What better way to provide you with financial peace of mind when the market is crashing than an indexed universal life insurance policy? Every stock market melt down is a great example of why indexed universal life insurance is such a fantastic tool for building and protecting wealth, all wrapped up in a tax favored vehicle.
In this article we will discuss the pros and cons Indexed Universal Life (IUL), focusing on the benefits and drawbacks of an insurance product that seems to polarize those in both the insurance and financial industry.
For years whole life insurance purists have engaged in mudslinging at this product from every direction possible, and with incredible vigor. Yet, there are options available to the consumer in the IUL marketplace that just aren’t available in any other permanent life insurance policy.
So we hope you’ll agree that it’s worth taking a closer look at IUL insurance.
This article is separated into two sections, the pros and cons.
- In the first section, we get into the different indexed universal life insurance pros and cons, starting with the benefits.
- The next section we shoot for a balanced approach so we offer the disadvantages of IUL insurance as well.
A Brief Note on Indexed Universal Life Insurance Policies
On September 1, 2015, NAIC Actuarial Guideline 49 (AKA “AG 49”), was put into effect. Essentially, AG 49 requires IUL insurance policy illustrations be based on the products general account, which means that cash value growth will be more conservative when creating an IUL illustration using an index than before AG49. (In our opinion, you should be highly skeptical of an IUL illustration in 2023 that shows greater than 5.5-6% return.)
Now, this is a good thing for consumers as it gives a more conservative picture of what a policyholder of indexed universal life insurance can expect. And tempered expectations are good for the industry and for the viability of IUL insurance products long term.
So with that behind us, let us take a moment and bring to your attention to some of the best indexed universal life companies.
IUL Insurance Definitions
An IUL insurance policy is permanent life insurance and a type of Universal Life Insurance. In similar fashion to universal life, indexed life insurance allows you to adjust your death benefit, your premium payment, and how often you make payments.
Cash Value
An IUL is cash value life insurance. The policy earns interest in either a fixed account or indexed account, which helps your premium grow, increasing the cash value accumulation and growth in your policy.
Floor
Both the fixed account and indexed account have a floor, which is the guaranteed minimum level of interest you will be credited in that specific account. The typical floor for a fixed account is between 2-3%. The floor for an indexed account is usually 0%.
Indexed Account
One place in an indexed universal life insurance policy you can put your cash value to use is in the indexed account. The indexed account tracks a major equity indices, such as the DJIA, S&P 500, NASDAQ 100, Russell 2000, Hang Seng, EURO STOXX 50, or MSCI Emerging Markets.
It is important to make a distinction that your cash value is not invested in sub-accounts containing securities, a la variable life insurance. This is one of the major differences between VUL and IUL insurance.
Instead, the cash in the indexed account earns credited interest based in part on the performance of the underlying index, subject to the cap and participation rate proffered by the life insurance company.
Participation Rate
The participation rate is used by the life insurance company to determine how much your cash value will participate in the gains of the tracked index. For example, if the participation is 100%, then your cash value will be credited interest up to the total gains in the index, subject to the cap. If the participation rate is 85%, then your cash value will be credited interest up to 85% of the total gains in the index, subject to the cap.
Cap
The cap is the maximum amount of interest for that segment the life insurance company will credit to your indexed account. Cap rates vary depending on the type of indexed account and crediting methods.
You will find different life insurance companies offer different cap rates and participation rates, depending on the IUL policy and the index chosen.
Your cap can vary significantly from one insurance carrier to another. Some companies offer uncapped potential but have a lower participation rate. In contrast, other IUL companies offer 100% participation rates but with cap rates ranging from 9% to 15%.
IUL Design
An IUL policy is only as good as its design. That is why it is important to be familiar with the various options available for policy design and the life insurance riders available and how they can affect your policy’s performance.
More on all this to follow below.ย Hopefully the above is enough information for you to move on to the next section.
Now, before launching into our IUL pros and cons, let’s briefly talk about whole life vs indexed universal life.
Whole Life Insurance vs Indexed Universal Life
We have an entire article dedicated to the pros and cons of an IUL vs whole life, but we will offer a few insights into this topic here.
Indexed universal life too often gets a bad rap by the “whole life purist” crowd. And while a whole life insurance policy is an excellent savings account option, there is certainly a place for an indexed universal life insurance policy in a solid financial plan, depending on what your specific goals and objectives are.
