An insurance agent who is a “believer” in the value of index universal life insurance sent me an illustration for what he considered to be the best Index Universal Life Insurance (IUL) policy out there. “Best” was defined as having the best annualized return on the cash value. I thought it might be interesting to look at it. I've written before about IULs, and I'm not a big fan. There are a lot of moving parts, and the devil is in the details. I'm not a big fan of cash value life insurance of any type, but if you want guarantees I think whole life is the way to go. If you want the maximum possible growth in a life insurance policy, I think a good VUL is the way to go. If you just want a permanent death benefit, a guaranteed no-lapse universal life policy is probably best. Most people, myself included, have no need to purchase one of these policies, and once they understand how they work, usually no desire to purchase one. At any rate, let's look at Index Universal Life Insurance.
How Indexed Universal Life Insurance Work?
The theory behind IUL is that you get some of the benefit of investing in stocks with none of the downside. So if the market is down, you get some guaranteed interest rate applied to the cash value (not the premiums paid) of your policy. If the market is up, you get some portion of the rise. The problem is that portion may not be anywhere close to what the stock market actually delivered since these policies generally don't consider the dividends, have a cap on the maximum rate, and sometimes (although more commonly with annuities than insurance) have a “participation rate” less than 100%. In addition, there are many different ways that these policies “lock-in” stock market gains, and since they haven't been around very long, hypothetical results rely heavily on back-testing, with its numerous methodologic issues well-known to physicians who have looked at retrospective studies.
Add in the costs of the insurance (not insubstantial if you're older, sicker, or have dangerous habits like I do), the fees, and the commissions, and you're looking at returns that are likely to be similar to a whole life policy, but could either outperform it or underperform it. That means, if you're one of the 20% of people who actually hold on to the policy for the rest of your life, that your returns will be somewhere between the 2% guaranteed and the 5% projected returns.
The big selling point of these policies is “stock-market like returns without any downside risk.” Wouldn't we all like that? There's a reason it sounds too good to be true.
Indexed Universal Life Insurance Illustration
The illustrated policy sent to me demonstrates this well. This is a Midland National XL-CV4 policy, which is designed to get you as much cash value as possible. This particular illustration is for a healthy 30 year old male making annual premiums of $5500. It has a guaranteed crediting rate of 3% (note that this guaranteed rate is much lower than the typical non-guaranteed 6-8% crediting rate in a whole life policy.) Also remember that the crediting rate (similar to dividend rate on whole life) is NOT the return on your premium dollars. The illustration also shows that the current cap rate on the policy is 14.5%, but that the company has the right to reduce that as low as 4% at their sole discretion (that seems fair, right?). This is NOT a bad policy, by the way. It's a pretty good one as these go. There are plenty out there that are much worse. The minimum participation rate is 100% (so you get 100% of the change in the index up to the cap rate.) It also only costs you a net 1.25% to borrow your own money in the first five years, and then 0% after that. Many policies charge more. And of course, the crediting rate is benchmarked to the index return only, not including dividends. So, what returns can you get out of this policy?
Indexed Universal Life Insurance Guaranteed Returns
People buy IULs for the guarantees. If they were willing to take on the risk of losing money, they'd just buy index funds. So what minimum return does the company actually guarantee?
| Year | Premiums Paid | Cash Value | Return |
| 1 | 5500 | 1341 | -75.6% |
| 5 | 27500 | 21940 | -7.44% |
| 10 | 55000 | 50671 | -1.50% |
| 15 | 82500 | 83074 | 0.09% |
| 20 | 110000 | 116739 | 0.56% |
| 25 | 137500 | 154043 | 0.86% |
So, after the first year you have a 76% loss. That's pretty typical for life insurance. That money is paying for insurance but mostly going to the agent who sold it to you as the commission. What is astounding, however, is that it takes 15 years just to break even, on a nominal basis. Even after 25 years you haven't broken even on an inflation-adjusted basis. Heck, you can get that kind of a return out of a high interest bank account even at our historically low interest rates. Basically, the guarantee they're selling (“you can never lose money”) isn't worth much at all. Now, I'll be the first to confess that you'll probably do better than the minimum guarantee, but it wouldn't surprise me to see you a heck of a lot closer to minimum guaranteed return than to the return of a good Total Market Index Fund. Let's look at how much better you might do with this policy. The illustration has two other categories, one with a consistent 4% crediting rate and one with a consistent 8.6% crediting rate, both using current insurance charges (which the insurance company is also allowed to change, by the way.) Here's how they stack up over the same time periods.
Possible Returns
4% Crediting Rate
| Year | Premiums Paid | Cash Value | Return |
| 1 | 5500 | 1472 | -73.2% |
| 5 | 27500 | 22938 | -5.99% |
| 10 | 55000 | 50671 | -1.50% |
| 15 | 82500 | 99345 | 2.29% |
| 20 | 110000 | 153083 | 3.05% |
| 25 | 137500 | 218859 | 3.41% |
All right. I tie my money up for two and a half decades to get a return of about the rate of inflation, and I'm underwater, even on nominal terms after the first decade. Forgive me for not getting excited.
8.6% Crediting Rate
| Year | Premiums Paid | Cash Value | Return |
| 1 | 5500 | 1712 | -68.9% |
| 5 | 27500 | 26852 | -0.79% |
| 10 | 55000 | 71479 | 4.71% |
| 15 | 82500 | 146800 | 6.91% |
| 20 | 110000 | 259954 | 7.63% |
| 25 | 137500 | 432603 | 7.98% |
Now we're getting somewhere. There's no reason someone can't be excited about a 7-8% return. It isn't guaranteed, but it might be all that many people earn on a traditional stock/bond portfolio.
