So are IUL fees expensive? That’s because, in these permanent policy scenarios, the chance of paying out benefits is closer to 100 percent. When I bring up how the “guaranteed column” of a 401k account would actually be a -100% return leaving you with $0, people will commonly reply, “Well that’s ridiculous because I have conservative and diversified mutual funds. Also, as stated above, the dividend interest rate was simply one factor that determining how big the annual dividend increases were in the 1980s. Like whole life, universal life is designed to cover you for your entire life while growing your cash value. This just isn’t true and should not be a factor when looking at the pros and cons of Indexed Universal Life insurance. You can choose how the death benefit will be paid out by selecting either Option A or Option B. Right now though, you can lock in a low lifetime rate on your IUL policy with a handful of highly-rated companies. If for whatever reason you canât fund your Indexed Universal Life insurance policy as expected, or it doesnât get the cash value growth inside the policy as projected, you may find the your IUL’s cost of insurance will get out of control unless you do something. In creating this post, we dug through all IUL pros and cons we could find on Google and YouTube to address each thoroughly. Again, any way you slice it, the statement about how “Late premiums kill guarantees in an IUL” is clearly not true and should not be considered when weighing Indexed Universal Life insurance pros and cons. Nor is it overly complicated to understand when explained properly. Again, this cannot possibly be true in today’s environment and shouldn’t be considered when deciphering Indexed Universal Life pros and cons. Exposure to stock market indices may offer better long-term growth versus other universal life plans. Unfortunately, these new regulations subsequently outlawed one of the most powerful tools available for illustrating potential turbulence in an IUL policy. This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. Indexed universal plans (like all universal life insurance) carry a death benefit and a separate cash value that increases over time, but differ in how the non-insurance part of the plan is structured. With both Whole Life’s term rider and IUL cost of insurance, as the cash value approaches the death benefit, you are paying for fewer units of insurance, so even if the cost per unit of insurance increases, the total cost should be manageable and eventually even minuscule compared to your cash value growth. Universal life is also a lot more flexible. That way clients could see the effects of turbulent market conditions while accumulating cash value as well as seeing the effect of taking tax-free retirement withdrawals and/or policy loans from IUL through different market cycles. There are certain considerations and responsibilities that the policyholder must take on when buying any type of universal life product, including Indexed Universal Life. However, if you put any of these supplemental term riders under an actuarial microscope, what you will see is that they are all Annual Renewable Term riders that function almost identically to the cost structure to Indexed Universal Life insurance. You can do exactly that with Indexed Universal Life Insurance! If your IUL carrier makes their product undesirable in any way (by lowering caps or increasing fees), couldn’t you just surrender the policy and walk away? Indexed Universal Life pros and cons are typically exaggerated by both sides with agendas to either sell an IUL policy or against it. Pro #1 – Death Benefit. Imagine being able to stay confidently exposed to market volatility at all times without the fear of losing any fraction of your account value to stock market losses? Using those assumptions, it appeared as if premiums only needed to be paid for a handful of years to support a lifetimeâs worth of charges. Iâm sure youâd be happy to pay for a nominal amount of life insurance to ensure that your cash value continues growing tax-deferred and you maintain your ability to take tax-exempt distributions from your IUL policy while you are still alive. I mention this because this argument is often brought by operations favoring Whole Life insurance vs Indexed Universal Life Insurance. One of the key benefits that is associated with an indexed universal life insurance policy is exposure to an equity index … Also, since life insurance provides a social good in the eyes of federal and state governments, you get special tax treatment on your cash value growth when letting them manage this strategy for you inside your Indexed Universal Life insurance policy. These mandates set forth uniform standards for all IUL carriers and agents to follow when illustrating Indexed Universal Life insurance. In fact, these initial IUL fees can be significantly lower at the onset of the policy compared to the same-sized Whole Life Insurance policy. Closing Thoughts on the Pros and Cons of Indexed