First off, let me start by saying I own this product. I am happy with its death benefit, its construction, and the way it is performing. I bought it to provide a permanent death benefit for my family that would also accommodate additional cash deposits to take advantage of the tax treatment of monies accumulating within a life insurance contract. If I die sooner rather than later, the money deposited will provide a large, tax-free death benefit which will represent a sizable gain compared to my actual premium investment. If I live considerably longer, the additional cash that I deposit will grow tax deferred (according to the strategy that I choose in any given year) and provide another source of funds (which I can access tax free) to use as I see fit. I constructed this policy with the intention of overfunding it to maximize the potential cash growth. This past year (2017), I saw a 9% tax free gain. I would have had to earn over 13% in a taxable account for the same after tax yield. I am pleased.
So, that being said, the following is obviously my opinion, but I hope you find it useful.
For the past few years, there has been a lot of excitement about IULs (Indexed Universal Life) in the American marketplace. I understand why. It is an innovative product with some attractive features. Who wouldn’t like, for example, a way to accumulate money tax deferred with tax free access? If you need life insurance anyway, why would this not be a great vehicle to satisfy both needs? In a vacuum, the answer is clear…it IS a great vehicle! Being that we don’t exist in a vacuum, however, it isn’t that easy.
Your choice of product is very important. Construction and policy fine print matter. So, if you own an IUL or are considering one, please be aware of the following:
- Do not buy an IUL if you don’t intend to overfund.
The biggest mistake I see with this product is people who underfund it. Paying “minimum premiums” gets you an expensive 10 or 15 year term (the initial guaranteed death benefit term). Paying “target premium” is better, yes, but you are going to be much happier with the performance if you give it more “fuel” and fund it at a higher rate. The horror stories you will read occasionally are almost always due, at least in part, to underfunding.
Bottom line: Ask your agent about a death benefit level that will allow you to “over fund” or “max fund” the contract at a premium you can comfortably afford.
- Do not overload the contract with extra “for cost” riders.
What do a swiss army knife, an all-in-one copier, or any utility item that boasts of multiple uses, have in common? Though they can be cool, many times you need to grab a specialized version of the same thing that will do the job better like a large hunting knife or a dedicated fax or scanner. Similarly, optional for-cost riders added to an IUL contract can dilute its overall performance. How? First, every rider that adds cost to the contract, can act to suppress the internal growth if the additional cost causes or tempts you to reduce your level of funding into the base contract. In other words, if you are putting a substantial amount of additional premium into the ”for cost” riders, less money is going to the basic reason you bought the policy in the first place (usually tax advantaged cash growth). This is a way to unintentionally underfund the contract. Second, few realize that the cost of most riders actually rise each year as we age. The increase is usually very nominal in the early years, but can grow fast in later years. Did you know this?
Bottom line: If your goal with an IUL is to provide death protection while growing cash internally, set it up as simply as possible for maximum efficiency and then fund it to that end.
- Choose the right product.
Does the illustration presented to you actually match the policy language? For example, if the illustration shows the expense charges dropping off after the 10th year, is it contractual (written into the policy) or at the Company’s discretion? Here’s another: If your illustration shows an income stream in later years (as many do), does it show some kind of “index bonus” or “segment bonus” (or somesuch) each and every year? Is that contractual or at the Company’s discretion? The true “elephant in the room” here, is that you might have no idea what I am even taking about. Why? Did you know that most Company’s illustration software is set up such that the agent has to manually check the box to even include the expense charges in the illustration? Does that seem right to you?
Bottom line: Finding a trained agent who can explain how the product works and is put together is critical. Every charge (to the penny) should be shown and explained.
Conclusion: A “good” product should be shown in a simple, straight forward manner with as few moving parts as possible. Everything should be disclosed. The product (policy) should be very streamlined so it can better accomplish its intended tasks as efficiently as possible using the premiums provided.
Chosen, constructed, and illustrated responsibly, the IUL is an exciting product and there are excellent products out there. If you are one of the people who want to enjoy the protection, accumulation and tax advantages afforded by these life insurance products, consider calling us for a free, no obligation review/consultation.
Justin White CLU® 2017