A week or so ago we received an email from someone who wanted our opinion on a YouTube video put together by an insurance agent. The video, titled The Dangerous Truths about Indexed Universal Life Insurance, came from Caleb Guilliams. I don't know Caleb personally, and I'll confess that I don't much about his insurance practice. I know he apparently wrote a book and my impression is that he uses the book as a selling system that is an extension of the Infinite Banking Concept™.
The video is a 25 minute attack on indexed universal life insurance motivated by a prospect who contacted Mr. Guilliams about an indexed universal life insurance policy he was contemplating as a means to accomplish something similar to the strategy advocated by Mr. Guilliams in his book. Caleb and some other guy present numerous points about universal life insurance while presenting whole life insurance as the better option.
The video's information is horribly inaccurate, and I'm going to use today's blog post to highlight the myriad of inaccuracies in the video. I don't intend any of this to be an attack on Mr. Guilliams himself. As I already mentioned, I don't know him and I'm not that familiar with him. Apparently, we are connected on LinkedIn, but I receive several LinkedIn connection requests from various insurance professionals that I–a few times a year–batch accept (side note, I'm not a big LinkedIn fan).
I'm doing this because I grow more and more tired of the intellectually bankrupt arguments people from all backgrounds make about life insurance. We've put people from the press, other bloggers, and actuaries who sell life insurance consulting services in the crosshairs for their dishonest and/or inaccurate “critiques” concerning universal life insurance. I've noted before, if you are uncomfortable with universal life insurance because you don't get it, there is absolutely nothing wrong with that.
Just be honest and leave it at that. Attacking something requires evidence that your negative views hold justification, and few…none actually…of the assaults led against life insurance (universal life insurance included) contain real evidence damning the subject at hand.
Here's the video for those interested:
Indexed Universal Life Insurance is from the '80s
Early in the video, around minutes 1:25, Mr. Guilliams comments that IUL was incorporated in the '80s. I'm going to assume that he misspoke and really meant that universal life insurance was incorporated in the '80s. Either way, this is incorrect. Universal life insurance began in the 1970s. Indexed universal life insurance traces back only to the very later 90's/early 2000's era, and it didn't really become mainstream until the very late 2000's more 2010's. Yes, this point almost appears petty, but should the presenters wish to profess expert level knowledge on the subject, this seems like an odd error to make.
IUL is Why We Can't Have Nice Things
Around minute 2:17, the presenters (Mr. Guilliams I think) note that situations like this (i.e. these horrible IUL sales tactics) are the reason the life insurance industry has such a bad rap. Apparently, the industry would be heralded with the highest prestige and a consensus of do-gooders if not for those bastards who sell indexed universal life insurance. Because you know, of all the lawsuits that have ever befallen the life insurance industry due to shady selling schemes, whole life certainly didn't play a role in any of those.
At this point, there is also a suggestion that the companies issuing indexed universal life insurance have a different investment philosophy than companies that issue whole life insurance. These “whole life insurance companies” are conservative, here for the long term, and invest in guarantees. We can only assume then that, according to these gentlemen, “indexed universal life insurance companies” do not do these things?
To test this theory, I took the #1 whole life selling insurance company (Northwestern Mutual) and the #1 indexed universal life insurance selling company (Pacific Life) and compared their asset breakdown. Here's how they compare:
In terms of the assets these two life insurers invest in, there isn't a huge difference. They largely invest in bonds (no surprise there). They both have approximately the same mortgage exposure. They differ slightly in the composition of assets held in Schedule BA and policy loans. Their holdings in real estate and common stock are very small.
Lastly, Pacific Life holds on to considerably more cash than Northwestern Mutual. That last point doesn't support the narrative that whole life focused companies are conservative where IUL focused insurers are not.
Moving on here's how each companies' percentage of non-investment grade bonds to total assets compare to one another:
|Northwestern Mutual||Pacific Life|
Here's how the two compare looking at overall bond quality ratings (1 is best)
|Northwestern Mutual||Pacific Life|
Lastly, here is the weight bond maturity holdings (we use this to speculate how soon an insurer faces stress over extended low-interest rates, the values are in years):
|Northwestern Mutual||Pacific Life|
None of this data suggests that Northwestern Mutual (the whole life focused life insurer) is more conservative, here for the long term, or invested in guarantees than Pacific Life (the indexed universal life focused life insurer). In fact, there are several data points that suggest Pacific Life is the more conservative investor in guarantees.
