Life Solutions

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Indexed Universal Life Doomed for Failure                                                           Part 11

Many companies analyze the risks and the probability of IULs. Let’s take a look at this analysis chart:

This chart illustrates statistical probabilities of an IUL performing based on the return selected by the agent and the caps put on the option. Often, caps are around 12% and agents are using 7%. Right away we can see that we have a problem. The index would have to perform at 9% as previously discussed. For this discussion, however, let’s take it at face value.

 

The probability of an IUL achieving a 7% return with a 12% cap is 47%.

This means that 1 out of every 2 IUL buyers are not going to achieve that 7%. Remember, this was pitched to you as a very safe investment. An investment where you cannot lose money. This is the same story, the same pitch that was delivered with the UL, and the VUL back in the 1980’s and 1990’s and we have seen the devastation those products caused. What if we go to 9% with 12% cap (remember that in order for the IUL to get 7%, the index must have a 9% gain), what does the analysis show? A big fat 0. This means that there is a 0 probability that the IUL will obtain 7% returns.

Statistics show that most IULs will perform at around 4%. If they would illustrate that we could at least say that they are trying to be realistic as opposed to deceitful. Here is the problem though: agents cannot control the caps. Caps can be adjusted up or down based on the economy. With some of the most popular companies, disclosures say that they can be as low as 2%. So, if you look at a 4% return and a 12% cap, there’s a good chance that you’re going to get that 4% return. However, if the company lowers the cap down to 6% or even 8%, it’s not looking very good again:

Now, here is where it gets kind of tricky. Remember back when the UL (Universal Life, early 80’s) was getting around 6%. It could not keep up with the internal cost as people aged. The result was that it became too costly and most ULs lapsed leaving UL owners with nothing but loses. The same thing happened with the VUL (Variable Universal Life, late 80’s and early 90’s). At 12% projections, it looked great; but when it only did 6% and 7%, it too imploded. Again, VUL owners lost all that money. Now, here we are with the IUL; if it’s anything like its predecessors (UL and VUL) 6% will eventually implode these policies too because those returns will not be able to keep up with the cost of insurance as you age. So, if we are going to rely on 4% being at least feasible in terms of the rate of return, which according to the analysis looks about right, 4% may not be adequate to offset the increasing costs of insurance. You know what means? Big trouble, strike three, game over for the UL markets.

 

The fact is that if 4% is the realistic return in an IUL, why even mess with it? Whole life will do that and more without the risks associated with the UL model. The only reason people move from a solid whole life policy is for the hope of a greater return; again, playing on that greed factor. This was the case with the UL in the 80’s, the VUL in the 90’s, and the reality is that not only did they not perform, they imploded and people lost their money.

 

The IUL has a good story, but so far, I have not seen one that has done better than a well-designed whole life policy with a dividend paying company that hasn’t missed the dividend in over 150 years. That’s when compared to fictitious returns illustrating a 7% and 8% return with 12% and 14% caps. There really is no need for you to bother; save yourself the time, the money, and the headaches. Get the solid, proven, predictable whole life and let someone else experiment with the IUL.  The reality is that IUL statistics present horrible odds and they are not in your favor. Add to that the consistently ever-increasing cost of insurance as you age. Add to that you can never own it. Add to that you’ll pay premiums as long as you live, even when you are retired and may not be able to afford them or they will take them from your cash value.

 

By way of quick contrast, let’s compare how a well-engineered whole life policy looks like:

Rate of return shown – a whole life illustration cannot pick a rate of return out of thin air. It cannot be made up. Historical rates of return are not even allowed to be used. A whole life can only project the actual and current dividend being paid today. Whole life companies typically declare a dividend each year and that’s the only number that can be used to project in illustrations. By the way, many companies have never missed a dividend in as much as 170 years.

Whole life is not term insurance – it is the only, truly permanent insurance. Each year you own more and more of your death benefit. Yes, you own it, and once you own it you no longer pay for the cost of it. In fact, you are reaping the dividend on what you own. This is huge! Why? Because when you are ready to retire you can actually own your policy and have NO further premiums. You can get it paid off, paid up during your young working years, and own it free and clear enjoying the dividend as part of your income when you are no longer working/retired. It’s sort of paying off the mortgage on a rental. Once you pay it off and own it, you reap the benefits of those rents each and every year. You can only do that in a whole life policy. It is shocking to try to imagine why the UL was created in the first place. Some had the notion that they could do better with the cash value than a whole life company can do with the dividend. The reality is that the UL and the VUL didn’t work long term, and I see the IUL, which uses the same model as it’s cousins, going down the same path.

 

There are many marketing companies spending millions of dollars to get you to buy an IUL. There’s a frenzy of agents looking to score a quick sale. When you come across one of them, ask the right questions (previously discussed). When they can’t answer satisfactorily, move on.

 

On the next section, we are going to discuss the myth of the wealthy and life insurance. It’s quite interesting, join me.