There are a few things we can learn from these two illustrations. First, you still have a negative return for years, even if you get a better crediting rate. With a 4% crediting rate, it's still going to be 12 years to your break even point. With a 8.6% crediting rate, it'll be about 6 years. They say “you can't lose money” but apparently that doesn't include the first 6-15 years. Second, even with the higher 4% crediting rate, you're still only looking at long term returns around the rate of inflation. Even with the maximum rate they're allowed by law to illustrate, 8.6%, your long-term returns are still under 8%. Long-term returns on the Vanguard 500 Index Fund (since inception) are currently 11.05%. The difference in your money growing at 7.98% vs 11.05% over the long run is astounding. If you invested $100K at 7.98% for 25 years, you'd end up with $682K. At 11.05%, you'd have $1.37M, or over twice as much money. That's the price of investing with an insurance company, I suppose.
What Is Your Crediting Rate Likely To Be?
So, as you can see, it really all comes down to what the crediting rate ends up being and how the insurance costs change. Some of this is under the control of the insurance company, since they can reduce the cap and increase the insurance costs at their own discretion. It really requires a great deal of trust in that single company to put any significant portion of your portfolio into one of its portfolios. Some of your return, of course, relies on market returns. Let's just hypothetically say they leave the cap where it is (a big assumption) and don't change the costs of insurance (another big assumption) and look at what the crediting rate would have been over the last 25 years using their “annual point to point” method (they do offer other methods with various changes in the other terms of the policy) assuming a January 1 anniversary date when all the resetting occurs. Keep in mind that many wise people believe future market returns will not be similar to what we have experienced over the last 25 years.
We'll start in 1989 and go through the end of 2013.
| Year | Total Return | Index Return | Crediting Rate |
| 1989 | 31.69% | 27.25% | 14.50% |
| 1990 | −3.10% | −6.56% | 3% |
| 1991 | 30.47% | 26.31% | 14.50% |
| 1992 | 7.62% | 4.46% | 4.46% |
| 1993 | 10.08% | 7.06% | 7.06% |
| 1994 | 1.32% | −1.54% | 3% |
| 1995 | 37.58% | 34.11% | 14.50% |
| 1996 | 22.96% | 20.26% | 14.50% |
| 1997 | 33.36% | 31.01% | 14.50% |
| 1998 | 28.58% | 26.67% | 14.50% |
| 1999 | 21.04% | 19.53% | 14.50% |
| 2000 | −9.10% | −10.14% | 3% |
| 2001 | −11.89% | −13.04% | 3% |
| 2002 | −22.10% | −23.37% | 3% |
| 2003 | 28.68% | 26.38% | 14.50% |
| 2004 | 10.88% | 8.99% | 9% |
| 2005 | 4.91% | 3.00% | 3% |
| 2006 | 15.79% | 13.62% | 13.62% |
| 2007 | 5.49% | 3.55% | 3.55% |
| 2008 | −37.00% | −38.47% | 3% |
| 2009 | 26.46% | 23.49% | 14.50% |
| 2010 | 15.06% | 12.64% | 12.64% |
| 2011 | 2.11% | 0.00% | 3% |
| 2012 | 16.00% | 13.29% | 13.29% |
| 2013 | 29.60% | 32.39% | 14.50% |
So, you can see that even with the relatively high cap rate of 14.5%, you would be capped out in 10 years, or 40% of the time. If that cap were decreased to say, 9%, that would increase to 13 years, or over half the time and if it decreased to the guaranteed minimum of 4%, that would occur in 16 of 25 years. The minimum 3% floor kicked in 8 times, or nearly 1/3 of the time. Over this time period, the annualized (geometric, not arithmetic) return of the S&P 500 Index fund would be about 9.04%. The average crediting rate over this time period for this policy (which didn't exist in 1989, by the way) would have been 9.17%, slightly HIGHER than the return of the S&P 500 Index Fund. But remember the crediting rate IS NOT your return, especially in the first decade or two, because of the costs of the insurance and fees.
So what would your return be if your average crediting rate were 9.17% for 25 years? If the insurance costs stayed the same, it would be slightly higher than the 8.6% scale illustrated above. You'd break even around 5-6 years, be approaching 5% returns at 10 years, and have returns of over 8% at 25 years. Any objective observer has got to admit that while that doesn't look particularly attractive in the short term, it is pretty good in the long run (although still significantly less than you could have made just buying an index fund instead.) But always remember the assumptions. We're assuming you're healthy and easily insured, that the insurance company doesn't raise the cost of the insurance and that the insurance company doesn't lower the cap rate. Also bear in mind that this is a pretty good policy, and far better than many I've seen out there. When you buy a policy like this, you're making a bet that requires a lifetime of trust in the insurance company NOT to change the deal, because the guaranteed returns are terrible.
Of course, there is also the issue of the fact that even without ever giving you a negative crediting rate, the insurance policy still underperformed an index fund by 1% a year. At $5500 per year, an additional 1% of return each year adds up to having a 17% larger portfolio ($508K vs $434K) after 25 years. (Yes, it would be a little less after tax, but an broad market index fund is awfully tax-efficient and taxes shouldn't add up to 1% of return.) So even one of the best IULs out there, with some rather generous assumptions and covering a period of time including some of the greatest bull markets in history and some terrible bears, still lags behind an index fund.
