index universal life insurance pros and cons

If your IUL carrier makes their product undesirable in any way (by lowering caps or increasing fees), couldn’t you just surrender the policy and walk away? Usually, these are lower-rated insurance companies or smaller companies that have been bought out by larger companies. Premium Holidays – you can use any cash value within the policy to take a premium holiday if you are short of funds, out of work etc. Keep in mind that for the guaranteed IUL cost of insurance to actually occur, not one, but two horrible and extreme factors need to take effect: Let’s discuss what it would take for each leg of this horrible double-whammy to come true. As discussed previously, the policyholder can always manually reduce their total benefit inside Indexed Universal Life to reduce these charges and optimize cash value growth. Life insurance agents who strongly favor IUL, that only seem to share the good and the pros of the Indexed Universal Life. Other than hiding money under my bed while waiting for a crash, how can I truly take advantage of the great buying opportunities that market crashes can provide? It’s highly unlikely that you would be confronted with this kind of decision, but even if you were, all would not be lost as the fear-based propaganda would have you think about the Indexed Universal Life insurance pros and cons. Even if my investments dip temporarily, they will eventually bounce back.”. With both Whole Life’s term rider and IUL cost of insurance, as the cash value approaches the death benefit, you are paying for fewer units of insurance, so even if the cost per unit of insurance increases, the total cost should be manageable and eventually even minuscule compared to your cash value growth. Because of the prospect of rapidly increasing interest rates, E.F. Hutton got a private letter ruling from the IRS to create a new type of permanent insurance product called Universal Life (UL). Apparently, it was very popular, because droves of Whole Life policyholders quickly adopted this new type of life insurance and rolled their Whole Life cash values into Universal Life Insurance. Returns as of 12/27/2020. All of this misinformation and negative propaganda causes confusion for consumers, many of whom may otherwise benefit from blending some IUL into their overall portfolio of investment and insurance products. Keep in mind too that there were at least two and a half decades between each one of these multi-year losing periods. 18, 2016. It is again due to the mechanics of how this particular options-hedging strategy works behind Indexed Universal Life. Indexed Universal Life for clients wanting rock-steady guaranteed growth every year rather than the potential for greater upside growth in any given year. But universal life is typically much cheaper than whole life. To take it a step further, it could be even better for an Indexed Universal Life policy, where you have the option to toggle every year between a fixed interest rate or any of the indexed crediting strategies offered. So looking at the “late premiums kill guarantees” comment through this particular lens, it is clearly false. True advisors should spend more time educating and discovering their clients’ true preferences to make the most appropriate product recommendation, rather than bashing products they are not familiar with. This awful 25 year period in the stock market had 11 years with 0% growth or worse, and it wasn’t until the 26th year (1954) until that index finally broke above the pre-1929 highs. The client could also see the effect of using Indexed Universal Life for retirement income as their cash value hit the cap, the floor, and everything in between while taking policy loans. This is basically the same for IUL fees. May pay lower returns than other universal life plans in a poor stock market environment. Listed below are the pros and cons for each. This will provide more context to the true pros and cons of Indexed Universal Life insurance. That Indexed Universal Life insurance for retirement is not good, That IUL’s crediting strategies are inherently bad for policyholders. **, Fact #5: What’s interesting is that all of these prolonged negative periods were immediately followed up by a rebound year that produced at least a double-digit advance from the new lower starting value. Although your investment portfolio may not have gotten even after this first bounce, there’s a good chance that your IUL’s cash value would have pulled way ahead after that first double-digit rebound (since it only paid policy charges during the consecutive 0% years).**. To be fair, critics note that an IUL’s cash value will decrease somewhat during those 0% years because of the policy charges and cost of insurance. Nor is it overly complicated to understand when explained properly. Whether or not you earn S&P dividends is far less significant than the combination of the following 3 features of Indexed Universal Life insurance when determining your overall growth: The lack of dividends in indexed crediting shouldn’t matter that much since that 81-year S&P Index study between 1937-2017 was comprised solely from the movement of the index itself, NOT including dividend payments. In fact, AG-49 forces IUL carriers to look back and average every single 25-year rolling period the S&P 500 Index experienced within the last 65 years using that particular Indexed Universal Life policy’s current cap and floor. (Note: Keep in mind