Rebuttal to ’10 Reasons Not to Buy IUL”

Brett Anderson

www.IULDigest.com / www.LastChanceRetirement.biz

  There has been an article floating around now since May 2012 from the Nelson Nash Institute titled “The Top 10 Reasons Not to Buy Indexed Life (IUL)” and why they promote Whole Life instead.  Let’s address them, but first, who am I?  My career began as a WL agent over 30 years ago.  Today I am the author of the IUL book “Last Chance Retirement” and the agent/analyst in the industry who back tests most IUL’s with all the co.’s, and rates and ranks them based on all those results, and also compare the different features of those policies to determine the best (and worst) IUL’s overall.  Many agents, agency owners and co. mgt. of IUL companies subscribe to receive these reports.

Now the business at hand. This article is a collection of outright lies and deceptions, either by ignorance or malice.  I’m not sure which is worse or that I understand why there is such venom from organizations such as this toward IUL.  Whole Life (WL) is good for some situations and bad for others – the same for IUL.  Or anything else for that matter.  Also – as with most lies – there is a small kernel of truth to them which makes the lie seem reasonable.  So let’s look at each of them:

  1. “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.”

 

Whole Life policies have guaranteed charges.  That said, many IUL companies are these same WL co.’s, are 100+ years old and they have established a reputation of not doing just this on an issued policy.  Sure they have the right to do so, would be dumb not too.  Otherwise the current costs would have to be higher at issue to offset that risk over “your” lifetime which may be decades.  Can you name one thing over your life that has not changed its cost?  Even so it is very rare that any of these co.’s have ever done this.  So rare that in my 33 years in the business I’m not aware of any “top” IUL co. that has done so. If costs increase they are more likely to go up (only) for new policies.

  1. Mortality charges, 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.

 

What they are trying to say is insurance costs are not guaranteed.  That is an absolute lie.  There are basically two cost tables in an IUL policy.  There are the current costs which are not guaranteed and another table with the maximum cost’s that could ever be charged which is guaranteed by the policy.  If they could not reserve the right to increase costs then again they would have to be higher at the start.

That said, it is again very rare that any co. increases these costs for a policy after issue and frankly for me it is an absolute Deal Breaker to do business with any co. that ever has.  Of the 35 primary co.’s that sell IUL only 3 have done this that I am aware of (Conseco [WA. Nat’l], F&G and TransAmerica).  In my career I have had this happen with two co.’s I worked with – both times it was on WHOLE LIFE policies.  From what I can determine the other 32 IUL co.’s have never done so – and many have been in existence over 100 years.

That leaves the “Term” insurance costs.  Everything has a cost and this statement is made out of context to scare and frighten consumers away from IUL.  Ironic in that we all know term insurance is the cheapest way to actually own life insurance – and that whole life is the most expensive.  How is it they are somehow using that here as a positive?  That they could flip this around and make it sound plausible is actually amusing if the end they are trying to achieve with this wasn’t so destructive.

Life insurance like everything else has a cost.  Let’s just assume at age 40 the annual cost is $1.20 per thousand.  At 41 it is $1.23, and 42 it’s $1.51 (actual rates male preferred).  With an IUL policy there is also cash value (CV) that is growing.  But for the first year let’s pretend there is no cash value so the insurance cost for $100,000 is 100 x 1.20 = $120.  If the 2nd year there is also no CV the cost is 100 x 1.23 = $123.  But if there is now $10,000 in CV then the ins. cost is only (100-10) = 90 x 1.23 = $111. (The total ‘insurance benefit’ to the beneficiary is still $100,000).  This is a simplistic example but you get the gist.  The most “efficient” (not lowest) premium in this case is $335 mo. (the maximum allowed).  The total costs will be $650 in year 1.  But at age 90 it will be $11,000.  Ahhh (!) – increasing term ins. – so isn’t that absolutely awful?!

What they are leaving out is the context.  In year 1 there is no cash value (there usually is but just for this example there isn’t), so the costs are 16% of the premium.  But at age 90 (if premiums paid until then) the Cash Value is $1,800,000.  But the Life Insurance benefit is $2,000,000 – 20x more than when the policy began (and you are 50 years older)!  So which is actually cheaper?  Look at costs as a % of the asset cash value (similar to mutual funds and other assets).  When you do it’s the $11,000 at 0.6% vs. 16% of CV!  [As for mutual funds, according to Morningstar the avg. cost of a domestic mutual fund for all costs is 3.03% per year.  Re another study, for those in Qualified Plans – including cash flow and other costs – it is over 4%!].

