Should I get indexed universal life insurance (IUL)?
I met with a financial advisor that says he is a fiduciary. He wants me to consider an indexed universal life insurance along with a Roth IRA and contributing to my company's 401(k). I am a 30 year old with $30,000 in fluid assets who is looking to buy a house and get married soon and want to start putting my money to work. Is an IUL a good idea?
I am not a fan of insurance products that try to masquerade as investments. Often, they are better for the sales person selling them to you (because the commissions can be high) than they really are for you. You will probably get other answers that dispute me, but that's the way things are.
You should only carry enough life insurance to fill the financial hole that your death would make in someone else's life. Don't buy insurance until you have a spouse and a home. Then, you should carry enough to allow your spouse to continue to have the same lifestyle that you did as a couple while you were alive. (If kids come along, just buy more insurance.) Term life is very cheap at your age. Get an appropriate policy and you can invest the difference between term premiums and the cost of an "insurance product". Most likely, you will get better returns because UL fees can be high.
But, that requires discipline. UL is a form of forced savings and unless you can discipline yourself to "pay yourself" every month by putting a regular amount into your investment account, you may find yourself worse off over the years. It's a good sign that you have met with an advisor and posted a question on Investopedia, so I have high hopes for you. Just beware of a slick sales pitch -- and I am guessing you feel the same way, or you would not have asked us.
Don't put the cart before the horse. No financial advisor should be recommending a product until you and he have become clear on your needs, goals, and comfort level with different levels of risk. You really need to go through a process of financial needs analysis to generate the “job description” of every product in your portfolio. Once you have these specifications, it will be much easier to decide on the suitability of different product recommendations.
NO!!! The first question you need to ask yourself is what risk you are trying to insure. Do you have kids? Does your fiancé' work and is she independent? If not, how would you want to take care of her if something happened to you? So if you do not have any kids yet or big liabilities to cover, and your fiancé is fairly independent, I don't see the need yet for a lot of insurance. But if you say you want to take care of your fiancé for 5 or 10 years you could argue that maybe you do need some. Point is, you need to back into the "need" for insurance. Those permanent insurance products, especially the Indexed Life or Annuities, are very expensive. Their ongoing carrying costs, or M&E (mortality & expenses), are very high. I know, I know, "but the sales pitch - you get most of the gains but none of the downside." Well, you won't get the downside, but you won't get hardly any of the upside either. Just in the past 2 months I have helped two different people get out of their indexed products as they were not happy with the results after 5+ & 9 years. They both found me on Investopedia strangely enough.
You've heard the old adage by your Priest, Rabbi, Grandfather, Teacher etc... "buy cheap term and invest the difference." Guess what, they were RIGHT! As long as you DO invest the difference you will have a LOT more money at the end of the day. If you are just going to spend and not invest the difference, then buy the expensive, clumsy policy because at least you will have some cash value (but not for YEARS). First check to see if you have group term at your employer as group term is the cheapest. Max that out first then see how much more you need.
And when you do get a mortgage, they actually have decreasing term that can fairly well match your mortgage payments. You don't hear about those much because there is no big commission & then they have to deal with an amortization schedule. Look, you could buy a 10 or even 20 year term with double the death benefit for less, invest the difference and "self-insure" over time. The last 15 years of my Dad's working career, he had no life insurance anymore as he self-insured over time.
Lastly, it is hard to say your advisor is a "fiduciary" IF he is suggesting a high commission, long surrender penalty product. I would respectfully beg to differ. You want a fee based only advisor who only gets paid by you period. An occasional cheap term policy as your life changes is ok. It is about strategy not products. By the way you asked the question, I think you are or have already figured that out.
Congrats on your marriage and getting your financial future started so early.
Hope this helps and best of luck, Dan Stewart CFA®
First of all, congrats on the big engagement and decision to purcahse a home. As a side note you should carefeully consider your mortgage options carefully to allow for ample room in your monthly cashflow for things like insurance and home repairs.
Remember, your risk of death is 100%...I don't know of any person that got out of here alive.
It is perfectly prudent to buy permanent life insurance at your age and don't let anyone tell you otherwise. A good advisor, whether a fiduciary or not, (whether fee only or not), should be addressing this with you. No one has a crystal ball into the future including myself (and including a fee only advisor) and to not have any permanent life insurance in place ever is not prudent. It's even foolish if you have a family in my opinion. You do not know your time of death and therefore it is impossible to predict your financial situation or obligations at the time of your death. In just the past 10 years how much has your financial situation changed? Now imagine the changes in 40, 50, 60 years? For a relatively small premium at your age you can hedge against this and also build some wealth (although much more slowly and conservatively) in the process. But thats ok, you want safe money here.
Remember, life insurance should be financial certainty for an uncertain future.
The main question becomes which type and what amount? That is hard to say as there are many different flavors of permanent life including indexed universal life. As a general rule in my practice I do not utilize IUL very often (in fact almost never). IUL is extremely complex. Have you looked at the product guide for these things? Between index selection options, caps, participation rates, floors, and the fact that the insurer can change some of these items makes IUL a beast with many moving parts. They are generally principal protected products meaning you will not be directly invested in the financial markets so you will not experience market loss. Is that what you want to achieve here?
So to answer your question it is not necessarily a bad thing to be considering life insurance. I think you might find much simpler products in the market that could fit your situation more pragmatically. Also, term life insurance could also be appropriate once your life insurance need becomes much larger if you were to have children.
I think you will see a lot of comments from advisor say NO don't buy the insurance, just as a general comment. I'm not opposed to using a Indexed Universal life which I often call the RICH PEOPLE ROTH. Starting at 30 the future tax fee income could be huge.
But you mentioned buying a home. Before starting an IUL make sure you have enough money for the home down payment and your other non-retirement financial goals. Normally I wouldn't recommend a IUL unless someone needed the death benefit AND was maxing out their other retirement account like your 401(K) and ROTH.
Beware that the advisor will likely make a nice commission selling you this insurance. Not a reason to not buy it, just something you should be aware of.
I'd think you may be better off starting with convertible term insurance to cover you life insurance needs (you will be getting married and buying a house), that way if you run into health issues you can later convert it into a permanent IUL policy.
Best of luck