If you see an illustration that works in today’s low-interest-rate environment, isn’t it probable that the actual results could be much more favorable if interest rates rise in the future? For the last 81 years, this is how the market has moved through good times, bad times, recessions, corrections, world wars, inflation, deflation, and so on. These mandates set forth uniform standards for all IUL carriers and agents to follow when illustrating Indexed Universal Life insurance. As discussed earlier in this article, you can combat the future rising cost per unit of insurance inside any UL or IUL policy in many different ways throughout the life of the policy. There are very few people whom we would advise to buy an indexed universal life policy. However, in an extremely high-interest rate environment, it’s probable that a Whole Life policy’s cash value won’t benefit as much from the increased rates as a comparable UL or IUL policy can because of the factors listed above. This extensive article explains what is IUL, how IUL works, and the pros and cons of an indexed universal life policy. This strong rebound year would have bolstered your IUL’s average crediting rate and helped to make up for the prior two or three years that translated to 0% crediting. Keep in mind though that although Whole Life offers very modest guaranteed growth provisions, dividends are not guaranteed to be paid to policyholders every year. All three of these extended losing periods were immediately followed by at least one double-digit year that would have easily hit today’s Indexed Universal Life cap rates. Keep in mind too that there were at least two and a half decades between each one of these multi-year losing periods. Other topics like IUL fees, IUL vs Whole Life, and IUL vs 401k will be addressed below. (Note: I apologize in advance to any actuaries reading this for my oversimplified explanation below.). Term Life Insurance. One way is to acknowledge the fact that most of the best performing IUL policies on the market don’t even offer a guaranteed death benefit option. Our video takes a deeper look at this 81-year study to analyze these historic returns of the S&P Index and how Indexed Universal Life can harness this volatility into positive growth. For that reason, this argument should hardly be considered when weighing Indexed Universal Life insurance pros and cons. Depending on your situation, the total costs paid may net less long-term benefits versus other insurance and separate investing alternatives. Whole Life with a term rider. The only reason that IUL carriers maintain their right to raise their charges that high is just in case some epidemic like the modern equivalent of the Bubonic Plague strikes America and modern medicine simply can’t handle it. If you make a late premium payment on an Indexed Universal Life insurance policy with a “No-Lapse Guarantee” rider, you actually have the option of restoring the guarantees by paying back that premium at interest. As an IUL policyholder, you can choose to take either this 3%-4% fixed crediting rate, or you can forgo the fixed-rate and instead shoot for a higher crediting rate by choosing any of the indexed crediting strategies offered by your Indexed Universal Life insurance policy. Let’s discuss how this same set of circumstances MAY play out with Indexed Universal Life in the current economic environment and into the future. Unlike term life policies, indexed universal life never expires. So unlike many of the polarized camps weighing in on Indexed Universal Life, I don’t believe it needs to be an “either/or conversation” between insurance and investments. The fact of the matter is, IUL as a financial product functions quite well if funded properly, reviewed regularly, and adjusted to meet the ever-evolving financial goals of the client. In summary, just like any financial instrument, what makes sense for one person may not be right for you. Does this mean that train travel is no longer safe for anyone? That is why we recommend sticking with highly rated, financially solvent companies that have stable histories. Performance does not reflect the impact of fees and expenses. Rather than have their comfortable business model be threatened and be forced into an intensive new learning curve, it’s much easier to throw around the common opinion that “IUL’s cost of insurance is expensive.” This justifies their one-dimensional insurance analysis and also frees up more dollars for the financial products they actually can speak intelligently about. Since universal life insurance has more immediate cash value, cash values can often grow faster since there is a larger pool of money off which interest is earned. The client could also see the effect of using Indexed Universal Life for retirement income as their cash value hit the cap, the floor, and everything in between while taking policy loans. However, this next little factoid of information is something that the critics conveniently omit in their attacks on Indexed Universal Life insurance. This awful 25 year period in the stock market had 11 years with 0% growth or worse, and it wasn’t until the 26th year (1954) until that index finally broke above the pre-1929 highs. Indexed universal life insurance has the potential to build cash value by tracking a major market index through index-linked options. Once that losing year passes, your Indexed Universal Life policy starts tracking its growth from that new lower 2,000 level in the S&P 500, despite the fact that your policy cash value incurred no market losses on its way down from 2,500 to 2,000. Indexed universal life insurance is one of several permanent life insurance products with a cash value component. What portion of my assets would I be willing to cap my annual growth in the 10%-13% range so that I can completely erase the possibility of downside market risk? [Pro Tip] Your escape hatch if IUL’s increasing insurance cost structure got out of hand. Contrary to how they are sometimes portrayed, insurance companies are often trying to do just that, and not trying to rip-off consumers. This way a carrier can’t simply cherry pick one very favorable look-back period to justify an abnormally high illustrated crediting rate. If you do hear this particular