It has a substantially lower non-investment-grade bond exposure relative to its overall portfolio, it holds considerably more cash, it has a lower exposure to schedule BA (i.e. alternative/riskier investments), and a slightly longer runway when it comes to bonds it holds. On top of all this, Pacific Life achieved a 0.63% higher yield on its assets in 2019 than Northwestern Mutual.
The claim that whole life insurers are solid and invested in conservative guarantees and the insinuation that indexed universal life insurers are somehow different is unsubstantiated. I do realize that this data only looks at two life insurers on opposing sides of the aisle, but they are very large insurers with substantial market share and assets in their respective camps. We might find some minor variances by adding more life insurers into this mix, but I doubt that will tip the scales dramatically in one direction.
The big take aware message here is that life insurers are life insurers. They ALL tend to invest in conservative guarantees. It's part life insurance investing culture and part regulatory imperative.
Universal Life Insurance Can Change; Whole Life Somehow Cannot
Around minute 4:00 the presenters say that whole life insurance shields the buyer from certain risks while universal life insurance puts these risks back on the policyholder–stop me if you've heard this one before.
The two follow this up noting that this is so because the insurance rates on the universal life insurance policy can “skyrocket” and the cap rates associated with the index options can change (go down…they can also go up, but they left any mention of that out).
So the issue at hand is that certain provisions concerning the universal life insurance contract can change, and these provisions are largely associated with how the policy accumulates cash value. Whole life insurance is not immune to this reality.
Yes, universal life insurance expenses can increase within certain boundaries set at policy issue. I'm aware of no universal life insurance contract specifically sold for its cash accumulation (notice the subtle, but important note there) currently in force that had its expenses raised to the maximum contractual level.
The skyrocket story is great for scaring people. It makes for good clickbait, but it has simply never happened.
Yes, it's also true that cap rates on indexed universal life insurance policies can go down, and do go down (especially lately). But they can also go back up, just like whole life dividends–remind me again what the general direction of those has been over the past five years.
In fact, as much as I love whole life insurance, I cannot run from the fact that it's far easier to compute the impact of a cap rate change on an IUL policy than it is to compute the impact of a change in the dividend interest rate on a whole life insurance policy.
So the truth is, both types of life insurance can change after policy issue and these changes can both be more or less good for the policyholder. Pretending that whole life is immune is dishonest, and simply not knowing that may be worse.
Overly Aggressive Sales Tactics, but then again, we don't Really Know much about Indexed Universal Life Insurance
Halfway through minute 4 and going on to minute 5, both hosts state that indexed universal life insurance is way oversold. Evidently, they do not think the same is true of whole life insurance. Neither of them offers any evidence of IUL being oversold.
Then Mr. Guilliams's co-host admits that he's never had a chance to pick apart an indexed universal life insurance policy before they received this one from the prospect who called them, but he assures us that he comes from a long line of picker-a-parters.
So if this was his very first time looking through an indexed universal life insurance policy, and they received this information that day (they later make a comment about this in the video) how on earth can we believe they know what they are looking at?
That would almost be like me telling you, I never liked Cadillacs. I've also never driven or been a passenger in one. But if I had a chance to sit in one right now, I could tell you all the reasons it's inferior.
It's a Contract! Or is it an Illustration…?
Near the end of minute five, they note that life insurance is a contract. You need to look at your contract and understand what it's actually telling you. They are correct that life insurance policies are contracts, but I think they confused life insurance illustrations (which are definitely not contracts) with the actual contract. They continuously make references throughout the rest of the video to this
contract illustration by noting things that are definitely in sales illustrations, and usually not in life insurance contracts.
They make the offhand remark that the “contract” (really the illustration) is telling the prospect that his policy is going to lapse. They are most likely referencing the illustration ledger pages that show guaranteed assumptions resulting in a lapse or adjusted non-guaranteed values resulting in a lapse. I can make a whole life illustration show the same thing.
Additionally, a ledger in an illustration showing a scenario where an indexed universal life insurance policy lapse does not mean that the policy actually will lapse.
