The Not So Dangerous Truths About Indexed Universal Life Insurance

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?

Citations needed

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:

Whole life vs. indexed universal life asset breakdown

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
9.50% 4.30%

Here's how the two compare looking at overall bond quality ratings (1 is best)

Northwestern Mutual Pacific Life
1.6 1.6

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
8.9 9.6

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.

20 thoughts on “The Not So Dangerous Truths About Indexed Universal Life Insurance”

  1. Great article! I appreciate the level of thoughtfulness and experience you provide.

    Question: can you articulate when a high cash value life insurance policy might be better suited for someone, and when an IUL designed for high cash value would be better suited (in addition to someone’s personal preference)?

    Thank you!!

    • Hi Scott,

      Thanks for the feedback. In general IUL excels for the younger individual or individual with a longer time horizon (e.g. 20+ years) and especially excels when the key goal of the policy is future income generation. One of the tests that universal life insurance can use to qualify as life insurance permits a lower threshold of death benefit relative to the cash value in the policy, which helps universal life insurance reduce insurance expense when the insured is very advanced in age. This helps produce a higher return on cash value much into the future.

      Whole life insurance has a strong advantage among older insureds or insureds with a shorter time horizon before they intend to take money out of the policy (permanently take it out, I’m not necessarily intending to mean loans in an infinite banking et. al. fashion). Whole life can also at times have an advantage for shorter funding scenarios like make five payments and be done or take a lump sum and move it into a policy in as few years as possible to maximize cash value.

      We’re working on a much more extensive guide regarding this. No exact date on when it will publish, but it is on the radar. We’ve addressed it in bits and pieces here and there over the year, but it’s time to make a more organized guide on this.

  2. the biggest issue with IUL or any UL is shifting of risk to those that can’t or don’t understand that they are now the one in charge of that risk and what is the impact if things don’t play out as expected. Another issue is setting expectations that may or may not happen.

      • So in a WL policy if dividends are lower than expected or mortality is higher than expected how does that adversely affect the policy? Really doesn’t although the cash value may be lower than expected, correct? Now take the same situation. I have a UL chassis policy and its crediting rate is lower than expected how does that adversely affect the policy? It could lapse the policy in the later years. The point I make is that UL gives something and that something is usually a potential higher return and the trade-off for that is the client has the risk of making sure enough money is in the policy to keep it going during the later years if they want to keep the policy inforce. So what happened here is that the insurance company transferred the interest rate risk to the policy holder. This is exactly what happened in 80 and 90 when client’s policies were doing great at a 12% interest rate but when rates dropped to 4 or 5% guarantees those policies all want to lapse at the current premium amount. The client and most agents didn’t understand the long term risk associated with the lower interest rates, whereas in a WL policy the insurance companies manage that risk for the client and understand the long term impact actuarially of interest rates moving negatively.

        Same could be said with expenses and Mortality charges. We see companies trying to raise the amount charged for expenses as well as mortality and what is the negative impact on that? Most people/agents don’t understand that they are responsible for that change and the impact and what they got out of it was the potential for higher ROR in the policy. Insurance companies understand the risk Most if not all clients do not.

        I am not saying UL is bad…It is just a tool but we have to understand that there are no deals in the insurance business and it is always a give and take. So what am I giving up when I take a potential higher return?? I would say certainty and guarantees that the insurance company is obligated to provide

        • But you are confusing (maybe not in your head, but outwardly in what you say) the difference in a planned increase in mortality and an unplanned increase in mortality. You are also overlooking the real circumstances of a UL policy that is max or adequately funded (say using a comparable whole life premium for the same death benefit amount) in the face of increasing mortality and/or decreased interest earnings. Financial journalists have covered maybe a dozen or two incidents of people who bought universal life insurance in the 80’s, and reached critical moments that required increased premiums to keep the policy in force. If we assume that there are 1000x more examples (probably lofty) that never made it to the press, that still represents a tiny sliver of all the universal life insurance policies issued. In fact, we received a comment on a different blog post about a week ago from an elderly individual whose universal life policy will earn interest in excess of the guaranteed maximum COI charges (which is not presently the COI charge on his policy) until the policy reaches maturity. This is the case because he paid adequate premium to the policy. His interest earnings are at the guaranteed minimum. He bought his policy around the time you are referencing.