Non Correlated vs Correlated Assets
Whole life insurance is a non correlated asset, which means that it is does not follow the movement of the stock market. Whole life insurance at its core is a contract between the owner and the life insurance company, in which the company offers certain guarantees, in return for the payment of the premium.
In contrast, index universal life does follow the stock market, as it is indexed to specific sector indices, such as the S&P 500 or NASDAQ 100. Once again, you do not share in all the gains of the particular index, but you also do not share in all the losses.
Guarantees vs No Guarantees
Whole life offers specific guarantees, such as guaranteed death benefit, guaranteed cash value growth and guaranteed level premium.
Indexed universal life does not offer the same guarantees, as its performance is largely tied to the underlying equity index that it follows.
Dividends vs Credited Rate
A dividend-paying whole life insurance policy pays an annual dividend. Dividends can be used to purchase additional paid-up insurance, further increasing the death benefit and cash value growth of the policy.
An indexed universal life insurance policy is credited an interest rate determined by, either the declared rate of the insurer, or the participation rate and cap rate of the underlying index the indexed account tracks.
So which is better, index universal life vs whole life?
Well, that is a great question. There really is no one best life insurance policy out there. Determining the right policy for you will come down to different factors, particularly how you answer the question:
“What are your goals and objectives?”
Hopefully the following index universal life pros and cons article will help shed some light on what permanent life insurance policy is best for you — based on your unique need and goals.
| IUL | Whole Life |
|---|---|
| Market Based Returns | Guaranteed Growth |
| Flexible Premiums | Fixed Premiums |
| Fixed and Indexed Crediting | Dividends (Not Guaranteed) |
| Flexible Premiums & Death Benefit | Not Flexible (Although Paid Up Additions Do Provide More Flexibility) |
| Unpredictable Market Based Returns | Non-Correlated Predictable Returns Based on Guarantees and Potential Dividends |
| Unpredictable Market Based Returns | Predictable Cash Value and Death Benefit Growth |
| Rising Cost of Insurance | Fixed Costs |
Indexed Universal Life Insurance Pros and Cons
Pros of Indexed Universal Life
In this section we will cover the top 8 advantages of indexed universal life insurance, starting with the most obvious, the death benefit.
1. Death Benefit – (AKA Family Protection)
This is an insurance product and ultimately the thing you are insuring (your life) is of utmost importance.
Money will never be able to replace the loss of a loved one, but avoiding the double-whammy of a family death and massive financial hardship is significant.
All life insurance policies have a death benefit, so it may seem odd to discuss this as a pro, but ultimately it is a huge benefit that is being purchased, so it shouldn’t be dismissed. The death benefit provides financial leverage, particularly in the early years of the policy. Your insurance premium payment may only be a couple thousand a month, but your death benefit could be in the millions.
Another benefit is that the IUL death benefit can be fixed or increasing. Additionally, the death benefit can be lowered to help manage costs, which comes in handy as you (and your policy) get older and your cost of insurance (COI) increases.
2. Cash Value
An IUL is a cash value life insurance policy, meaning that it has a cash value account and allows for cash accumulation growth inside the policy.
This is a distinct advantage of permanent life vs term life and is part of the reason that an IUL is more expensive than term life insurance, at least initially.
The cash value grows over time as the individual pays into the indexed universal life insurance policy. The cash value can always be accessed and used as you see fit to purchase items, such as real estate or stocks.
In addition, the withdrawals are tax-free income, up to the amount of premiums paid, because the premiums were paid in after-tax dollars.
And don’t forget that you can also access the growth of your account tax-free, by taking a life insurance policy loan (sometimes called a swap loan) against your cash value.
The cash value can be used to help pay for long-term care costs. In addition, some IUL policies offer long-term care insurance riders.
With the rising costs associated with long term care, have a hybrid policy might be a good option.
For those with a lot of extra cash to invest each year there is a limit to the amount you can pay into the policy (typically a percentage of the total policy value), this limit is known as the MEC (modified endowment contract) limit.
3. Flexible Premiums
Convertible term insurance policies require that you pay your premium each and every month, if you stop paying, your policy lapses. There are some exceptions, but it is fairly rigid.
With an Indexed Universal Life policy you have the ability to pay more or less each month (there is a minimum to cover fees, and a maximum based on the MEC limit) but the policy has much more premium flexibility than the other types of life insurance policies in the market.
The flexibility of an IUL is great for those that have income that fluctuates throughout the year.
If you work on commission and certain times of the year are much better than others, you may want to consider the flexible premium options available with an IUL policy.