In fact over the life expectancy (to age 90) of a Male, the average annual cost (this is ALL costs – not just insurance) of an IUL designed the “best” way with a top co. can be:

Start age:

30        0.33% avg. per year to age 90

35        0.33%

40        0.35%

45        0.37%

50        0.44%

55        0.59%

60        0.93%

A WL policy cannot even come close to this low cost!  Bottom line there is almost nothing that can be as inexpensive as IUL!  [These are 1/10th to 1/3rd the cost of a mutual fund!].

  1. 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.

 

First, one of the great benefits of IUL is that when the market has a loss the account value does NOT go down in value because of it!  It will go down in value only by the amount of expenses the co. deducts.  So if the CV is $50,000 and the costs are $2,000 and the annual cost of the ins. is now $2 per thousand (age 50), then the “additional” cost is 2 x 2 = $4.  Sorry, but I’m not going to lose any sleep over that.  And just for the record, if the average annual gain is 8% gr., then what about the years when the gain is 14% (or more) – then that year you buy $6,000 less ins. (to maintain the amount of the policy insured death benefit).  Why don’t they bring that up?!  And the fact your account did NOT lose $2,000 in cash value that year because of the 0% minimum guaranty!  For an IUL “Zero is Hero”!  In the long run it all evens out re the up/down ins. costs.  But the bottom line is DO NOT let these naysayers scare you off with ½ truths and outright lies!

  1. 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?

 

This is the reply I received from one of the top IUL co.’s about this:

  “Most companies have late premium adjustments.  We treat premium payments up to 30 days late as if they were paid on time without impacting guarantees With most co.’s the guarantee doesn’t usually go away if they are late or skip a premium payment.  Rather the guarantee duration shortens but premium payments can be made up to put back on track. Annual statements are sent to the client every year confirming how long the policy guarantee is at current funding.

So another lie from the article!  But what about these guaranties?  Frankly I don’t like them anyway and don’t recommend an IUL with them for one simple reason:  Most people who are my clients obtain an IUL to also function as a Retirement Savings and Income asset.  It is already “safe” re market risk, and historically the gross returns have averaged 8%+ per year.  A policy with guarantees will reduce this return with higher fees and/or lower caps.  The head actuary with one of the top co.’s told me people don’t need them.  Even if you have them, almost as soon as you start taking out “income” (loans) they void the guarantees anyway.  So why pay for them and end up with less CV and income for something you will likely never get any benefit from paying for?

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.

Well this statement is actually true.  My reply is, so what?  I’ve back tested the S&P with dividends vs a “top” IUL without them for recent 20 year periods, and the IUL always “win’s”!  According to the most recent Dalbar “Qualitative Analysis of Investor Behavior” report (done annually), “over the prior 30 years from its inception to 2013 the market had an avg. gain of 11.11% (gr.) whereas the ACTUAL average annual return for a typical investor was only 3.69%”.  And that was before taxes!  What matters is not so much how much you make but how much you keep.  So sure, with the IUL you don’t get the dividends.  Even so, when the dust settles how much you actually NET can be more than double what you will earn if “invested” in the actual market with dividends.  Don’t forget that with an IUL there is NO market risk!  (Don’t forget that the NET return of a Whole Life policy is between 2-3%!  I’ve seen many with less).

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.

  This is another outright scare mongering lie.  For several years now I have analyzed about 100 IUL’s with currently 35 primary companies, and for a straight annual point-to-point plan with a cap the participation rate is 100% (of the market gain up to the cap).  All of the ones I’m aware of guaranty it will never be less than that.  Some are even 140%.  The only time it is less than 100% is if there is NO cap – then it can be down to 40-60% – or more than 100% depending on the crediting time period.

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.

  All IUL’s have a cap and/or flexible Participation Rate.  YEA!  This is a positive because it allows the product to have a 0% floor!  Do you know what it is called when you don’t have that?  Market Risk!  Recent studies have shown that people will overwhelmingly choose an investment with a 6% cap AND a 0% floor vs. an uncapped gain with risk known as the STOCK MARKET!

What about those caps though?  To make a long explanation short, the co. takes the interest they would pay you with a WL policy or vanilla UL, and with an IUL they buy options (up to a cap that has a 100% participation rate) instead.  The cost of the options is based on the cap amount.  How much they can buy depends on the portfolio rate of the co.’s bond investments, which determines how much they have to spend.  As we all know in recent years interest rates are at historic lows (i.e., 0%!).  Yet the caps with the top co.’s have rarely dropped and most are over 12%.  When rates go up again they can buy more options.

I’ve been told by actuaries that in a normal interest rate environment they think IUL caps can be 16%+ (and there are few actual gains over 16%).  But again, so what?  The back tested and historical performance of IUL’s (they have been around now for about 18 years, is about DOUBLE that earned by most people in the actual market (or for a typical WL policy it’s close to triple)).

