Author Topic: Indexed Universal Life Insurance?  (Read 1090 times)

MoneyGoal

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Indexed Universal Life Insurance?
« on: March 02, 2019, 08:40:21 PM »
I asked about this on:

https://forum.mrmoneymustache.com/ask-a-mustachian/indexed-universal-life-insurance-102431/msg2293569/#msg2293569
The pros and cons of indexed universal life insurance:
Pros: (1) tax exempt (2) market risk control - there is return rate floor  (3) insurance - death, long term care (4) Investment
Cons: (1) return might be lower than market (return rate cap) (2) Premium high (3) Cost of insurance increase by age. It is not 'locked'

And the replies were, just do term.

Anyone bought Indexed Universal Life insurance? If yes, why did you do it, and what are your thoughts about it?

pbkmaine

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Re: Indexed Universal Life Insurance?
« Reply #1 on: March 03, 2019, 02:43:34 AM »
The reason people keep saying “buy term” is because any other form of insurance is very expensive. There are all kinds of costs cleverly embedded in the policy. It’s the reason insurance agents are so very enthusiastic about selling it.

smallstache

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Re: Indexed Universal Life Insurance?
« Reply #2 on: March 03, 2019, 06:17:49 AM »
As life insurance, the product sucks.  You correctly point out that the cos of insurance increases by age.  It isn't much of an increase per year, but over time the increase is huge.  More and more of your payment each year goes towards the insurance component and less goes towards the investment.  When you die, the beneficiaries receive the face value and the insurance company keeps the investment component, so each year the portion of the policy that truly represents the insurance goes down.  Example on a $500,000 face-value policy:

- In 2019, after a few years in force the cash value has grown to $50,000 and the death benefit has grown to $510,000
- In 2029, the investments have done well and the cash value has grown to $150,000.  The death benefit has grown to $580,000.
- It all looks good until you plot out the death benefit growth versus the cash value growth.  If you die in 2019, the beneficiaries get $510,000 at a "cost" of $50,000, so you truly net $460,000.  In 2029, you only truly net $430,000 ($580,000 - $150,000).

As a savings mechanism, the product is okay.  In the example above, you were mathematically better off cancelling the policy and paying the deferred taxes on the growth.  If you are already going to do that, why not invest in a tax-favored (or even taxable) account?  the answer is fear--the floor is set to play on the customer's fear of the next crash.

But, keep in mind the company charges lots of fees and employs an army of actuaries to ensure it isn't going to lose money on the deal.  Therefore, the ceiling is set to ensure company profit.  Calculate your life expectancy and compare the ceiling to the average returns of the index (include dividends) over that time versus the ceiling.  Then think about all the bad things that happened in the market during that time and wonder how the index still beats the ceiling.

Nate79

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Re: Indexed Universal Life Insurance?
« Reply #3 on: March 03, 2019, 08:26:35 PM »
It is not tax exempt. It is tax deferred. If you cash out gains it is ordinary income. If you borrow against it there is no tax but there is a cost to borrow. Also, the insurance portion itself is much more expense then shopping competitive term insurance.

It is a horrendous product.

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MoneyGoal

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Re: Indexed Universal Life Insurance?
« Reply #4 on: March 06, 2019, 11:19:18 AM »
Thanks for the inputs. What about long term care in Universal Indexed Life insurance...and living benefits in term life insurance?

Even if I get term life, is it good to include the living benefit? Purchasing separately next time would be much more expensive, right?

yachi

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Re: Indexed Universal Life Insurance?
« Reply #5 on: March 06, 2019, 12:09:24 PM »
I just wanted to add my 2 cents on insurance.  We have 4 kids (age 9 to 4 moths), a currently-at-home mom, and I'm the sole breadwinner and we carry no life insurance on ourselves.

We're on this forum to retire early, right?


yachi

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Re: Indexed Universal Life Insurance?
« Reply #6 on: March 06, 2019, 01:35:19 PM »
To clarify, I looked into getting a term life policy, so I looked into what Social Security would provide, and what the 'Stache would support.
Social Security would provide enough income for my wife to raise our children to college age.  We're also about 80% of the way toward FIRE.  I expected to end up with a missing need that insurance could fill, but I found there was nothing missing.
Insurance companies make calculations knowing about all the statistics, and price policies to ensure they don't lose money, so your best bet is to get the minimum for what you need.

Telecaster

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Re: Indexed Universal Life Insurance?
« Reply #7 on: March 06, 2019, 01:55:01 PM »
Thanks for the inputs. What about long term care in Universal Indexed Life insurance...and living benefits in term life insurance?

Long term care in a universal index life insurance policy is a horrible idea.   

MoneyGoal

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Re: Indexed Universal Life Insurance?
« Reply #8 on: March 06, 2019, 02:05:27 PM »
Thanks for the inputs. What about long term care in Universal Indexed Life insurance...and living benefits in term life insurance?

Long term care in a universal index life insurance policy is a horrible idea.   


Can you explain why? It is one of the selling point.

pbkmaine

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Indexed Universal Life Insurance?
« Reply #9 on: March 06, 2019, 02:19:57 PM »
Thanks for the inputs. What about long term care in Universal Indexed Life insurance...and living benefits in term life insurance?

