Protect What Matters
Indexed Universal Life Doomed for Failure - 9 Questions Part 8
A good friend of mine who’s been in this industry for over 32 years recently shared a story with me about an older couple who had not one, but three Universal Life (UL) policies back in the 80’s and 90’s. I say had because they no longer have them; they all lapsed because the couple could no longer afford the premiums. All the premium they paid over the years was lost to the insurance companies. Now they have not wealth, no life protection, no death benefit for their beneficiaries. Their mistake was living too long.
It is truly sad the amount of wealth that has been lost in the UL market throughout the years. This could had been prevented. How? Those same agents who boast about the awesome and fuzzy benefits of the IUL product, should also inform the consumer how it could implode/lapse down the road if the consumer happens to live too long. However, for some reason they seem to always forget to do so. How convenient. To combat this, the attorney general has mandated some changes in the IUL presentation.
When an agent makes an IUL presentation, he/she will use special IUL software to create an illustration that will project possible future performance. However, the numbers spit out by the software are not achieved 99.9% of the time. The attorney general found that IUL illustrations were deceptive and showed unrealistic returns. We will discuss this in more depth in another section. For now, think about this; the attorney general had to step in because people were being deceived by the illustrations being presented to them. So, things might have improved a little bet since that mandate. But, what about all those folks that purchased ULs, VULs, and IULs prior to the mandate. Where does that leave them? Yes, they were deceived royally. Those people are finding out the hard way that their premiums are climbing astronomically. They are experiencing first-hand the reality of the UL products. They are not seeing the returns projected on their illustrations, they are seeing their cost of insurance increase, they are seeing the high fees and the impact those fees are having on their cash value.
Don’t be one of those folks who fall for the deception of the IUL. There are too many risks that you will face if you do. Here are some:
You will take all the risk for the performance of the market
You take the risk of paying more for your insurance each year
You take the risk of living too long (what?)
You take the risk of your premiums, if you don’t pay them or decide to adjust them
You take the risk if you take income from your policy
You, basically, take all the risks basically
Insurance companies have only one risk, and that is if you die. By the way, insurance companies are really good at mortality projections; they know the odds. You have a really good chance of being priced out of your policy and outliving your ability to pay if you live to an older age. With that, let me share with you nine questions that you should ask before buying an IUL.
Q1: Is the cost of insurance capped, and if so what is that cap?
A: There is no cap. Some have what is known as “maximum cost of insurance” but that goes up every year. Uh? The maximum cost of insurance is not really a maximum cost of insurance across the board. No. It is a maximum cost of insurance per age group. For example, a 20-year old’s maximum cost of insurance is X. A 21-year old’s maximum cost of insurance is X+Y. A 22-year old’s maximum cost of insurance is X+Y +Z, and so forth and so on. So, even though there is a maximum cost of insurance, that maximum increases as you get older. With this set up, your cash value can be eaten away by the increase cost of insurance and you will still have premiums to pay. The fact that in some cases there may be a maximum cost of insurance does not mean that you will have cash value or the ability to pay those “maximum” costs. During your retirement, if you are on a fixed income there is a pretty good chance that you will not be able to pay those premiums since they go up every year.
Q2: When I’m retired is there still a cost of insurance? What if I don’t pay premiums during retirement?
A: Cost of insurance never disappear. If you don’t pay premiums, the cost of insurance and policy fees will come out of your cost value. If you pay less than the required premium, the difference will come out of your cash value. So, you see, your cash value will begin to decrease and eventually it will disappear. If your cash value is eroded you will have to pay those premiums out of your income. If you don’t pay those premiums, your policy will lapse and you will have lost all your money, you will have no life protection, and there will be no death benefit to leave to your beneficiaries.
Q3: What happens if I stop paying premiums, I begin to take income, and the market gives me a 0% return? Can my cash value go down due to costs?
A: Yes! Costs need to be paid every year, regardless of market performance. If you don’t pay those costs out of pocket, they will be paid from your cash value. Zero years only refer to your return for the year on your cash value. There is no such thing as a zero-cost year. If you have a zero-return year, costs are still paid from your cash value. If you take income on those zero years, you will see a significant drop in your cash value. If you run out of cash value, you will have to pay the premiums out of pocket. If you don’t pay those premiums, your policy will lapse, you will have no life protection, and there will be no death benefit to leave to your beneficiaries.
Q4: The agent projected 7% on the illustration. Does that mean that the market has to return 7% every single year for me to get the projected cash value, or is that an average return?
A: It is not an average return. The illustration is projecting that you must obtain a 7% return every single year, without missing a year for ever, to get the projected cash value. Again, it is not an average return. Now, has the market ever performed with such consistency? The answer is a big fat NO!
Q5: Is the risk of the market return on me or on the insurance company?
A: It is ALL on you! There is no guarantee that the market will perform according to the illustration.
Q6: Could I end up paying more in premiums than the death benefit will be?
A: YES! If you have a fixed death benefit, you could end up paying more in premiums than that death benefit. You will most likely be shown a fixed death benefit because the increasing death benefit will incur a substantially higher cost and can lapse a policy even fast as you get older. You might be even be shown a decreasing death benefit as you get older because costs are going up. They reduce the death benefit as a means to combat the cost of insurance. In other words, your premiums are going up, but you are buying less and less death benefit. This sounds like a twisted deal, doesn’t it? You are paying more each year, but getting less.
Q7: What is the maximum cost of insurance at various ages such as at 65, 70, 75, etcetera?
A: They don’t know. The amount of death benefit that you will have at those ages is unknown at the time that you purchase your policy. You can increase of decrease your death benefit which will have an impact on your premiums. Many policies don’t have a cap on the cost of insurance and age will certainly be a huge factor. This combination puts you in a very vulnerable situation with no control or predictability.
Q8: Does the policy pay the death benefit in a lump sum or over time?
A: This is the new “thing” with IULs which we will discuss in more depth in another section. Most policies do pay the death benefit in a lump sum. However, some policies don’t pay the death benefit in a lump sum. They pay it out over a period of time; as long as 30 years.
Q9: Is this permanent insurance of term insurance?
A: It is term insurance; annual renewable term to be exact. If your agent tells you that it is permanent insurance, that is a clear indication that he does not understand what he is selling; you should run, and run fast.
There you go. These are some basic questions that your agent should have satisfactory answers for. Now, don’t be surprised if they don’t know the answers. Many agents out there don’t have a clue as to what they are selling. Chances are that at this point, you know more about the IUL than most agents out there.
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