Recently a woman by the name of Pamela Yellen with Bank On Yourself published a review of Wealth Beyond Wall Street and the IUL as a financial asset on her blog.
Pamela heavily promotes and profits from the sale of one product, Whole Life Insurance.
What’s interesting is that I own a whole life insurance policy. I love its benefits. But, it’s not the one and only Holy Grail of financial assets like some product pushers would have you believe.
I have no axe to grind when it comes to the asset you choose to use.
I believe in (and own) Indexed Universal Life Insurance to be sure. I also believe in (and own) Whole Life. I also believe in (and practice) Real Estate investing and I own precious metals. I also believe in entrepreneurship as a great way to build wealth.
When a client we work with decides to use one of these strategies, sometimes we get compensated, sometimes we don’t. That’s okay…
Our goal is to educate you to the point that you are empowered to make a good decision for your finances.
The savvy consumer will ask the question: “How unbiased can someone be who ONLY sells one product?”
The first thing to keep in mind when reading any review online is that competitors get angry when someone else comes along and offers an alternative that takes their customers.
So read reviews with a healthy dose of skepticism knowing that some of them are more than likely competitors trying to sabotage their competition.
Pamela is a product pusher. She focuses on one product: Whole Life Insurance.
The premise that anything other than that is a ‘scam’ or ‘rip off’ is so obviously biased that anyone can see through the marketing scare tactics for what they are.
To hear Pamela say it, anything other than HER VERY SPECIFIC type of whole life policy is a ‘danger’ or ‘rip off’. These scare tactics are part of her ploy to scare unsuspecting people away from any option that doesn’t make HER money…
Why doesn’t she admit there are other financial assets that can be valuable for someone to own? This very bias proves her analysis is disguised marketing hype and cannot be trusted.
So, the first thing to realize is that Pamela is biased. Anyone buying something other than a whole life policy from her advisors is money out of her pocket.
(Despite her positioning as an author and ‘consumer advocate,’ her company does get paid a commission disguised as a fee for the policies clients buy through her network of advisors. Last I heard she isn’t even licensed to receive commissions, which is a violation of insurance laws.)
Now to address the points she makes in her biased blog post…
She claims buying an IUL could be the worst thing you could do…and I’ll prove it.”
She goes on to paint a Halloween worthy scary story of why an Indexed Universal Life policy is oh so baaaad, and how if you buy one you could basically be committing financial suicide.
Oh the horror!
This analysis could, possibly be true, if you buy yourself the worst possible IUL policy you can find, and structure it the worst way possible. (The same can be said for whole life insurance policies as well.)
I have always believed in ‘eating my own cooking’. If I ever recommend something to someone else, I try it first and make sure it works for me.
So, as I looked into the IUL there are some definite downsides, just as there are with any financial vehicle, whole life included.
Just like buying a car, you can buy a bad one, or you can buy a good one.
You can also buy a great car and put water in the gas tank and it won’t work very well.
In her article she makes several critiques, and several of them were concerns I had when researching the downsides of Indexed Universal Life Insurance.
Of course, just about any financial product you buy can be a ‘bad deal’ if it’s not done with your goals in mind.
Now let’s go through each of her arguments one by one, and I’ll give you the conclusions I came to as I did my research for myself as a BUYER first, not a product pusher.
Keep in mind; if the cons out weigh the pros for you personally, you may want to look at another one of the other exciting wealth building strategies we recommend. The Indexed Universal Life is not a fit for everyone. Yet for the right person it can be a strong foundational asset in their portfolio.
1. CLAIM: Illustrations are wildly ‘inaccurate’.
REAL STORY: They may be; depending the agent you use.
In the past, agents have sold IUL’s with the ability to illustrate returns of up to 9 even 10 percent for 30-40 years in a row.
It’s easy to put these exciting numbers on paper and show a client how much money you might have 20 or 30 years into the future.
When I looked into this I wanted to know are these ‘illustrations/projections’ actually accurate?
In order to find out what was realistic over a 20-30 year period of time, I did an analysis using a 13% cap.
So we looked at what the S&P 500 has done over the past 20 years. The analysis shows a 92% probability of averaging 7% growth in the IUL with the cap staying at 13 %. If your money were simply left in the S&P 500 index fund, we would only have a 69% probability of reaching 7% on average during those 20 years.
An illustration with 8.5% return on the other hand only shows a 27.3% probability of reaching that cap.
This is why you don’t typically want to look at an illustration of more than 7-7.5% growth on average. The critics, usually agents pushing whole life, always say ‘these are just projections, and they are unrealistic,’ and often they are.