This is, again, an area where universal life insurance is far more transparent about various scenarios (no matter how unlikely) and how they will impact the policy. Whole life illustrations by contrast tend to be very obtuse in terms of the ramification of certain events unfolding. Like those net outlay columns that show up in later years that means if you don't put money into the policy it will lapse. I've never meant a layperson who understood that point when looking through a whole life illustration for the first, or even eighth time.
I know this guy who…
Sometime around minute 7:00, Guilliams recounts a story from his past when he worked for a gentleman who purchased a book of business (that's all the clients another insurance agent had at one time) and needed to call a bunch of those clients and warn them about their awful universal life insurance policies. There isn't much more to this specific story shared. It's, of course, supposed additional evidence damning indexed universal life insurance.
Ignoring the post hoc ergo propter hoc problem for just a sec, let's entertain the idea that Mr. Guilliams' former boss really did have the thankless task of calling up a bunch of old cash value life insurance policyholders and telling them they were in severe danger and he needed to talk to them about plans to save their life insurance (sarcasm light on and glowing hot).
I've seen a good many universal life insurance policies over the years. Several that were issued years ago under ridiculous assumptions that made unwitting consumers purchase life insurance for mere pennies on the dollar compared to that good ol' whole life insurance policy. They thought they really got one past the system I suppose.
Yes, some of those policies were in rough shape or would be in 10-15 years. Yes, one option on the table was to replace that old underfunded universal life insurance policy with a brand new whole life policy that will never lapse so long as the policyholder paid the premium.
But you know what other option was also on the table…though admittedly rarely pursued by most life insurance agents? Simply putting more money in the universal life insurance policy. Yup, fixed the problem every time often for less money than the cost of the new whole life policy.
Let's get back to the fancy Latin phrase I whipped out a few paragraphs ago.
Let's assume that, next to Mother Theresa, there really was an insurance agent out there fighting to undo a terrible wrong committed on a bunch of old universal life policyholders. Why does that mean buying indexed universal life insurance is bad? If your struggling to come up with an answer it's because it doesn't. It doesn't mean anything about buying indexed universal life insurance.
Statistically red cars get pulled over by the cops more often than other colors. I happen to own a red car. I was pulled over and issued a ticket in that car a few years ago…on my birthday (true story). Did it happen because of the red car? Maybe.
But then again, perhaps going 75 in a 50 had something to do with it.
This story is being used to scare people away from indexed universal life insurance without any verifiable proof that, 1.) there really were insurance buyers who had a big problem because they bought universal life insurance and 2.) if there was a problem that problem is at all applicable to someone who purchases indexed universal life insurance today.
You know what happens when an attorney tries to present this sort of evidence in a court of law? The opposing counsel objects, labeling it hearsay and it then gets tossed from the evidentiary record.
Term Insurance that Could Be Any Price!
At numerous moments Mr. Guilliams and his co-host make several references to the cost of the universal life insurance death benefit. They liken the policy to an ever-increasing term life insurance policy (not original, and not completely accurate either). A little before minute 9:00 they note that people who buy universal life insurance are buying term insurance that could be any price in the future.
A little after minute 10:00 they note that on page 4 of the
contract illustration the monthly cost of insurance is variable. Caleb exclaims, “meaning there is no metric to what it could be!”
This clearly displays a bit of ignorance regarding the fundamentals of insurance expensing protocol.
First, there is a metric, actuaries typically refer to them as schedules. A schedule of mortality assumptions that have a minimum and maximum threshold that the insurer puts in the universal life insurance contract (yes I actually meant to use that word this time). The reason they differ, and the reason insurers rarely (actually never) use the guaranteed maximum insurance rates has to do with competition and regulatory oversight. Let me explain.
For any given level of death benefit, we can calculate the reasonable cost of issuing a life insurance policy on an individual at any age. There's quite a bit of work that goes into building, maintaining, and testing, a database that serves as the basis for making this calculation.
It's the Commissioners' Standard and Ordinary (CSO) Mortality Table. Updates occur roughly once every two decades (we recently had an update in fact). This mortality table provides data on what we call ultimate mortality. Ultimate mortality is an actuarial term for mortality that looks at broad death statistics not concerned with additional variables that might seek to explain or categorize certain segments of the population by higher or lower life expectancies.
The alternative to this (more offshoot of this) is a select mortality table, which does seek to control various factors to categorize certain segments of the population for perceived higher or lower life expectancy.
Now hold on to your hats because this is where it gets fun.