          Increased mortality or decreased earnings that affect the whole life dividend can definitely increase the risk of some extremely undesirable circumstances for whole life policyholders. People who bought whole life with the plan to pay premiums with dividends, or who used a blend to bring out-of-pocket cost down are certainly facing some incidences of required premium payments or else lapsing or greatly reducing their policy death benefit. Yes we can argue that if they just pay the required whole life premium they are fine. I’ve shown numerous times on this blog that if you just pay an adequate premium on universal life insurance the same is almost certain to be true.

          Agents who don’t understand these aspects of universal life insurance certainly shouldn’t be selling it. I’ve been saying this for ever a decade.

          The math actuaries use to price whole life insurance applies to universal life insurance. You’re are correct, there is no deal. If you buy universal life insurance and treat it differently from whole life insurance with respect to funding it, you’ll end up with very poor results. The same is true for whole life insurance.

          • So you throw a lot out there and even add in things that I never said or included in my original argument. You divert the conversation with talk about dividends and using the vanishing premium idea, but that was not my assertion.

            The point I am after is that If I fund a Whole life policy and continue to pay those premiums, that policy will stay in force until maturity. On the other hand can we say the same things about UL policy, even you are not willing to state definitively that to be the case “you just pay an adequate premium on universal life insurance the same is almost certain to be true”

            UL policies provided great flexibility and opportunity but along with that came a transfer of responsibility to manage that policy so if you didn’t fund it at the WL premium or the assumed interest rate didn’t perform or there is an increase in mortality or expenses the policy holder is the one that has to adjust to that change.

          • I’m not diverting, I’m bringing up the items you are glossing over when you make marketing brochure-like statements about whole life insurance. You’re not going to get a pat on the back around here for parroting platitudes. My point in bringing up these things it to point out that you, perhaps by accident, are trying to distill the conversation into an overly simplistic binary discussion and there is way more nuance to this discussion than you are letting on. Your simplistic categorization of how things work leads people down paths that may or may not be helpful to them. The shifting risk back to the policyholder discussion isn’t new and it isn’t entirely accurate. If a company with loads of whole life policies underperforms its benchmarks its obligated to pay at the very least the guaranteed component of the contract to its policyholders, but the real risks it faces with respect to financial health sits–at least in part–squarely on the shoulders of its policyholders. The shifting risk argument has an underlying insinuation that companies will use their UL policyholders to make up losses, that is fundamentally not how insurance profit taking works. Yes in absolute terms a company issuing whole life can completely miss the mark on asset return and mortality experience and…in theory…the policyholder still has the guaranteed death benefit provided he/she pays the premium. There’s a chapter after that in the book, however. If you truly believe life insurers are going to manage life insurance assets so poorly, we have to question why you’d buy life insurance at all.

          • I never said or implied that insurance companies will take profits from one product to bolster other products, Frankly that should be illegal or at best it would be highly unethical. You mention “If you truly believe life insurers are going to manage life insurance assets so poorly, we have to question why you’d buy life insurance at all” my position is the exact opposite. My faith rests in the insurance company to manage risk and portfolio performance over individuals, not because people are stupid but rather, that is what insurance companies do and individuals and agents rarely have the capacity to manage those risks so therefor I transfer the management risk to the insurance company. The UL chassis does give the client the potential to earn a higher rate inside the policy but what if it does not perform as expected? Who has to manage the fallout from that? My point is that the potential higher rate of return comes with a price like all things in life.

            You still didn’t answer my question “If I fund a Whole life policy and continue to pay those premiums, that policy will stay in force until maturity. On the other hand can we say the same things about UL policy?”

