Misconceptions

Misconceptions

I’m concerned!

Having been in the financial services industry for 35 years, it’s important to me to minimize “misinformation.” With the advent of the internet, other financial advisors, TV & radio, and even other insurance producers, it’s easy to see why there are so many opinions leading to further confusion. It also reminds me of that old psychology experiment where you tell one person something, they relay it to someone else and as it goes down the line to others, the story would probably be so very different! Unfortunately, people often hear what they want to hear, but there’s also a chance for biases, opinions and even recollection to further cloud the story! I feel that Indexed Universal Life, (IUL), often falls victim to many of these circumstances.

Despite its many benefits, there are just so many misconceptions regarding IUL and a vast array of opinions. I realize IUL can be complex, technical or even confusing, but I’m hoping that by cutting through the noise, many people can form a better understanding of IUL’s powerful benefits!

  1. Indexed Universal Life (IUL) is so expensive?

Compared to what? This is probably the most common objection that I hear from clients working with an investment adviser or detractors. However, the first problem is that IUL is often compared to a stock market investment. Indexed Universal Life allows a portion of your premium payments to participate in the growth of an index that the IUL is mimicking. However, if you want less risk with a portion of your money protected from the downside risks of the stock market, IUL is an exciting option. However, the bigger issue stems from the fact that IUL is really designed as a safe money alternative, not to compete with a direct investment in stocks!  Finally, there are other benefits, which include easy access to your money, attractive tax advantages and even supplemental retirement income potential.

Ultimately, there are costs and expenses which can seem confusing, which I’ll explain shortly. However, remember that those extra costs provide death benefit protection for your loved ones or a company’s livelihood and potential monies for critical or chronic illness like long term care. Despite the intrinsic value & differences with IUL, those fees are why detractors feel IUL is so much more expensive than investments, like mutual funds or ETF’s. Ironically, when you truly convert those fees into a percentage cost against the cash value of other assets, IUL actually compares very favorably, and just maybe isn’t that expensive! For example, if you consider an investment of $50,000 a year into an equity account for 10 years earning 7%, and compare it to a life insurance policy earning roughly 6.25% GROSS for 10 years, the life insurance policy will cost more. Assuming a money management fee of 1% plus .50% for internal transaction charges (the industry average), it would equal 1.5% or $52,113. The life insurance policy fees would be $79,138, mostly due to the upfront commission structure. I can hear it now, ”Are you mad?, you see IUL is more expensive!”  I would definitely agree on costs alone, but this is also where the tables start turning dramatically longer-term!

What isn’t mentioned, is that traditionally most investment professional or life insurance producers stress the need for a longer term investing time horizon. Furthermore, after 10 years, something magically happens with most insurance, policy fees actually start dropping substantially. After 20 years, your managed account fees would be another $139,748, but the  insurance policy fees are roughly only $7,000! That’s a huge cost difference of over $130,000 more with the managed account. As a matter of fact, over 40 years, the managed account has over $769,000 in fees and the insurance is a little over $119,000. I realize that things could change, but by looking deeper into the story, there is often 2 sides to many stories!! At the very least, regardless of other bells and whistles, maybe IUL isn’t as expensive as we are led to believe!

  1. Buy Term & Invest the Difference (BTID), never buy IUL or permanent protection! 

I have heard this for years, but this blanket statement assumes that this is best for clients no matter their situation! Candidly, I feel that this couldn’t be further from the truth a every situation is different. Term insurance provides death benefit coverage for the lowest cost for a specified period of time and there’s no permanent protection. However, it does have one glaring problem, you need to die while the policy is in force to pay-off! Unfortunately, many studies suggest that 99% of term policies never have a claim, so many people never get the benefit. I realize that most insurance is a guessing game, protecting against a “what if” scenarios. Even though many types of insurance never have any claims, term insurance has the least amount. More alarming is that you die without your term policy being in force, so I have seen many times the financial and emotional impact this can cause, it’s devastating! Imagine if it happened to you, your family or key business personnel, what’s the impact?

Yet, the chances of you dying someday are 100% and you run an additional risk of term premium payments increasing sharply if you want to keep your coverage after the term runs out. Besides potentially running out, being more expensive, your health could change making it harder to even keep or qualify for new coverage. Don’t get me wrong, having term at a minimum is a great peace of mind benefit, but there are other things that can create more problems. Finally, with the traditional myth of buy term and invest the difference (BTID), it assumes you will outperform IUL, which suggests that you get a better bang for your buck! It makes it seem that lower insurance costs means more money in your pocket by simply investing the difference. Again, there is no attention to the other potential benefits of IUL or that it can provide lifetime coverage that never goes away! 

The biggest irony is that most people don’t actually invest the rest, using it instead as “extra” spending money! It doesn’t guarantee that you will have more money because you also need to decide where to invest it, so that it performs better. Numerous studies indicate that most people just don’t have the discipline to actually invest, such as a CNBC survey indicating that 77% of millennials admit to not investing, or that 55% of people wish they had saved more for retirement and a lot earlier! By actually paying into an IUL policy, it can be a source of “forced” savings that helps with many other financial needs from retirement, college planning, legacy building, even emergency funds!

The markets are also very volatile, this causes investor’s emotions to bubble during times of volatility or uncertainty. According to Dalbar’s studies of investor’s behavior, most people are short-term focused, often selling at the first sign of trouble, which would limit how effective the BTID strategy works. A feature of the Indexed Universal Life is the indexing, which gives you upside participation while protecting you from the downside. This is a powerful deterrent and emotional boost that helps to keep people invested, so that they can truly benefit from the longer-term growth potential Maybe a better slogan for IUL would be, “buy insurance and save the rest!”

3. “Loans are really just borrowing your money, and hurt your policy!” 

Actually, life insurance loans involve using your accumulated cash value in the policy as the “collateral” for the loan, because the actually money comes from the general account of the insurance company. With most payments, when you use it, it’s gone and the interest goes to the payment. However, with the IUL, your cash value still enjoys constant compounding of the potential growth! Additionally, policy loans don’t require qualifying, or repossession if you fall behind or don’t make payments. People’s lives do change, so what happens If you don’t pay your house or car payments? In most cases, the house or the car will get taken back to help satisfy your obligations, just remember 2009, ‘10’ or ’11. Finally, most of us plan to pay back our debts, but most IUL policies contain “over-loan protection, ” which provides a non-forfeiture option. This feature protects it from lapsing or being repossessed due to the loans. 

Finally, there are a couple of other things like:

  1. Your premiums can stay level
  2. Premiums are flexible to meet changing needs
  3. You can use your cash value to make future payments
  4. Premiums never increase
  5. Terrific growth potential

Conclusion

There are a couple of other features like:

  1. Your premiums can stay level
  2. Premiums are flexible to meet changing needs
  3. You can use your cash value to make future payments
  4. Premiums never increase
  5. Terrific growth potential

This is an asset class, that’s not competing with stocks, but cash, fixed income assets or safe money alternatives. When positioned properly, it can actually work quite well for a piece of your investment strategy. Lastly, If you are out there simply following the crowd or rushing to conclusions, you may be missing out on a great opportunity with IUL as piece of your strategy!

Pat Moran is managing partner and founder of Healthier Money, a premier provider of guaranteed income, reduced risk and layers of protection from the unexpected. He can be reach at (602) 789-3099 or pat@healthiermoney.com

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