Long term care in a universal index life insurance policy is a horrible idea.   


Can you explain why? It is one of the selling point.

Because a very large percentage of the money you put into these types of policies go into the pockets of the insurance companies and their agents and do not benefit you.

Telecaster

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Re: Indexed Universal Life Insurance?
« Reply #10 on: March 06, 2019, 02:54:34 PM »

Can you explain why? It is one of the selling point.

Where to begin?  First of all, in general it is better to self-insurance when you can.  When you can't self-insure, then buy insurance.  Long term care is one of those areas where there is a pretty narrow set of doors when it makes to sense to buy, rather than to self-insure.   Have you done the cost

Next, they claim there is a floor.  But there isn't.  There are substantial fees which means you start off with a loss.   As we all should know, the market can trend sideways for long periods of time, or maybe even decline over a period of years.  Additionally, the cost of the premium increases with age.  If either one or both of those things happen itís entirely possible that your cash accumulation account will dry up. 

Next, you don't actually get market returns.  They don't include dividends (which is about 30%-ish of the total return), have participation limits, and/or caps that drastically limit your upside.   

Finally, do you really understand how they work?   Do you know how they calculate how the returns are capped?   Do you know how they calculate the return guarantees?  Do you include the costs of fees when looking at the potential returns?  How often can the insurance company change the management fees? 

If the answer to those questions is "no" then you don't know what you are buying.   Never buy anything if you don't know what it is.   Especially financial products.   




TomTX

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Re: Indexed Universal Life Insurance?
« Reply #11 on: March 06, 2019, 06:16:10 PM »
Just do term.

Seriously.

If you need life insurance at all.

Travis

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Re: Indexed Universal Life Insurance?
« Reply #12 on: March 06, 2019, 08:27:32 PM »
Life insurance is "in case you die."  If it's being used for any other reason, run away. It's the most expensive way of doing whatever that thing is.  My mother started a "college fund" for my son.  She died before she could put more than a few hundred dollars into it.  It was transferred to me, and then I read it.  A 20-year CD might have been more productive considering all the maintenance fees, eventual payout, and opportunities to surrender the whole pot if you miss a payment.  They called it a college plan, but it was just an insurance policy with a disarming name.  They were kind enough to return most of the principle, but if we continued to pay into it what they were asking we would have just been pissing away returns.


Car Jack

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Re: Indexed Universal Life Insurance?
« Reply #13 on: March 07, 2019, 07:32:02 AM »
Sigh

I fear that you're fishing for anyone to say "oh, index universal life is great" and then you'll go buy it.  Some points.

1) You say you don't need term because between ss and your stache, your family will be fine.  Translated....you don't need any life insurance.

2) You're ignoring the costs and the benefits.  Let me break it down.
Costs:  The moment you buy....10% goes to the salesman.  Then the fees are with you forever.

3) You DON'T get the return of the index.  To make up numbers, for an S&P following index UL policy, say that the S&P goes nuts and is up 50% next year.  The policy will have a cap....likely 8%.  So you get 8%, right?  Wrong.  You get 8% minus 2% in fees and the good part....wait for it....you get NONE of the dividends.  So your "investing" just made the insurance company a boatload of money.

4) Tax free?  No.  It isn't.  Only if you die and someone gets the death benefit.....but for 1/10th the cost, you could have bought term.  If you collect the cash value, ever, the only way that it's tax free is if the cash you take out is less than the premiums you put in.  So let's see......how is that a good investment?  You put in more than you took out but weeeee, you pay no taxes.  Heck.....put your money in a loser stock that tanks, then sell at a loss.  You don't pay taxes in that case either, but wait......you can take a loss and get money back in your tax refund.

In short an IUL policy is for suckers.  If you're a sucker, then it's for you.  It would be less painful if you simply go with your insurance agent to the BMW and let him pick out the new 3 series that you're paying for.

YttriumNitrate

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Re: Indexed Universal Life Insurance?
« Reply #14 on: March 07, 2019, 07:39:32 AM »
Life insurance is "in case you die."  If it's being used for any other reason, run away.
Whole life policies do actually serve a good purpose in the estate planning of high net worth individuals.  It's just that most of these policies are sold to young and broke individuals rather than bought by 75 year olds with $50 million estates.

Telecaster

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Re: Indexed Universal Life Insurance?
« Reply #15 on: March 07, 2019, 12:01:21 PM »
Happen to randomly stumble onto this on another board.   A scathing review of analysis of these products:

https://www.advisorperspectives.com/articles/2017/01/23/as-seen-on-tv-financial-products-you-should-avoid-ty-j-young

TLDR;  They are even worse than you thought.  The author opines they are borderline criminal. 

Nate79

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Re: Indexed Universal Life Insurance?
« Reply #16 on: March 07, 2019, 08:35:39 PM »
Thanks for the inputs. What about long term care in Universal Indexed Life insurance...and living benefits in term life insurance?

Even if I get term life, is it good to include the living benefit? Purchasing separately next time would be much more expensive, right?
If you want long term care insurance just buy long term care insurance. Complicating and intertwining two products is not a good idea, especially when one of them is already a heaping pile of crap.

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