            I am starting at the very basics of the differences because if we can’t agree on the basic premise of what are the differences between the two products how are we to discuss the nuances, which there are many. You boil it down to its simplest form, if you intended to do so or not, that UL and WL are the same identical products so long as we fund it the same (“you just pay an adequate premium on universal life insurance the same is almost certain to be true”). I contend they are not. No Good and No Bad just two different tools to be used in the correct situation. I have an illustration showing the same premium ($16.870) for the same time period and the Death benefit ($1 million dollars) going into a WL and One going into a UL product. Under guaranteed column the UL lapses at 83 and the WL endows at age 120. Now with that being said, under the illustrative rate at age 80 the UL has 500k more cash. In order to get that additional cash you have to be willing to manage the risk that the crediting rate may be closer to the guaranteed side than the illustrative side

          • Wade, go back and read my last reply to you. Actually read it. The things you accused me of skipping over are clearly addressed. Also, my contention that your attempt to simply note some differences by definition that you appear so adamant to defend is the core of my problem with your classification of things because, for the umpteenth time now, it over simplifies the discussion and draws people down the wrong path from the very beginning. You’ve had ample time to note the many nuances you mentioned–I’ve invited you to do so. But instead you claim I’m trying to over simplify the discussion.

            Yes whole life can guarantee a death benefit be in force so long as you pay a premium. No one is here to argue that point. You aren’t breaking some new ground by making that comment. I made that same point 9 years ago in an introductory blog post about whole life insurance on this very web site. My question was effectively who cares? Your response did and continues to read like a mutual company brochure. Surely you can come up with something a bit more original?

  3. This is a fantastic episode. A true step by step study of the facts with life insurance. I’ve listened to all your episodes but why do I decide to comment now? Brandon’s use of the term “post hoc ergo propter hoc.” Fantastic!

    It seems the example you brought up was a “begging the question” fallacy rather than a “post hoc ergo propter hoc.”

    • Hi Ben,

      Hmm, now we get to debate insurance and logical fallacies on the Insurance Pro Blog! We’re in the fast lane for mainstream general appeal ;-).

      My understanding, and feel free to offer up criticism to my understanding if you’d like, is when someone says something like:

      Tim did action A and event B occurred, therefore if Judy does action A event B will also occur to her

      They’ve committed post hoc ergo propter hoc.

      In the context of the universal life discussion:

      Aunt Kim had her policy lapse and she bought universal life insurance, therefore if you buy universal life insurance your policy will lapse.

      I do see where we could apply begging the question specifically to indexed universal life insurance, perhaps something like:

      Indexed universal life insurance is bad because universal life insurance is bad.

      This being said, my formal background is statistics and economics, not logic/philosophy so I could be wrong in my understanding.

      • Every time the Insurance Pro Blog talks about logical fallicies, it trends world wide on Twitter. Today you mentioned logical fallicies… it should follow that you will be trending soon…

        Listening again, you used the term correctly. However Brantley gave an example of a news reporter. In that example, I believe it is begging the question. Brantley misusing logical fallacy terminology is not a surprise and probably won’t be mentioned by the “gotcha mainstream media.”

        I think there is a fundamental issue with advisors and agents is in regards to proper proportion.

        (Obliviously the next version of your podcast will be just a “Pro” podcast and what is wrong with sales people in general.)

        With proportion I like to think of it as the Ricky Bobby problem. “Either you are first, or you are last!” Well, first at what? And if something is good, what makes it good? If it is bad, what makes it bad? Moreover, how bad is it? Why not quantify the difference! If there is risk of the IUL raising expenses, what is the probability of that happening?

        On a separate note, when will you do a podcast of the various index options, S&P Caps, Low Vol strategies, uncapped strategies etc. There are lots of numbers and percentages which goes over great on a podcast!

      • On second listen, Brantley’s example of the news reporter was begging the question.

        Separately, when will there be a podcast on the different index options… Caps, Spreads, Low Vol strategies, Par rates etc? This topic combined with logical fallacies should be make this a trending topic right quick and in a hurry.

  4. I want to apologize in advance for such a long comment, and thank you for taking the time to read it.

    I’m not fully understanding your overall defense of IUL. I get that you are correcting some misinformation that’s being spread by another agent, but the big picture (marketing-wise at least) of IUL is “take more policy risk, potentially get more return.”

    But, I’m not sure I fully understand where you’re coming from.