Also with caps, if they could not change at the end of each crediting period then the co. would have to have a cap significantly lower than it is today to offset their purchasing risk over a lifetime (maybe 9% instead of 14%).  So it is actually much better for the consumer that there IS a cap!

As to why life insurance companies do not invest their money (a LOT of which is YOUR money in your policy) using the same stock options is because by law they are NOT allowed too.  They are mandated to maintain the actual cash assets in the co. in prudent and relatively secure assets.  YOU can choose to base your gains in a life insurance policy on (risk free) market gains – they cannot!  If they could it would be called a Casino!

Don’t forget, with IUL you KEEP all your annual gains.  They are locked in (less annual costs) forever.  The market CANNOT take them back from you.  This is why people love IUL!

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.

  So what.  This is a lot of hyperbole over something that is really a non-issue if you want an IUL for what it is meant for – earning market gains with no market risk.  If you are interested in the concept appeal of an IUL the primary understanding you should have is that there is a 0% minimum guaranty.  Period.  I analyze many IUL’s in the industry and I don’t know of any that have a min. CV guaranty that is calculated annually over a five year period.  Those that do have one anymore have a 1% min. that is calculated annually.  I don’t care for them because they typically have lower caps and/or higher costs.  You are much better off with an IUL with a 0% min. guaranty.

That said, the “top” two co.’s – in addition to the 0% annual minimum guaranty and among the top caps in the industry – also include an 8 year look back with a min. annual guaranty gross gain of 3%.  They do this every 8 years.  I expect they would have never had to step up the values of any policy as a result of this (that is a good thing!).  Also, a handful of co.’s include a lifetime surrender (and insurance benefit) minimum guaranty of 2.5-3% that upon surrender is calculated annually since inception.

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.

  Ok, that is close to the truth.  I can understand it could be a little disconcerting.  So let’s look at it closer.  First, any changes would NOT be for the benefit of the co.  They do NOT participate in any of the IUL gains.  They earn their profit off the top of your premiums.  In a sense they don’t care if you buy WL, UL or IUL – it is all the same to them.  They DO CARE in the sense that they want your policy to perform well so that you will continue to pay more into it and/or not cancel or move the policy to another co., and recommend them and IUL to your family, friends and co-workers.

There are moving parts – primarily the cap.  The participation rate usually only moves if it is for an IUL with no cap, or if it is one (with a lower cap) for more than 100%.  Typically any of these rates are guaranteed for 1 year at a time.  The only reason a co. would need to lower these is if the interest they have earned is less, so they can only buy less options than the year before.  Ask the co. for a cap history.  The top ones will provide it – and you will see it has not changed much in recent years.  Also, caps are the lowest they have ever been since they started 18 years ago yet they can be found for 13 and 14%+ still!  If the co.’s have not (already) dropped them to the guaranteed minimums (or at least something a lot less than they are), they are not likely to ever do so!  Also this works BOTH ways.  Caps and PR’s in the past have also gone UP (and will again)!

Below is the cap history for the past 10 years for one of the two companies I consider the “best” IUL’s overall for both performance and features.  The “fear” he outlines in this article from several years ago just has NOT played out – the cap is actually 1% more than 10 years ago before interests rates started to fall (only dates of change shown):

5/01/06            12.50%
3/01/09            13.00%
1/01/10            13.50%
5/01/10            14.00%
8/15/12            13.50% (added VLR cap so lowered 0.5%)
1/01/16            No Change – still 13.5%

 

1)Whereas 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.

  “No risk, no gain”.  We all know that.  Even so, neither the co. nor the insured bears all the risk with IUL.  And this is about as minimal risk as it is possible to have to earn market comparable gains!  The main risk anyone takes with an IUL is that there will NOT be a gain EVERY year!  But based on past performance there will be a gain 7 out of every 10 years and the avg. gain will be 12%.  Any permanent life insurance policy should be bought and considered as a lifetime asset/investment.  From that perspective an IUL can be expected to perform better – and at a lower cost – than almost anything else there is!  If however you need a policy that is “guaranteed” to pay you 2-3% (net) per year EVERY year – and never 0% – then that describes a Whole Life policy.

That said be aware of this.  All IUL’s are NOT alike!  They range – based on past performance and future real expectations – from Dismal to Great!  Why the difference?  Because they all do have different caps, participation rates, costs, bonus (if any) and guarantees on them, fixed rate requirements, loan rate options and caps, minimum guaranties, Accelerated and Illness (terminal and chronic) advance benefits, and more differences. (In general the well “known” co.’s have poorer IUL’s because they can).