Universal Life, Indexed Universal Life Insurance for retirement, the fees and charges of Indexed Universal Life insurance (video), 81-year study on the S&P Index sequence of returnsÂ, check out this YouTube video examining IUL Fees. The S&P Index had three losing years in a row from 1939-1941 and not again until 2000-2002. Now, this doesn’t mean that Whole Life is a bad product vs. Often the same agents who insist that “increasing IUL fees are too risky and should be avoided,” are not practicing what they preach. However, that would often entail that these biased sources spend some dedicated time to properly educate themselves first. Fact #4: There was only one other instance where the S&P Index even had two consecutive negative years from 1973-1974. This early compounding may propel your cash value toward the death benefit, which in turn may reduce the total amount of death benefit youâre actually paying for when the IUL fees per unit of death benefit increase. The PROs Of Indexed Universal Life Index Universal life has cash value build-up, which means you can make a return on upward market movements. Some people think that the double-digit cap and zero-percent floor growth methodology in Indexed Universal Life insurance is “too good to be true.”. Pros: Term life plans are the most affordable type of life insurance. This may have been true in the past with some IUL agents, especially those who naturally have a tendency to over-promise and under-deliver. That way you can take opinions out of the equation and make an informed choice whether to use Indexed Universal Life Insurance for retirement, and/or IUL for private family banking, and/or legacy planning (since none of these are mutually exclusive).I also realize that many practicing life insurance agents will be reading this page as well. If the clients feel they would be valuable, then why not do an in-depth analysis to see if the cost for the benefits with Indexed Universal Life insurance would, in fact, be “too expensive” for them? Universal life insurance plans, including indexed universal life, frankly, aren't good choices for the vast majority of people. Don’t get me wrong, I own several Whole Life policies, and I recommend Whole Life insurance vs. Stock Advisor launched in February of 2002. The following is a list of the popular pros and cons of the variable universal life insurance policy. Other topics like IUL fees, IUL vs Whole Life, and IUL vs 401k will be addressed below. The benefit to the policyholder for bearing the full responsibility of maintaining however much death benefit they want is that IUL is a very flexible policy without any rigid premium structure. Letâs discuss how this same set of circumstances MAY play out with Indexed Universal Life in the current economic environment and into the future. Here is a look at the pros and cons of indexed universal life insurance. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Of the various pros and cons of IUL, this one is simply not true. That way consumers could more nimbly benefit from the rapidly rising interest rates. May pay lower returns than other universal life plans in a poor stock market environment. In fact, I did a little experiment using the worst period I could find with the Dow Jones Industrial Average from 1929-1953 (since the S&P 500 doesn’t have data that far back). Random bloggers and/or pundits of Wall Street, who aren’t even licensed to represent IUL, offering their own strong opinions and biases based on bad facts regarding Indexed Universal Life so they can sway you towards traditional stock market investing. Often it is ignorance. Although would not be guaranteed, the costs for this nominal amount of death benefit in a properly-funded Indexed Universal Life policy would be so minuscule to the amount of cash value you have in indexed crediting strategies, that it would be nearly impossible for the fees to overshadow the growth, much less your principal balance. When that happens, some investors use life insurance as a way to earn additional tax-sheltered growth. The fact of the matter is, IUL as a financial product functions quite well if funded properly, reviewed regularly, and adjusted to meet the ever-evolving financial goals of the client. The other thing we have seen from the top IUL carriers is that they will lower caps and then subsequently raise caps as interest rates have temporarily ticked back upward. Here is an example of what the insurance company calls “the net amount at risk.” If you have $600,000 of death benefit and $50,000 of cash value, your IUL cost of insurance will be based on $550,000 of death benefit since the $50,000 of cash value is already your equity in the policy. Universal life insurance (also known as UL policy) is a type of life insurance which combines two elements: a lifetime coverage and a savings account feature. Let’s also say that you, in fact, earn an average of 5%-7% crediting over that period. Depending on your situation, the total costs paid may net less long-term