Top 10 Reasons NOT to BUY Equity Indexed Universal Life

 

The Top 10 Reasons NOT to BUY Equity Indexed Universal Life

Prosperity Economics, April 17th, 2012

The Top 10 Reasons NOT to BUY Equity Indexed Universal Life
By Todd Langford, www.truthconcepts.com Mt. Enterprise,Texas

Insurance companies have put numerous pages on the front of Equity Indexed Universal Life (EIUL) illustrations that describe the issues below, but most people (by design) will not take the time to read and understand what these pages are saying.  I would encourage you to read those pages thoroughly before depending on an EIUL policy to increase your assets or protect your family.

Similarly, Universal Life (UL) and its cousin Variable Universal Life (VUL) have some of the same problems so I’ve spelled out the issues below and placed an * next to the ones that are specific only to EIUL.  As stated earlier, all Universal Life policies are a side fund (money market for regular UL, mutual fund-like separate accounts for VUL, and index fund-like accounts for EIUL) plus annually renewable, or one year increasing premium term insurance for the death benefit. *(See below for an example of what an illustration of an annually renewable term premium actually looks like)

#10  Internal costs are not guaranteed
#9    Mortality charges are not guaranteed
#8    Market drops cause double pain
#7    Late premiums kill any guarantees
#6*  Dividends from the index don’t get credited
#5*  Participation ratios are often less than 100%
#4*  Returns are usually capped at various interest rates
#3*  Guarantees are not calculated annually
#2    All of the above can be changed by the company
#1    The risk is shifted back to the insured

Now, let’s look at each of these individually and tell the whole truth about the matter.

10.  Internal administration fees charged against cash value on any type of Universal Life policy and shown on illustrations are run under current expense levels but those can change at the discretion of the company.  Since the insurance company uses this money to run its operations, as prices of office supplies and real estate go up, they may choose to adjust these internal costs after you have bought the policy.

9.  Mortality changes, what the insurance company charges for the death benefit are removed from the cash value or paid by premiums.  In UL, these pay for annually increasing term insurance costs.  This is true for any type of UL, no matter what the side fund is invested in.  The cost for this one year term insurance can be changed at any time.

8. Market drops affect the side fund negatively no matter what the side fund is invested in.  Since the death benefit is comprised of the One Year (or annually increasing) Term Insurance plus the side fund, any market drop causes double pain.  Markets can drop regardless of whether they are supported by stocks or money markets.  When the side fund is reduced by a drop in the market or current interest rates, it now has less value so more Term Insurance must be bought to make up the difference which further reduces the side fund.  Consequently you have double pain; less cash value and higher costs.

7.  Any late premiums remove any guarantees in the policy.  In most UL policies, even if the premium is finally paid, once it is late, the insurance company is off the hook for supporting any guaranteed premiums, cash value amounts or death benefits.  In many cases, the insured may not even know that a premium was late and that the guarantees have been forfeited.  Thinking about the time frame of a 50 year policy paid monthly (600 payments) ask yourself what the likelihood is of a mistake being made by the premium payer, their bank, the post office, the insurance company clerks or anyone else along the way?

6. *  Equity Indexed Universal Life policies provide the policy holder no credit for any dividends from the stocks making up the index.  The side fund of an EIUL isn’t actually invested in the index; instead the index is used to determine the gross crediting rate for the side fund.  If money were actually invested in the index, the investor would get both the change in Net Asset Value (whether up or down) AND the dividend income.  However, in the case of EIUL, only the change in value of the index is the determining factor and the dividend is left out of the calculation entirely.

5. *  Participation ratios are often less than 100%.  As mentioned directly above, the side fund is not invested directly in the index and many insurance companies only credit a certain percentage of the increase in the market.  Known as the participation ratio, this is often reported at 80% or less meaning you are getting only 80% of the increase in the market.

4. *  Capping returns in order to keep high returns in the market from crediting too much to the side fund is a strategy many insurance companies use.  The maximum return they’ll give credit for may be at a certain percentage rate even though the index may have generated a higher percentage rate.

3. *  Guaranteed minimum returns are not always calculated annually.  Most EIUL policies have a guaranteed minimum return so that if the index drops below this rate, the insurance company will still credit at the guaranteed minimum rate.  However, with some policies this guarantee is not applied annually but instead over an “indexing period” which could be 5-10 years.  So you could have negative years in the index (below the guaranteed minimum rate) which would be applied to the side fund.  This would cause a further reduction of value in excess of the guaranteed minimum rate in one particular year and as long as the overall average rate for the entire indexing period is not less than the guaranteed minimum rate, this would still count as meeting the minimum.
For example, if the minimum guaranteed rate is 2% inside a 5 year indexing period, you could have crediting rates of +13, -10, +10, -8 and +9% which would validate the promised guarantee because it would average more than 2% per year over the 5 years.  The implication is that you cannot have a negative return, but as shown in the example below, you can have a negative return as long the guarantee is not calculated annually.


