Indexed Universal Life Insurance White Coat Investor

Indexed Universal Life Insurance: The White Coat Investor Responds

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Last week we published a critical piece regarding a recent review of indexed universal life insurance that showed up on Jim Dahle’s website The White Coat Investor. Jim took our criticism seriously and on Friday of last week published a lengthy reply.

Based on the time Jim has taken to address this, I felt it was necessary to offer up some additional thoughts, and even a small critique on his attempt to rebut my biggest criticism of his original work.

First, an Apology

While I don’t deny that certain comments were made with sarcasm a-plenty, making a joke at someone’s expense was not my intention. There was never a point at which my criticism was intended to be ad hominem.

I’m not above admitting when I’ve gone too far in my humor and I’ll publicly apologize to Jim for my more biting comments (I’ve also reached out to him directly with similar sentiments).

Now the Topic at Hand

indexed universal life insurance

I’m not interested in arguing the issue of indexed universal life insurance as it relates to intentionally buying for its cash value per se. In fact the motivation of the original post came at the request of someone (who is not a licensed agent, but a physician actually) to give my thoughts on his review.

I found errors, or at least a lot of suggestive statements that weren’t totally accurate and as a result decided to take on the task.

There were statements that weren’t false at all, and I left them completely alone. And most of Jim’s reply deals with areas in which he and I will agree to disagree. That’s totally fine, and I completely expected that.

There are, however two points that we must readdress.

Surrender Charges and Real Losses

I don’t think there’s much more to argue on this subject necessarily, but my read of the response here seems to frame my argument to suggest that surrender charges don’t matter.

This is not my point at all. I merely pointed out originally that the cash value of the policy (all of it not just the surrender value) earns interest. So looking at the policy as a “loss” because you can’t walk away with the money is (from an accounting and finance point of view) not accurate.

A lot of people and institutions place money into products and/or situations that come with some degree of lost liquidity.

It doesn’t make them bad. It just makes them different and calls for an understanding and strategy that can make use of that.

One can suggest that it’s not worth it due to other options that exist and that’s fine. We’ll agree to disagree on just how significant that is or isn’t.

The Compound Annual Growth Rate of a Systematic Investment

My biggest issue with Jim’s original review was the comparing returns based on a lump-sum investment and a systematic investment.

And this issue wasn’t really addressed in his reply, instead he chose to talk about a systematic investment in the S&P 500. Whether he intended to do it or not, the goal post was moved a bit here.

He switched from the Vanguard S&P 500 fund that he mentioned in his original post, to the S&P itself. This seems minor, but the returns are different. This led him to a statement that suggested I made an error.

My numbers are below. I took the Vanguard S&P 500 Fund’s returns as reported by Yahoo Finance and calculated the annual return with those numbers assuming a $5,500 per year investment.

The fact that the results appear to come out below the indexed universal life insurance policy is irrelevant in my opinion.

My only goal in bringing this up was the show the relatively large difference between what one accomplishes when they are all in at the very beginning and systematic investment that’s made over time. The difference is significant and for the sake of accuracy, we need to make sure that the comparisons are apples-to-apples.

1989 0.251 $6,880.50
1990 -0.0929 $11,230.35
1991 0.2726 $21,291.05
1992 0.047 $28,050.22
1993 0.0715 $35,949.07
1994 -0.0176 $40,719.56
1995 0.3366 $61,777.07
1996 0.1914 $80,153.90
1997 0.3086 $112,086.69
1998 0.2617 $148,359.13
1999 0.1876 $182,723.10
2000 -0.1164 $166,313.93
2001 -0.106 $153,601.65
2002 -0.2381 $121,219.55
2003 0.2218 $154,825.95
2004 0.0907 $174,867.51
2005 0.0294 $185,670.31
2006 0.1179 $213,709.29
2007 0.036 $227,100.83
2008 -0.3763 $145,073.14
2009 0.1973 $180,281.22
2010 0.1283 $209,616.95
2011 -0.0002 $215,073.92
2012 0.1172 $246,425.19
2013 0.2593 $317,249.39

A Few Final Comments

I actually really appreciate the work Jim Dahle does and I wish him continued success.  He has some really great resources on his site and a recent post about disability insurance occupation classes was pure genius–I really wish I had thought of that.

There’s not one correct way to the top of the mountain and his audience is going to come down a tad differently on this subject than ours.

Do we believe we have it more right then they do? Of course we do. Just as they believe they have it more right than we do. We’re biased and he’s biased.

We’ve even picked up a handful of clients due to the White Coat Investor web site who listened to both sides and decided they agreed with us—thanks to Jim and others who have referenced us in the comment section.

We don’t view this as us versus them. We don’t consider it a win for us and a loss for Jim Dahle every time we write a life insurance policy on a physician that isn’t term life insurance.

I also want to point out that it’s not all or nothing.

I want to be clear in pointing out that I don’t think the White Coat Investor makes this suggestion. Most of our clients already have a pretty substantial sum of money either in securities or elsewhere and are looking for another place to store cash that has a lower element of volatility.

Life insurance is one of the options on the table, and they come to us to look at the best life insurance has to offer. Sometimes people choose life insurance, and sometimes they don’t. And when they don’t it’s more often the case that they don’t because we tell them not to.

About the Author Brandon Roberts

Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. Brandon was born in Northern New England, and he currently calls VT home. He attended Syracuse University and graduated with a triple major in Economics, Public Administration, and Political Science.

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