4. Locked-in Gains & Annual Reset
Another great aspect of an indexed universal life insurance policy is that each year the gains are locked in or captured. So, every year your gain will be secured along with your previous cash value account total.
Within an IUL your insurance company does not invest your cash value in the stock market. Instead, the life insurance company purchases options on the market index, providing the opportunity to make money when the stock market is up and helping avoid losing it when the market goes down.
In reality, the company still loses the โoption priceโ but that is part of the cost of insurance each year and is a fixed cost. In other words, the cost is known ahead of time and therefore the insurance company can estimate accordingly.
Annual Reset
The Annual Reset may not seem like much at first, but in reality it’s a fairly big deal.
What it means is that you are always starting from zero each year. You never have to struggle to โcatch upโ due to previous losses.
Consider that over a 79 year period (1937-2015), the S&P 500 had two periods where it lost three years in a row, 1939-1941 and 2000-2002. It only had one period where it lost two years in a row, 1973-1974. And after those distinct losses, the market bounced back with double digit returns every time.
I share this because normally those double digit returns are just a way of getting back some of the horrible losses in the previous years.
For Example
If you have $100k invested and lose 10% in year one, 20% in year two, and 10% in year three, you’ll be at around $65k at the end of the three years. In order to get back to even, you’ll need to get around 50% in the coming year.
However, if you had $100k in cash value in your IUL over the same period of time, after those three years your cash value would still be really close to $100k – which means that the double digit returns don’t get you back to even, but springboard your policy’s cash value to new heights.
5. No Required Distributions or Penalties for early access
When you get ready to retire there is no mandatory distribution with an IUL policy.
If you have an IRA or the pesky 401(k), you’ll have to start taking distributions (withdrawals) when you turn 70 1/2.
I’m sure you know already, but the reason for this mandatory withdrawal is because the IRS can’t tax that money until you start to take 401k withdrawals.
Now, if you’re trying to build your retirement account while you or your spouse is still working, these mandatory distributions can seriously slow your progress.
The IUL has no mandatory distribution requirement.
With an indexed universal life insurance policy, if your spouse is working and you are retired, you can live off the employment income and let your cash value grow and grow without being forced to take out any money.
You can also access your policy’s cash value via a withdrawal or loan for tax-free retirement income.
(If you have a 401(k) and you are still working after reaching the age limit, you can delay the distributions, but only until you stop working, then it becomes mandatory).
6. Is it Tax-Deferred or Tax-Free?
The IUL is a tax-deferred policy. Similar to that of a 401(k) or an IRA, but different in many significant ways (some of which we’ve already mentioned above).
If you choose to build up your cash value account in an IUL policy and use the protection during your working years, the policy will act much like other tax-deferred products.
The cash value will grow and you will not pay tax on the growth of the policy’s cash value account.
Note though, if you happen to close the account (not recommended) or take withdrawals instead of policy loans, you will pay taxes on the growth.
However, unlike the IRA and 401(k) accounts, you can take out a life insurance loan from the insurance company and borrow against the IUL’s cash value tax-free without incurring any penalties.
In addition, you can always withdraw from your cash value up the amount of the premiums paid (your basis) without being taxed since those premiums were paid in after-tax dollars.
Access Cash Value At Any Age
With an IUL you can access your cash value at any age, without penalty or compulsion. You do not have to wait for some required age to access to your cash value.
Many tax-deferred retirement accounts have an age restriction of 59 1/2 before you can access the money. If you withdraw ahead of time there are penalties and restrictions.
I don’t know about you, but I prefer to have zero limits on accessing my own cash.
With an IRA you do have some stipulations for emergencies, and age distributions, but even so, an IRA can be limiting.
7. Excellent Growth Potential
The Indexed Universal Life insurance policy has more potential upside growth than a whole life insurance policy and is probably the main reason why individuals looking for permanent life insurance will choose an IUL over a Whole Life.
If the market index that your policy is tracking increases 10% in a given year your account will be credited around 10%.
If the market index increases 20%, your account will be credited with the max or cap, which is currently around 8-13% for many policies.
Just know, when the index returns a rate that is higher than the cap, the life insurance company keeps the difference. But don’t forget that in down years the insurance company also protects your account from a loss making a floor of 0% a huge benefit.
8. Doesn’t Impact Social Security
Many people don’t know this, but the money you make from Social Security in retirement may be taxed as income if you make more than a certain limit.