As you can see, your short term money doesn't belong in an insurance contract since you will have a negative return. Your long-term money is also likely to do worse in an insurance contract than in riskier assets. So the reader is left with the question, “What money DOES belong in an insurance contract?” None of mine, that's for sure (and that's ignoring the fact that my insurance cost would be far higher than this policy illustrates.)
What do you think? Were you surprised that the potential returns could be as high as this illustration and my example show? Do you own an IUL? Are you happy with it? Why or why not? Comment below!
I’ve never mentioned anything about “raiding your retirement accounts” maybe direct me the answer to my question where it is on your site? I gave you a scenario of a 40 year old, you said the answer is found on your site. Security salesman are hilarious, always deflecting.
You have no idea how I show how to use the IUL but yet you know the answers, I brought up several points you state that the answers are on the site. You seem like you have a high financial IQ, and so I do, so we are 2 individuals having a dialogue about philosophy.
You for some reason try to act like insurance salesman commission seems greedier than Wall Street? That is beyond hilarious, I NEVER stated that someone shouldn’t use Wall Street at all. I don’t believe in qualified plans simply because the Math doesn’t work and it compounds the liability back to the government and it is being used for a purpose not meant for how it was created.
You found the time to post links to Doug Andrews which I appreciate, but you didn’t do too much studying for blaming the IUL. So you can be so kind and post where on your site is the answer to my question I posed?
Peddling? So you have this blog trying to be the most educated guy in the room and can only talk down to anyone who doesn’t agree with you?
Sounds pretty pompous to me. Usual deflection, you have a prime disadvantage where I know the usual jargon that all securities guys talk, a whole bunch of words that is not saying anything……like I said you CAN NOT solve the equation that I posed or there wouldn’t be a retirement crisis. Wall Street greed and their strategies that are antiquated and posed for individuals who live for about 10 years after retirement, again will be responsible for the collapse of the middle class.
Doug Andrews, if he is just speaking about the IUL then there is nothing wrong with him or his topics, the lawsuits he was involved in was due to what I explained in detail in my earlier comments.
I can name guys responsible for the sub prime collapse that have cabinet positions in the United States of America, so you can keep hanging your hat on Doug Andrews if that is all you got.
The problem that you face is that more and more companies who have strong securities divisions like Prudential, AXA, AIG, Mutual of Omaha, Lincoln Financial, I could go on and on who have developed strong IUL products and there advanced markets guys who typically are securities and life guys would embarrass you with so much erroneous information that you are spreading with your blog.
I’m done commenting, it’s your blog, just wanted your comments not to go unchallenged, maybe our paths will meet one day on a debate stage, Id welcome that opportunity. Good luck with your business!
Glad to hear you won’t be back, although I’m skeptical. Past experience shows that insurance salesmen showing up on a blog post 3 years after its written to “challenge” my comments don’t actually go away until they are eventually banned for ad hominem attacks.
I’d wish you luck with your business but the purpose of mine is to put people like you out of business by educating your potential clients before you get to them.
[Ad hominem attack deleted.]
It wasn’t an attack on you, it was an attack on falling victim to your own research and intelligence. I succumb to it also, which is why I read your site. You set up the variables so your thesis is always supported. I suggested it was dangerous.
Pick reasonable assumptions and see where it takes you. If you don’t like my assumptions, run your own.
Mario Henry & Mr. White Coat, I really enjoyed reading the dialogue between you fellas! Lot to take in…. I’m currently considering an IUL.
I’m 40 yr old male, annual salary is $150-$175 unfortunately i’m starting my retirement planning now, bc of some life changing events recently.
after doing some research and working with a close friend in the business, we’re considering a $500 monthly premium in an IUL that will start next month.
I trust my friend very much, and we have gone thru the forecasting etc… I plan on working for then next 25 yrs Lord willing.
I’d be interesting to see both scenarios with considering both philosophies…
I don’t want to burden you guys, my position is to make sure i don’t end up like my parents with only a $600 monthly check from SS.
Also if there is an opportunity to make a million dollars within the next 25 yrs I don’t want to miss out on the opportunity, of considering the risk. thx for your time I hope you guys have a minute to respond, I was very intrigued by the conversation..
Mario Jasso
Glad you trust your friend. I once trusted a friend selling life insurance too…..I had a 30% loss…..after 7 years. Now I trust but verify.
Any particular reason that you’re considering investing in an IUL other than your friend sells them? Have you already maxed out your available tax-advantaged accounts including Backdoor Roth IRAs and HSAs? Have you invested the proceeds in low-cost index funds? Have you started a taxable investing account?
Just make sure your friend over-funds it to the max and you’ll be on your way. You have to overwhelm the upfront fees and cost of insurance to get all the other benefits of IUL at a competitive advantage. (Do you seek asset-protection, want to ignore the rule of 100, want disability insurance, an opportunity fund for out-of-product investing, etc.)
Hello Mario
I would be happy to do a webinar comparing the fees of the IUL comparing to the management fees of the IRA, we can compare income, we can compare tax savings and I invite White Investor to attend and let’s look at the Math and most importantly the end result of retirement income. I have developed a process that shows an individual how to manage their own home equity instead of the bank. Feel free to have you and your agent friend fill out your info and be on alert for my next webinar should be soon http://www.investyourdebt.com. There is a bias from Wall Street guys on anything that is directly not just purchasing stock. The Math doesn’t lie. We just so happened to have invested in software that a true comparison can be done. If you want to see the info faster join my Facebook group Control Your Assets and I’ll add you and tag you on the 401k vs CYA video.I
If we attend can we use the fees on my IRA?
