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

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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.

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James Mayer

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

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

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

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

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
Toll Free: 1-855-LESS-IRS

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

Buy term invest the difference!! Rule of 72!! Learn that and then tell me how whole life is the best "investment ever"!!

May 15 2014 at 11:51 PM Report abuse rate up rate down Reply

John, I spent almost 20 years as a field agent with a major US life insurance company (stock) beginning in the late seventies and running into the mid nineties. My company, which had both Weiss's and AM Best's top ratings, was very conservative (responsible), came into the UL game late and only did so because our traditional whole life products (par and non par), and even term, were being replaced left and right by UL peddlers. When we finally fielded UL there were many safe guardsbuild into the produce and the agent training stressed being up front with the uncertainty of non-guaranteed assumed interest rates and mortality charges. Our computer generated product illustrations (UL could not have been sold without the availability of them) limited the extent of the assumption an agent could make and in addition to the assumed values always also illustrated the policy -- with premium and values -- based on the guaranteed interest and mortality charges.

I have been away from the company for about twenty years now (and it has since merged with another) but of the few clients I have kept up with, none of their policies lapsed, otherwise failed or needed a premium increase to stay in force. This is because I always insisted on a premium that was pretty much based on the guaranteed interest rate and cost of insurance. I simply told my prospects that if the policy continued to pay high interest rates and low mortality charges then later on they would either reap a windfall, pay up a policy early, etc. I am also aware of individuals in this town that purchased UL policies based on assumptions (usually double digit) that were not sustainable over the long run. In some cases additional premiums had to be paid and in others the death benefit was reduced. I would also suspect that some died - or will die - without a death benefit.

Bottom line: UL can be a good product if its properly understood and properly sold. As others here have noted, I question your motives - just as I questioned those of agents back in the day that used unrealistic interest projections to help close the sale.

Bottom line: UL can be a good product if its properly understood and properly marketed. As others have commented, I question your motives - just as I questioned those of agents back in the day that used unrealistic interest projections to help close the sale.

As for the neurosurgeon, insurance is not what they do and, like others, they can also make bad decisions and/or put their trust in those not deserving of it.

May 15 2014 at 11:14 PM Report abuse +1 rate up rate down Reply

First - SHAME ON DAILY FINANCE for allowing such a poorly written, miss informed, potentially damaging article! Seriously, are they that hard up for content?

Next - Click on John Jamieson's name to see his bio and find the following statement, "John Jamieson has come a long way from his days of being a high school failure and a college dropout." I contend that he has not! The article speaks directly to and gives an example of an sale done 8 to 10 years prior to the existence of the product in the industry. How can that be??? Simple; John is clueless and only sells Whole Life. His best recourse is to try to proactively shoot holes in a product he obviously does not understand.

The only reason a person doesn't either sell or own an index Universal Life product is because they either don't understand it or their agent is still living in the darks ages and doesn't understand it. Financial advisors who are students of the industry have made the IUL product a go to product for clients looking to accumulate large sums of money in a tax deferred product that also allows for tax free distributions when structured correctly.

Get a clue John Jamieson! And Daily Finance... WOW

May 15 2014 at 6:12 PM Report abuse +1 rate up rate down Reply

Posted on the web site are news articles concerning NY AG Spitzer's investigation of the fraudulent policies sold by MONY to residents of New York and Connecticut. New York policyholders received return of premium plus 8% interest on their policies. The same policies were sold in Texas. Texans got nothing and had to pay the fines and settlements for NY and Ct. Can you see that Texans are treated equally? I would like to have my policies rescinded and the 8% on all premiums paid just like New Yorkers!

May 15 2014 at 6:05 PM Report abuse +1 rate up rate down Reply