You’ll notice another example below of the same interest rates, but with $100,000 of existing value instead of $10,000 per year of cash flow into the account.



2. At the discretion of the company any of the above factors can be changed at any time for the benefit of the company even after the policy has started.  This is really one of the scariest aspects of all types of UL.  There is no way to calculate what the outcome might be.  Even if you analyzed the policy under the current structure and found it to be a viable tool, future changes could cause future problems.

1. Where as typically the point of all insurance purchased is to shift the risk from the insured to the company, all types of UL shift the risk backwards or from the insurance company to the insured.

With a mutual life insurance company, a whole life policy gives you a share of the entire profits of the company via dividends.  The carrot being sold with EIUL is that it might exceed the return of a whole life policy.  Yet this begs the question: How could the insurance company pay out more than the profits of the company and still be in business?

It has been explained to me that the insurance company buys options in the market to cover the risk of potentially having to credit any portion of high market returns in the index that exceeded their general portfolio rate to policy holder cash values.  If this was a sound investment strategy, why wouldn’t the insurance company use this strategy on their overall portfolio?  I think the insurance company knows that the stock market is going to under perform their portfolio rate over time.  This could reduce EIUL profits and increase the profits of the company, which then get distributed as dividends to whole life policy owners.

As a whole life policy owner,  I should be pleased that EIUL could contribute additional profits to the company which might increase dividends to Whole Life, my concern is that EIUL policies are going to create a detrimental effect on the life insurance industry as a whole. I believe this may be the next major blight on the industry since under funded Universal Life (UL) so heavily promoted in the 1980’s.  The unfortunate outcome is that any negative media affects the entire industry because the media doesn’t differentiate between the new faulty products and the old tried and true whole life products that have been around for close to 200 years. As we know, the biggest danger with negative press is that is causes panic and the people will think the entire life insurance industry is bad and many perfectly structured whole life policies could get cancelled to the detriment of the policy holder and their family, just like what happened in the 1980’s.

Remember #2 above, since the insurance company has the ability to change #10- 3, they can always keep the Universal Life policies from outperforming their portfolio.  Why would I want to take the safe portion of my assets and the protection of my family and expose it to risk?  Doesn’t that defeat the whole purpose of insurance?  In my mind, I buy insurance and shift the risk to the insurance company, because they are experts at mitigating that risk and storing the cash to support it.
If you are seriously considering purchasing an EIUL product, please make sure you read and understand all the risks you and your family are assuming.  Because of the complexity and numerous moving parts for this product, many of the people selling it that I’ve spoken with don’t even understand it themselves.  For me, I prefer a number of simple, guaranteed, tried and true whole life policies.  These protect my Human Life Value and store my cash in the most efficient manner I know.

* (See below – Annual Renewable Term Policy Illustration Example: Woman aged 55, excellent health.)

PART 2 OF TOP 10 REASONS NOT TO USE EIUL FOR IBC:

Analyzing the Cost of Universal Life policies. Just looking at the ART illustration above makes seeing the annual increasing cost easy.

Why I never recommend any type of UL product for Privatized Banking.

Uni­ver­sal Life poli­cies are among the most disin­gen­u­ous and in fact insid­i­ous finan­cial prod­ucts ever cre­ated.  That they are enjoy­ing so much pop­u­lar­ity is di­sas­tr­ous for those unsus­pect­ing souls who pur­chase them.  They vio­late every prin­ci­ple we hold about wealth cre­ation, preser­va­tion, use and trans­fer.

If  clients want risk, let them buy risky prod­ucts that they KNOW are risky…  bank­ing and PLI is about mit­i­gat­ing that risk to as close to zero as pos­si­ble.  If that isn’t impor­tant, then cer­tainly, buy an IUL.

 

This link is to a LinkedIn discussion about this exact topic. I have taken a few of the replies and added them below

Pure Whole Life Insurance Policies verses Indexed Universal Life Policies

“Arrived”?…I’m still on the dock waiting for the train!…lol. Help. My core values are being rocked. I am a rock solid use pure whole life insurance and nothing else kinda guy. Nelson taught to use ONLY pure whole life insurance…that’s what I am doing. Recently though, I have been challenged by people that have been in this business a lot longer than I. I ran an illustration that is pretty darn impressive for someone to use in their IBC…until I saw an IUL illustration that they ran. In the IUL it grows cash value faster. The “Indexed” part of the IUL allows the policy to grow upward and not slip backwards. Borrowing money from WL policies creates an interest expense that in an IUL is completely recoverable. At retirement time when one starts taking “loans” from the WL policy, you are not overfunding it anymore so the growth slows and even stops and goes backwards whereas in the IUL policy the growth at this point blows the WL policy away. All you smart people already know where I am heading with this…Pure Whole Life Insurance or Indexed Universal Life Insurance for Infinite Banking Concept?