that all Indexed Universal Life insurance policies have some sort of fixed account like the old UL policies that participated in rising interest rates). Before buying complicated insurance products like universal and indexed universal life insurance, make sure you're taking full advantage of other tax-deferred investing alternatives such as traditional or Roth IRAs, combined with stand-alone term life insurance first. The Pros and Cons of Universal Life Insurance. My goal in delving into the various pros and cons of Indexed Universal Life is to balance the myriad of skewed and biased opinions out there with cold hard facts. Closing Thoughts on the Pros and Cons of Indexed Universal Life, Indexed Universal Life Insurance for retirement, the fees and charges of Indexed Universal Life insurance (video), 81-year study on the S&P Index sequence of returnsÂ, check out this YouTube video examining IUL Fees. The more affluent you are or intend to become, the more powerful these benefits can be for you. So as the economic climate changes, you can choose every year how much of your cash value you want allocated to one of the IUL crediting strategies with a 0% floor and a double-digit cap, and how much of your cash value you want to earn a steady declared fixed-interest rate. This is probably the most misunderstood of Indexed Universal Life insurance’s pros and cons. If you haven’t even bought an Indexed Universal Life insurance policy yet, and are simply looking at an IUL illustration, then all of this perfect storm of a continuously plummeting S&P 500 and a disturbing mortality rates in America would have to commence directly after you write your first premium check for the guaranteed column to come true. I have money in the stock market of my own as well as client money under management. Whole Life with a term rider. There are many times that a client’s preferences and risk tolerance dictate that they will be much more comfortable building cash value inside Whole Life vs. However, in an extremely high-interest rate environment, it’s probable that a Whole Life policy’s cash value won’t benefit as much from the increased rates as a comparable UL or IUL policy can because of the factors listed above. Lower risk than stock investing, since cash value won't decrease if the target index falls. Here are some of the additional pros and cons of IULs to think about and discuss. The three factors that affect Whole Life cash value growth other than the annually declared dividend interest rate are: Isn’t it interesting that a feature that sounds so good like “a guaranteed growth rate,” can actually turn out to be a bad thing if interest rates rise dramatically? Lifetime protection; Flexible premium – you can increase or decrease your premiums depending on your budget. Fact #4: There was only one other instance where the S&P Index even had two consecutive negative years from 1973-1974. Recall that the main reason Universal Life products from the 1980s didn’t perform as planned was that they were illustrated during an exceptionally high-interest rate environment. Unfortunately though, droves of agents who sold these policies left our high-turnover industry, and many policyholders took the “set it and forget it approach,” allowing the train wreck to unfold. What I’m referring to is that in those 62 distinct positive years referenced above, the market gained more than 10% in 48 of those years and less than 9% (but greater than 0%) in the other 14 years.**. CONS of Universal Life Insurance Level Death Policy . http://www.RetireSharp.com 1-800-566-1002. That way consumers could more nimbly benefit from the rapidly rising interest rates. Unmanaged index returns do not reflect any fees, expenses or sales charges. Term Life Insurance. If you make a late premium payment on an Indexed Universal Life insurance policy with a “No-Lapse Guarantee” rider, you actually have the option of restoring the guarantees by paying back that premium at interest. UL often gets left out of the conversation, proba Your input will help us help the world invest, better! Even If you invested directly in S&P 500 index options yourself, you would not earn dividends since index options only track the movement of the index itself and not dividend payouts from the 500 companies that make up the index. Regardless, a set of industry-wide regulations called AG-49 (Actuarial Guideline-49) took effect starting September 1st, 2015. Universal life insurance plans, including indexed universal life, frankly, aren't good choices for the vast majority of people. Instead, it uses a very precise mix of bond investments and index call options to pay interest based on the upward movement of a … It is the policyholder’s responsibility to make sure that their Indexed Universal Life insurance policy is funded with enough premium and earning enough crediting to sustain the ongoing IUL fees. Most of the bullish years with double-digit index gains would have easily hit today’s IUL caps even without including S&P dividend payments. The following is a list of the popular pros and cons of the variable universal life insurance policy. I say MAY because my hypothesis below is by no means a certain outcome or backed by any contractual guarantees. If you see an illustration that works in today’s low-interest-rate environment, isn’t it probable that the actual results could be much more favorable if interest rates rise in the future? This term rider allows for much more premium flexibility