The bank doesn’t manage my home equity.
And I’m quite familiar with the math, but thanks for the invite.
Bank is figure of theory I didn’t mean it actually. I’m only using 1% as your management fees, I’m going to keep taxes the same, even though I believe it will go up, and I’m using 6.1% we have data from both Lincoln Financial and Columbus of 8.1%.
If you were certain of your Math you wouldn’t make the comments you made. I’m using my real name, you use yours, I’ll record it and put it on YouTube and put it on this thread and you will be broadcasted to help prove these erroneous information you are putting out there. Deal?
Not sure why it is hard for you to find my real name. It’s on the front cover of the book and the about page. If you want to make a Youtube video about my website, knock yourself out. It’s your time and your resources and maybe it’ll even send me a few more readers. No such thing as bad publicity.
And yes, I’m certain of my math, and I’m certainly NOT paying 1% management fees. More like 0.05%.
Lost 30%? Really? Who was the carrier? Participation rate? Floor? Cap?
I know people who lost a lot more than 30% with your recommendations. Plus none of those vehicles can produce 20 to 30 years income factoring inflation.
It wasn’t my industry that has caused trillions of dollars short fall for future generations. Stop paying for Hedge Fund managers yachts.
Not sure why you think I invest in hedge funds.
I don’t expect to convince someone who sells IUL that it’s a bad deal. If you want to buy it, buy as much as you like. If you want to sell it to doctors, I hope you fail and am actively working toward that end.
But I’m not going to sit here and try to convince you to agree with me. Years of doing that convinced me it was a poor use of my time.
we can make your fees .5% if you like but net out of pocket will be more like .75 ….you hope I’m failing? Why because your industry is failing. I didn’t say you were a hedgefund, I said the Alphas of the Wall St casino are the the hedgefund manager. There are other fees associated in your prospectus that are annual fees that all have to be factored into the entire net interest. Plus since you are going to recommend term insurance we are going to add that in there since we are talking net cost. EVERY time of my fees will be included in the head to head. It’s funny because I have a different philosophy you have to hope I fail? Well since your industry is already failing I guess misery loves company. What is your real name and firm or brokerage house you represent? Are you independent? Are you going to hide behind an anonymous screen name?
I love that it is so hard for you to figure out my real name. My readers are going to love reading this comment thread. They will find it highly entertaining. Especially since unlike most of the insurance agents who wander in here you weren’t smart enough to use an anonymous name.
WTH are you talking about my fees. You have no idea what my fees are. Mine certainly are NOT 0.5% nor 0.75%. It seems this is the only page of this site you’ve ever read. I am not a financial advisor. I do not have a financial advisor. The only fees I pay are the expense ratios of my mutual funds. Last I checked, my largest holding, the Vanguard Total Stock Market Index Fund Admiral Shares had an ER of 0.04%. Look it up. It’s public knowledge.
https://personal.vanguard.com/us/funds/snapshot?FundId=0585&FundIntExt=INT
Term insurance need only be added in for that time period where it is required. I am 41 years old and financially independent. I have no need of term insurance. So no reason to add it in to the calculation. But even if one did (as I have in the past), it has a very minor effect.
In addition to the ridiculous expenses of an IUL, it also gets inferior tax treatment to boring old tax-advantaged accounts like HSA, Roth IRAs, and 401(k)s. I’m sorry someone misled you that these are good for your clients. They are not. You are doing your clients a disservice. You are hurting their financial futures and profiting off their ignorance. You should be ashamed of your behavior and if you honestly educate yourself on the subject, you will be.
Good day!
Now I’m not smart? No one had time to troll your site. I asked you a very simple question to go lice and do a webinar with your plan vs mine. All the arrogant personal jabs aren’t relevant. No one cares about your personal situation, people concerned about their own. If you want to accept the challenge, all of our fees are illustrated until 120 years. You may pay less over time because your money will run out. If you going to personally insult someone who challenges your view then you just broadcasted to everyone your small minded mentality. I said let the numbers speak
Yes, let them speak. Should we go poll readers and see how many of them actually had a gain when they realized they’d been duped and surrendered their IUL? It’s not a high percentage.
WCI is right. Comment #23 down is highly, highly entertaining. Thanks!
WCI, much apprecited the advice to bring the popcorn. I ate a whole bowl reading Mario’s comments and your replies. Great financial entertainment for this old doc. How could Mario Henry not know who you are when he’s on your website? Mario really thinks you’re a Hedge Fund manager or that you sell securities!
This guy has no interest in the truth. He’s a troll with a website.
What company are you referring too? I use Midland XL EC and CV. love them. I dropped 100k in an EC a litte over 2 years ago and my walkaway value RIGHT NOW is 117k in 25 months. Love these IUL’s
Weird that someone who sells IULs for a living thinks they’re awesome. That never happens.
White Coat….what percentage fees are you calculating when you are referring your clients to Wall St? .5%? 1%? More? Since you are also recommending Term insurance to them that has to be added to the net costs as well.
What is the future tax rate you are bracing your clients as they pull the money out of the pre-tax plans you are referring too? You asked me for a list of all the fees on one of the IULs that I represent. I just happen to have every fee for the policy for 50 years with Lincoln Financial.
