The Contrary Faces of Indexed Universal Life

The Contrary Faces of Indexed Universal Life

You shouldn’t know how sausage gets stuffed, policies cooked up, why the boss is so steamed.

It’s best not to know; walk on and leave it alone.

If you’re buying life insurance, though – a universal policy, laced with complexity and flexibility – you’d better grasp the fine print. Our subject is indexed universal life insurance – IUL for short – a red-hot industry darling. Is it a salve for the longevity crisis, solving the problem of outliving your retirement funds, or a slippery confidence scheme aimed at killing your dreams?

Ancient god Janus, looking east, facing west: which direction should map out our path? Insurance can be grand, if we look at it so.

IULs are superior insurance products – that’s my bottom line. Researching them, I was astounded to hear a line repeated with confounding consistency: IULs are quite excellent, yet few agents understand them. That’s worrisome – it’s like trusting a dentist who asks where you might be keeping your teeth.

Indexed universals are unusually complicated – it’s part of the draw, their customizable nature. The cash portion is key: it can be borrowed on or withdrawn to supplement a retirement income. But they must be skillfully tailored to fit your retirement plan – and fit rather snugly.

Insurance specialists tell me that IULs shouldn’t be reckoned as life products at all: they’re investments, the death benefit being secondary. That’s odd, because one of the key mantras for newbie agents is: life policies aren’t investments; the death benefit is all. So this stone-carved prescription is in fact scribbled in wax, easily melted or scrubbed. What’s going on here?

The problem is our stubborn insistence on living long lives. Life expectancy is around 80 today with actuarial regularity, and lasting to 100 is realistic. Sounds swell; meet me by the pool, we’ll watch hipsters play shuffleboard, sip what the doctor prescribes. It’ll be nice, assuming we can pick up the check, and don’t wind up in geriatric servitude, schlepping mocktails for tips.

Let’s examine these IULs. All depends on fine details: the individualized structuring, the intricacies of investment and percentage. This is where the critics step in: to them, IULs are blindingly opaque and oiled with snake. Some people are never satisfied, but let’s listen anyway: the critic is usually me, and it ought to be you. We’re not playing with Monopoly money.

Indexed universal is a type of permanent life insurance. It shares attributes with its brethren, whole and universal, most importantly in the cash value portion. IULs are funded with after-tax money. Fees are frontloaded and heavy: don’t expect to see gains for a decade. IULs are compared to real estate: both appreciate slowly, offer superior returns and a highly useful equity line of credit. Real estate is dizzyingly high-risk – recall 2008. Are IULs just as chancy? Hang on, now, readers; the party’s just starting.

In a proportion selected by customer and agent, the IUL’s cash account is linked to an index, commonly the Nasdaq or the S&P 500. There’s an earnings floor of 1% or even 0%, in which case you technically can’t lose. Upper earnings are capped, however, at around 12%. Permanent life investors are commonly drawn to fixed returns, moderate yet dependable. IULs offer a ride and it’s bound to be thrilling, if you can handle the swings. If planned and executed with care and good fortune, the results at retirement can be exhilarating.

I offer an example suggested by a major provider, the kind you should use: a 35-year-old male, husband and father. He buys an IUL with a $400,000 death benefit. Primary goal: supplemental retirement income. Premiums are $6,000 a year – expensive, but not unbearable. Growth of 6.7% is assumed over 35 years – a moderate scenario, they posit. By retirement, the death benefit has risen to $1 million, and the cash proportion exceeds $650,000. John Doestoevsky – ethnically Russian; a friend of mine – can take $50,000 per year via policy loans and cash withdrawals until 90, tax-free. If he wisely expires just then, a $400,000+ death benefit pays out to heirs. John can even afford to reach 100, if he’s greedy. That’s how well it works, if all goes to plan.

So the sales videos tell us – and it’s highly convincing. Listen up, as I repeat: IULs are all about structuring. Your agent must be expert and second opinions are standard. Rely on stolidly reputable firms; go boring. IULs are fantastically popular: 20% of new premiums written in 2019 were of its variety. Hot new products invariably generate excitement and, often, immoderate action.

Here’s where we find those know-nothing agents – bandwagon hoppers, eager, if ill-educated. Customers can get careless when offered high alpha, too. Don’t sign anything until you understand, well – everything. Take time to learn the concepts and risks. If an IUL fits your retirement strategy, it can support a comfortable and lengthy old age. Wrongly taken on, it could become a costly mistake.

Let the spoilsports speak: as that’s usually me, I’m bound to listen. Consumer advocates are chary of the product. They don’t like the fees, and it’s true: IULs are priced dear and a policy’s early days will be costly. The regulatory structure is suspect, with insurance rules, rather than financial regulations, governing. IULs can be dizzyingly complex, as noted, overwhelming for policyholder-investors – so as always, caveat emptor. If you don’t keep up premiums and the policy lapses, you’ll lose funds invested and the death benefit vanishes. Expect ‘premium calls’ when markets sink fast, as happened in 2020.

I do not – underline – wish to minimize the risks. I often think IULs should be bought solely by experienced punters with broad portfolios, so as to spread out the risk. Sometimes I’m too cautious; ordinary citizens shouldn’t reflexively say ‘no’ to new products. I recommend assigning a solid three months for self-education, conversations with agents, second and third opinions, budget calculation and calm rumination. IULs are a serious commitment, on par with a mortgage: you get in, and there’s no walking away without pain.

I recommend caution – still, don’t miss the boat. Done right, IULs can be magnificent. See if one works for you – it may be the ticket to paying a surrogate to blow out 100 candles one day. At a moment like that, you’d hate to be passing the hat.

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