FAQ
The most commonly asked questions and their answers.
An IUL is an Indexed Universal Life policy, which can outperform your 401k. According to an article entitled "Juicing Your Life Insurance" published by the Wall Street Journal in 2010, it’s “This year’s hottest life-insurance product …well-suited to an era of sudden ‘flash crashes’ and overall uncertainty: it appeals to people eager to capture stock-market gains while avoiding undue risk.” It gives an individual an option to enjoy gains when the market is up without any risk of loss during times when the markets are down.
If the IUL is properly designed it should cost less than the cost of owning an annuity, a 401(k) or a mutual fund. But this only happens if you use the right IUL and the agent fully understands how to properly design it. In The Better Money Method: A Better Plan for Retirement you will find a chart that details funding a 401(k) for 40 years at $8,000 a year earning 7.5%. At the end of the 40 years Wall Street would have made more money off your 401(k) then you did. After 25 years a properly funded IUL will cost only 10% of what the same money in a 401(k) would cost in fees.
Just because you have not heard of an IUL does not mean they are too good to be true. If you find a knowledgeable agent and take the time to understand the IUL you will find they are best kept secret in retirement planning.
There are many reasons why people don't do this. Not all of them are good reasons and others are valid.
"Bad Reasons" Not to do an IUL
1. Retirement planning is hard work and can be complicated and intimidating. It's easier to just stick with a 401(k) or IRA because “everyone” is doing the same thing.
2. Advisers recommend alternative strategies or plans because they make more money when they put you into something different.
3. Fear of the unknown or unfamiliar.
4. Hesitancy to give up the tax deduction received when you contribute to your 401(k) or IRA.
5. Enticed by employer match.
Valid Reasons Not to do an IUL
1. Ineligible because of health issues
2. Lack of ability to build up the cash value needed to achieve the best possible rate of return.
No, some have caps and some don’t, some companies have been in this business for a long time and some are new to the industry. IUL’s sales are one of the fastest growing products ever introduced to the insurance industry. Many companies that said they were never going to sell them years ago are now selling them. Therefore, they don’t have the track record to know what they are doing and some are offering more than they can deliver in order to get into the market. An IUL has many moving parts therefore it is very important you deal with someone who is very knowledgeable on the subject.
There are many different kinds of annuities, the best are something called a hybrid annuity. This annuity offers an option to earn all or part of the gain of the market without the risk of being in the market.
So to answer this question, I took one of the top selling indexed or “hybrid” annuities in the country and ran an illustration for a typical 55 year old inventing $100,000 into that annuity and holding it for 10 years before starting withdraws. Then I took the same company (which also has one of the best IUL’s in the country), used the same index and used the same 55 year old and the same assumptions. After 10 years I compared the projected income from both – The IUL produced almost 100% more income then the annuity.
Life insurance companies are what is known as a legal reserve company. That means they must have at least a 1:1 reserve ratio, meaning for every dollar of liability they have they must have a dollar of assets. The ones I prefer have much more.
Now compare that to your local bank which is only required to have 10% in reserve. Meaning for every dollar you put in the bank they can loan out 10! Let’s also compare the reserves required of insurance companies to those required of your favorite broker. They are only required to have 2% in reserves! That is why you saw banks and brokerages go broke or get bailed out by the government in 2008 but not a single insurance company went broke.
James Hunt, an actuary with the Consumer Federation of America as saying about IULs, “One needs a PhD. In finance from MIT to completely understand them.” While I believe that may be a little bit of an over statement, not all policies are created equally and not all agents are truly knowledgeable.
The number one reason you probably haven't heard of this is because of the pack mentality and the idea that if “everyone is doing a 401(k) it must be right”. Here’s an interesting quote “When all think alike, no one thinks very much” – Walter Lippmann. I think that says a lot about why you might not heard of an IUL.
There is also a more sinister reason why you might not have heard about an IUL which is that it's not in the best interests of Wall Street to make this known. Wall Street makes billions on your 401(k) and IRA accounts in fees alone and your adviser gets significant commissions every year without doing any work.
Something interesting to note too is there is a little known double standard that exists in corporate benefits provided to U.S. based executives. If you go to work for a large company you hear about all the wonderful things the company 401(k) can do for you.
However, if you are a top executive you are shown something different. In addition to the 401(k) you are offered a supplemental retirement plan on top of the 401(k) called a COLI – company owned life insurance. The vast majority of these plans are fully funded with IUL’s. Studies have also shown that these top executives only purchase mutual funds about 50% of the time. It's time to ask, "What's in your 401(k)?"
Yes. It's possible provided you have enough money in your qualified account(s). It is definitely a complicated process that depends on several factors that need to be analyzed on a case by case basis. But the bottom line is I do this all the time for people and still get them a higher rate of return.
No, a floor of 1% or 2% is very expensive to the insurance company so the net to you is less. The goal of every IUL should be to generate the maximum income possible for you, the policy-holder.
Not true, quite the opposite is true.
One of the things I love about an IUL is that I can see (and disclose) 100% of all fees and expenses within an IUL. That is not true of an annuity and it is not true of a whole life policy. One of the things I despise about how whole life sales are made is the emphasis agents and marketing puts on dividends.
I recently saw an agent explain how they were great because they outperform the interest rate on bonds. He was talking about the policy's "dividends."
In fact, that's not true at all. Consider U.S. Treasury Decision No. 1743, which states, in part “Dividends declared by participating companies (whole life companies) are not dividends in a commercial sense of the word, but are simply refunds to the policyholder of a portion of the overcharge collected. It was necessary, in order to secure new business, to convince the prospective policyholder of the desirability of the same, and that this commercial necessity had resulted in the companies making misrepresentations of the facts as to DIVIDENDS.”
No, because of how the insurance company guarantees the floor and sets the cap, the insurance company does not get any income above the cap. This is a unique process I have not seen used anyplace else. If you fully understand it, it is almost magic because neither the insurance company nor the client ever has their money at risk. To learn more Click Here.
You can work with your current insurance agent or financial adviser. Feel free to share the summary of my book with them to help explain what you want. Many of them have read my book. Please be sure to make certain they are knowledgeable and understand what you want.
Alternatively, you can get started by sending me an email with any questions you may have, schedule a 15-minute conversation or just picking up the phone and giving me a call. I'm happy to help!
