Financial noise is everywhere. I try to be selective and only write about a limited amount of unique, profitable, and actionable information. If I see a bad product, I usually just ignore it and move on. Angry rants are not my thing.
However, I do worry that if something happens to me, my surviving loved ones may not know what to avoid. Therefore, I am adding a DO NOT BUY list as part of my estate planning documents. Simply avoiding the worst things is often a better (and easier) strategy than searching for the absolute best thing.
This WSJ article (paywall?) profiles one of the items on my DNB list: It’s the Hottest Thing in Life Insurance. Are Buyers Aware of the Risks?. I was unaware that indexed universal life (IUL) had grown so much in popularity, now making up 25% of new individual life insurance policies as measured by premium:
A universal life insurance policy combines a death benefit with the ability to build up a policy cash value. An indexed universal life policy is a universal life policy that increases the cash value at a rate tied to the performance of an index, often the S&P 500.
Briefly, here are reasons why I avoid Indexed Universal life insurance products:
- High fees. In fact, probably multiple layers of fees. They might sound simple, but are actually amazingly complex. Per the WSJ – “We joke that it takes an actuary, an attorney and sometimes an engineer to understand the calculations,” said Billie Resnick, co-author of an American Bar Association book on life insurance.
- No guaranteed return. You are unlikely to get near the long-term S&P 500 returns. Most IULs have floors which protect you from losses in down years, but return caps which cuts off your return on big up years. Stock market returns are lumpy, but with more big up years than big down years. Historically, protecting against the downside does not help enough to offset missing out on the upside. In addition, they almost always exclude dividends, which means you are guaranteed to miss a significant part of total return. So even if you did magically track the S&P 500 perfectly, you’d still be behind by ~2% due to losing the dividend. You’ll get a smoother ride, but at what cost?
- Life insurance is better when it is simple and transparent. Ideally, the payout should be a guaranteed amount in exchange (i.e. $1 million cash) for a clearly defined event (i.e. death). When something is simple and transparent, you can easily comparison shop and let market competition create a fair price. IUL policies are again highly complex and nearly impossible to compare side-by-side. Maybe one day this will change, but for now it’s buyer beware.
- More fine print: Insurers can change the rules after purchase?! Per the WSJ: “Insurers generally retain the contractual right to change these percentages, subject to regulator-approved limits. They also typically can raise the cost of the death benefit, per contractual provisions.” What? Even the floors and cap percentages are subject to change and not guaranteed?
- In my experience, the loudest supporters of this product tend to be the people who sell them. Why are some things pressured upon you initially as the best thing since sliced bread, but immediately after purchase they become nearly impossible to sell again? The second you buy it, it has lost a huge part of its value. Reminds me of timeshares. Look out for big surrender charges for 10+ years because they have to recover the big upfront commission paid to the salesperson.
I can see how the idea of “stock market-linked returns with less risk” can be attractive, and I would be intrigued if there became some sort of commodity product where multiple companies sold essentially the same thing and competed to drive down prices. However, the current way of selling IULs is too vague and hard to understand for the average customer.
I’m a relatively conservative investor myself, but UILs have all sorts of risks. Side-by-comparisons are hard, so you risk buying a bad version of the product. There is no fixed return, like a fixed annuity. If the stock market tanks, you still risk getting a lousy return. There is a risk the issuer will change the growth rules on you. As with all insurance, the issuer could become insolvent somewhere in there. I prefer my term life insurance policy, as it gives my family a guaranteed fixed payout at a low fixed price after comparing prices side-by-side with several issuers that all offered the exact same product.
My recommendation is simply to steer clear of them all. If you are my loved one and are reading this, my advice is not to buy an indexed universal life policy. Definitely don’t use my hard-earned money to buy one!
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I have been reading and hearing about mixing insurance products and investments for many years and yet people keep purchasing these rip off products.
Hallelujah! Now cue the comments from any insurance salespeople who have even convinced themselves that these are “good investments.”
Great post. I’d like to add there are two types of people who recommend this product, one who sells them and people who already bought them.
hmm.. I have always simply sold Term policies .. call me crazy, but if you look at the premium alone vs the benefit amount, it’s almost like giving your money away .. take your cash from the savings of buyinh term life, and purchase an aggressive annuity policy… you get the same tax deferred status and can create an income for life down the road when you need it!!
that’s mu 2 cents!!
