7 Reasons to be Wary of Indexed Universal Life Insurance? A Response to Bank on Yourself

Pam and friends over at Bank on Yourself® released a blog post detailing the reasons to be wary of Indexed Universal Life Insurance complete with a video to further emphasize their point.

It comes as little surprise that a marketing program that seeks to help insurance agents sell more whole life insurance would work to demean indexed universal life insurance, but what is surprising is the sheer lack of honesty.

There are a number of over-the-top claims with zero supporting evidence, so we’ll discuss all seven reasons to be wary of indexed universal life insurance.

#1 Be Careful of Illustrated Values

The first point is something we’ve discussed several times before, the lofty assumed interest rates that many agents and brokers use when proposing indexed universal life insurance. You’d think we’d be in agreement with Pam’s noble quest to suppress expectations here, but that critical second step to the discussion is strangely missing.

While I much appreciate Pam’s bringing attention to the over-stated assumptions behind an 8% or higher assumed credited interest rate, it’s unfortunate that she didn’t also take the time to note that even with lower expectations, these products work pretty well.

But there’s one more thing about this discussion (specifically in the video) that doesn’t sit right with me. Pam notes that assumed credited interest rates are constant and insinuates that this is somehow flawed. This happens everywhere and its the reason we compute compound annual growth rate on an investment to extrapolate future values. Further, the assumed dividend rate in a whole life illustration is also constant when you are looking at illustrations.

#2 Indexed Universal Life Insurance is a Ticking Time Bomb because of Costs

This point starts out by stating universal life insurance is simply annually renewable term insurance with a savings account. This is sort of correct.

It is true that universal life insurance assumes a rising cost of insurance as the insured ages and the probability of his or her death increases.  But this assumption is no different for whole life insurance

Ask an actuary if you don’t believe me.

The only difference is that whole life insurance forces you to pay the premium whereas universal life insurance does not.

While it’s absolutely true that one could incorrectly implement an indexed universal life insurance policy and have it fall apart, a properly designed and implemented policy has no issue.

We then see a story about an indexed universal life insurance policy that Pam and friends recently reviewed. According to the guaranteed column, the policy she reviewed, ran out of cash and lapsed in 15 years.

I’m sure that I could design an indexed universal life insurance policy that was guaranteed to have no cash and lapse in two years—and I could make a lot of money selling that policy (inside joke, sort of), but being able to find one example of bad policy design is not evidence that a product is bad.

I could just as easily set up a whole life policy to be a big train wreck, doesn’t suddenly mean whole life insurance is bad.

#3 Be Wary of Guarantees on Indexed Universal Life Insurance Policies

This one takes issue with the way some indexed universal life policies credit minimum guarantees on their indexed accounts.

Of course, it totally neglects the fact that anyone can use the fixed account on an indexed universal life policy and receive the annual interest rate credited every year if they want to.

It also incorrectly depicts the way expenses are deducted from policies vis-à-vis the minimum guaranteed credited interest rate

Then it goes on to misinterpret language in the policy proposal about guaranteed cash values and way over hypes the way guaranteed cash in a whole life insurance policy works. The article mentions:

Your cash value is guaranteed to equal your death benefit when the policy matures.

This is technically correct, but only applies to the base whole life portion of the policy.

Let’s say you have a $1,000,000 death benefit whole life policy that is designed to optimize cash value. The base whole life death benefit is $250,000 and for a 35 year old male the chosen outlay is $35,000 per year. This means that at maturity (the insured’s age 120, by the way) the guaranteed base cash value is $250,000, stunning…(shakes head no).

#4 Look out for Indexed Universal Life Insurance Death Benefits

This reason heavily spews the traditional anti-universal life insurance talking points about guarantees.

It’s funny to me that a marketing company that's in bed with Lafayette Life would go so far to make such a big deal about guarantees. Lafayette Life has commitment issues regarding guaranteed charges on their paid-up additions–the so called “turbo charging rider” of whole life insurance (the main reason we gave then an F on our paid-up additions comparisons).

Apparently, it’s okay to suggest that you not buy a life insurance policy product due to some hypothetical scenario with a very low likelihood of occurrence. Mind you, a scenario of that magnitude would require documented claims experience to materialize.

But…

It’s perfectly fine to buy a product from a company that could decide to NOT allow you to fund the paid-up additions rider at the company’s discretion?

There’s also mention that universal life insurance policies do not have a “paid-up” option like whole life policies do.

