5 Areas of Concern for an Indexed Universal Life Policy

When sitting down with people who sell indexed universal life policies, you often hear the same arguments over time.  The advocates of these policies continue to make arguments despite the fact that Dave Ramsey, Suze Orman and CNN Money all support the "Buy Term and Invest the Difference" philosophy.  Here we discuss common statements made by advocates of IUL policies.

Risk

"There is risk wherever you invest your money."  Normally, for a personal account you offset risk using a concept called diversification, which allows you to invest in multiple places.  Within an IUL policy, the separate account holding the investments is actually owned by the life insurance company, not the policy owner.  This means, that if the life insurance company goes bankrupt, the whole separate account is at stake.

Commissions

"Commissions are not paid from your separate account, but rather, from the company.  This allows your entire pool of money to grow."  For someone putting $50,000 a year into an IUL policy, it is not uncommon for $25,000 (or more) to be paid out in commission.  Although the company pays the commissions, the money must come from somewhere, right?  Indirectly, the consumer pays the bill.  Extremely high commissions are not uncommon and unfortunately the law does not require these commissions to be disclosed.

Guarantees

"Don't you want a guarantee that your money will grow?"  IUL policies have guarantees.  However, if the life insurance company goes bankrupt, the guarantee will be obsolete.  In addition, the fine print often explains that the guaranteed value is before administration costs and mortality fees.  If you would like the guarantee of a life insurance company, you will save money by purchasing a cheap term policy and investing in an indexed annuity (with the same guarantees), rather than purchasing an IUL policy.

Discipline

"Having an IUL policy allows those without good discipline to build cash value."  First of all, the separate account is owned by the life insurance company.  When people do not have good discipline, they will end up taking loans against their cash value, in which case they will have a new liability along with paying for overpriced life insurance.  They would have been better off owning a cheaper term policy, even though they had no savings.

Cost

"After a certain number of years, you no longer have to pay for life insurance."  The cost does not have to be disclosed on a hypothetical illustration.  Over time, as a person gets older, the cost of life insurance coverage becomes very expensive.  Somebody, must pay that bill, right?  A person is better off, purchasing a cheap term policy and investing the difference, where the cost of life insurance will not hinder the growth of the investment account.

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This post was reposted from http://finlit.biz/life-insurance/5-areas-of-concern-for-an-indexed-universal-life-policy/, originally written on April 25th, 2013.