Continue to educate yourselves on the Indexed Universal Life products. They are not as complicated to understand. Check out the book- The Financial Pocketknife for clear, easy to read information about the product!
Honestly, just the fact that they can change the rules after the fact makes it a no-go for me. If you look carefully at the brochures for IUL, they will show some sort of projection, but then in the fine print it says something to the effect of “this is non-guaranteed and purely theoretical because we might just change these floor and cap percentages in the future. but it’s a nice chart right?”
This is great. I’d love to see similar posts about other DNB list items. You bring up a very good point that we tend to focus on good things and just ignore the rest of the crap, but if we aren’t there…
What else is on your do not buy list?
Thanks for asking – I’m working in a series of posts about other things I would avoid.
Any kind of life insurance while you are young & childless should be on that list, perhaps excluding a basic burial benefit. Anyone remember the Gerber Baby Life Insurance commercials? Why???
Great post and I agree 100%. I’m actually in the business and both life & securities licensed. Your blog has some really great content and I continue to follow it. A vast majority of people will do far better with a BTID strategy. Most people don’t buy this stuff, it gets sold to them and sold by someone who is just life licensed.
Term is ok until you outlive it. Your concern seems to be based upon the changing nature of the policy, correctly funding the policy will remove the worry that your article displays. If you are concerned with death benefit then you are better off purchasing a guaranteed universal life policy that will cover you for your life. This is all assuming that you are healthy enough to qualify which is another downside to term. Iul policies are sold to provide cash value options along with death benefit protections. I apologize for who ever explained it to you incorrectly. Have a great day.
Let me guess… you sell universal life insurance policies.
Missing the very basic premise (and rarely understood) real purpose of insurance – it should replace the income of the breadwinner for his/her dependents should he/she suddenly drop dead. Not be a windfall.
If you have outlived cheap term insurance, congratulations, your kids have grown up and the money you saved is invested and kicking ass and you’ll actually get to enjoy some of the proceeds!
In defense of the Insurance Industry, they are competing with the rest of Wall Street, the US Medical Industry, The Federal Reserve, Mortgage Originators and the US Congress to annihilate the middle class of America and rob it of everything they can.
When America’s epithet is written it will be on a scrap of paper because that will be all that’s left.
If I might digress to a somewhat related experience. Early in our marriage I was sold a variable life policy. Although I would not buy one now — because of a better understanding of financial and investment matters — I have to say it has actually turned out pretty good for me. The cash value has done well enough (invested in a Fidelity growth fund) — to overcome all the setup and ongoing costs and has reached a point where it will probably keep the life insurance in force without me having to pay any more premiums. Also, I’ve from to time to time taken loans from it to fund other investment activities — mainly my Roth IRA with a discount broker. I like that the policy has no upside cap on investment returns, although all the downside risk is on me. Cash value loans can be — can be — a more cost effective way to access profits in a market investment than an equivalent taxable account as long as you pay back the loan. I monitor the policy online to keep an eye on the performance of cash value account, as it does take a degree of active management to make one of these things work. The point I’m trying to make is if you find yourself realizing you’re stuck with a “turkey” of a life insurance policy after paying premiums for many years, there may be ways to “make lemonade out of lemons” rather than just letting it lapse or cashing it out.
You can’t look at it that way. you have to look at the return you would have gotten by putting that money in the stock market, as well as buying term
Amen Joshua!
Jonathan, thank you so much for writing about this! I agree 100% that people should stay away from an equity indexed universal life policy. Actually, they should stick away from all universal life policies. These policies are more sold than they are bought by insurance agents looking to make a high commission. Indexed universal life policies have high fees, high surrender values and in the end if the policy owner dies, the insurance company will typically keep the cash value and only pay out the death benefit (they may give the option to pay out the higher of the two, but typically the higher is the death benefit). So if you think about it, they charge you so much extra and “invest” your money, but in the end if you die, your family does not get that “investment” portion back, only the death benefit.
I have read about this… One of the argument was, when you are in your 50s, this is a good option with risk free index compatible returns… Any thoughts?