Some agents will put numbers in front of clients that look really exciting but, in my opinion, it’s a pipe dream. For example I know of agents illustrating 8.5% or 9% and my analysis shows that the likelihood of getting that is less than 28%.
So at 7% average, I was pretty comfortable with a 92% chance. That’s pretty good odds. With a higher cap the odds get even better.
(SOURCE: Yahoo Finance- Historical Returns for the 20 year holding period using beginning of the month data. January 1968-January 2013 (301 data points) with 20 years of S&P 500 index returns in each segment. The historical percentage is for illustrative use only, and assumes 100% participation of the S&P 500 with a 0% floor and no dividends. Actual caps would have been different over different time periods. The historical percentages reflect past S&P 500 index changes, and have no bearing on future changes, and are not guaranteed. Actual results may be better or worse than shown. Past performance does not guarantee or predict future results. )
CLAIM: “Sales practices are under investigation”
REAL STORY: When she uses scary attacks like “sales practices are under investigation” she intentionally leaves out the truth that insurance departments nationwide have investigated all kinds of sales practices from home owners insurance to health insurance and whole life agents have been in the cross hairs as well for similar sales practices.
Agents have been in trouble for selling the whole life policies as “Banks” instead of actual insurance policies. People get into these policies, put in a chunk of their life savings, only to find out the whole life insurance policies are so expensive they have to continue paying substantial premiums just to keep the policy from lapsing (which is why whole life is not suitable for every person either).
Insurance agents are usually compensated on commission only. So whether they are selling whole life or term, or health or IUL, they are almost always trying to make a sale to earn that next commission to pay the bills…
This creates a scenario where they will often over promise, or mislead their clients in order to get that sale made. This is why Insurance Departments across the country have investigated questionable sales tactics of insurance agents in all areas.
CLAIM: “You could pay premiums every year and still have no cash value or death benefit” and “There is no guarantee of any cash value.”
REAL STORY: Many of the negatives of cash value policies apply to whole life and IUL’s together. This is one of them.
Anytime you buy a policy there is a risk that the policy could lapse and you would have no cash value or death benefit.
The truth is that whole life insurance costs are substantially higher than IUL costs during most of the early years of the policy. So any reduction in premiums paid in will more adversely affect you in a whole life policy causing the cash value to be eaten up, and possibly lapsing the policy.
Granted there are more guarantees in a whole life policy. However the growth is limited substantially compared to the IUL. This is why you need to come to the conclusion of what you are looking for. Or perhaps have multiple different assets in your portfolio. (Which is what most people do.)
If you want slow and steady tax deferred growth and more guarantees, a whole life policy may be for you.
On the other hand, if you would like a potential for more tax deferred growth and more after tax cash flow in retirement, cash flow that is protected from market crashes and increasing tax rates, then an Indexed Universal life might be better.
In a dividend paying whole life policy dividends are NOT guaranteed even though many companies have a history of paying them. Point being, an insurance company could elect not pay you a dividend in a given year or over a number of years.
In fact, insurance companies are required to say in all their marketing that “Dividends are not guaranteed” because the companies can and do change their dividends each year.
Now any agent (or even Pamela) will reply, that yes they are not guaranteed but you can count on them because the company has a history of paying the dividend. Bottom line is, it is NOT guaranteed. And the argument against the IUL that the companies can change caps, is the same here, it’s up to the insurance company, and they can reduce it or eliminate it altogether.
This is a risk with a whole life policy. If you pencil the math, on average, most whole life policies are going to give you a return between 4-5 percent each year including the guaranteed rate of return and the potential dividend. Hence, no policy is perfect since a perfect asset does not exist. Each one has upsides and downsides.
The IUL also has risk. You may not get a credit to your policy if the stock market goes down. That year you could have a zero. For me, I would rather have a zero year than lose 20 or 30 percent. Over time, however, the indexing strategy averages growth of 7 to 8 percent from these policies over time. Like the whole life policy the IUL is not get rich quick. It is a long-term play.
Yes an IUL has some risks that you may not be comfortable with. In that case, chose a different asset class that suits you when it comes to money and risk tolerance. On the flip side, if you do the research and are okay with the risks for a portion of your portfolio, then it may be worth adding it as an asset in your portfolio.
The IUL could give you more potential growth with no market risk and provide you a tax-free cash flow for life, under current tax laws. Again it should never be the only asset in your portfolio (as Pamela seems to think whole life is the only thing anyone should put money into), yet for many it has become a great addition to their assets classes.
This is where it’s essential to work with someone who isn’t a product pusher but can actually understand your goals and recommend the right product for you.