The income from an IRA might just put you over the limit ($32,000 if filing jointly, or $25,000 if filing as an individual) and therefore cause your social security to be taxable.
For example, say you get $24,000 a year from Social Security, and you take another $40,000 from your IRA each year. You may find yourself in a situation in which the Social Security benefits are taxable, and you’ll end up in a higher tax bracket.
If, instead of an IRA you had an IUL policy loan for $40,000 per year, your taxable income would be zero because you would be under the base limit.
For an individual or family that is living on less than $80,000 per year, you may find that your annual tax savings are in excess of $10,000.
That’s a big deal.
For those making more, your savings would be even greater. That’s a bigger deal.
Cons of Indexed Universal Life
As much as we have mentioned the many pros of IUL insurance, there are some cons to ponder as well. We list our top 7 IUL insurance disadvantages below.
1. A Zero Percent Returns WILL Reduce your Cash Value
One of the big selling points of the Indexed Universal Life policy is the fact that you never lose cash value, because there is a floor of 0% (sometimes 1%).
The reality is that the cost of insurance in the early years can be significant, and therefore you may see your cash value decrease (i.e. you can lose money) if you have been paying near the minimum premium each month.
It is recommended in the early years that you do what you can to pay the maximum life insurance premium. Doing this in the early years when your cash value is low will help get the ball rolling and the momentum accelerating.
One of the benefits of an IUL policy is the flexible premium.
But if you consistently pay the minimum premium, the down years will definitely be a big kick in the pants and you’ll be disappointed at the cash value of the policy.
This can also start a negative snowball effect as the cost of insurance increases as you age.
Bottom line, do your best to keep up with premiums in the initial years.
2. Cost of Insurance Increases as you Age
The cost of insurance in based on your age, your rating, and the amount insured.
For each $1,000 death benefit there is a cost that increases each year as you age. The reason the cost of insurance goes up is because you are more likely to die.
Alternatively, one of the benefits of whole life insurance is that your premium is determined by averaging the total cost of insurance for your policy’s entire life and provide a fixed premium based on that figure.
Increasing COI
IUL policies have an increasing cost of insurance rate. This means that it is cheaper in the beginning and more expensive down the road. This can be scary for those that are not prepared financially and as they get older the cost of insurance increases.
Competent Insurance agents are not trying to sell you a product that will lapse in your old age due to crazy expenses. Yes it can happen, but that should not be the intention of the competent indexed universal life agent.
The intent of an IUL policy is to gradually decrease the โnet amount of riskโ (as seen by the insurance company), as you age.
A properly designed IUL policy is one that provides enough cushion in the beginning years to protect your policy from rising COI down the road. And you can always lower your death benefit to hep ease the burden of rising costs.
3. “Net Amount of Risk”
On most indexed universal life insurance policies, the death benefit is equal to the original insured amount minus the cash value.
In other words, if you purchased a $500,000 policy, and you had $200,000 in cash value at the time of your death, your beneficiaries would receive a check for $500,000, not $700,000.
This means that the insurance company only had to pay out $300,000 at the time of your death, because you had accumulated $200,000 in cash value during the life of the policy.
All this to say, that as you get older the cost per $1000 of death benefit increases, but so should your cash value account.
Therefore the risk to the insurance company is relatively the same.
You have a higher risk of dying because you are older, but the company also has a lower amount at risk, so the two should even out.
This is all fine and good if things go as expected.
But if you pay the minimum, and the policy struggles because there are a few bad years in the beginning, you may find yourself down with too little cash value to compensate for the increasing cost of insurance associated with your age.
You can always call and lower your death benefit, but that is obviously not something that most want to be facing.
4. The S&P Index Crediting does NOT include Dividends
For the life insurance company to give you a 0% floor for downside protection, and to also give you upside, the insurer has to buy options.
These options are not the same thing as buying the underlying stock that these options represent.
As a result, the company does not get the dividends that a stock owner would rightfully get.
Therefore, when you look at the S&P 500 index you must be aware that the index was created to include the dividends associated with the representative stocks.
In other words, you will earn less than the index because you’re not getting the dividends.
In some years this can be a 1% difference in the index, and in other years it may be as high as a 4% difference.
But it’s helpful to know that you will never get the same rate of return that the index itself returns.
To be fair, almost all asset managers fail to earn the same rate of return as the index, but that’s another point entirely.
5. There is a Crediting Cap
There is tremendous upside to IUL insurance because the life insurance company is buying options on a given index. However, they do cap the credit amount to limit upside potential so that in years where there is an index return of 22%, you will only be credited the max, or cap rate, associated with your policy.