Life insurers are allowed to use their experience with mortality to price their insurance products. So maybe the CSO tells me that I should be charing Bob-the-policyholder $1.57 for every $1,000 of life insurance he has in his policy. But my experience shows me that for people similar to Bob, I'm perfectly okay to charge him $0.97 per $1,000 of life insurance he had in his policy.
I'll issue him a policy at this $0.97 rate, but I'll also put in his contract a right I have to increase his rate up to a maximum of $1.57 per $1,000 if I need to.
Is there a high likelihood that I'll need to? No, I've underwritten Bob and ensured that he falls into a category of the population with a much better life expectancy than just anyone off the street. I have no idea what will happen to Bob specifically, but I know that if I gather enough people like Bob, my math will work out just fine.
That being said, something could change and if it does I have the ultimate mortality of the entire U.S. population as a safety. If for some reason a lot more people in my insurance pool start dying or if the earnings I achieve on my investments fall below the assumptions the CSO tells me I need to guarantee, I can draw closer to the CSO's rates. It's a pressure relief valve that was created by regulators to ensure against insurer insolvency.
Additionally, the cost of life insurance will increase as Bob gets older. This is true for all insureds at all insurance companies under all insurance contracts (yes even whole life insurance).
But if Bob buys a universal life insurance policy from me, I'll provide him with a detailed breakdown of what those increases are (both current and guaranteed) so if he wants to know what they are, he can look them over.
So there is a “metric” there is a very precise “metric” that all universal life insurance policies make available to policyholders. Additionally, it is extremely rare for the insurance rate to increase beyond the current assumption when the policy is issued. There are a handful of very unique blocks of mostly second-to-die universal life insurance policies in existence that have had rate increases.
And again, just because your neighbor's cousin's co-worker's great aunt and uncle bought a second-to-die universal life insurance three decades ago that had a 20% increase in mortality rates assessed does not mean that all indexed universal life insurance policies issued now and forever will face the same eventual circumstance.
But the Company Can Change its Mind
About halfway through the video, Caleb claims that insurance companies issuing indexed universal life insurance can change their minds on the direction in which the company will go. If an insurer decided to do this, they apparently just need to “hike up the cost of insurance” and motor on in whatever direction they now choose is right for them.
This is an interesting statement largely because it's mentioned so matter of factly, but doesn't even have an accompanying story. The big problem with this argument for Mr. Guilliams or anyone who sells life insurance is the fact that this possibility exists for any company selling any type of life insurance. Oh, except for the hike up the cost of insurance part, that still requires some justification to execute.
Actually, I can name more insurers who once focused on selling whole life insurance, changed focus, and left several legacy whole life policyholders in a sub-optimal position. Those old whole life policies experienced not so insignificant reductions in dividend payouts as the issuing life insurers transitioned the blocks to effectively “run-off” status.
I've also reviewed whole life policies issued by insurers still very much in the whole life space whose changes in direction leave several older whole life policyholders who used some of the design techniques we've mentioned in a difficult position. They used policy blending to reduce the committed outlay (usually not a great idea) and now have policies with reduced dividends that will mean very substantial changes must occur now or in the future.
Yes, insurers can change their direction, but that is not a unique danger of indexed universal life insurance. It's a wide-reaching danger that exists for all life insurance.
Lapse, Lapse, No Lapse, Lapse
The two seem very appalled that a universal life insurance
contract illustration explicitly notes scenarios, where it will lapse, should certain conditions unfold and the policyholder continues funding or taking money out of the policy as planned under the original assumptions made at purchase. I've always marveled at insurance agents (and non-agents) who attacked this. Isn't it nice that we have some guidance from the insurer about possible pitfalls or stumbling points to our plan?
Then they turn their attention to a feature of the indexed universal life insurance policy in question and make what I think they thought was a critical nail-in-the-coffin point. Sadly, it put more of their ignorance on display.
The two explain that the proposed indexed universal life insurance policy has a no-lapse guarantee rider.
They appear quite disgusted by the existence of the rider. Not because it indicates very poor agent execution of an IUL policy designed to accumulate cash value…nope they appear to completely miss that point (more on that in just a bit). Instead, they appear appalled that such a rider needs to exist in the first place (fun fact, it doesn't). They label its existence insane and Caleb tells his listeners, “If you need a rider to not lapse your policy, think twice.”
