PM Report abuse rate up rate down Reply
judghi

I was put in this plan as a single individual with no beneficaries. This is not a practical plan.

November 01 2014 at 6:09 PM Report abuse rate up rate down Reply
derrontravis

I would like to know where did the author get his facts from. IUL's started in 1997. Can the author please reply and answer why he didn't do just a little bit of research?

July 30 2014 at 12:23 AM Report abuse rate up rate down Reply
Michael Lauren

It's simple.

Unfortunately there are many insurance agents that quote "facts" like the one about the neurosurgeon buying an IUL 20 years ago that simply aren't true (They did not exist then) These "facts" support what they believe and what they have been trained. Their trainers are motivated by compensation and probably have not even taught them to say things like that.

Anecdotal evidence is not necessarily indicative of the truth anyway. You can misuse, poorly structure, or find short periods that any financial vehicle has performed poorly than another. The fact remains that the modern products that have evolved over the years, with their full disclosure, have proven to be vastly superior in both performance and efficiency than their predecessors WHEN PROPERLY USED,

Bill Zimmerman

May 16 2014 at 2:49 PM Report abuse +1 rate up rate down Reply
louis.labash

Just some observations about what has to be about a fictional 49 year old Dr that put $50K a year into a IUL policy starting about 3 years before it was even available.

1: First thing is when you invest $50k a year into a product that doesn't exist it's no wonder it didn't perform well.

2: If the entire death benefit was based on a 20 year term policy then it wasn't even a IUL it was a term policy. Most likely in his mind this fictional policy could be some hybrid version of term and IUL which generally makes the cash bucket even larger at the end of the day in the short term. Since he made it up, who knows how bad of a product he can design. I don't know what actuarial experience he has.

3: Most investments are sold using a projected non guaranteed rate of return and to try to randomly pick different rates for different years in the future to build some kind of realistic project would be impossible unless you had a real fully function crustal ball. At the very least there is a method to the projecting in the IUL and if you project 7% growth average growth at least you have a specified number to track. Whole life illustrations that are 50% to 60% made up of projected dividends that don't even have a number associated with them that makes any sense at all. The whole life companies say they are projecting as an example a 6% dividend projection but that 6%, is 6% of what? One major mutual said they paid over a billion dollars in dividends a couple years back and that sounded like a big number until you find that they had over $100 billion under management and gave the owners of that $100 billion (the policy holders supposedly own the company) a whopping 1%, such a deal! Their current dividend project rate is also around 6% what happened to the other 5%. When it comes to playing with the numbers the whole life companies readily admit that dividends are nothing more an a return of premium that they overcharged you to begin with and they say they have been paying dividends for 100 plus years. Since they also have overcharging the policy holders for 100 plus years it only make sense they can pay a dividend (technically a return of premium).

4: The money in a real IUL policy doesn't disappear overnight and generally the only policies that don't make it are the one that are underfunded (simply, no premium equals no coverage) and if this policy was monitored as it should have been on at least an annual basis, the opportunity for failure, if there even was a failure, could have been avoided long before the Dr. retired and needed the money for retirement income.

At the end of the day, you can always find a case that didn't work out as planned due to unrealistic projections or from lack of funding (premium) but to just make one up to suite your own needs, tends to make one question the author's reasons for doing so.

Louis G. LaBash, President
http://www.financialscenarios.net/
Toll Free: 1-855-LESS-IRS
louis.labash@financialscenarios.net

May 16 2014 at 9:10 AM Report abuse +1 rate up rate down Reply