life insurance
Indexed universal life insurance (IUL) is an insurance product that seems to promise you can have your cake and eat it, too. Unfortunately, as with most things in life, there are no free lunches.
Indexed universal life insurance is similar to the more familiar whole life insurance policy in that it is composed of two basic pieces: first, a permanent insurance policy that will pay a death benefit whether you die young or old; and, second, a cash value account from which you can borrow money.
Your insurance agent is sure to point out all of the benefits of purchasing one of these policies; this article will show you five reasons why buying IUL is generally a bad idea.
#1 You Don’t Need a Permanent Death Benefit
The portion of your premium that pays for the insurance component cannot go into your cash value account. The more the insurance costs, the less you’ll have in the cash value account.
#2 Complexity Does Not Favor the Buyer
The more complex the policy, the less likely you are to really understand how it will work in the future. The less you understand, the more likely you are to be disappointed when you eventually compare the steak to the sizzle you were sold.
#3 IULs Don’t Count the Dividends
You have probably heard that “the stock market returns 10% in the long run”. While this figure is approximately true—at least on a nominal (non-inflation-adjusted) basis—it includes the stock dividends, not just the change in the index value. IULs, however, only pay you based on the change in the index.
#4 IULs Have Cap Rates
To make matters worse, IULs usually have a cap rate. That means if the stock market has a really great year, such as the 30% index return in 2013, your return is “capped” at some lower figure, often in the 10% to 15% range.
#5 IULs Have Participation Rates
If your participation rate is 80%, that means that if the stock market goes up 10% (not counting dividends) you get 8% credited to your cash value account.
These policies are likely to provide a return very similar to that of whole life insurance (with the possibility of much worse performance), which is easily seen to be in the 2% to 5% range long term for a policy bought today and held for life.