Life Solutions

Protect What Matters
Indexed Universal Life Doomed for Failure                                                           Part 10

We’ve covered a lot thus far. You should be well armed in overcoming any sales pitch geared at misleading you or your money. You should feel well equipped and confident on your ability to protect your money. Remember, permanent insurance policies are supposed to be the place where you store your safe money; not where you gamble with your money. Even with your new gained knowledge you must stay vigilant. Money hungry agents don’t take the time to analyze the risks they put their clients in, or they just don’t care. Many of those agents will still try to swindle you into buying an IUL relying on your greed. Yes, that’s right. Agents know that people are, by nature, greedy when it comes to money. Their hope is that your greed for high, unattainable returns will supersede your knowledge, common sense, and your ability to see the IUL for what it really is; a money sucking device that will eventually break your bank. Hopefully you will put this knowledge to good use. Now, are you ready to keep learning? Great, lets keep going.


Most IUL selling agents will tell you that they don’t like whole life insurance. But if they were to write down the reasons for not liking it, they would not be able to fill half a page. Those agents never say that whole life is risky, or that it will implode, or lapse, or that it is unproven; they really nothing negative to say about whole life. Their only argument is that the IUL can beat it in terms of rate of return. That’s it, nothing more. They can’t really say that the whole life model is flawed, not that it has a history of imploding, not that it has bankrupt individuals and businesses, nothing of the sort. “The IUL can get you better returns” they say. Again, they hope that your greed will overcome your suspicions.


Let’s recall what makes up an IUL. An IUL has two parts. Part one is the annual renewable term insurance, and part 2 is the excess premiums that go into a cash value, or sub account. In the cash value account, the insurance company buys the options on the index to participate with the market. Your money is not invested in the market itself, the insurance company is merely buying an option in the index. The insurance company does not earn enough interest on the bonds they buy to turn around and buy 100% of the option. So, what they do is that they make deals to participate with the option.  Those deals create caps.


 A cap is the maximum return you can be credited in a given year. The reality is that those caps are rarely reached, so this should not be a big concern.  Caps vary and are reset each year. Caps may also be reduced to almost zero if the insurance company deems it necessary for profitability. The trade-off for buying the options and having caps, instead of buying into the index directly, is that your cash value can’t go down when the market experiences loses. By buying options and having caps, your money increases if the market has gains, but it cannot decrease if the market has loses. In a nutshell, that is the IUL story. There is one part of the equation that is often overlooked when the market experiences loses. That is that your cash value can and will go down due to costs incurred. So, you do go backwards in down, or zero return years. There is no such thing as a zero year where everything stays exactly the same. The agent may argue that the costs and fees are absorbed by next year’s premium. Maybe so, but no matter how you slice it, the costs and fees affected your bottom line, your cash value. Whether it comes out of your cash value, or from new premium, it is still a cost and it is taking you backwards. Let me give you an example:


Let’s suppose that your IUL costs this year are $5,000, and this year the market had a negative gain, or it experienced losses. Your cash value does not increase, it stays the same. Where does the $5,000 come from to cover the costs? The insurance company will take them from your cash value, or from new premium that you will pay the following year. Either way, you are down $5,000 down in a zero year because the market did not give me a return. The agent may argue that you did not lose anything to the market. That is true, technically; but it’s a sly of hand in telling only half the story because the cost had to come from somewhere. Since the market did not go up, you are going to go down $5,000. This is one of the fallacies of the illustrations because what they show is a consistent return every year, year in and year out without fail, forever. Everyone knows that the market does not go up every year forever. It goes up, down, sideways, it’s all over the place. But never just up! Zero and sideways years can be costly. How many can you afford? It depends on several things such as age, costs, whether or not you have taken income, etcetera. Another thing to keep in mind with regards to options versus investing directly in the market is the dividend.


What is a divided? A dividend is a sum of money paid regularly by a company to its shareholders. The S&P 500 index is made up of 500 companies. Companies you are familiar with and have probably purchased and used their products. Many of those companies are profitable and reward shareholders each year with a dividend. Remember that the dividend makes up for a little more than 2% of the total return. To get the dividend, you need to invest directly into the index. As a direct investor and stock holder of the index, you’ll also get the dividend. What most folks are unaware of, including agents, is that when you buy an option on the index you do not get the dividend. The logic behind this is that you are not really an owner/stakeholder of the index. You only have an option to buy the index at a certain price, and before a certain date. For IUL owners, this means that they should expect 2% less than the advertised index rate of return. So, if your illustration shows 7%, the market has to generate a 9% return. If it returns only a 7% return, you can expect to be credited only 5%. This fact alone should make IUL owners pretty nervous.


Looking at the S&Ps historical returns as a measure would be erroneous at best, and misleading as well. You can’t look at the S&Ps historical returns and assume the IUL would’ve participated at those levels, or even close. Between the caps and the loss of dividends the returns fall off substantially when compared to the index directly. Don’t let the smoke and mirrors, and the sizzle of the IUL fool you. Statistically speaking, how does all this play out?

Let's find out, Continue to next section.