Let me be clear, I’m not talking about your fees since you are fee only, I’m speaking about if you refer someone to use X company for the 401k the national average is about 1% fees https://www.fool.com/retirement/401k/2015/04/06/average-401k-fees.aspx, plus the cost of the term insurance. So let’s look at the numbers side by side, what the client is receiving for their fees for the IUL, and what the client is receiving on their 401k fees
Still think I’m a financial advisor huh. Amazing.
None of my three 401(k)s charge anywhere near 1% by the way. Total fees (including fund ERs) in my 401(k)s range from 0.02-0.2%.
I love that I’m subscribed to this. 3 weeks go by –> new nugget of entertainment. Awesome.
BTW….read all your personal insults on your “Get your popcorn forum” I have my lawyers looking at the page now since you are walking the fine line of slander.
I’ll be awaiting the answers to the questions I posed, so I can paste all the fees associated with this IUL policy vs what you recommend
You think you can walk in here, threaten to sue me and then expect to not only get a response but continue to post? Get a life.
Looked at the “Get your popcorn” forum Henry was slandered lol
Anyways I write for Columbus and I also have all the fees that I can post on our IULs…..02% fees? Well you are either not telling the truth or have millions in your 401k which most peopLe do not have.
Since Henry obviously has been censured from commenting I will continue….With the vast knowledge you been wrong about someone who didn’t know better would believe you are a financial advisor. BTW a physician calling another profession crooks….your industry had to have laws in put in place so pharmaceutical reps wouldn’t bribe some physicians. However that’s a different subject
Yup. I’m going to block the IP of everyone who threatens to sue me. Do you find that surprising?
Yes, I do have millions in my 401(k)s. But even the lowliest private with $100 in his 401(k) has access to a 0.02% 401(k) plan. It’s called the Thrift Savings Plan.
Thanks for playing.
P.S. Medicine has plenty of issues. Feel free to start a blog about them. But that’s not what this one is about. It’s about people who hold themselves out as financial professionals but haven’t even heard of the largest 401(k) in the country.
And since your IP addresses map to the same location as Mario’s, I’m going to assume you’re either the same person or closely enough related that I don’t need you in my life.
Again, people who threaten to sue me don’t belong in my living room or on my website. Have a nice life.
We weren’t talking TSP, we were talking 401k. To my knowledge they are available to federal and government….you can’t go self directed, you are limited in your choices, you must be in the VA but most people aren’t qualifying for the TSP, I agree much lower fees than the ripoff 401k.
Still wouldn’t defer my taxes, even at the lower fees of .02% you will pay back much more to Uncle Sam than what you are deferring I have software that I can post your tax liability.
Your choices might be limited, but they’re all good. My other two 401(k)s aren’t quite as cheap, but they’re close and I can go self-directed in both of them.
Most people should defer taxes from their peak earnings years to their retirement. Even though the total tax paid might be higher, the money will be taxed at a lower total effective rate and they’ll have more money after tax, plus asset protection and estate planning benefits.
Really, there is no cash value insurance that can compare at all favorably to the use of a good retirement account. It doesn’t even compare very well against a taxable account, but at least it has a chance there.
How do I get a table or listing of the COI on an IUL that is indexed to the S&P 500 and the ins co does not provide any information till my yearly anniversary when I get a statement but they are charging me a COI monthly which I have no idea what it is. I need to know this because its coming out of my principal and depending on the cost I may need to get out. Its totally liquid.
Thanks.
I guess I’d ask the agent who sold it to me for that info.
My Minnesota Life IUL has cost of insurance illustrated on a page. It also shows that the total “fees” (burden) associated with the policy are miniscule as a function of the cash surrender value. My agent quoted it at the time but I remember it to be something like .2% even in later years when the COI climbs due to age.
Two things that usually seem to be missed in discussions like this are:
1) this is a savings bucket, not an investing bucket. Your funds are not at risk of loss. They are safer than in a fractional reserve bank that only now is paying over 1% interest again. It is a tribute to the power of the vehicle that the returns approach the index yield in the best of years. Where else can you look at the left side of the chart after the fact to decide whether you wanted to invest in the market over the last 12 months or not? With IUL, everyone is a genius market timer!
2) the growth is tapped tax-free. This is like a Super-Roth because it has two additional benefits from the cash that is paid in. It is your (mandatory) life insurance, AND, if you have the right policy, it covers a lot of your disability risk (terminal, chronic, and critical care) through accelerating the death benefit.
Ray Lucia has the best balanced approach to IUL’s that I’ve heard. He said they aren’t for everybody. He said age and capital were the biggest criteria. I knew that already – you really do have to overfund them to get the fees (in the best policies) to be inconsequential. If you are over 60, your yield is probably going to be too compromised due to COI in most policies. If you don’t have either capital for five strong years of premium payments right up to the MEC limit or a solid income stream to keep it overfunded for most of your life, the fees might catch up with you.
The biggest drawback that IUL’s really can never overcome compared with the index is that it doesn’t get the dividend. That’s 2% in recent history and will probably continue. 2% reinvested is a huge number. If past performance was an indication of future returns, it would certainly be a disqualifier. But, if you believe that the U.S. equity market is an overpriced casino, who in their right mind would put all their retirement funds into it?
Roth IRAs are tax-free and interest-free. Cash value life insurance is not. That’s just one of many reasons why cash value life insurance is not “like a Roth IRA” must less a “Super-Roth.” If you’d like to read some of the other reasons, the post can be found here:
https://www.whitecoatinvestor.com/8-reasons-whole-life-insurance-is-not-like-a-roth-ira/
With all due respect WCI, your hatred for IUL are so evident! Did you get burned by an insurance advisor at one time? IUL have to be structered properly and are a FANTASTIC piece of the investment puzzle. MOST people should NOT have them but for us FEW who hve more money then they know what to do with it is an excellent product.