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George Kozol Rip, The speakers at the recent IBC Think Tank did a great job in explaining and demonstrating why IUL is not a very good product choice for a client who is looking to employ the Infinite Banking Concept. This is not to say that IUL is per se a bad product, but IUL does come with extra risks for the policy owners – marketing soundbites notwithstanding.

Did you happen to see Todd Langford’s presentation? He showed excerpts from the financial reports of prominent stock life insurance carriers revealing that the carriers invest their funds (including funds that cover the reserves associated with IUL policies) in investment grade bonds – the same investments that mutual companies invest in to cover their reserves. One would think that the stock carriers would invest in the components of the index (typically the S&P) to back their IUL business. The stock carriers can’t afford to do so because state regulators don’t give insurance companies as much credit for stocks as they do bonds in assessing a carrier’s financial standing. Also, applicable accounting conventions require carriers to report their equity holdings at market value and their bond holdings at amortized value. So the IUL carriers utilize complicated and unproven hedging strategies to address this extra risk, much of which lies with the IUL policy owners. In this regard, take a look at the “guaranteed” columns in the IUL illustrations. And read the fine print as to index caps – the IUL prducts that I have seen come with very low cap guarantees, some even guarantee that the cap will be no less than 0.

The situation with IUL resembles the mortgage backed securities debacle of a few years ago. Or as Yogi Berra once said, “It sounds like Deja Vu all over again”.

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Anthony P. John, CLU, ChFC OK….for what it’s worth, I’ll jump in. As a really old, old-timer one of the first things I learned, back in the ’70s, long before computers, laptops, notebooks and tablets, was to never, ever fall in love with numbers on a page. It didn’t matter then or now if it was typed, printed, scribbled on a napkin or displayed on a screen. The only thing you can actually guarantee is that it will be wrong. One year, five years, ten years or more than twenty years down the road you won’t be able to recognize the “illustration” as the same one proposed years earlier. It will be wrong!
So, how do we as trusted advisors handle those pesky illustrations that “blow away” a WL policy? Upon seeing for the first time the awkward illustration from EF Hutton sitting on a policyholders desk, I thought it could have been left behind by an alien. And that name….Universal Life….or, as it was known in PA, Flexible Premium Adjustable Life….what was that? Damn, I wanted one. A peek behind the curtain….to see the Wizard….computing and illustrating numbers that just crushed the competition: Low cost of insurance….it was the early Eighties you know….new money rates at 12% or higher….make changes as you need or want….more premium….less premium….lower the death benefit when needed….damn….I really wanted one…who wouldn’t want this magnificent specimen?
Well, after check writing schemes, interest free loans, money laundering and a host of other misdeeds, EF Hutton is long gone, so too that first generation of UL poicies are gone…and probably the 2nd, 3rd, 4th etc generations are all gone. And, they didn’t die because they didn’t illustrate well…..they sucked! That product, that idea, was responsible for more replacements of solid, well funded whole life policies than any one thing that I can recall. We as an industry let the “stock brokers” and Wall Street dictate what we had to have and sell to our clients. The problem then as now is that they can’t deliver. All insurance companies are in the same interest rate market, they use the same actuarial tables, and unless they’re very stupid, they keep expenses low. So, how can one or two products illustrate so well that everything else pales next to it? As I said, never ever fall in love with an illustration!
There, I feel better already…..
Tony John

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Jim Kindred Rip:
The IUL illustrations remind me of the discussions I’ve heard coming from the White House and the socialists who keep telling us 1- “you have to pass it so you can read what’s in it.” 2- “You’ll be able to keep your same doctor”, 3- “no one’s taxes will increase… except those nasty rich people”, 4- we ARE reducing the debt and putting people to work!” , and the grand daddy of them all 5- “we are making social security strong again for all Americans”. If you believe any of the above, you should sell and by IULs. If you can read the small print where if you USE the cash value, most if not ALL the guarantees are null and void, you might as well borrow from your 401k, and hope the money will be there when you need it most. Remember, the BEST INVESTMENT is the one that pays you WHEN YOU WANT IT. Imagine telling your client that wants to borrow money agains their policy only to learn the money is not there… opps! Do you want to have the converstation withthem. The guarantees are on the death benefit, but should the company have illustrated higher gurantees than they can produce (as they did notoriously with VULS) all they have to do is change the Mortality Charge (the cost of insurance), What kind of guarantee is that? Reminds me of the old adage “I’ll pay your price… if you will meet my terms.” In properly structured Whole Life policies, YOU control the price AND the terms! Including the dividend! Re-read Equipment Financing to see WHO really controls the dividend.