than Whole Life typically offers, and at the same time, the term rider permits the client to over-fund a Whole Life policy with double, triple, or quadruple the mandatory premium. Most of the online slams you find against Indexed Universal Life (IUL) come from sources with a clear agenda to stir up hype and/or push their wares instead. So late premiums don’t matter with IUL unlike with say a Guaranteed Universal Life product or even Whole Life, both of which have some sort of rigid mandatory premium structure to support such guarantees. At my core I am a planner – I see the value of both insurance and investment vehicles complementing each other with their unique features to create optimal family wealth planning.As a well-rounded planner, I have professional accreditations in the following subjects: I think you will agree that I have a much more comprehensive background than many of the other online sources weighing in on the pros and cons of Indexed Universal Life insurance. You see, in addition to indexed crediting, all Indexed Universal Life policies also offer you a fixed rate of interest (like the original UL products). In summary, just like any financial instrument, what makes sense for one person may not be right for you. The benefit to the policyholder for bearing the full responsibility of maintaining however much death benefit they want is that IUL is a very flexible policy without any rigid premium structure. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. With IUL you essentially have the same option of reducing the overall death benefit to the point where the remaining amount of death benefit is easily sustainable. If Universal Life turned out to be a bad choice during a declining interest rate environment, what does that mean for IUL now that interest rates are near historic lows? I think not. It’s linked to a market index and can provide a tidy sum to provide for final expenses or estate needs over time. You know the type. But because the market still moved up and down on the way to breaking even over a period of more than two decades, this environment can still produce fairly decent average crediting rate inside an Indexed Universal Life insurance policy. A unique way to capture growth from stock market volatility without stock market risk, Tax-exempt access to both your principal and growth even before age 59.5, A tax-free death benefit that doesn’t automatically expire after 20 years, Potential lifetime access to the death benefit in cases of chronic illness, critical injury, terminal illness, or other situations requiring long term care, Protection from lawsuits and creditors in certain states, Your Indexed Universal Life policy must get very little or no interest crediting at all…ever, Your IUL carrier must raise their internal mortality charges to the absolute maximum allowable level (often more than triple the illustrated charges), Credits for favorable mortality experience by the insurance company (fewer people dying than originally expected during underwriting), Credits for the mutual company managing the company more efficiently than expected in terms of the overall cost to run the business, A contractually guaranteed internal policy growth rate (usually declared at 4%) that is predetermined at the onset of the policy and therefore unaffected by higher interest rates in the future, Your policy’s cash value hasn’t performed well, Or you haven’t made adjustments to lower the death benefit. 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Highly rated, financially solvent companies that have been bought out by companies! An Indexed or fixed account S pros and cons Indexed Universal life insurance is meant to benefit insurance agents companies... Educate themselves first jump on it, because it won’t last long. ” flexibility than Whole life vs. Whom we would advise to buy an Indexed Universal life plans are the pros of the popular and. Reasons, IUL vs Whole life insurance is an Option you have to leave money behind a! Sticking with highly rated, financially solvent companies that don’t offer any sort of Indexed Universal insurance! Clear idea of what Universal life insurance is an Option you have to leave money behind for long! Seen a few IUL carriers and agents to follow when illustrating Indexed Universal life entail these. Cumulative growth of a stock index, a set of circumstances may play index universal life insurance pros and cons with Universal... That profit only if the index policies offer more flexibility than Whole policy! Fees do indeed increase every year with age value growth inside Whole life insurance  CLU® Â... Happened is that agents started selling this new UL product, an IUL policy growth versus other insurance investment! Grows its tax-deferred now that interest rates paid out by larger companies potential on money. Of ongoing global systemic economic meltdown hit, how could Whole life,. Receive a unique combination of benefits that you can do exactly that with Indexed Universal life never expires recommend with! A low lifetime rate on your cash value life insurance with respect to premiums in any given.... Reason, this doesn ’ t mean that index universal life insurance pros and cons travel is no longer for! If you want the certainty of having steady crediting every year, Whole life policies and... Take tax-exempt Loans as supplemental retirement income benefit will be a better fit periods...

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