So many advisors do not make the DB the right amount because they either were not taught or because they are unethical and want that huge commission.
Anyway, you do make valid points but I really, really wish you would be more fair about the subject. Carry on….
LORDB
Ahhh well I’m one of those few who own an IUL (like you) but I don’t make more money than I know what to do with so does that mean I’m in trouble?
You gave advice not to buy a IUL, but what if we already have? Is it worth it to take the cash value, close the policy, and run? After 15 years of not seeing returns I was hoping for, I’m debating what to do. Any advice?
Su, please detail your primary illustration numbers (interest rate, premium, death benefit) so we can see if this was a defect in the IUL as a product or in the agent who sold it to you and didn’t know how to do it correctly. 15 yrs is an old policy with lots of information in it. My 54 yr old wife’s is less than 4 yrs old and if we hadn’t hit the rug pull last Oct, it would have nearly hit parity in 3.5 yrs. I still consider it my most valuable product in my portfolio.
I’m glad you like your policy Tom, but your experience is pretty rare among my readers. When polled, 75% of those who actually bought a permanent life insurance policy (not those who were pitched one) regret buying it.
I wish there were whole market studies or surveys of a cross section to be able to get a good measure of how many policies were deficient vs performing as illustrated. I think we only see outliers – those who are satisfied and those who are dissatisfied and complain. I also wonder how long it took for agents who are good with finance to figure out how to make an investment grade product. Is there any source for historical information? I know the products continuously evolve so a snapshot in time may not be adequate. There has to be a continuously improving ratio of agents who know what they are doing vs those who just maximize DB for the premium paid. Banks certainly know how to do it since they own a good deal of cash value policies as a strategic method of storing cash and offsetting risk of key employees.
I was an A.L. Williams trainee for a time and was a real crusader for term before the IUL was even invented. I was completely sold on the idea that the best use of funds was to get the most death benefit for the least amount of premium. For young and cash poor couples just beginning their families, that was the only rational choice.
When I first heard about a practical use of cash value policies from a professional investor group studying high net worth investors, I was pretty skeptical, but read the books and studied the proposals offered. Through my investment network, I think I stumbled on a pretty incredible agent, although what he designs doesn’t seem all that complicated. I just think the average agent doesn’t have enough training in finance and either doesn’t see a way to make it efficient or doesn’t want to work that hard for low commission policies.
The insurance industry is directed by the SEC(?) not to focus on the investment value of cash value policies but only on the death benefit value. That puts a smart insurance agent at odds with the regulators because they don’t have a license for securities. That means unless you are intentionally seeking information that is somewhat concealed, you may find it challenging to know how to find an advisor who has a broad enough background to direct you to investment grade insurance. Radio personality Ray Lucia comes to mind as one of the rare financial planners who has an excellent grasp of traditional investments, insurance, and tax consequences.
If we look at the crediting as a bonus instead of an investment, we might see clearer where high net worth individuals use them in their portfolios. They don’t go head to head with an ultra-low index fund or ETF, but they are frequently compared because their returns are so similar. That only magnifies the benefit of properly structured IUL’s. We all have to have a place to store cash – be it an emergency fund, or savings. What options are there? Pretty much there is a savings.checking account, CD, or money market. Until a year ago, those were paying less than 1%. That usually won’t even keep up with inflation.
The IUL gives someone a place to store their cash that in most states is protected from creditors, can be accessed tax-free, transfers to heirs tax-free, provides a back door way for both disability coverage and long-term care, can be used as collateral on a line of credit, grows at nearly the rate of the general market (doubling every 10 years), and oh, by the way, if the insured happens to be in the unfortunate 1% and dies prematurely, provides a death benefit to dependents at virtually no cost.
The vast majority of Americans are without life insurance. I used to ask myself why that is. After studying investments and insurance and as a professional alternative investments specialist, I conclude that they are just being prudent and playing the odds in a smart way. They are rolling the dice and betting their budget that they will not be the 1 out of 100 people that die early. It’s a natural decision. How do you then sell a prospect a policy? It either must be so cheap to be inconsequential to their budget (how cheap does it have to be when the average American doesn’t have $1000 for an emergency) or the death benefit has to be a by product of a savings bucket and the policyholder has to be wise or lucky enough to find the right agent and have the long-term discipline to maintain the savings plan unless they come into a windfall of cash and commit to a five year paid up policy. For Americans who live paycheck to paycheck, it simply isn’t suitable, unfortunately. They will depend on social security for their twilight years living in poverty. But if more schools taught financial literacy, they might have a section just on IUL’s as an irreplaceable component of a balanced financial plan.
I disagree that IULs get you close to the market return. Over the long run, I’d expect a return close to what WL pays. No free lunch there.
So well stated…everything you’ve said. These products are NOT for cash poor people nor people who are not financially stable. Keep the DB low, overfund and this is going to be a winner. Stop the 401k madness🤪
Please understand…this product isn’t for the masses;)
15 years and still haven’t made money? What makes you think the next 15 years are going to be any better? These posts are about whole life but the same general principles apply:
https://www.whitecoatinvestor.com/how-to-evaluate-your-own-whole-life-policy/
https://www.whitecoatinvestor.com/how-to-dump-your-whole-life-policy/
Can you adjust the numbers for taxation? I assume one would only do this if they’re maxing out retirement contributions across, 403bs, 401k, solok’s, cash balance plans etc. I wonder how the return would look if you adjust for NIIT, Medicare surtax, and the tax drag of cap gains and dividends. The index returns you used certainly aren’t net of taxation, are they?