The cap rates are typically between 8-12% (although there are uncapped accounts available with certain insurers).
Having your upside potential limited by a cap can be frustrating if you are watching your stock portfolio go through the roof and you want to get in on some of that action with your IUL.
But it is usually outweighed by the converse effect of watching your stocks get decimated in a crash and your IUL is none the worse for wear.
Credit caps are just a cost of doing business with an IUL policy. If you don’t like it, you may be better off with a Variable Universal policy or perhaps another investment product that participates fully in the stock market.
6. You Don’t Keep “Excess” Returns
The additional % that the market index returns above the cap is used to make up for the years in which the company has to cover the losses of a negative year and give the minimum guarantee.
Not all companies offer a minimum guarantee that is above 0%, but some do offer a guarantee around 1%. This can be a big deal in covering the cost of insurance in down years.
Paying the max life insurance premium allowed in the first few years of a policy will really tilt the policy in your favor for the life of the product.
7. It’s Complicated
Finally, it’s also true that an IUL can be complicated, particularly if you are comparing it to something as simple as term life insurance.
The fact that the cost of insurance rises as you age, and that there are some strategies for increasing death benefits and strategically managing the policy throughout the years to manage the various indexes and crediting options, means that it isn’t simple.
This isn’t a big deal if you have a good IUL insurance agent that you trust, but it can be an issue if you don’t have an agent and prefer to just pay the premiums and forget about it.
IUL Pros and Cons Conclusion
Hopefully you can tell from our indexed universal life insurance pros and cons list above, there are plenty of good reasons to choose an IUL, but they need to be understood and weighed against the disadvantages and your own personal situation and needs.
It can be complicated, but if you choose to stay educated and consider discussing your policy with your agent from time to time, it’s not something that should be a deal breaker.
The Indexed Universal Life policy is a solid and reliable life insurance product that provides a specific set of benefits to the consumer.
For those that want a taste of the bull markets without the bite of the bear, this may be the perfect product for you.
If you have questions, please don’t hesitate to reach out – we’d love to help. Please call us today for a complimentary strategy session.
40 comments
Mike
What you conveniently omit is that the insurance company can drop the cap rate over the life of the investment . No IUL has ever maintained its beginning cap rate. All have dropped consistently over the last ten years and have never ever gone back up. The return has very little to do with the underlying index and everything to do with the cap rate, fees, and interest charged against any money you borrow against the plan. You can in fact lose equity on this No insurance company will guarantee you a cap rate over the life of the policy that insures you wonโt lose money and the odds are you will wind up funding the plan when you can least afford it. I unfortunately have one of these and I already know Iโm screwed three years to retirement.
Insurance&Estates
Hello Mike, if there is an omission it certainly wasn’t out of our own sense of “convenience”. In fact, we’re pretty candid about the Cons (part of the title of article) of IUL policies as well as potential pros. As a rule, our experts tend to prefer recommending whole life products, more specifically, high cash value designs utilitzing mutual dividend paying whole life that does not carry the risk to the policy holder that you’re describing. You may want to see about converting that IUL if that is available to you.
Best, Steve Gibbs for I&E
Greta James
Thanks for explaining the benefits of indexed universal life insurance. I would like to get some kind of life insurance soon. It would be smart for me to consult a professional so I can get the best policy for myself and my family.
Insurance&Estates
Hello Greta, thanks for connecting. I recomend you speak with Barry Brooksby first as he is our cash value life expert. Depending upon your goals, he may or may not refer you to another team member. You can request a call from him at barry@insuranceandestates.com.
Best, Steve Gibbs for I&E
Menzhie
Anyone can explain this “no lapse ending date is April 2020” and now I got my 202i annual policy statement that says, “no-lapse guarantee is no longer in effect.” What does it mean?
Husband purchased an IUL policy at age 59, He is now 67 years old. We pay the target premiums each month. I asked my agent, she told me to call the company 5 years from now? We’re worried that we might lose the policy. What is the best way to keep it in force or to avoid lapses? Any input is appreciated.
Insurance&Estates
Hello and thanks for commenting. Unfortunately, for an agent to comment on the status of a policy would require some in depth review. You are welcome to connect with one of our Pro Client Guides to take next steps. I suggest you make contact with Barry Brooksby at barry@insuranceandestates.com as a first step.
Best, Steve Gibbs, Esq.
