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Wednesday, October 01 2014

I found an interesting article published recently regarding the IUL, my personal favorite financial product. I’m always looking for new information, changes in the industry and particular carriers, and to evaluate both positive and negative reviews on the concept. To be sure, this is a concept, with many variables between particular product providers (companies) and the products they offer. It is a very flexible product, which is customized to each client; it is not a cookie-cutter or rate-book product. This causes it to be misunderstood and misapplied by some financial experts who are more familiar with non-customized products such as mutual funds.

I have highlighted a few interesting comments in this article and included my responses. Feel free to form your own opinion about this perspective!

                                                                                    Kellie Austin, PLIA, Licensed and Insured

The Skyline Group

Indexed Universal Life Insurance: A Rip-Off with a Fancy Name

John Jamieson

May 15th 2014 9:15AM dailyfinance.com

How would you like to put money into a financial product that lets you benefit from market gains, but never feel the pain of its losses? The money and growth inside the policy will be 100 percent tax-free for life. That's the seductive pitch often used to tout an investment called indexed universal life insurance.

Based on that sales pitch, it would be no wonder if your response were, "Sign me up for that right away!" Unfortunately, all that glitters is not gold. The sales materials for your IUL policy will almost always be illustrated with unrealistic compounded rates of return. But as we all know, stock market growth does not simply compound over time. Sure, you can measure an "average rate of return," but in the real world, prices oscillate, and performance can be a creature of timing much more than investing.

In fact, an indexed universal life insurance policy will almost always leave you holding the bag.

Let me clarify first that these are entirely different investments than the "properly designed 
whole life policies" that I wrote about back in March. When you invest money inside an IUL policy, you're setting up a life insurance policy with an annual renewable term cost of insurance. The extra money placed in the policy goes into sub accounts, and those funds will generally follow an index (or indices) in some form when that index increases in value. This structure will cause the cost of insurance to rise every year, which is why most people let these policies lapse in later years.

One Man's $50,000 Premium
A retired neurosurgeon at one of my seminars told me about his IUL nightmare. He invested substantial money in an indexed universal life insurance policy when he was 49. He funded this policy for 20 years(1), and the projected profits never seem to materialize.
(1) The IUL has only been around for 17 years, and I don’t even know who had one that long ago. It is generally a 10-15yr old product, and as any new product, the first few versions had a few design issues. To reference that this attendee had already had one for 20 years is simply untrue, and the author’s blatant false-hood causes me to question anything else this “expert” writes.

Among the reasons why:

·         The projections that were illustrated for him were not realistic.

·         The expenses of the insurance and many other hidden fees come out daily(2)

·         The guaranteed growth of 3 percent was only payable at policy cancellation(3)

(2) Every financial product has fees. The IUL discloses all fees, unlike many investment accounts, such as 401(k), which, by law, do NOT have to disclose the majority of fees. Fees are charged monthly, and a well-designed IUL will earn interest on the entire amount of premium – before any cost of insurance.

(3)This sad soul may have gotten a product with a delayed guarantee, similar to an annuity; however, this isn’t true for any of the products I offer, nor any I have evaluated.

Much worse was the bill when he turned 70. This policy was structured with a 20-year guaranteed term policy for the death benefit, and his premium hit almost $50,000 -- and not one nickel was going into any cash value.

Surely, something must be wrong, you say? He assumed it was clerical error until he called the carrier and was told that is how those types of policies are built. In the 21st year of the policy, the premium was supposed to be almost 100 times the first year's premium, and it was only going to rise further, since term insurance gets more expensive as people age.(3) This man closed the policy down, which meant he no longer would receive the death benefit, and even the pitiful gains his investment had realized were now taxable because he'd lost the umbrella of the insurance policy tax structure.

(3) This indicates that the policy was either designed poorly or the client was never informed on how it should be managed. No IUL has a substantially increasing cost of insurance, if it is designed and funded to plan – even with a low-performing index or market. More likely, the client didn’t understand or fund properly, and is relating information verbally without the policy details to confirm and explain. The fraud here is for the author to use verbal examples by someone who isn’t even his client to develop an opinion and present his expertise on this issue.


Lousy Ideas, Without Clear Numbers
Welcome to the wonderful world of indexed universal life insurance. I can't wait to see in this articles comments that somehow, one of you knows about a "special product" that has a "no lapse" guarantee or some other new (and yet old) wrinkle that allegedly makes these lousy policies better(4). These dogs with fleas are generally sold to those with high incomes, such as doctors, as a way to put loads of money away in a tax-free environment instead of the limitations of an individual retirement account or 401(k). The illustrations are not realistic and fail to speak plain English as to what is going to happen with these policies.

(4) Anyone who is vehemently against a class of products in a black and white dynamic has already demonstrated a lack of logic or expertise. This is a typical blanket assessment of an author or spokesperson who has built a career around generic statements which can never be related to a specific product or individual. Let’s do a comparable analysis of the prospectus for client’s funds inside a 401(k) or mutual fund account prior to the 53% drop in the market of 2008/2009. The IUL never participates in the down-side of the market which allows all illustrations to be far more reliable than traditional investment projections.  

If you have been sold one of these policies, examine the illustration you were shown and notice the cost of insurance cannibalizing the cash value in the later years of the policy. Study the cost of insurance, which will never be plainly spelled out in dollars and cents (your first clue something is amiss) but rather in decimal points. Watch how that number grows in the later years.

If you have the misfortune of having one of these policies, you might still have an option to roll into a 1035 tax-free exchange. It would allow you (assuming you qualify health-wise) to exchange your cash value in your IUL policy into a properly designed whole policy with solid guarantees and fixed costs all disclosed up front.

John Jamieson is a best selling author

This author certainly believes what he is saying, however, perspective has a funny way of blinding people to a reality with which they don’t agree.

There is no perfect financial product. Understanding the “lock and reset” feature to prevent loss in a down market, and the arbitrage capacity to be your own bank and provide income regardless of how long you may live are just a few features that do make the IUL a unique and incredible financial product. It should be designed and presented by a licensed professional who understands not only the big picture features, but is able to select the best carriers and versions of the IUL to meet the client’s particular needs and financial goals. As with any financial product, it is not static, it requires some level of maintenance and upkeep between the agent and the client over the years to ensure changing needs and financial ability to fund are in line with the product design. The IUL is the most flexible product to allow it to conform to these changing needs and goals.

*Kellie Austin is a professional life insurance agent, licensed in GA, TN, FL, VA, WV, NC, MI and OH. She is the owner of The Skyline Group and represents multiple carriers of her choosing, based on the best market availability. She is not salaried or a paid marketer for any provider. Kellie is a single mother of five school-age children and owns the products she recommends for clients, based on her personal needs and commitment to protecting herself and her family against risk and providing for her future financial goals.

The Skyline Group

www.TheSkylineGroup.net  Kellie@KellieMarie.net

Posted by: Kellie Austin AT 01:54 pm   |  Permalink   |  Email
 
 
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