I wish these policies were only sold to people who had already maxed out their real retirement accounts.
What about Kai-zen IUL? https://www.kaizenplan.com/
I’ve always been against getting a whole or universal life insurance policy but since having children I’ve decided I’m going to get a IUL as insurance, not an investment. I do that through 401k, backdoor Roth IRA and REI. Of all the permanent life insurance policies this one seems to be the best because you pay premiums for 5 years and take out a loan that pays into it for 10 years. At year 15 you pay back the loan from the policies cash value or from outside personal funds. With the leverage the cash value grows faster than other permanent life insurance policies. There’s more to it than that but I think this leverage and only paying premiums first 5 years is what makes it so different. I’m curious if you or your readers have heard of it? I can’t attach anything here but on their website they have more info.
Thanks for the heads up John. I was already Linkedin with the President of Kai-zen but hadn’t really put 2 & 2 together until your post piqued my curiosity. I’m sure the whole life and term life proponents are going to go nuts to think that sophisticated advisors are actually leveraging a product that they think is dangerous, even in its unleveraged form.
Don’t know that I’d call it dangerous, but at least leveraging it up addresses the main issue with it- the low expected returns.
Expectations are in the calculations of the saver. Obviously, some estate planners have convinced banks that lending on investment-grade IUL cash value policies to leverage premium payments are a no-brainer. I would consider that substantial corroboration.
People always trotting out the “banks buy it so you should too” argument. Individual investors aren’t banks and have different financial goals. It’s a silly argument I addressed years ago in my Myths of Whole Life series.
Tom Cyr, why do they think it’s dangerous? I see it as insurance for my dependents should something happen to me or I lose all our networth. Ha! The latter I don’t see happening but I do like that creditors can’t touch it. I’m planning to get the minimum DB (1.5m) for myself and wife, fund it and just leave it alone. I know there are better options for returns, but that’s why this is called insurance.
John, besides the discussion on this thread, there are many YouTubes of Term and Whole Life agents who doubt that the contract can perform as illustrated due to sequence risk. Their experience includes VUL and UL policies that have lapsed due to being defective products and mismanaged by the owner and agents who sold them. It comes down to being an ultra low risk tolerance mindset and thus needing a guarantee provided by a whole life policy. The folks at Kaizen Plan told me they back test their design with actuaries even including a flat nine year period as came during the great depression. Banks obviously believe in NIW’s calculations in order to leverage the premium payments without any personal guarantee beyond the collateral of the cash accumulation value inside the IUL. Premium financing is an incredible opportunity to pay back a loan growing at simple interest with an asset that is growing compounded. I see one danger in that it’s an adjustable rate loan. The current spread between a reasonable expected cash value growth rate and premium finance interest might be around 3%. What if interest rates revert to the mean during the next 15 yrs when your loan balloon payment will be due? Ask about how the interest is calculated on the financed premiums. You don’t want to get into a negative arbitrage for long.
The illustration they provided me uses an example return 5.76% and loan btw 3.9% and 4.4%. Cash value equals my contribution at year 7. I have a question out to them about the cap because it says “upside growth crediting potential that is capped”. My friend who has Whole and IUL says his IUL has already out performed Whole and the cash value is higher than what he put in and expected at this point. Stock market has performed great past decade so I’m not expecting that to last. I’ll ask the question you suggested.
Another concern I have is if stock market performs poorly which will directly impact my cash value and repaying the loan year 15. My illustration uses 5.76% and this policy has a 0% floor. I asked them and they said the bank won’t call the loan if there isn’t sufficient cash in it because they’d have to pull everyone’s policies that is in it. Kaizen leverages putting lots of policies together to get the loan. This is definitely another risk I’m weighing.
Long time lurker here. I bough an IUL in Feb 2018 after doing enough study on this including reading this blog and comments. I follow bogleheads and was looking for something better than VBTLX (40% of portfolio) as recommended for the three fund portfolio. . I have already maxed out my 401k, HSA, ROTH IRA, backdoor IRA.
So I replaced VBTLX with this IUL to beat the bond returns. I am 100 % in equities in my investment accounts and my “bond portion” of the portfolio is this IUL.
There is a place for IUL in your overall portfolio. It is not for “market return”, but as a hedge against future tax increases, replacement for your CD and bonds.
I am quite confident that this IUL will outperform the bonds during a 20 year period. The ability to take “loan” from IUL, while the money still grows is an added benefit.
Welcome to the IUL Club Sthokk. I’m confident that if your agent checked all the right boxes, you will be very pleased with your IUL. Besides outperforming the bond index, you won’t have to pay any taxes on the IUL, it should be sheltered from creditors in your state as it is in most, you have a death benefit many times greater than what you deposited if you die soon, you might have a built-in LTC or disability benefit if you get sick, your policy shouldn’t count in means testing for government assisted care, and on and on and on. Enjoy your policy!
Good points.. Only if the insurance sales agent design IUL properly – for the client to maximum fund it and market it as a low risk investment with better return than CD/bonds, all this bad reputation for IUL should have been avoided
Not sure I’d say “most” states. I’d say, “some” states, and even then it usually isn’t 100% of the value.
I hope none of my readers thinking about IUL funding will ever have to spend down to Medicaid levels for LTC!