    Here’s what I mean:

    Someone recently sent me an IUL illustration. The hypothetical crediting rate was 6%. The 25 yr IRR works out to be about 4.5%. This is fairly similar/comparable to one of your favorite mutuals’ par whole life (based on their current DIR). I’ve run a bunch of IUL illustrations. Unless you run them at very high crediting rates, they mostly illustrate well at 50 basis points above a current assumption UL. That’s not wildly better than a good part whole life product, but does carry more risk.

    Regarding cap rates, no insurers don’t arbitrarily change cap rates, but they do have to change them based on options pricing and their budget for options (unless they lean heavily on mean reversion pricing, and even then…). Right now, with an options budget of 2.51%, an insurer can reasonably afford to offer a 4.6% cap rate or a 29% par rate. To afford a 10% cap rate, they need an options budget of 5%. So… look out there in the marketplace. It’s been trending downward for a while now. Even rewind it a year. The most an insurer could reasonably afford at then-current options pricing was maybe a 7% cap rate. Cap rates have been a lot higher than that on most products (probably all products). Cap rates have to come down or policy charges have to go up. There’s no magic here.

    But, beyond hypotheticals, and speaking more broadly about the general concept of insurance, people tend to buy insurance because they’re planning for the worst, not planning for ideal outcomes. Why so much focus on the non-guaranteed side of the ledger? Whose buying non-guaranteed values in life insurance ledgers, and more importantly, who is selling non-guaranteed ledger values and… why?

    I’m struggling to see a good use case for UL as a product. I’m not saying it’s defective as a product. It does what it says on the box. But, what it does doesn’t seem to offer any unique value when taken in the broader context of what insurance is supposed to do.

    It looks good if you’re using arbitrary crediting rates, but so does everything else. Let’s say I approach someone and tell them, “Here’s your worst case scenario. If you can live with this, then you will love anything that is better than the worst.” Worst case scenario in a UL product is $0 (however unlikely it may be, insurance is about planning for the worst, and hoping for the best so let’s look at the worst-case). Whole life’s worst-case is whatever the guarantee is (again, however unlikely it may be or however bad those values look).

    With that in mind, how does it make sense to insure someone’s savings using IUL instead of whole life?

    • Hi David,

      No worries about the long comment, thoughtful discussion are always welcome regardless of word length.

      I don’t view it so much as a defense of IUL as I do a defense of the truth. Far too many whole life only insurance agents make extremely lazy arguments against universal life insurance in general and they are doing more harm to the industry than they think. Do we truly believe the industry is one where UL is the troubled kid and WL is a model citizen seeking to right its sibling’s wrong?

      I do believe that the two will most likely produce real results that are relatively close to one another. The attractive aspect to universal life insurance isn’t so much its cash accumulation potential in absolute dollars compared to whole life insurance. Instead, universal life insurance shines brightest with respect to the way guideline premium test allows for a lower overall net amount at risk, which can further drives expenses down as the insured ages. This creates much lower drag on the accumulation aspect of a policy in later years and definitely opens up wider income benefits to the UL policyholder. The death benefit through PUA aspect of whole life an the higher necessary NAAR due to CVAT will put whole life at an income disadvantage due to a higher overall cost of insuring the life in more advanced ages. Income planning with life insurance must take these anticipated expenses into consideration in advanced ages of the insured.

      Because you didn’t breakdown how to arrived at your suggested cap rates, I cannot comment on that part of your comment. If you’d like to elaborate further on how to arrived at those figures, I’m more than happy to review and comment.

      Now looking at your comments about why people buy insurance, you appear to not trust the very institutions you are seeking out to protect people from the worst case scenario. Do you truly think that at some point in your life time only the guaranteed values of a whole life contract will matter? I read your comment to suggest that at some point all the non-guaranteed elements will go away and people will be left with nothing but the guaranteed part. If this is truly what you’re advocating we disagree fundamentally on how economic events will unfold in the future. And if you’re are correct, I honestly think I’ll be worried about several other things not at all related to the cash value in my whole life policies.

