Is it a wise decision to invest in an Index Universal Life Policy?
I'm considering an IUL policy. I am 27 years old and want to use it not only as a retirement plan, but as an investment. What is your take on IULs? Do you have one?
First, do you have a need for life insurance? If so, and you can afford it, a IUL can be a good choice. I personally have an IUL because I have a need to provide life insurance, and I like the cash value build up for retirement. With that said, it is not the only thing I have for retirement. The IUL is the fixed income portion of my portfolio and the equity and bond portions are in my 401(k) and Roth IRA. I'm sharing this with you to suggest that the IUL should be only a part of your retirement plan, not your only retirement plan. Also, shop the insurance companies. You want one with easy to understand index accounts, financially sound with "A" ratings or better from A.M. Bests, and with an experienced agent who has been in the insurance business for a while. Good Luck, at your age, if you stick with it, you will experience some substantial compounding and have a nice nest egg in your later years.
In a word, NO. I have my insurance license and it is a bad idea. And life insurance is not an investment and shouldn't be sold that way. That is why agents are required to call all monies you put into the policy "premiums" and not investments. You are young and need to be more aggressive with your investments anyway.
With Fixed "Indexed" Insurance or Annuities, they are all designed to pay around 3%-4% once you break down the math. Whether they have monthly averaging or caps at 8% or whatever, all of those limits are meant to cut the overall return in half. That's what monthly averaging does. And if you cap at 8%, you don't participate in big up years and make zero in negative years, and make 3%, 5%, in mediocre years. So when you average those together, what do you get? Now, if you hit a big uptrend for years, I suppose you could make somewhere near the cap, but the odds of that happening are small and you would have made far more money in the markets. And yes, I have heard the marketing mantra that you have "much of the upside but none of the downside." Again, you are young and I don't believe you have nearly as much upside as they state. Whatever the minimum required illustration they must show you, then use that as you guide and even add one or two percent.
The first question you need to ask yourself is, do you even need life insurance? What risks are you insuring? If the answer is yes, then go buy cheap term and invest the difference. You will be far better off and won't have the internal carrying costs of the permanent policy which is around 2% to 3%.
Also, don't buy 30 year term because all term is convertible. So buy 10 year term and then 9 1/2 years into it, if you still need life insurance, get underwritten again and do another 10 year term. If you are terminal which would be rare, then convert. Repeat this process 3 times and you overall premiums will be much less than the 30 year term. Sure, the last ten years will be more, but the average is less AND you compound the early years difference for 20 years. Not only that, but many people won't need the insurance the last 10 or even 15 years especially if they have saved and self-insured.
Hope this helps and Best of Luck, Dan Stewart CFA®
Maybe, but probably not. The question to ask is, do you need insurance? And is it the cheapest way to get it? I don't have one, for me the numbers don't add up. Buying term and investing in low-cost retirement investments in retirement accounts is the best way to do it. The fees with IULs are just too high to make sense for most people.
I have been doing this for years and I can think of 2-3 clients where IULs or an Index Annuity made sense. The main problem is insurance is an expense, not an investment. Investments are capital-raising instruments businesses use to fund the selling of a product or service. Insurance products are artificial, not natural capital-raising products. They are designed first and foremost to make money for the insurance company. A lot of smart people make sure these products don't lose money.
Before you "invest" in one, run the numbers. They will show you illustrations that may or may not be realistic. Compare what they show you to buying term insurance, which will be very very cheap for you, and investing in an index fund or ETF, like SPY or EFA.
I hope this helps. I am sorry to be cynical, but I have studied these products since I did the CFA over 10 years ago and in most cases, they are just too one-sided. And in many cases they seem to be overly complicated on purpose.
Mark Struthers CFA, CFP®
This will be a great investment IF you:
- Are in the 33% federal tax bracket
- have maxed out your 401(k) contributions
- can NOT contribute to a Roth IRA because of your high tax bracket
- Minimize the amount of insurance in the policy
- Maximize the amount of investment (but don't go over the MEC limit)
- Have an extremely long time horizon
I'm assuming that is not the case at 27?
There is an order of operations in that list if you were paying attention.
Don't listen to Dave Ramsey or Suzzie Orman about life insurance, they are trying to sell books to that masses earning under the 28% federal marginal tax bracket. The tax benefits of the life policy are very valuable. The Indexing strategy are outstanding on the inside of the IUL products. The participation rates and caps in the life products are outstanding. Check out Tony Robbin's book, "Money, mastering the game" (chapter 5.5, I think). He has a great section in there about how IUL works and what the benefits are to the policies.
Here is what you need to watch out for:the life insurance agent with "commission breath!" He will try to get you to push up the face amount as high as possible to get more commission out of the sale which will minimize the investment instead of maximize the investment. He needs to feed his family next month, and you're his meal ticket! Look for someone that is a Fiduciary and has your best interests at heart to advise you.
The moral of the story is to buy some term insurance that is convertible, if you even have a reason to insure yourself, and convert that policy to an IUL later in life when you've met the 6 conditions listed above. Statistically speaking, it won't happen and you'll end up with a great portfolio of investments to retire on in your 401(k) and Roth IRA.
I wouldn't do it, but it's hard to say if it's suitable for you without knowing more information. Here are some basic economics you should consider when analyzing this:
1) The most attractive feature of life insurance as an investment is the tax-deferred growth potential within the product. Without being required to pay dividend and capital gains tax, the idea is that there will be a less drag on compounding potential. However, this also means that the portion of your future withdrawals that represents investment gains will ultimately be taxed at your ordinary income tax rates.
2) Because of #1 above, life insurance is more appropriate as an investment if the individual has already exhausted each of their other tax deferral methods (like investing in IRAs and other workplace retirement plans, 529s for college planning, Health Savings Accounts, etc.). These other methods are more attractive than investing in life insurance because they typically have lower costs, greater flexibility of investments, and better withdrawal flexibility.
3) Finally, the combination of 1 and 2 above leads me to this; if you've maxed out the tax deferral resources you have and you have enough assets in taxable accounts that you actually think to yourself, "capital gains tax and dividend income taxes are killing me", then it might make some sense to use IUL or an annuity in your financial plan. If you don't say that to yourself, then I'd shift your focus elsewhere.
Of course, these are just general comments for informational purposes only. If you'd like to get into the specifics, feel free to shoot me a message and I'll be happy to provide what I can.
Adam Harding, CFP