Indexed Universal Life Insurance – Be Careful!

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Indexed Universal Life InsuranceFinancial advisors and insurance agents have been trumpeting Indexed Universal Life Insurance’s “no down side” in a bad market for years.  These advisors often refer to 2008 and claim none of their clients lost any money.  In other words they are promoting that there will be no policy losses in a down market…EVER.  You might also hear financial planners and insurance agents market Indexed Universal Life as a “401k alternative” or “the ultimate tax free retirement savings”.  Be careful with this hype. 

Because there are so many questions and confusion surrounding indexed universal life insurance policies, we are going to try and clear that up. Life insurance is one of the most important purchases that you are going to make for your family. It’s vital that you make the perfect choice.

Let me paint you a realistic picture of Indexed Universal Life Insurance, also known as “Equity Indexed Universal Life Insurance”.

The fees involved are rarely mentioned.  Such as:

  • Cost of Insurance
  • Premium Loads
  • Admin Fees

Depending on the policy, these expenses could be at least 2-3% or more.  Even if there was a down market year and your policy remained flat (remember, no downside?), you will lose money because of the fees and expenses of your policy.  HOWEVER, there are Indexed Universal Life  policies that have floor rate guarantees to pay part or all of the policy expenses in a down year.  This is something we recommend you have on your Indexed Universal Life policy and not every company offers this, so be careful. 

It’s safe to assume that if you’re looking at an Indexed Universal Life Insurance policy, you’re interested in safe cash accumulation.  Here are some tips in structuring your policy for cash accumulation:

Tip #1

Figure out how much you can safely commit each month, quarter or year and obtain the lowest non MEC death benefit.  In other words, stuff this policy full of cash for the lowest amount of insurance possible (You cannot go over the MEC limit or else there will be tax consequences).  Structuring a policy this way minimizes expenses and loads and maximizes tax free income.


Tip #2

Female’s live longer and therefore are less expensive than males.  If you are doing this for purely cash accumulation and tax free withdrawals at retirement, you’ll have a lower cost of insurance if this policy was taken out on a female.  So men, if you’re reading this, think about taking the policy out on your spouse instead of yourself. 

Tip #3

While accumulation is very important, don’t forget you can access your cash value at anytime in emergency situations or whenever you need it.  It’s very easy to take a loan against your policy, but it can also be VERY expensive.  If you plan on accessing the cash before retirement, make sure the loan provisions are satisfactory.  Poor loan provisions could make a policy with more money pay out less than a policy with less money.

Tip #4

Consider whole life insurance as well.  Equity Indexed Universal Life is a complicated product that needs to be structured correctly in order to work the way it’s promoted.  Whole life insurance works the same way AND has more guarantees than indexed universal life.  Have your agent of financial advisor run through illustrations of both.  Many financial advisors and agents drink the Equity Indexed Universal Life kool-aid and forget there are better alternatives in some situations.


Indexed Universal Life CAN be a great financial tool.  Make sure you trust your agent or financial advisor.  They are ultimately the one’s recommending the policy and structuring it for you.  This is a big financial commitment and you want to be sure you are getting the maximum out of your policy. 

The Alternatives 

Indexed universal life insurance can be extremely beneficial if it’s done correctly, but there are some easier and successful alternatives. An indexed universal life insurance policy is going to cost you more than a traditional term life policy. Instead of going through the hassle of these complicated indexed plans, apply for a term policy, enjoy those savings, and invest the difference instead.

In just about every case, term life insurance is going to be the most affordable options for insurance coverage. Instead of trying to navigate the murky waters of indexed universal policies, go with the simpler option of taking the leftover money that you won’t pay in fees and invest that through traditional means.

As we mentioned early, an excellent option is whole life insurance. You’ll get a lot of the same benefits without the confusion or risks. Whole life insurance is a great way to provide the coverage that you and your family deserve while also accumulating a cash-value component that you can borrow against in case of an emergency. 

Getting Enough Coverage 

Regardless of which kind of policy that you choose, it’s vital that you get enough insurance coverage. When you’re looking to purchase a plan, aside from the type you choose, the next most important thing is the size of the plan, but how do you know if you have enough coverage?

The are two main goals of life insurance, to help your loved ones pay off any debt that you leave behind, and to replace any income they would lose if you passed away. Sure, there are other uses for life insurance, both those are the two fundamental purposes of a policy.
When purchasing life insurance, time the time to sit down and add up all of the debt that you have, mortgage, car payments, student loans, etc. and anything else that would be left to your loved ones if you were to pass away tomorrow.

The other purpose of life insurance is to replace your annual salary. You know how much you earn every year and how many people are relying on that paycheck. If you have a spouse and children that need your paycheck to pay for basic expenses. Life insurance can give your loved ones the money they need to give them time to find a way to permanently replace that income.

Working with an Independent Agent

There are hundreds of different companies that you can purchase life insurance from. You could spend days researching different companies and calling agents to receive quotes. Your time is valuable, don’t waste it talking on the phone to all of those companies. Instead, let us bring all of the lowest quotes to use. Simply fill out the quote form with your information and we will give you the quotes from all of the highest rated companies in your area.

There are dozens of different life insurance policies that you can choose from, it’s important that you get the life insurance that your family needs. Don’t let them be stranded under thousands of dollars of debt if something tragic were to happen to you. Losing a loved one is never easy, but being left with unpaid expenses can make it that much worse. Life insurance is the best way to ensure that your family has all of the resources that they need.

Don’t hesitate to contact us with any questions about Indexed Universal Life Insurance.
 

About Jeff Root

is the owner of rootfin.com. He's an independent life insurance agent who has helped 1,000's of consumers purchase life insurance online and over the phone.

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1 Comment

I’d be interested in an unbiased opinion of whole life vs IUL. I’m hearing from friends how great the IUL are and im skeptical. I sold UL over 10 years ago and understand the pitfalls. Whole life has
More guarantees but am I paying too much? . I would be interested to talk to someone that truly understands both and possibly sells both

August 24, 2012 at 12:13 am
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