While this is true, it’s a completely disingenuous juxtaposition. I can stop paying premiums on a universal life policy and reduce the death benefit to a point where I can assure you expenses will never be a problem—I’ve done it before.

#5 Risk

This one is over the top. There’s a suggestion that with indexed universal life insurance, all of the risk is shifted to the policyholder. Really?

So I guess the policyholder somehow produces that minimum guaranteed rate the article did admit to? I also suppose that if the call options that support the indexing period expire without appreciating in value, the policyholder reaches into his or her pocket and reimburses the insurer?

No.

The suggestion that whole life insurance somehow magically absorbs all of the operational risk associated with providing cash value life insurance without an outward manifestation to the policy holder is pure fiction. If you think I’m wrong, explain why dividend rates have mostly been on a steady decline for the last half decade.

And don’t assume dividend declines are purely a function of prevailing market interest rates.

Mortality and operational expenses contribute (or take away from) to the dividend as well. Ask the Guardian Life Insurance Company what happened to the dividend when large portions of your policyholders die from sickness as was the case in the early 1900’s.

#6 Policy Loan Risk

Not stopping with the outlandishness–the next reason deals with policy loans.

The suggestion is that indexed loans (which are just a non-direct recognition loan for universal life insurance) come with a degree of risk that could leave you penniless.

It’s true that there could be a negative spread between the loan interest rate and the interest credited to your policy, and if this happened indefinitely that would absolutely be a bad thing—I assure you. However, it's also true that most of the time there is a positive spread (i.e. the interest credited to cash exceeds the policy loan interest rate).

Now, if you are at least vaguely familiar with Bank on Yourself®, you know that there is high praise for non-direct recognition.

It’s a “must have” feature according to the Bank on Yourself® crowd (or at least among those who haven’t defected from Lafayette Life and started pushing Mutual Trust Life). What stands so odd about this is the fact that the same inherent risk exists with non-direct recognition loans.

There is a lot of variability behind these loans.

Now, historically this loan method (non-direct recognition) has caused no problems as dividend rates have far exceeded policy loan rates which has allowed cash values to grow more rapidly than loan balances—and there is no reason to assume this will come to a dramatic end anytime soon or ever.

But the insinuation that there is somehow a difference between these two (the variable loan of an IUL and non-direct recognition whole life insurance) that leaves one prime for a catastrophe is just more sensationalism.

#7 The Lawsuits

Not to steal a page form my favorite financial information dispensing medical practitioner, but this argument is purely ad hominem.

Apparently, you shouldn’t buy indexed universal life insurance because someone, somewhere in the United States has hired and attorney to file a complaint in court alleging bad things about the sale of an indexed universal life insurance policy—the horror.

By this logic, we pretty much shouldn’t buy anything…ever.

By they way, they mention lawsuits, but they never actually cite any lawsuits.

And I’m sure there has never been a lawsuit filed against an insurance company for whole life insurance sales…(sarcasm light glowing red hot)

Like in the case of Benincasa v. Lafayette Life where the complaint noted that the withdrawal rate shown in the illustration at time of sale varied “significantly” (their words not mine, but if you’re wondering–$31,000 per year less) from the withdrawal rate that was calculated when the plaintiffs decided to take withdrawals—remember reason #1’s warning about illustrated values?

Or what about Harshbarger et. al. v Penn Mutual, which was a dispute over whether or not Penn Mutual paid the correct amount of dividends to policyholders. Riddle me this, how does one reconcile the dividend payment on a whole life policy?  This case, by the way, was dismissed as it was totally bogus.

And then there’s Gaidon et. al. v. The Guardian Life Insurance Company of America–a lawsuit concerning agents/brokers selling a whole life policy under the assumption that the policy would pay for itself (a now illegal sales concept known as vanishing premium).

Note these last two examples were seeking or achieved class action status.

I could go on for quite some time, but there’s no need. The truth is simply this, for every lawsuit filed involving indexed universal life insurance, there exists a handful for whole life insurance.

This is not an area to throw stones.

None of this is Intended to Demean Whole Life Insurance

indexed universal life insuranceI want to be very clear about something.

I very much like and respect whole life insurance as a product. I own it (as well as indexed universal life insurance), and write a large amount of it every single year as a broker.

And just as I’ve said many times in the past and will continue to say in the future, anyone who stages a full scale assault on any financial product declaring it unnecessary or un-needed is likely someone you should dismiss.

The sensationalism in Pam’s edict against indexed universal life insurance is not helpful and borders on questionable ethics—and for this reason we decided to take the time to set the record straight. Just as we have when people make baseless attacks against whole life insurance.


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