      If alternatively you meant to suggest that we need to hold the guarantee in highest regard and then treat everything else as a nice to have happy accident, I think you are over simplifying the consideration of buying whole life insurance. Higher guarantees can and usually do come at the cost of lower non-guarantees. I don’t think you are looking to re-litigate the risk/reward concept. Based on what you appear to understand mathematically, it shouldn’t take much convincing on my part to get agreement from you that there are varying levels of this risk/reward principle and some insurance products will be better than others in how they balance guaranteed and non-guaranteed elements. We also have to take into account the probability of an event that drives us to the guaranteed level of the contract.

      To put another way, there are other options arguable safer than whole life insurance, but they come with non-guaranteed elements that are far worse. You and I most likely don’t advocate for these options because we assess them as protecting from an event so unlikely it’s not worth giving up the additional benefits we get from other options (e.g. whole life insurance). We cannot completely discount non-guaranteed elements in favor of guaranteed elements without assessing the likelihood we’ll go to the guarantee. That assessment of probability is where the disagreement stems regarding indexed universal life insurance in most cases. I think there are a lot of insurance agents who overstate the risk and have a fundamental misunderstanding of how insurance works evidence by the way they talk about universal life insurance. I also believe life insurers are prudent asset managers and no one seriously engaged in issuing cash accumulation focused life insurance (whole life or universal life) will pull the rip cord on some of the nightmarish scenarios such agents suggest could happen without absolute necessity. And I question why anyone would advocate for life insurance when they appear to argue alternatively to this notion.

  5. ***
    Instead, universal life insurance shines brightest with respect to the way guideline premium test allows for a lower overall net amount at risk, which can further drives expenses down as the insured ages.

    It sounds like you believe this is an advantage over whole life insurance in some ways. I see that view, but I also believe it’s somewhat necessary to have that advantage since IUL policies tend to be considerably more expensive than WL due to the options pricing and what the insurer is offering. There is a certain sense in which ULs and WL look the same (or very similar) under the hood, just in terms of interest credits and M&E debits. But, there is a sense in which ULs differ in the underlying premise of the contract. UL is an assumption-driven product, and WL is a guarantees-driven product. That was by design, presumably to serve different market preferences.

    RE: income scenarios. The wider income benefits only materialize if we assume options pricing remains unchanged during the stated income period. We can’t know that. We hope it does not experience pricing volatility, but we can’t know that insurers will receive favorable options pricing in the future. For example, even now, those embedded options are costing insurers a pretty penny. I don’t know if you’ve seen the latest options pricing, but there’s a considerable spread between the cap rates an insurer can actually afford to offer versus what they’re currently offering. Of course, insurers don’t change caps daily to reflect daily changes in options pricing, but the trend has been such that insurers are finding increasingly difficult to justify even as high as a 5% cap rate.

    That’s absolutely going to negatively impact income scenarios.

    The death benefit through PUA aspect of whole life an the higher necessary NAAR due to CVAT will put whole life at an income disadvantage due to a higher overall cost of insuring the life in more advanced ages.

    It only puts WL at a disadvantage on hypothetical/projected income scenarios. Those scenarios are always wrong because dividends always change over time. The strength of the insurance isn’t in its projected non-guaranteed values. It’s in its ability to shift risk to the insurer and reduce both the probability of loss and the *magnitude* of financial risk to $0 for the policyholder. But… even on illustrated values, that really depends on how far out you look. Unless the contract never endows (and most of them do), total net costs of insurance decline over time as the cash value grows to equal the DB.

    Now, don’t get me wrong. It’s not that dividends can’t add a substantial amount to the cash value. And, it’s not as though policyholders don’t expect dividends in the future. It’s that you cannot sell the policyholder a non-guaranteed, projected, value in the future, because you don’t know what that value will be. At most, you can tell your whole life policyholders that if nothing changes, then the illustration will accurately reflect what they receive. Interestingly, the same does not necessarily apply to IULs (for some very interesting reasons which I don’t think will fit in a comment section).

    Regarding cap rates and pricing, Bobby Samuelson has done some of the best work on this subject. Not the only work, but some of the best work I’ve ever seen. He uses current market pricing to determine what insurers can afford based on today’s options pricing. Again, it’s not that insurers *ought* to change cap rates daily. But, looking over the pricing trends (especially over long periods of time), you’re going to see where insurers will go. They’ll have to lower caps… eventually. The economics of it will force their hand.