argument about cherry picking averages from any agent, blog post, or video, it just simply cannot be done anymore. Universal life insurance (also known as UL policy) is a type of life insurance which combines two elements: a lifetime coverage and a savings account feature. The S&P 500 Index (S&P 500) is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S. Most IUL carriers have only lowered caps by relatively small increments over time in an attempt to stay competitive with the rest of the marketplace. I think not. But that limit is a positive feature. Term life plans are easy to understand. Indexed Universal Life . Imagine being able to stay confidently exposed to market volatility at all times without the fear of losing any fraction of your account value to stock market losses? Life insurance agents who strongly favor Whole Life (vs. IUL), that only exaggerate the bad and the cons of Indexed Universal Life insurance to suit their agenda. Everything is priced perfectly. One of my favorite sayings about the market is that “Stocks tend to take the stairs up, but they take the window down.”. Obviously, Indexed Universal Life growth caps will have to decrease if prevailing interest rates do, since the IUL carriers would have less of an options budget to buy up a higher S&P cap. Closing Thoughts on the Pros and Cons of Indexed Universal Life, Indexed Universal Life Insurance for retirement, the fees and charges of Indexed Universal Life insurance (video), 81-year study on the S&P Index sequence of returnsÂ, check out this YouTube video examining IUL Fees. When I bring up how the “guaranteed column” of a 401k account would actually be a -100% return leaving you with $0, people will commonly reply, “Well that’s ridiculous because I have conservative and diversified mutual funds. We here at I&E hope that this list will help provide just a little insight into this unique insurance and investment product. They felt that the IUL carriers were getting too much market share and were stealing clients from their preferred product offering, mainly Whole Life Insurance. You can all about how premium financing works as well as the pros and cons of premium financed life insurance here. Conversely, if the S&P Index was losing 15-30% in a single year, would receiving an additional 2% dividend payment make you feel anywhere near as good as having a contractual 0% floor against market losses? An IUL is a form of cash value life insurance, which earns interest in either an indexed or fixed account. This is why you often see little or no cash value during the first two policy years of a pure Whole Life policy. Pros: Term life plans are the most affordable type of life insurance. However, if you put any of these supplemental term riders under an actuarial microscope, what you will see is that they are all Annual Renewable Term riders that function almost identically to the cost structure to Indexed Universal Life insurance. Indexed UL policies aren’t directly invested in the stock market like a variable universal life insurance policy. While IUL is one of the hottest products on the market, it’s also one of the most volatile. Universal life insurance pros and cons also apply to how the death benefit works. Keep in mind that for the guaranteed IUL cost of insurance to actually occur, not one, but two horrible and extreme factors need to take effect: Let’s discuss what it would take for each leg of this horrible double-whammy to come true. If the clients feel they would be valuable, then why not do an in-depth analysis to see if the cost for the benefits with Indexed Universal Life insurance would, in fact, be “too expensive” for them? As soon as one year goes by where you either earn crediting, or the carrier doesn’t triple their charges, then the guaranteed column you see on that sales illustration suddenly becomes utter nonsense. Universal life is also a lot more flexible. So the investment community leans heavily on the common opinion “Indexed Universal Life is too expensive” without providing any factual grounding. No Whole Life policy allows you to lock in your loan rate and still realize maximize growth potential on loaned money. Most of the bullish years with double-digit index gains would have easily hit today’s IUL caps even without including S&P dividend payments. Most articles about life insurance discuss two basic policy types: term life and whole life. Although your investment portfolio may not have gotten even after this first bounce, there’s a good chance that your IUL’s cash value would have pulled way ahead after that first double-digit rebound (since it only paid policy charges during the consecutive 0% years).**. Information presented in this article by John “Hutch” Hutchinson is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities product, insurance products, financial services, or investment strategies. For most Indexed Universal Life insurance policies the guaranteed column means 0% growth…in any year ever. But if you want the certainty of having steady crediting every year, Whole Life may be the way to go. Since sharp bounce-back market rallies often follow crashes, Indexed Universal Life insurance can be an amazingly powerful financial tool to harness that volatility in a positive way. Premiums can be lower than traditional universal life insurance plans. Most of the higher-rated companies that offer IUL have never even raised their mortality charges above what was originally illustrated for the client. Whole Life agents will tell you not to worry because your cash value will grow and reduce the amount of the term rider you will be paying for on an ongoing basis. If that’s the case then you certainly shouldn’t need to worry about tracking the S&P 500 index with a 0%-1% crediting floor like you have built into IUL crediting strategies. Regardless, a set of industry-wide regulations called AG-49 (Actuarial Guideline-49) took effect starting September 1st, 2015. A handful of insurance companies that offer Indexed Universal Life policies will actually lock in your policy’s loan rate FOR LIFE while still letting you fully participate in some or all of their policy’s indexed crediting strategies (even on loaned money). 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