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Persistently low-interest rates leave more conservative investors in a tough position. While these people aren't really keen on assuming a position in higher-risk assets, the returns achieved on fixed-interest options have been on a downward trend for more than a decade. Cash-value life insurance products do tend to compare very favorably as fixed-interest options, but even they are boasting far lower numbers than they did just a few years ago.
What to do…
It turns out that impressive results are still attainable inside certain life insurance products. In fact, we just surveyed a block of in-force indexed universal life insurance (IUL) policies and discovered the average index interest earnings on these policies was 9% during the last 12 months.
Not bad…not bad at all.
Indexed Universal Life Insurance Continues to Deliver Impressive Value
It's difficult to fully appreciate what indexing insurance products can bring to the table. Indexed universal life insurance has long held a reputation for varied returns due to its ability to follow movement in a stock or bond index to produce the interest payable to policyholders. This doesn't mean that money is invested in the market–it surely is not. But what it does mean is that policyholders open up a new world of possibilities with respect to the rate of return all the while enjoying protection against loss when economic times turn sour.
Now, some have taken critical shots at indexed universal life insurance over the years. Truth is, you could have bought a policy with a much higher rate of return prospects a handful of years ago–and those policies now have a much lower rate of return prospects today due to changes brought about by continuously low-interest rates…the product is not immune to this reality.
But a fixed-interest product that is still capable of producing a 9% rate of return is an envious asset for low-risk savers or anyone looking to round out his/her portfolio with a diversifiable asset that doesn't move in lockstep with the U.S. Stock Market.
We've Probably Been Low-Balling the Product
Just like most life insurance agents, we help explain the functionality of products through ledgers that seek to project future potential values achieved by owning the product and paying premiums. This practice applied universally to life insurance products that have a cash value component. But when it comes to projecting values with IUL, we have to select a static indexing rate. This causes the software that computes projected values to simply use that static rate as a multiplier against current cash value plus premiums paid minus policy expenses. That's fine in theory. But this potentially overlooks something very important.
The indexed universal life insurance policy will never earn the same amount of interest year-over-year. It's going to vary because it's derived by market performance. Some years will be really good. Others will be meh. The hope is that the really good years will overwhelmingly materialize versus the meh years–in fact if you doubted this scenario, there'd be no reason to own IUL.
But there's a sequence of returns element to indexed universal life insurance that is extraordinarily difficult to model when you use a static assumed rate of return. It completely ignores just how much interest you might earn later in life when you have a lot of money in the policy and you achieved the highest possible interest payout scenario.
This subtle–but very real and important–reality can dramatically change how much money someone actually accumulates in a policy. And this difference can be dramatic.
A Significant Result from In Force Policies
Looking at indexed universal life insurance policies that we put in force at least five years ago, all of them performed better than the original forecast we used at the time of policy origination. This may not seem like a particularly meaningful statement but compare against the fact that all of the whole life insurance policies we put in force from the same time period have under-performed projected values. And we know this is universally true across all whole life products people bought during this time frame because every single life insurer that sold whole life insurance during this time has reduced the payable dividend on these policies.
So while whole life has underperformed those original projections and we can state with certainty that everyone experienced this trend, we cannot make the same statement about indexed universal life insurance.
In fact, we know that without upward adjustments in whole life dividends these products will continue to lag their original projections. And the difference between the original forecast and achieved results will continue to grow as time goes by because the compounding effect will produce different growth curves.
But for indexed universal life insurance, the circumstances still exist today to produce the same or better results when compared to the original projections.
Additionally, while we've been a few years since the last time any life insurer announced a rise in dividends payable to policyholders over the prior year, we've been about a month since the last announcement from a life insurer that they were improving certain provisions of the indexing features of in force and new IUL products.
This Doesn't Mean Everyone Should Bail on Whole Life Insurance
I don't bring any of this up in an attempt to cause people to ditch their whole life policy and start a buying frenzy of indexed universal life insurance. I do think, though, that there's a serious strength to indexed universal life insurance that often goes overlooked when comparing options in the cash-value life insurance space. I've held this belief for a long time.
Whole life does provide a calmer mind in terms of continuous earnings that tend to be agreeable to most people. For those looking for a much less varied annual returns result, whole life insurance wins hands down. There are also, sadly, certainly people who don't have access to most–if any–indexed universal life insurance policies because they live in a certain state–I'm looking at you New York.
