Episode #29: 10 Reasons Not to Buy an Indexed Universal Life Policy [2018 Update] (2024)


The Internet has been a remarkable channel when conducting research on a particular product and/or service. However, this abundance of information has caused the line between reliable and misleading to greatly thin. Since May of 2012, an article by Nelson Nash has been circulating entitled, "The Top 10 Reasons NOT to BUY Equity Indexed Universal Life".

In this episode of Money Script Monday, Kevin addresses "The Top 10 Reasons NOT to BUY Equity Indexed Universal Life" article and provides insight into the areas you should focus on when selecting a preferred financial vehicle.


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Video transcription

Hey there, thank you for watching today's Money Script Monday video. My name is Kevin Nuber.

Today, what I want to talk about the 10 reasons not to buy an IUL.

This is a very common article you find on the internet today about people who are promoting whole life insurance, which is a different type of permanent product.

They use these 10 points to say why you shouldn't buy IUL. I would like to go through these 10 points and show to you that most of them are wrong and give some clarification on a few other ones in order to make you have the ability to have an informed buying decision.

Before I do that, though, I want to tell a little personal story. Once upon a time, I was having really, really, really bad chest pains.

I went on the internet and I started reading articles and googling different things about chest pain. To make a long story short, I diagnosed myself with a terminal illness that had something to do with my lungs.

I had been convinced that something significant was going on, some problem. So, I scheduled an appointment with my doctor, I went down to the doctor, I told the doctor exactly what was wrong with me, and about what I read on the internet.

He smiled and had me drink something, and a couple minutes later, he asked me how my chest felt.

I said, "This is amazing. My chest feels fine. It hasn't felt this great in a long time." And he said, "Kevin, you have heartburn."

I tell the story because the internet is a great place to get an unlimited amount of information, but it's also a bad thing because you can get the wrong information and there's no filter for you to determine which information is good or which information is bad.

So, before you make some sort of buying decision, I would like to give you the full story about the 10 reasons why not to buy Indexed Universal Life.

Episode #29: 10 Reasons Not to Buy an Indexed Universal Life Policy [2018 Update] (2)

#10: Internal costs are not guaranteed and #9: Mortality charges are not guaranteed

First off, number 10 and number 9, they're both related, is that the internal costs of an IUL are not guaranteed.

I'll just state that this is not true.

To show you this, I've included in the notes below, copies of this. But this is something that gets printed in every single universal life contract that ever gets produced.

It says, "Table of guaranteed monthly cost of insurance rates." So, right there, I have shown to you that there actually are guaranteed cost of insurance inside a life insurance contract.

So, that is just simply something that isn't true.

Another nice thing about IUL is that because we can fully disclose everything to you up front before you buy, we can tell you exactly what the costs are going to be each and every year.

This is an example of a ledger that we can show every client before they buy, exactly what the costs are going to be inside the contract every single year.

Now, there's maximums the insurance company can charge, but there's also current rates.

And for the most part, insurance companies do not change these. We can hold the insurance company accountable every single year, and see if they're charging exactly what they said they're going to charge you.

With other types of insurance like whole life, there's no way to do this.

The insurance company will not tell you what the cost of insurance is, they're not going to tell you what the mortality charges are. So, there's no way to know if they're charging you the minimum or the maximum, they simply just do not disclose it to you.

I actually think it's an advantage with IUL that we can actually show those to you and disclose to you exactly what the cost will be every single year up to the maximum guaranteed charges.

#8: Market drops cause double pain

Number eight states that market drops cause double pain.

First off, with an Indexed Universal Life, even though you have an interest rate tied to a benchmark, like the S&P 500, if that index goes down, you will never be credited as zero percentages, or anything less than zero percent.

It'll never be negative 10 or negative 40. It'll only be a 0%. So, this implies that you can lose money and you can't.

Now, if you earn a 0% interest rate, you're still going to have some expenses come out of the contract and this is true with any investment.

Your 401(k), your mutual fund account, anything. So, IUL is not an exception to that rule.

#7: Late premiums kill any guarantees

Number seven says late premium to kill any guarantees. I'll just simply state that these are typically riders, they're added to a contract and we don't add those riders to the types of contracts that we use.

The reason is because these types of riders add extra costs and our philosophy is for you to pay the least amount of fees on every single policy, so therefore, we do not add the types of riders that would cause number seven to be true.

#6: Dividends from the index don’t get credited

Number six, is that dividends from the index don't get credited. I think this is actually a selling point of Indexed Universal Life.

We sold thousands and thousands of these policies over the last 15 years. And we track every single policy that is inforce.