benefits versus other insurance and separate investing alternatives. [Dirty little secret] How agents will improve a Whole Life policy’s performance by blending riders that have the same cost structure as IUL. So, going back to the debacle of the 1980s. However, since most investment advisors were trained by companies that don’t directly profit from life insurance products, they will often lack the expertise to perform this kind of examination of an Indexed Universal Life insurance policy. This is unlike a Guaranteed Universal Life product or even a Whole Life policy, where the policy can lapse or the guarantees be removed after a single missed or late premium. Indexed universal life insurance is designed for that purpose, allowing policyholders to vary their premiums and death benefit to maximize growth. The most common are variable universal life and indexed universal life. So if the S&P Index rises by 12% or more without including dividend payments, and the cap on your IUL crediting is 12% that year, does it matter that the 500 companies making up the S&P Index paid an additional 2% dividend? Or they would have to manually drop the death benefit to reduce the ongoing charges. [Pro-Tip] Little Known Sweet-Spot with Indexed Loans. Indexed universal life insurance links the cash value to the gains of a stock index such as the S&P 500. Index Universal Life Pros and Cons With indexed universal life, the insurer doesn’t invest your premium dollars into the general investment account. They use it to vilify Indexed Universal Life insurance and to distract from the true value proposition that makes IUL crediting so unique and powerful. No contribution limit on policy contributions can make them attractive for tax purposes because of tax-deferred growth. Not coincidentally, the push for AG-49 came from a handful of insurance companies that donât offer any sort of Indexed Universal Life product. What happened is that agents started selling this new UL product as if interest rates would remain that high for perpetuity. What I’m referring to is that in those 62 distinct positive years referenced above, the market gained more than 10% in 48 of those years and less than 9% (but greater than 0%) in the other 14 years.**. There are a number of either straight-up myths or overblown half-truths about how an Indexed Universal Life insurance policy works and grows cash value. Recall that the main reason Universal Life products from the 1980s didnât perform as planned was that they were illustrated during an exceptionally high-interest rate environment. Do you believe that the majority of those up-years will continue to produce gains in excess of 10% (even if they were rebound rallies that happen to follow some harsh down-years)? IUL provides a unique combination of benefits that you can’t get in term insurance or any other investment product for that matter. Life insurance agents who strongly favor IUL, that only seem to share the good and the pros of the Indexed Universal Life. If interest rates increase over the next decade or two, shouldn’t actual results be much better than what you’re seeing illustrated today? Policy Risks Although a portion of your premiums go toward your cash value, very little of your money goes toward cash value in the first few years after your initial purchase. You can all about how premium financing works as well as the pros and cons of premium financed life insurance here. So raising mortality charges is not some willy-nilly tactic that an IUL carrier employs whenever they simply want a bit more profit. Indexed Universal Life is meant to benefit insurance agents and companies much more than the policyholder. What if we said that Indexed Universal Life was no more expensive than decades of compounding managed money, would you believe it? This con of Indexed Universal Life is a true statement, but also frequently exaggerated as a manipulative sales technique. That’s right, many IUL carriers currently have a 5% or 6% loan option that would be locked-in for life as soon as you initiate one of these policies. Referred to as an advanced life insurance product, an IUL includes certain steps and attributes. Even If you invested directly in S&P 500 index options yourself, you would not earn dividends since index options only track the movement of the index itself and not dividend payouts from the 500 companies that make up the index. That ever-escalating cost per unit of insurance is only levied upon the “net death benefit” or “net amount at risk” (the total death benefit minus how much you have in cash value). But universal life is typically much cheaper than whole life. A universal life insurance is a permanent type of life insurance policy that offers flexibility along with cash value accumulation. As soon as one year goes by where you either earn crediting, or the carrier doesn’t triple their charges, then the guaranteed column you see on that sales illustration suddenly becomes utter nonsense. 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