    [link removed]

    Now looking at your comments about why people buy insurance, you appear to not trust the very institutions you are seeking out to protect people from the worst case scenario. Do you truly think that at some point in your life time only the guaranteed values of a whole life contract will matter? I read your comment to suggest that at some point all the non-guaranteed elements will go away and people will be left with nothing but the guaranteed part.

    No, you misread my comment completely. The reason I sell insurance is because I completely trust the insurers to make good on their promises (i.e. the guarantees). The dividend enhancement in the product is just that — an enhancement. It’s something we can speculate about, but not be sure of. The likelihood is that the insurer will pay more than they promise. What, exactly, that will work out to be is unknown and, for the most part, unknowable,… especially 20 years from now. This is why I say people buy insurance to plan for the worst. But, WL (through the dividend) offers them a way to hope for the best. Consider that in 1960, most insurers had dismal projected dividend scales. Yet, if you based your buying decision on the projected values, you got more than you bargained for. For the next 3 decades, dividends rose dramatically. Then, the opposite happened. From 1980s onward, dividends steadily declined. If you bought the non-guaranteed ledger, you got far less than you bargained for. We all knew insurers would make good on their guarantees. What we didn’t know was the speculative nature of the dividend scale, which is driven by various market forces that are difficult, if not impossible, to predict.

    The agents who sold a 13% dividend in the 80s regretted it for the next 40 years. Agents who sold the strength of the guarantees never regretted anything, and neither did their clients. In both cases, the insurer delivered more than they promised. But, it was impossible to predict beforehand how much premium a policyholder needed to pay to get the non-guaranteed rate in the future. However, basing future values on the guaranteed rate was easy, and policyholder expectations were exceeded by a wide margin.

    If alternatively you meant to suggest that we need to hold the guarantee in highest regard and then treat everything else as a nice to have happy accident, I think you are over simplifying the consideration of buying whole life insurance. Higher guarantees can and usually do come at the cost of lower non-guarantees.

    No. I’m not suggesting a higher or lower guaranteed rate. And, dividends aren’t a happy accident. They are a necessary part of the contract, but also an unpredictable fact, inherent in the nature of non-guaranteed crediting. It is what it is, nothing more, and certainly nothing less. I also don’t assign a $0 to the dividend. It’s simply an unknown, and not something one can reliably predict over the long-term.

    Let’s say there’s a 80% probability of the dividend rate climbing to 8% over the next 20 years. How does that inform the policyholder’s buying decision? How much weight do they put on that 80%? And… if they are wrong? I’m not saying knowing a probability of an outcome is worthless. It’s not. But, statistical probabilities don’t apply to individual circumstances in the way we’d like them to. It’s not as easy as saying either discount the non-guaranteed element completely or accept that it’s likely to happen so go ahead and rely on it.

    For the record, I’m not one who thinks that all ULs will crash and burn. I am, however, of the opinion that ULs do inherently carry more risk than WL just by the way they are put together. And, if the risk profile weren’t meaningfully higher in IUL, there would be no market for it against WL. Over the long-term, I would expect to see returns at about 0.50% to 1% over CAUL. That excess return potential in IUL, specifically, is unlikely worth the added risk for *most* individuals.

    Maybe I’ll change my mind in the future, but based on what I currently see, what I’ve learned from some of the product devs and actuaries I’ve interacted with, there’s significantly more risk and uncertainty inside an IUL than inside a WL product. IUL is not “just a different way of doing the same thing as WL”. It’s a different thing altogether. Again, I’m not saying it’s bad. But, IUL agents tend to greatly understate the risk to their clients and, in many cases, don’t fully understand the nuances of the contracts they’re selling or what’s driving them.

    • Hi David,

      Sorry for the delay in getting to your reply, other priorities took over.

      RE: income scenarios. The wider income benefits only materialize if we assume options pricing remains unchanged during the stated income period.

      This is not true and fundamentally misunderstands some key differences between GPT and CVAT 7702 Testing. We can remove all of the regulatory allowed NAAR from both whole life and universal life insurance, but we can remove more of it from GPT qualified UL. Options pricing does not affect COI unless perhaps the UL has a Secondary Guarantee driven by accumulation assumptions the insurer made through the indexing feature. Such a product would not meet the necessary parameters to be recommended for the purposes of our discussion.