Josh
Hello everyone, I really enjoyed reading this transparent review. Looks like anything you find online is either biased towards IULs (people who sell them) or against them (traditional financial advisors). This is one of the least biased reviews I have seen.
Has anyone looked into MPI IUL by Curtis Ray? He made it in 2017 and has been blowing up over social media lately. I am looking into MPI and LASER fund as I do want to buy a policy. If someone has thoughts about MPI I’d love to know.
Seems like every financial party out there tailors the bells and whistles of an IUL and puts a name infant of it (e.g. MPI or Laser fund). The biggest difference I found with IUL is that they carry our arbitrage during the growing phase. Meaning, when eligible, the insured will take out loans and put the loan amount in the policy. So, if the policy returns 8% and your loan is 5% you will keep 3% (i.e. make an extra 8% – 5% = 3%) on the borrowed money. You sill keep the full 8% on the non-loan cash contributions. I see this as a major benefit when the markets rises but it creates a -4% loss on the years the market crashes. On top of the -4% loss, you still got the premium charges, cost of insurance and any other fees. Not sure if this is worth it! What do you folks think?!
Insurance&Estates
Hi Josh, thanks for your questions and comments. I’m not aware of the particular IUL you’re referencing; however, some of our team members may be. That said, I’d say to be wary of flashy marketing of IULs. Generally, we are favorable towards properly designed IULs provided for very specific people who want to participate in market gains while limiting losses. I say properly designed because huge problems arise when these products are mishandled by folks who aren’t experienced. Often, we tend toward dividend paying whole life insurance as an alternative that, when properly designed, can provide similar returns with much less speculative risk and guesswork. For a deeper dive, I suggest you connect with either Jason Herring (jason@insuranceandestates.com) for IUL insight, OR Barry Brooksby (barry@insuranceandestates.com) for high cash value whole life insight.
To your success:)
Steve Gibbs for I&E
Yevette Hypolite
Are there health evaluations, to qualify?
Is laser account w/ connected IUL The better investment?
Insurance&Estates
Hello Yevette, yes health screening affects your rating which affects your cost of insurance. Am not familiar with laser account but our IUL expert Jason Herring may be – reach out to him at jason@insuranceandestates.com.
Best, Steve Gibbs for I&E
Araik P
Hello OP! Well written article here thank you. Would like to contribute if that is ok with you?
Seems as though some people are confused with Con #3 because it lacks detail.
IULs have several death benefit options. The two main ones are an level death benefit or option 1 and increasing death benefit or option 2. If you choose option 2, increasing, you are choosing to receive face amount + cash, which means your family would get both the 200K cash and the 500k death benefit. Of course, option 2 means the insurance company’s net amount at risk will always be 500k. Conversely, option 1, or level benefit, your family will only get the face amount or 500k. With a level benefit, the insurance companies net amount at risk will go down as you pay premiums, effective lowering your cost of insurance. Also, you can switch between level and increasing benefits down the road. Increasing benefit option allows you to contribute more money into the policy as opposed to a level benefit. One final thing, if you have a level benefit and your cash value surpasses the death benefit, your policy will automatically switch to an increasing benefit as the IRS rule is that you cannot have more cash value than death benefit.
In regards to whole life, yes some insurance companies that offer whole life have options such as paid-up additions, meaning, your cash value is used to buy more insurance for you periodically. This, however, does not mean your family would get the cash value and the death benefit. A whole life policy will ALWAYS only pay the death benefit.
Hope this clears things up.
Insurance&Estates
Thanks for your comment Araik, all comments are welcomed although I think you need to be careful when talking about insurance costs inside of IULs and framing things in terms of a sales pitch. We try to stay objective and factual and IULs are all about the illustration and whether this is done responsibly. Best, Steve Gibbs for I&E
Jerry Eagleston
Have been an NML agent and a whole life advocate. Would like to visit with Jason Herring, your National Sales Mgr to look at the difference in IUL companies…and what to look for in them. Have liked Pacific Life and Lincoln. Will look forward to a meeting with him. Thanks, Jerry
Insurance&Estates
Hello Jerry, thanks for your interest and comment. Feel free to reach out to Jason Herring at jason@insuranceandestates.com.
Best, I&E
Brad
Good article, thanks. If one gets a large inheritance at 50yo with no current retirement accounts and maxes out other tax advantaged vehicles – like paying previous and current years of a Roth – does it make sense to drop a large chunk to start an IUL to do a sort of catch up? What pros/cons would this specific scenario have?