They note two “problems” with this feature.
First, it only lasts for 20 years. So after the 2oth policy year, the policy could still lapse.
Second, the rider is expensive at $250 per month.
At this point, I felt like Bill Murray in Groundhog Day (there is even an annoying insurance agent, how serendipitous).
You may remember several weeks ago when I took issue with Scott Whitt's poorly prepared attack on indexed universal life insurance largely because it lacked quantifiable substance to support his claims and also showed a glaring example of agent recommendation ignorance when used an example of an IUL policy to support the claim that it compared terribly to whole life insurance.
My problem there was that Whitt's example wasn't a best-foot-forward example of indexed universal life insurance so the comparison was complete rubbish. If he knew that shame on him. If he didn't know that…again shame on him.
The same principle applies here.
Elective no lapse riders have no place in cash focused indexed universal life insurance sales. If we max fund an IUL policy, there's no reason for the no-lapse guarantee. If Caleb and his co-host understood this, they could have discussed why skill as an agent is important. Instead, they chose to put their own ignorance on display and attack IUL in general for this feature.
They further note later in the video that the policy takes 15 years to break even and that it has no cash value, or very little cash value, in the first couple of years. Again, a clear indicator that this policy is poorly designed and a poor choice for one who seeks to maximize cash value build up in a life insurance policy. This doesn't mean it won't work period with indexed universal life insurance.
Cap Rates: Confusing and They Can Change
The pair notes that there's a big range in the cap rates available within the policy. There appears to be some confusion over how this works and why there's such a range.
This is most likely a result of varying index options within the policy. Some index options have higher cap rates than others. This has to do with the options pricing the insurer faces. If the insurer can find a mix of indices that bring the overall options costs down, they will offer a higher cap rate on those index options.
There's a casual reference to the idea that insurers can change these cap rates mostly at will to suit their personal needs/wants. There is also an emphasis that these cap rates can change (go down) and that's bad for the policyholder.
First, life insurers do not change cap rates just because. Insurers do not profit off any delta between what they pay policyholders and what the options strategy returns. There is no delta. If there was, the insurer would be in violation of insurance regulation concerning speculative investing with General Account assets.
Cap rates can change. They can go down and they can go up. Just like dividend interest rates can go down and up on a whole life insurance policy. Pretending that the fact that cap rates changing is a unique weakness of an indexed universal life insurance policy is foolish, myopic, and/or ignorant.
The two also appear to lack a basic understanding of what governs the assumed index interest rate in an illustration ledger. They note that policy in question assumes what appears to be a pretty high assumption and then remark that this limit is probably set by the insurance commissioner.
Not exactly, there was a big debate concerning this about six years ago that ultimately took shape in the NAIC Model Regulation adopted by all 50 states. It was probably the most significant industry-wide change in the last decade and the fact that these two appear oblivious to it really calls into question just how expert they are on the subject of life insurance.
“There Is a Lot of Deception Going On In This”
At one point in the latter part of the video, one of the two made the above comment. I found it hilariously ironic.
I've said before that I have no problem with people who chose to avoid indexed universal life insurance because they are uncomfortable with it. If you can't wrap your head around it and you'd rather avoid it and leave it a that, I can respect that position.
But when someone decides to make a half-cocked assault on IUL that displays a fundamental misunderstanding of it and/or insurance in general in an attempt to dissuade people I get slightly peeved.
The video displays numerous moments of misinterpreted elements of indexed universal life insurance that seek to call out its many potential pitfalls while mentioning how whole life insurance is superior and lacking such faults. It lacks substantive data to support any of the claims made. It twists features of indexed universal life insurance and miss-applies them to cash focused life insurance in the most novice ways.
I've spent way too much time defending indexed universal life insurance, especially since we sell way more whole life insurance in our insurance practice. But for some reason, I'm still stupid enough to believe in truth and feel compelled to speak up when I witness such garbage as this supposed warning on the dangers of indexed universal life insurance.
Caleb reached out to us after reading this blog post and listening to the podcast. His take on our critique and response was extremely self-reflective and evident that he too seeks truth in this industry over well crafted soundbites. He commented on this blog post with a link to a video he recorded as a response. His own words about his reaction will do a much better job than my attempt to paraphrase.
He floated the idea of some sort of collaboration between us in the future. Stay tuned for what we figure out on that end.