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Three Things Consumers Should Know About IULs

AA006481Recently there has been some press about a State of New York regulator looking into the sales practices of Indexed Universal Life carriers.   IUL sales are growing like a weed, up 13% in first six months of 2014 and up from nothing to over $2B in a decade or so.  Growth typically invites scrutiny.  The investigation seems to stem around “unrealistic expectations for gains” put forth by carriers (& by extension advisors/agents).  I use the word “seems” because there hasn’t been any official comment on the purported investigation by the regulator at the time of this writing.

The fact that there is an investigation doesn’t mean IUL is a bad product or anything you should be afraid of, but if you are considering purchasing a contract, you should understand how it works.  It was true before.  It is true now.

Three things consumers should know about IULs:

An IUL is not a guaranteed product. Period.  Yes there are some limited guaranteed elements in the contract but for the most part it is devoid of guarantees related to interest crediting.  Yes, you are guaranteed to never lose money because of market declines and there is some real value in that.  But simply not losing money isn’t going to deliver the kinds of results you want.  An IUL relies on long term growth or favorable changes in whatever index crediting methods you select and the insurance carrier to continue to offer attractive crediting methods.  If you are seeking a guaranteed product, don’t purchase an IUL!  Simple as that!

If you work with an advisor that says something like, “All you have to do is put in $xxx for y years and then you are guaranteed to be able to pull out $zzzz per year…” run like hell away from him!!!!  That is simply not how it works.  .

The narrative should be more like, “This shows you putting in $xxx for y years with an interest crediting assumption of z%.  That interest crediting assumption is based on historical performance.  We have no way of knowing what will happen in the future but the math suggests you may be able to pull out $qqq per year beginning in year r.”  I typically tell my clients when showing them an illustration (the formal document that contains the projections), “The only thing I know for sure is this is wrong.  Your actual results will be either better or worse than what is in this document.”

Be wary of paying minimums (or a sales proposal based on minimums). If you are only paying the minimum or anything close to the minimum needed to keep the policy active for a prolonged period of time don’t ever expect to pull any money out of the contract and be prepared to pay more in the future to keep it active.  You should never enter into the contract thinking you’ll just pay the minimums.

You need to keep an eye on IULs.  Not every week or month, but you should get in the habit of reviewing your performance annually and make changes as necessary.  You want to work with an advisor that will review your policy with you annually.

All that said, a properly structured IUL remains an incredible way to facilitate tax free cash flows to be used during retirement.  An overfunded Indexed Universal Life policy is still a very efficient way to leverage the advantages life insurance uniquely enjoys under the tax code.  It is worth noting that the retirement savings alternatives with direct equity market exposure (like a 401(k)) don’t come with guarantees either.  You can still lose a lot of money in the stock market (S&P 500® down 38% in 2008).

Finally to my advisor colleagues: It is more important than ever that we as advisors are upfront and balanced about what we are proposing as solutions.  I’ve written about this before.  There is no doubt in my mind that (like just about any product in any industry) there are some bad apples out there intentionally or unintentionally doing a bad job of selling IUL.  The IUL market is growing and will continue to grow because it is a really good story.  Let’s take the time with our clients to be educators first and let them make informed decisions about if IUL is right for them.

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