Insurance&Estates
Hello Brad, interesting question, you’d need to run some scenarios and we suggest connecting with Jason Herring if you haven’t already at jason@insuranceandestates.com.
Best, I&E
Marcus Dennis
Just finished reading โThe LASER Fundโ and I want to know your thoughts on maximum funding the IUL policy within the five year minimum (or even longer, so long as the policy is fully funded).
Insurance&Estates
Hello Marcus, thanks for reading and commenting…I ran your question by Barry Brooksby, who handles a lot of IBC structuring and he just mentioned that with IULs you have to be aware of the fact that the cost of insurance can (and will) continue to increase and this is the problem with using them for an IBC safe bucket. I suggest you connect with Barry@insuranceandestates.com to explore pros and cons of using IULs for IBC in more detail.
Best, Steve Gibbs for I&E
Josh
Hey Dennis, I just finished reading the laser fund as well and I am currently working with an agent to provide to me a tailored illustration if I were to put $10,000 every year. He explained contributions are only made in the first five years.
Did you end up enrolling in a laser fund?
Also, have you heard about MPI IUL with Curtis Ray? They carry out arbitrage during the growth/accumulation phase, which is pretty interesting!
DENNIS G CORPUZ
Been paying into a I.U.L. with Midland Natl since 2/2013 with 175k death benefit. I have 375k term life also. My IUL premiums have been $200/month since opening and my latest annual report displays an ending account value of $15,844.18; minimum acct value of $13433.43 and a net cash surrender value of $12683.68. I am 46 years of age what are your thoughts and advice for my current status?
Insurance&Estates
Hello Dennis, thanks for reading and your detailed comment. Your question has been forwarded to Jason Herring, our National Sales Director, who is an expert on IUL policies. He will reach out soon if he hasn’t already.
Best, Steve Gibbs for I&E
JeanMarie
So with the illustration of the $500,000 policy and cash portion of $200,000. What happens to the $200,000 that was paid for by the insurer?
Jered
The answer is that the premiums go back to the insurance company upon death.
Insurance&Estates
Hello Jered, and thanks for commenting. However, I’m compelled to clarify your answer. It appears you’re responding to a blog post of a few months ago asking about what happens to cash value that, (and I’m paraphrasing) “was paid for by the insurer”. In our original response to that comment, we asked for a clarification of the question and then directed the individual to discuss the question further with an expert in order to deliver an accurate answer.
So, in regard to your response, premiums generally don’t go back to the insurer strictly speaking upon a person’s death because they’ve already been paid to the insurer to keep the policy in force. Perhaps you’re referring to dividends that were retained as part of the cash value in the policy as this appears to be the only reasonable interpretation. Dividends in a mutual company can be viewed as a return of premiums overpaid (to policy holders) and these can be added to the cash value as part of a paid up additions strategy.
Yes people do often ask what happens to the policy cash value. I always encourage them to think of the cash value like the equity in a house and the death benefit is the house. In the case of a real estate asset, if there is no equity in a house because it was removed (via an equity loan), that amount will need to be repaid upon death thereby reducing the value of the home. The same goes for the whole life insurance asset. The cash, equity, funds the death benefit in a sense. There is nothing mysterious about this and life insurance companies wouldn’t say in business long by offering free death benefits. Not picking on you, just clarifying that point for the benefit of our readers.
Best, Steve Gibbs, for I&E
Joey N
Trying to add clarity to one of the previous questions, bc it confused me too until it was explained to me in the following way. (Please correct me if I’m wrong)
The 500k is the total value of the policy, which is partly comprised of the 200k. The 200k is accessible in withdrawals/loans, and the 300k is only payable on death.
So you don’t have 700k, you have 500k of which 200k is accessible as cash.
Insurance&Estates
Hello Joey, thanks for commenting. I would like to offer a response but am a bit confused by your question. I’m not sure what you mean by value. If there is $200,000 in available cash value, then that is the value. However, if there is $300,000 in death benefit, than this is also value, and often this is the scenario because permanent policies can be supplemented with term. This can be a great benefit, especially in the early years for growing cash value. If you want more insight, I suggest you connect with Barry Brooksby at barry@insuranceandestates.com.
Best, Steve Gibbs, Esq.
Insurance&Estates
Hello Jean, thanks for you comment. I’m not sure I understand the question, so don’t want to just throw an answer out. I can tell you that with every whole life contract, there is a cost of insurance and the is mostly reflected by the base premium AND the cash portion is generally funded by Paid Up Additions as a way to take advantage of life insurance tax deferment, etc. I suggest you connect with our National Sales Director Jason Herring to get more information about how the numbers work inside of a whole life policy or answers to other questions. I hope this points you in the right direction.
