My buddy Steve called me three weeks ago, all excited because his insurance guy showed him this fabulous “can’t lose” financial product. Market returns when things go up, zero losses when they crash, and tax-free money forever. I pressed him for what it was called. He said, “IUL something.” Did he even know how it worked? I had asked him. Long silence. Yeah, that’s how these sales pitches usually go. Here’s what IUL means: IUL stands for Indexed Universal Life Insurance, which is a financial product that gives you life insurance and some benefits of investing in the stock market.
What Is an IUL When You Strip Away the Sales Talk
All right, so what is an IUL insurance policy? IUL means Indexed Universal Life Insurance. It’s life insurance in disguise as an investment account. Every month or year, you pay premiums. Some of that money covers the life insurance part (your family gets a payout when you die). The remaining part supposedly increases according to stock market performance. The cash value part gets tied to an index, usually the S&P 500. The market goes up? Your cash value grows. Market tanks? You supposedly don’t lose anything. Sounds amazing, right? Hold that thought.
Where This Gets Sketchy Real Fast
Here’s what Steve’s insurance agent had not said until I began digging: there are caps on everything. Say the S&P 500 has a killer year and climbs 25%. Do you know how much you get? Maybe 10%. Maybe 12% if you’re lucky. The remainder is taken by the insurance company. It’s referred to as a “participation rate” or a “cap rate”. I call it them taking your money. Now flip it around. Markets fall 30 per cent during a bad year. You get 0% growth. Not negative, which sounds good. Other than that, inflation’s ticking away at 3-4% in most years, so you’re still losing buying power. You just don’t see it on paper. The insurance company? They are taking the difference in both directions.” When the market’s up big, they keep most of it. When it is down, they are not really eating those losses, as they say.
The Fee Problem Nobody Talks About
This is the point that I started to get really irritated as I read through Steve’s letters. The fees on these items are totally bonkers. There is the mortality charge (the expense for actual insurance). That increases every year as you age. Administrative fees for… existing, I guess. Premium surcharges are merely for paying your premium. Rider fees if you felt like adding some extras. All that adds up to somewhere between 3% and 7% of your money disappearing every single year. Steve’s agent provided him with the chart based on 8% average annual returns. After fees? He’d be lucky to clear 4%. And that’s supposing the market cooperates and he actually hits those caps every year. Good luck with that.
IUL for Dummies – The Version That Makes Sense
Allow me to put this another way. You know the type of carnival game where you throw a ball at milk bottles? The game appears to be fair, but the deck is stacked in favor of the house. That’s an IUL. You’re playing a game where your wins are limited, your losses are prevented (but so is any growth), and the house is taking a cut of everything. Oh, and if you want to stop playing before 15 years are up? You pay a massive penalty to leave. Want to actually win at the carnival? Don’t play the rigged games.
Why IUL (Indexed Universal Life Insurance) Is a Bad Investment – Let’s Be Honest
Look, some financial advisors will defend IULs. Usually the ones who make huge commissions selling them. But let’s get real about the problems here. You’re getting terrible returns compared to just buying cheap term life insurance and investing the difference yourself. Over 20-30 years, you’d probably end up with twice as much money doing it that way. Maybe three times as much. The surrender charges are predatory. Try to get out in the first 10-15 years and you’ll lose a chunk of your cash value. Sometimes up to 20-30% of what you put in. They’ve got you locked in, and they know it. Those projections they show you? Based on historical returns that aren’t coming back. Your actual results will be lower. Way lower. The fine print even says so, but it’s buried where most people don’t read.
When This Might Actually Work (Rare Cases)
I’m trying to be fair here. There are maybe 5% of people for whom an IUL investment makes sense. You’ve already maxed out your 401k and IRA. You’re in a high tax bracket. You need permanent life insurance anyway, not just term. You’ve got money you won’t need for 20+ years. You can afford the premiums without sweating. Even then, it’s debatable. But at least you’re in the ballpark of someone who might benefit from the tax treatment. For everyone else? It’s a bad deal dressed up with fancy charts and projections.
How to Open a IUL Account If You Ignore My Advice
Alright, say you’re dead set on doing this. Here’s what happens. You contact a life insurance agent. They’ll ask about your health, run bloodwork, and do the whole underwriting thing. If you qualify, they’ll present you with policy options. Different caps, different fees, different features. Before you sign anything, and I mean anything, do this. Get a fee-only financial advisor to look at it. Someone who doesn’t sell insurance and won’t make a penny off your decision. Use an IUL calculator online to run different scenarios. See what happens if returns are 4% instead of 8%. See what happens if you need to cash out early. Read the actual policy. Not the colorful brochure. The actual legal document with all the fees listed. It’ll be boring as hell, but it’s your money.
The Commission Secret
Want to know why agents push these so hard? First-year commission on an IUL runs anywhere from 50% to 100% of your premium. Steve was about to pay $10,000 a year. His agent stood to make $10,000 immediately, plus trailing commissions for years. Term life insurance? The agent makes maybe 30-50% of the first-year premium, and the term is way cheaper. So on a $500/year term policy, they make $200 once. On a $10,000/year IUL, they make $10,000 right away. You do the math on what they’re motivated to sell you.
What Steve Actually Did
Steve didn’t buy the IUL. After we spent an afternoon going through the paperwork and running real numbers, he bought a 20-year term policy for $600 a year. Set up automatic investments into a low-cost S&P 500 index fund with the other $9,400 he would’ve spent on the IUL. His term insurance is more coverage than the IUL death benefit. His index fund has lower fees (0.04% vs 3-5%). He can access the money anytime without surrender charges. And over 20 years, he’ll probably have double or triple what the IUL would’ve given him. Sure, he loses the tax-free growth angle. But he gains flexibility, lower costs, and way better expected returns. Trade-offs are worth it for him.
My Take After Looking at Dozens of These
What is an IUL really when you cut through everything? It’s a mediocre life insurance policy stapled to a mediocre investment account, sold at premium prices because people don’t understand it. The insurance part costs more than term insurance. The investment part performs worse than a simple index fund. The only people who consistently win are the insurance companies and the agents selling them. I’m not saying they’re a complete scam. They’re legal, regulated products. But they’re sold way more than they should be, to people who’d be better off with simpler, cheaper options.
If someone’s pitching you an IUL, ask them this: “If I buy term insurance and invest the difference, what would my results look like?” If they dodge the question or say it won’t work, that tells you everything. There’s no magic in finance. Products that promise great returns with no risk are making their money somewhere else. Usually out of your pocket, through fees you didn’t notice and caps you didn’t understand. Be smarter than I was when I first heard about these things. Ask questions. Get second opinions. And remember: if it sounds too good to be true, someone’s probably getting rich off you believing it.