Life Solutions

Protect What Matters
Indexed Universal Life Doomed for Failure                                                           Part 13

In this section, I’m going back to the radio ads we briefly discussed on the last section. I’m doing this because those radio folks do so many little things that are just not fair to the public. The lure is to get you to call, and after you do, they want to set you up with one of their trained advisers. Then they tell you about how they have found the answer to the ever-increasing cost of insurance. It’s a miracle. They go on to say, “I couldn’t, in good conscience, sell an IUL knowing my clients could lose everything due to the rising cost of insurance and could actually be priced out of their policy.” “It’s a tragedy” they say, even though, before this “miracle” they were selling IULs. They tell you that “IULs have an ever-increasing uncapped cost of insurance that will likely price you out of your policy before you die.” That statement is true. “Price you out” is a nice way of saying that your cash value will be eroded, eaten away. Premiums become so high that you can no longer afford them. When you can no longer pay your premium, your policy will lapse and you will lose everything that you’ve put into it. It is tragic, and agents will agree that it is. But they rebuttal that with something they call the “Death Benefit Optimizer”.

 

The Death Benefit Optimizer (DBO) should really be called the Death Benefit Devastator. Let me tell you how this DBO works. As we have already discussed, as one ages the cost of insurance rises to the tune of unaffordability. Agents will, actually, agree that this will happen, and they will even show you in your illustration how high the costs will rise if you decide to keep your policy in the later years. However, they will also show you how they can control those costs. By virtue of the DBO, no matter how old you get, the cost of insurance does not get out of control. You look at the numbers and you can see how it is true, and you wonder “wow, how do you do it, what’s the catch? Did your shareholders agree not to get paid anymore?” Well, I can tell you that those shareholders will continue to get paid. So how do they do it?

 

What essentially happens is that the insurance company absorbs those costs that cause your premiums to skyrocket. There must be a catch, right? Yes, there is. Here it is. Normally, beneficiaries receive the death benefit in a lump sum. But, with the DOB, instead of your beneficiaries receiving the death benefit in a lump sum, they receive it over a 30-year period. Thirty, years! Holy cow, that’s a long time. What if your beneficiary is your spouse and she doesn’t have 30 years to live? What if your beneficiaries need a large sum upfront for estate taxes, or as a down payment on a piece of real estate, or for a business opportunity? Then what? At first, you probably think that’s nuts. But, the agent will keep you interested by telling you how your beneficiaries will receive more than the actual death benefit by electing the DOB (death benefit optimizer). They tell you that the insurance company will take the death benefit and put it into an interest-bearing account earning 1%. That 1% interest will go to your beneficiaries; “this is money on top of the contracted death benefit” agents will tell you. Wow! One whole percent, that ought to get you excited uh?  Let’s run through a scenario using $500,000 as our death benefit. Let’s also say that your cash value is $200,000. What this means is that the risk to the insurance company is really $300,000. Your cash value is part of your death benefit.

 

So, the insurance company takes $500,000 at 1% amortized over 30 years, and they begin making payments. The payments come out to $19,374 per year ($1,614.50/month). As the years go by, inflation will start eroding the purchasing power of that payment. Now, let’s fast forward thirty years into the future. If we add up all the payments that we received over that thirty-year period, we come up with $581,220. So, the original death benefit was $500,000 but your beneficiaries received $581,220, that’s $81,220 over and above the death benefit.

What could your beneficiary do if he/she received the death benefit in a lump sum? Let's take a look in the next section.