Is term insurance more suitable than an indexed universal life policy for someone in their thirties with three kids?
I have an indexed universal life policy. I realized it's not a good option for me because I could end up losing a lot of money in the end. The agent who sold me the policy promised returns and cash value growth. But the more research I do, the more I learn about the fees, caps and participation rates involved. Would term insurance be more suitable for me? I have three kids and I'm in my thirties.
I am a big advocate for term insurance. I think the only time you really need any form of permanent insurance is when you have a permanent need or a permanent want. Nothing you indicated suggests as such. Instead with three children you likely need quite a bit of death benefit on you and likely aren't getting the appropriate amount due to the costs of your indexed universal life policy. I would rather see you allocate those dollars to one of two places. Either A. getting more less expensive term insurance or B. simply invest the rest in traditional investment vehicles. If you go with option A. I'd spend the time to think through the right death benefit for your children and spouse you deem appropriate. Then I'd figure out the term worth covering, likely something like 20 or 30 year term policy. Think that will get you on your way.
I'll admit to being a big fan of Cash Value Life insurance which I call the RICH PEOPLE ROTH IRA - but this only for my client who have essentially maxed out everything else. 401k/savings for a house/ college for the kids etc - and still need/want to save more in a tax deferred manner. This strategy is more about cash value than life insurance.
From your questions- (and fact that you have 3 kids) I'm guessing you actually NEED A LOT OF LIFE INSURANCE. Ideally you would have something like 10-15 times your annual earned income in Life Insurance. Maybe more if you have a lot of debt, or a lot of kids.....who you want to make sure are taken care of and sent to school.
If I had to guess you could put them insurance premiums to better use with a term policy and saving the rest elsewhere. I'm also guessing the Indexed Universal life policy has a large surrender charge so you may need to strategically wind down that policy to get the most value out of it. You can probably drop the death benefit a bit each year, and have the cash value pay the premiums for a bit. If you've really funded this policy well you may be able to drop the death benefit enough and drop the premiums to keep a small policy that will have a cash value that actually end up growing over time. Or at least keep going until the surrender charge is gone.
Talk to a fiduciary financial advisor - not an insurance salesman to get advice on this stuff.
??? Why in the world do you have an indexed universal life policy with three kids? Unless you have at least a $4 million death benefit and are already maxing out all other retirement accounts, then you are UNDER INSURED and you are putting your family at risk. Indexed Universal Life is a fantastic tool---for the right problem. You may be misallocating your scarce capital in an inefficient product.
Get a solid term plan--get the coverage you need. INVEST the difference, max out your other accounts, then get the IUL.
I am glad that you have realized the importance of having life insurance, especially when you have kids. First of all, you need to figure out how much money your family needs in addition to your current assets if you pass away. Once you figure out how much life insurance you need, you could decide what type of life insurance you should get.
From cash flow perspective, term life insurance often could get you the correct amount of coverage in the most affordable way. It is what I usually recommend to people in their earlier stage of life. For your case, term insurance is probably also the way to go if you don't have any life insurance now.
In general, I am not a big fan of using life insurance as an investment. However, for very limited cases, indexed universal life insurance (IUL) can be beneficial if it is designed properly to optimize the growth of the cash value, especially for people who have maxed out other tax-advantaged saving vehicles, have over 20 years of investment horizon, and expect to be in the top tax bracket when they take out the money. And no matter what, an insurance agent cannot promise returns or cash value growth on an IUL.
Having said that, to address your specific question regarding what to do with your current IUL, it depends on a lot of factors including but not limited to:
1. Whether the IUL give you enough life insurance coverage?
2. Whether you are using the IUL as an additional saving vehicle for a long-term goal like retirement or your kids' college expenses？
3. Whether the IUL was designed in an optimized way?
4. How much have you contributed to the policy already? For how many years? In other words, how much it will cost you to surrender the policy?
5. Has your health condition changed from the time you get the IUL?
I am sorry that I cannot give you any specific recommendations without knowing all the details. I recommend you to consult an independent financial planner who is not selling insurance but understand the ins and outs of the IUL. He/she could guide you through the process of deciding whether you should keep your IUL and add some term insurance on top of that if needed or simply get rid of it and get some term insurance instead based on your specific situation. Hope it helps.
I understand the need to make this decision simple, but I think there really is more to it than simply comparing the two products. The best way to answer your question would be to give you some parameters, so you can figure out which is the best course of action for yourself.
Universal life insurance is permanent coverage, which means it could last for your entire life. It just has to be designed that way. The premium has to support the death benefit for as long as you live. It should do this on a guaranteed basis. This way the policy will not collapse on you at a later age.
The advantage of this strategy is that it could preclude your ever having to buy another policy. Unfortunately, you may not qualify for a decent rate later on in life, due to poor health - or you may not be eligible at all. If that does happen, you'll be glad you had locked into a policy at a young age.
IUL has a non-guaranteed portion that is based on market indexes. Would it be worth sinking extra money into the policy to potentially accumulate a decent amount of cash? Could be. Have your insurance broker give you an illustration of what the money could be like over the long run, after expenses, and assuming all the tax advantages of the product are used. Then have your investment advisor make a similar projection for a non-insurance product, also factoring in expenses and taxes. Be sure to use the same contribution amounts in both projections. Let the numbers speak for themselves.
Term insurance is cheaper than IUL and has no cash. It provides short-term coverage. You could even pick up a product that will return all premium paid after a certain amount of time, if no claim has been filed. If you do out-live the policy, but still need coverage, you will have to buy a new one. At that point you will be older, and hopefully still insurable. But maybe the total outlay for both these policies would be greater then the premium needed to lock into an IUL at a younger age! I think you owe it to yourself to think through this, and even ask for some speculative pricing as to what insurance could cost you at a later age.
And by the way: if you eventually decide that you do want permanent coverage, but don't want to use life insurance to accumulate cash, then get yourself a guaranteed universal life product, as opposed to an indexed universal life product. You won't get the cash build up, but you will be able to lock into the lowest possible guaranteed premium for the rest of your life.
This is the process I suggest you go through for making this decision. In doing so, you will have covered the major bases you should be considering.