It is very difficult for an agent – let alone a lay person – to analyze (or even know what to analyze) to compare IUL’s and have a sense of how they can be expected to really perform.  What you can NOT do is compare IUL’s using the same Illustration Rate.  Because they do have different caps, bonus, etc.   Of some help in this regard are the new AG 49 Illustration Rate rules, which state that an illustration rate – at the most – cannot be higher than the rate that would reflect how the policy would have performed for every 25 year period (on a daily avg. basis) for the prior 40 periods (or 65 years), based on its current cap, costs, etc. (Be aware that the new regulations for illustrating loans do not go into effect until March 1, 2016).

Even so, how well an IUL may perform is also determined by how it is designed.   To put together a well designed IUL with a top co. you must work with a financial advisor who knows and understands how to do this and who they are, and how the features and benefits compare to (all) the other companies in the market.  Not many do.  If they provided you with this report then they likely do.  Since IUL began premiums have grown about 25% per year to well over $1 Billion a year (2015) in new premium.  There must be a good reason!

 

What about WL?  This is not an attempt to be tit for tat – these are just the facts and reality about it.  There are two sides to every coin and this is what the article did not tell you about WL:

  1. An industry dirty “little secret” is that many WL agents are “captive” and can only sell their co.’s products – this usually does not include IUL.   (Also many Stock/Securities agents are also ‘captive’ and not allowed by their broker to sell IUL or only for a few select co.’s [typically the “known” co’s. with poor IUL’s]).

 

  1. Policies generally have less benefits such as accelerated terminal and chronic illness (LTC) benefit riders than UL or IUL.

 

  1. Values of growth are based on company experience which is not guaranteed and perhaps not even repeatable.

 

  1. Interest credits can be changed at the discretion of the company. Dividend (rate) is not guaranteed.

 

  1. Much more expensive to guarantee than other policies.

 

  1. Don’t have increasing death benefit option causing a perception that the company keeps the client’s money on a death claim.

 

  1. Very limited premium flexibility (typically none unlike IUL where you can reduce it substantially or skip it altogether for a year or two in the early years if necessary).

 

  1. Guarantee goes away if premium not paid or taken as a loan against policy.

 

  1. Cannot take withdrawals – they are generally not allowed.

 

  1. Loans are prohibitive.  While UL or IUL have net cost zero loans, whole life generally does not.  (Also the WL co. considered the “top” policy by many WL agents – Northwestern Mutual – does NOT pay dividends against loans!).

 

  1. Returns are not as attractive as other vehicles.

 

  1. Mortality charges are at the worst case scenario and they won’t provide any charges lower/better than the worst case guarantee (this is partly why WL is so expensive and the returns so low).  Isn’t it ironic that the type of insurance that charges costs at the MAX. Rate (WL) says that a reason to not buy IUL is because it charges instead at the LOWEST rate table with an option to use the other, but most NEVER do?!

 

For several years the WL companies self-reported on themselves in the Blease report.  Part of this is that the Co.’s stated what the policy was illustrated to earn at point of sale, and what it ACTUALLY earned 20 years later.  The last report is a bit dated now because Roger Blease died in 2013 and no one took over doing these, but in this report the result for the 12 top performing companies, the projected IRR was 6.72%.  Whereas the ACUTAL IRR 20 years later was (only) 3.81% — that is 43% less than projected! (So who is telling the truth?!).  [The range was 2.77% to 5.11%].  The report results were basically the same every year.  The last ‘public’ one can be found at:

www.lifeandhealthinsurancenews.com/Issues/2010/May-17-2010/Pages/Full-Disclosure-Whole-Life-Report.aspx

  It may be little dated, but what I know for sure is that interest rates – and so WL returns – have only gotten LOWER since!

You are not being arm wrestled to choose one over the other – many agents sell both (as can I). The “problem” is that many WL agents are still ‘old school’ and do not understand IUL so choose instead to malign and denigrate it to save their livelihood rather than be concerned and learn about what is the best product for their client for the 21st century (one interesting phenomenon is they dislike IUL until their co. comes out with one!).

But choose based upon the truth of what they are and how they work and can reasonably be expected to perform based upon historical experience.  Also on what you want/need it to do from a life insurance perspective as well as a “return” on premiums short and long term.

If your objective is to have your policy do double duty by also providing maximum gain, minimal risk, low cost performance to supplement future “sleep at night” retirement savings and Tax Free Income, then don’t be fooled or swindled by a captive WL/Stockbroker agent – you Really DO WANT IUL!

 

WL Recent Dividend History

  This chart was created by Penn Mutual.  This is not an endorsement for their policy.  Presumably it is correct – a co. lowered its dividend or it didn’t.   You will see that since 2009 that of the 8 co.’s shown, 7 have lowered their dividend – a few multiple times.

WL Dividend Table

 

PDF of Rebuttal:  http://kvisit.com/SgOvWAw

 

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