The same people pushing IULs are those who were pushing VULS… they are BOTH built on a faulty premise. Social Security, is built on such a faulty premise. Yes, you can make it look good for a while, but sooner or later the Ponzi scheme it is built on will be exposed and will come tumbling down. Remember this, the illustrations giveth and the insurance company taketh away! If the guy that popularized and literally wrote the book on IBC doesn’t think much of IULs, don’t you think that should tell you something? Go back and look at Todd Langfords piece so you can PROVE the numbers.

One of my clients made a remark that is appropriate here: “I don’t trust ANY Financial Instrument that is less than 100 years old!” ‘nuf said

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John Colson IUL’s have many issues. Most of which are never discussed by agents selling them. Over Illustrating rates of returns greater than the general account earnings of the carrier. Using derivatives/options to insure these spreads from 3rd party insurers. Premiums that are increasing in costs each year and become very expensive in retirement years for the client. These products have a very short history and no proven track record of every coming close to their illustrations. Just because you can illustrate a 6-8% return doesn’t mean it will happen. In fact, over the last 10 years IUL’s have performed close to fixed rates products. Run an illustration at 4% on an IUL and wholelife with max dump ins and then compare. Look at both the guaranteed and non-guaranteed. Wholelife has much more certainty and destroys IUL on the guaranteed side. With IUL’s the cash value usually gets completely depleted and the death benefit goes away on the guaranteed side. The cost of the insurance is too great for the 3% guarantee. Wholelife is the only product I would recommend when implementing a banking policy. Using IUL’s for banking becomes very problematic when illustrating realistic ROR and when the client reaches retirement and the cost of the insurance continues to skyrocket each year, putting stress on the cash value to be used for banking.

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Victor Cuevas Rip, Here’s the problem, and this coming from someone, me, who has written some pretty decent IUL cases in the past and now am only going to use WL, unless the client twist my arm. IUL illustrations are basde on the illustrated interest rate never changing. It’s suppose to show an average, but you can’t count on that any longer. The stock market is way different now than ever before. Many of the caps in the policies have come down over the years to below 10%. Because of the higher cost in the policies, your average returns with those low caps will not beat WL. If you get zero return that year, your cash value will go down. You don’t want cash value going down in retirement when you’re drawing cash. When the caps were high, you had a better chance to mitigate those down years and the higher cost. Not so much any longer. I know it’s great to say to a client they can never lose money due to market performance, because the CV isn’t in the market. However, they can lose cash value due to costs.

WL just goes up each year guaranteed and PUA riders give you future cash value increases with NO cost. You don’t want to borrow from a policy with no guarantees of growth. I don’t see how the borrowing cost is completely recoverable in an IUL. If you don’t earn enough interest to cover the borrowing cost, especially in years you don’t receive a return or maybe two or three percent, I can’t see where those cost are recovered. Maybe I’m missing something. When drawing income from an IUL, the cash value goes down as well for a while because you’re no longer funding it. Also, you can draw income from an WL using all loans instead of taking out principal first and then loans later. That can make a difference.

Bottom line, IUL can and will work long term, but with the market the way it is and the caps going way way down for inforce policies, WL will be your best option in my opinion. Believe, it’s not fun trying to explain to a client why his cash value went down and what are those high fees about. This happens in years when the market is flat or your interest credited was low. Stick with WL and you won’t go wrong and you’ll only have positive reviews. And you can sleep better.

 

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May 2, 2012 · Jennifer · 2 Comments
Tags: , , , , ,  · Posted in: NEVER EIUL, UL, VL

2 Responses

  1. Transamerica sucks - April 30, 2014

    Those suckers are trying to push IULs on me. I have my ROTH IRA and I’m keeping it. The cost of insurance grows on those stupid policies! Stick with Term!

  2. Jennifer - May 1, 2014

    You are right, Jim, the cost of insurance does increase annually but it also increases with term as well, after the term is up. Only properly designed Whole life has level premiums and can be used while living as well.
    http://debtdiagnosis.com/2012/09/15/l30-how-cash-flows-through-your-private-banking-system/

    If you want your life insurance to last your whole life then Whole Life is cheapest and best. See why here: http://debtdiagnosis.com/2011/06/25/death-benefit-cost-analysis-term-or-whole-life-that-is-the-question/

    IUL’s are not Whole Life. Term is not Whole Life.
    ROTH’s are limiting, come with penalties and keep your money in jail.

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