Best, Steve Gibbs for I&E
DENNIS G CORPUZ
Sorry just read the reply…can you please update me. Thank you!
Insurance&Estates
Dennis, if you need feedback on something concerning a policy, a blog comment isn’t the best way to go. We suggest you connect with Jason Herring at jason@insuranceandestates.com.
Best, I&E
Zouheir Zeidan
Just to go back and answer Ramon R question, yes a WholeLife policy will have a built-in increasing death benefit. UL, VUL, IUL will not have it unless you add additional cost for the increasing death benefit. WL from Mutually owned insurance company will have as a given
Jeffery G.
A friend of mine is suggesting I take a hard look at Transamerica IUL life insurance policy. With a $9 million net worth (6.3 million is equity in our home) do I even need any of this?
Insurance&Estates
Hi Jeffrey, thanks for checking in and offering a good question about permanent life insurance as it relates to wealth planning. The short answer is whether you need this may depend upon your values, goals and mindset. Rather than focusing only on a death benefit of life insurance, we encourage folks to think about perm life policies (IULs and Whole Life) as an asset, like real estate, that you can fall back on and leverage for other opportunities. Also, given the current market conditions, relative to both the financial markets and real estate, a safety net strategy may make sense for you and perm life can serve this important function.
I would like to connect you with Jason Herring, our top IUL expert, to explore your question in more detail. Let me know if this works for you and if so, please e-mail your contact information to me at steve@insuranceandestates.com.
Best, Steve Gibbs
Jeff Lezak
My two 100K New England Graduated whole life policies are 30 years old and the death benefit is lower than the 100K plus the cash value. The illustration back in 1982 showed a death benefit and cash value much higher based on probably a 8-10% return whereas itโs been more like 4%. Thatโs because in 82 we had much higher inflation and interest rates.
Insurance&Estates
Jeff,
Illustrations from 30 years ago did not take into account our current unprecedented low interest rate environment. Personally, it appears we are seeing interest rates rising but with so much of our current economy dependent on debt creation it is hard to imagine that rates will go much higher. Then again, these are strange times and it is difficult to forecast what the future will hold.
Sincerely,
I&E
Steven Chen
Your answer to Ramon is not clear, since you already died, no one will borrow or withdraw $200k cash value, will beneficiary receive both $500k plus $200k? Yes or No?
Thanks!
Insurance&Estates
Steven, thank you for your persistence; however, a blog commentary is not really the best place to discuss policy design questions. When it comes to IULs, it is possible with certain companies to obtain a policy that would preserve the cash value upon death, although this isn’t the norm. To me, this would be similar to purchasing an increasing death benefit. As was “clearly” stated in the prior answer, with a standard IUL policy, your beneficiary would NOT keep BOTH the cash value and death benefit. Think of the cash value like the equity in your house and the death benefit as the house. People often confuse this issue. If you continue to have questions, you are welcome to take the next step and schedule a conversation with one of our experts to discuss specific policy design details. If you’re an agent, I suggest you explore this question further with your chosen carriers. Thanks again and best to you. I&E
Ramon R
You mentioned in No. 3 that if you purchased $500K on IUL policy and have $200K cash value at the time of death, beneficiaries will only get $500k. Is that true too on whole life policy? Pamella Yellen’s book on Bank on your Self mentioned that you can get both totaling $700k. is that true?
Insurance&Estates
Ramon,
For Whole life insurance, the cash value growth also grows the death benefit. However, your beneficiary would not get the cash value AND the death benefit. Your beneficiary would only get the death benefit, which increases as your cash value increases.
So, if the cash value is $200K and the death benefit is $500k, your beneficiary would get the $500k only. You, as the policy owner, would have $200k cash value to withdraw or borrow against for a life insurance loan.
If you have further questions, please email us at info@insuranceandestates.com and refer to your comment on this article.
Sincerely,
I&E
KC
So looking at this response, and thinking about the 2ook you can borrow against, is it possible to use the cash value in an IUL to pay for / offset the premiums one is paying? Simply put, can the policy begin to pay for itself (at least), while generating even more cash value (at most)?
Thank you,
KC
Claire Zheng
Yes! If you pay the target premium for 18 to 20 years, the policy should be able to pay for itself.