This is an actual review summary showing an inforce contract last year that earned 21.04%. And I use this as an example to show that you have an ability to earn a really high interest rate inside the contract.

A dividend would only be another 1%, or 2%, or 3% on top of that, but that takes more risk.

And the benefit of an IUL is if the market goes down, you're going to get a 0% credit. To get a dividend on top of that, you have to get rid of that floor and take more risk and we do not believe in that.

You have the ability to earn up to a very high amount, but the thing that you have to give up is the dividend and we think that's fantastic.

#5: Participation rates are often less than 100%

Number five is that participation rates are often less than 100%. It's not very often, but it can happen.

This gives me an opportunity to explain how interest credits work a little bit more in detail.

Anytime that you have an interest credit tied to a benchmark like the S&P 500, there's always going to be something on an IUL that limits the amount of upside growth that you're going to earn.

You're going to have a cap or you're going to have a participation rate. And, for example, you might have a cap that is 12%, but in exchange for that, you get a 0% floor.

If it goes negative, you're simply going to earn 0% and not lose any money.

Again, having a limitation such as a participation rate on the amount you can earn, to us, is a selling point of an IUL about what makes it so advantageous.

So, I'd much rather have a participation rate less than 100% and a 0% floor.

#4: Returns are usually capped at various interest rates

The returns are usually capped at various interest rates. Again, this is true, and this is a selling point of IUL.

If we were to have returns that were not capped, then we would be invested directly in the market, meaning that we can lose an unlimited amount of money as well.

That is a risk that we're not willing to take. So, participation rates and caps, in our opinion, is a selling point of Indexed Universal Life.

#3: Guarantees are not calculated annually

Number three is guarantees are not calculated annually. This is a complicated explanation.

I'll just simply state that there are guarantees in the contract and when they're calculated, whether its annual or over a five-year period, over the life of your contract, is inconsequential to what type of product you should be choosing when coming to an IUL.

#2: All of the above can be changed by the insurance company

Number two is all of the above can be changed to by the insurance company. So, there's factors inside any insurance contract that can be changed and ones that cannot be changed.

For example, I showed you what the maximum guaranteed mortality charges were, that can't be changed. It's in the contract.

There are parts that can be changed such as caps or a participation rate. And every single year, the insurance company will adjust this in your advantage up or down.

But this is true for any type of permanent insurance product. Whole life insurance, which is another type of insurance, the insurance companies simply can change the dividend that a person earns every single year.

And over the last 30 years, dividends have steadily declined year after year.

So, whether you choose whole life or you choose IUL, either of them is going to have a mechanism that the insurance company can choose to change that can limit the amount that you can earn.

It's just the mechanism by which they choose to do it is different between the two products.

#1: The risk is shifted back to the insured

And then lastly is that the risk is shifted back to the insured. I'd like to use this to explain a little bit more about the difference between whole life and IUL.

Episode #29: 10 Reasons Not to Buy an Indexed Universal Life Policy [2018 Update] (3)

So, on this side, I've drawn this spectrum. Down here, this shows low risk and up here, it shows high risk.

But down here, it also shows low rate of return. And one of the fundamentals of investing in general is that if you want the safest place with the least amount of risk to put your money, you're also going to get the lowest rate of return.

If you said you wanted the safest guaranteed product where you can put your money, it would be at a savings account in a bank.

But guess what? You're not going to earn any interest rate on that money. So, to have the safest place, you get the lowest rate of return.

Now, let's say you want the highest rate of return possible, so we go and we invest your money into the market.

You get this huge amount of potential return, but you also take a large amount of risk in that you can lose 40% if the market crashes.

So, clients typically do not operate on either end of this spectrum 100%. They choose to have some happy place right in the middle between these two extremes, and IUL is exactly where this fits.

You give up some of the guarantees of a whole life contract, but you also give up the low rate return and you have an interest rate that is tied to the market, but subject to the cap, which we talked about over here.

However, we have a 0% floor so you can never lose any money.

In our opinion, IUL is right here in the middle where you still have guarantees. However, you're not taking a lot of risk.

Before you go and make any sort of purchasing decision, the reason why I wanted to have this conversation with you is just so that you can get some good information about Indexed Universal Life, and the differences between it and other types of products like whole life.

Remember, there's a lot of information out there on the internet.

But, before you diagnose yourself with what type of insurance product you think that you should be buying, you should meet with a professional that has experience with the types of products you're considering such as IUL.

They can be most qualified to explain to you exactly how IUL works. So, thank you for watching.

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Episode #29: 10 Reasons Not to Buy an Indexed Universal Life Policy [2018 Update] (2024)
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