      COI increases happen much more often for whole life products than most people think. MassMutual, New York Life, and Ohio National have all made dividend adjustments due to COI increases. There was never an official announcement made to policyholders about this. You can find these increases in the dividend interrogatories that are part of the SAP filing requirements.

      Now, you’re probably getting ready to argue that the whole life policies issued by these three companies still have much higher guarantees than practically any indexed universal life policy in existence. I’d agree. There is no argument about who has the higher guarantee. It’s whole life insurance. I’m merely questioning to what degree that guarantee matters. I also think there are a lot of people out there selling whole life insurance and way over playing the significance of the guarantee either through their own ignorance or through their opportunistic instincts on a poorly educated population.

      That said, I also think there are also a lot of people out there way over selling the indexing accumulation feature of indexed universal life insurance.

      It only puts WL at a disadvantage on hypothetical/projected income scenarios. Those scenarios are always wrong because dividends always change over time. The strength of the insurance isn’t in its projected non-guaranteed values. It’s in its ability to shift risk to the insurer and reduce both the probability of loss and the *magnitude* of financial risk to $0 for the policyholder.

      But what happens when an insurer gets tied up in guarantees that stress its ability to provide benefits outside of the guarantee? Something we’ve seen unfolding in the variable annuity space where GMWB rider charges are now maxing out and some other unattractive rip cords are being pulled. Sure the policyholders still have the guaranteed income benefit, but they also have access to other options with higher and very likely non-guaranteed components elsewhere.

      We can argue that whole life insurance is different, and in some respects it is, but the basic principle still applies. Higher guarantees cost the insurer more money, and they all play in the same sandbox when it comes to investment options. I take your argument to distill down to we can’t trust universal life insurance to do the right thing. I can’t find any evidence to support that claim.

      Regarding Bobby, you might have more access to his information than I do. His publicly available chart of calculated cap rates is scant on details and methodology. Perhaps there is a more thorough explanation behind his paywall. Your glowing endorsement of his work didn’t come with any specific reason. Also, let’s not forget that IUL is not exclusively tied to just the S&P 500.

      You appear to distrust IUL based on what you perceive to be appropriate cap rates given what you see from options pricing available to retail investors, you even went so far as to say:

      I don’t know if you’ve seen the latest options pricing, but there’s a considerable spread between the cap rates an insurer can actually afford to offer versus what they’re currently offering. Of course, insurers don’t change caps daily to reflect daily changes in options pricing, but the trend has been such that insurers are finding increasingly difficult to justify even as high as a 5% cap rate.

      I doubt you actually know that. I don’t know that. I’m also willing to bet that if either one of us knew that for sure, we would have written at length about it and referenced it as part of this conversation. My guess is that you are taking that from what you see published on Bobby’s site. Nothing he displays adequately explains how his calculations fit the different advantages institutional money would have for options pricing and what impact that has versus the numbers he is pulling from public sources. Maybe you know something I don’t, but last I knew, Allianz, Minnesota Life, PacLife, etc. do not call up Fidelity to trade options for their indexed accounts.

      There is also an underlying sentiment that if cap rates go down they will not go back up. I say this because you appear to have a big problem with the likelihood that cap rates will go down possible a lot in the near future due to current economic conditions, and you appear content to leave the conversation at that.

      Now I do realize that one can skip all the mental work out thinking through cap rates and options pricing and just buy whole life insurance. I have no problem with that if that’s what people choose to do.

      I simply think it’s fair to give them the opportunity to decide if they want to think through it.


      Over the long-term, I would expect to see returns at about 0.50% to 1% over CAUL. That excess return potential in IUL, specifically, is unlikely worth the added risk for *most* individuals.

      Okay, based on what?

  6. Thank you. Thank you. Thank you. As I have recently been contemplating a permanent life insurance policy, I have been searching for something that simply explains or perhaps disproves the doomsdayers on IUL’s and instead lays out facts and data. This was perhaps the best post I have come across in doing just that.


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