If you were more concerned about guarantees than growth, then we would recommend a different option. (However you can also get guarantees within an IUL, something that Pamela never mentions, of course…why would she give you the whole story?)
CLAIM: Yet to see an advisor tell you about this ‘garbage’.
REAL STORY: This is just silly. In my blog post about the 16 skeptical questions I had about IUL’s, I personally discuss each of the risks of these policies, and how to protect yourself.
CLAIM: IUL companies can raise insurance costs.
REAL STORY: Despite what whole life product pushers would have you believe, insurance costs are a risk in both IUL and Whole Life Insurance policies.
IUL’s are written with annually renewable term, so each year the insurance costs can and usually do go up. This makes the policy more efficient during your contributing years, because you can buy lower cost insurance while you are younger, and the cost goes up as you get older in most cases. (There are exceptions if you use the right product.)
Whole life is written with a guaranteed insurance cost from beginning to end. This means the insurance company has to price your insurance as if you were 85 years old… starting today. Meaning since they can’t raise rates when you are 70 or 80 years old, you are paying the high cost of insurance starting now…for the life of the policy.
So to maximize your cash value, you definitely want to keep your insurance costs to a minimum in both cases and do everything in your power to fund them to the maximum level possible.
There are two ways to combat this:
First you want to start with a company that has a low fee structure to begin with. We discussed using a company that is not a publicly traded ‘stock’ company with higher profit margin targets. This doesn’t mean that all mutual or employee owned companies have good fee structures, but it’s a place to start.
Second, and the most important, is by structuring the policy in such a way that you are minimizing the death benefit, and maximizing the funding for the cash value side of the policy, and using what I call the Death Benefit Optimizer.
This way you are only every paying the bare minimum for insurance costs, and keeping those costs down as low as possible.
When done this way you are minimizing your expenses in the policy and maximizing your cash value growth.
CLAIM: IUL’s have no guarantees.
REAL STORY: This, again, is misleading and incomplete.
The truth is that whole life insurance has more guarantees than an IUL, often much higher expenses and lower returns. Just like a bank has more guarantees than a whole life policy.
It’s a matter of what you are looking for.
There are guarantees built into the IUL. Most companies offer a guaranteed interest account where your money is guaranteed to grow each year. Many of the companies we use have interest rate loan guarantees, which protect you from rising interest rates.
Some offer a minimum crediting guarantee of 1-3%. This is nothing to get too excited about because most companies don’t credit the growth until the end of the policy.
Whole life insurance guarantees higher costs on the front end, and lower returns. But you will get small, consistent growth each year, and depending on what you are looking for, that may be perfect for you.
CLAIM: Companies can change their caps
REAL STORY: Part of what makes the IUL work is the ability to get credited potential double digit growth during good years in the market. This credit is limited by a ‘cap’ on the growth of your cash value. Usually these caps are between 12%-15%.
It’s important to understand that caps are interest rate driven. The lower the interest rate, the lower that cap generally speaking.
The reason for this is because the insurance company buys bonds to form the basis of their returns, and then they buy options to make up the difference between their bond returns, say 5% and the cap, say 13%, during good years.
Contrary to what I first thought, the insurance company, in almost all cases, doesn’t profit when the market goes over the cap. That would create a larger expense that they don’t need to undertake. During down years, they still profit because they have a guaranteed return on their bonds, but the policy owner doesn’t get credited in those years. (Sad but true!)
The lower the return on the bond, the lower the cap will be so the company can maintain a profit.
So ask yourself, how low have interest rates been for the past 8 years? (From the time of this writing in February of 2016.)
Rates have been at historic lows, basically zero or near zero. How can rates go any lower?
During this time the companies we use have had caps of 12-17%. What does that mean? It’s not likely that caps will go lower than they are right now, and when we return to a normal interest rate environment, caps will likely go up.
In summary, can the IUL be a big waste of money? It certainly can…or it can be a great asset for your portfolio.
Can Whole Life be a big waste of money? Indeed…or it can be just what you were looking for.
Can buying mutual funds or investing in a 401(k) and watching your money get crushed by taxes, market losses and fee’s be a bad deal?
You get the idea.
The key here is that when properly structured and used, the IUL can be a great additional piece of your portfolio.
Regardless of what disgruntled competitors or uneducated ‘advisors’ may claim…
It’s critical that it’s structured properly, with the right company. I wrote about my 16 Skeptical Questions Before Buying An IUL here. If you are interested in educating yourself further, I encourage you to check it out.
If you already know the IUL is something you want to do, and need some guidance on how to build your policy as efficiently as possible, feel free to contact the office at 801-693-1677 or email us at the contact us page above.