When we discuss indexed universal life insurance with new potential clients, they commonly mention that they already have stock market exposure, so they see no need to gain additional exposure to the market.
I understand the impression they often have, but assuming that indexed universal life insurance gives you additional exposure to the market is a misunderstanding that could lead you to the wrong decision–many clients have expressed their gratitude in our willingness to pause and discuss the product more to ensure understanding.
Generally speaking, when someone is trying to minimize further exposure to something it's because they feel as though continued or further exposure places them in a more precarious situation. In other words, when someone mentions wanting to avoid further exposure to the stock market, they are looking to avoid the potential for asset losses when the market retracts.
We've noted in the past that indexed universal life insurance is a non-correlated asset, and that discussion was more to point out that indexed universal life insurance does not lose value in a down market and can benefit immensely from resurgence in price after selling pressure eases to “snap” prices back to normal.
That discussion is somewhat complex, but the big takeaway is that indexed universal life insurance is really only concerned with the movement in the market and it captures said movement (at least in part) when it's positive.
But what about the year in which the market declines? Insurance agents have fancied bringing up the 2008 fallout and remarking that if indexed universal life insurance returned zero, it would be far better than -38%.
But would indexed universal life insurance really have been zero interest in 2008?
Looking at the results for 2015 from a few indexed universal life insurance policies we have in force, I figured the results of these policies' performance would be of interest to many.
The S&P 500 return for 2015 was -0.73%. Not exactly cause for alarm, and reinvested dividends would bring the annual return slightly positive.
Given these lackluster results, we should anticipate similarly poor returns for indexed universal life products. This, however, is not exactly how it shakes out.
Looking at two different indexed universal life policies we have in force on two different clients and from two different companies, the resulting returns for the year far exceed stock market results for 2015.
Policy number one achieved a 5.22% return for 2015 and policy number 2 achieved a 6.5% return for 2015.
So how exactly does indexed universal life insurance achieve returns like this when the underlying stock index is down slightly for the year?
There are several explanations for why this happens, and that discussion goes beyond the scope of this article, but the important takeaway is the fact that it's possible to implement indexed universal life insurance in such a way that down stock market years can continue to be positive years for indexed universal life insurance.
The idea that indexed universal life insurance gives you additional market exposure is false. The product can benefit from market gains, but it does not “move” with the market. Instead it captures movement in the market to the policyholder's benefit.
This product is rather unique, but it's not the cure to all the world's problems. It is, however, well worth your consideration as it may very well become one of your most reliable and cherished assets.
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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