I also think it’s important to point out that IULs generally do NOT perform bonds, certainly not in the first decade and while you may surrender your basis tax-free and borrow against it tax-free (but not interest free), if you surrender the policy the gains (if you should be so lucky) are taxable at ordinary income tax rates.
So what’s your cash surrender value compared to the premiums paid? Please keep us up to date on it each year and let us know when you break even on this policy you expect to outperform bonds. So far I bet bonds are ahead and I’ll be surprised if you’re ahead of bonds at 15 years. 20-30? Entirely possible I suppose, but we’ll see.
Since 02/2018
Premiums paid – $37, 620
Accumulated value – $33,045 as of 10/30/19
If invested in VBTLX – $38,620
My target is to break even in 7 years and beat VBTLX from year 10
Looking at surrender value doesn’t make sense. This is buy and hold for at least 20 years
The surrender value is the current value. Just choosing to ignore what that is doesn’t change it, but I’m not surprised you don’t want to look at it because as we both know, it isn’t pretty.
I mean, what does “accumulated value” mean if you can’t walk away with that value. It doesn’t mean anything. It’s a fictional number.
If I want to walk away from an investment in 18 months, I buy TQQQ or UPRO, which I do. IUL is a long game. Max fund for at least 15 years and keep until you die . The index credit is based on accumulated value, so it does have a value in knowing what my future returns is based on.
I agree that it what has to be done to get even a moderate investment return. It certainly is a terrible investment in the short run. The issue is that if I’m going to tie money up for 50+ years I expect a better return.
Definitely agree that it is a terrible investment for short term. If the IUL can beat bond returns for a 20 year + period, it will serve the purpose for me
I’m glad you’re happy with your policy and hope you are just as glad in 20. I wish every purchaser both understood the product they were buying AND actually still wanted it.
Agree to that. if you don’t understand the product and don’t have a strategy around how it fits in the overall investment portfolio, don’t buy it.
The good thing is that an IUL doesn’t tie up capital. The cash surrender value is available to be used for opportunities without ever affecting the accumulation value! If that isn’t as close to a too-good-to-be-true nirvana, what is? I can access the capital and my investment is still inside the insurance contract growing full strength at the rate of the market index growth. Holy cow! That’s like using the same dollar two places at one time. AND I’ve been insured against loss of life and health the entire time. It’s as close to a PERFECT investment vehicle as has ever been designed.
Just because you can borrow against something doesn’t mean it doesn’t tie up capital. Same story with a stock portfolio and a house. You can borrow against both. There is a cost to it every time and you simply have to decide whether you’d rather the capital be “tied up” (which in reality it is reducing your interest cost) or if you’d rather the capital be used for something else, in which case you can pay the interest cost.
The main problems I have with IULs is that # 1 there are so many moving parts very few really understand what they’re buying and how it works (and how the company can change the deal if they wish at any time), # 2 in the end, a purchaser should expect performance very similar to a whole life policy, but without the guarantees whole life provides, and # 3 by putting “index” in the title, people think it’s a good thing like index funds when in reality it is far more like whole life insurance than like an index fund.
STHOKK – Don’t worry about the accumulation value compared to the premium. The one thing I have never seen mentioned on this thread is “INCOME”. Everyone, including TWCI, is focused on IUL vs traditional investments from a pure accumulation perspective. Accumulation values are just numbers on a piece of paper.
Brokerage statements don’t pay bills. So having a bigger number at the bottom doesn’t make any difference in your retirement lifestyle.
The cash value of a life insurance policy, specifically an IUL, can provide 2 to 3 times the after tax income of money in a regular brokerage account or IRA/401(k).
What is the rule of thumb for a safe withdrawal rate? The 4%-Rule. And most would agree that 4% is actually a little high. A properly designed IUL [min death benefit, max non-MEC funding] is more like a 7-8%-Rule.
If you have an 401(k) with $1 Million, the safe withdrawal rate is $40K per year. But that $40K is subject to income tax at ordinary income tax rates. So if taxes are 25%, the net after tax is $30K per year. An IUL with $1M in cash value will safely generate $80K per year tax-free. That is almost 3 times the income from the same amount of savings.
Unless you are very young, you will likely get more income bang for your buck with an IUL than with a traditional mix of assets.
Bottom Line: don’t focus on accumulation. INCOME is what matters.
Tom, The 7-8% return or $80K per year from 1M cash value is unrealistic. To get 8% return, the index credit has to consistently average 10% or above for next 40 years , which is not going to happen. The median cap rate for IUL’s is ~10.5%. A realistic goal will be 4-5% tax free return
STHOKK – Please read carefully. I did not state that the RETURN would be 7-8%. The 4%-Rule for traditional investments doesn’t imply a “return” of 4% either. I stated that you can take 7-8% as income. 8% of $1M is $80,000. Forever.
The beauty of a life insurance retirement plan is that you don’t physically withdraw the cash in order to take income. You borrow against the policy’s cash value. The insurance company is giving you a loan of their money with your cash value serving as collateral. So if you take an $80,000 loan on $1,000,000 of cash value, the entire $1,000,000 of cash value remains in the account and continues to earn interest crediting.
If we assume that the million dollars only earns 6% interest crediting, and your loan rate is 5%–which is contractually capped on many of the new indexed loan products–then you will finish the year with $1,060,000 of cash value and you will owe $4,000 interest on the loan. The life insurance company will loan you $4,000 and tack it onto your loan balance.
So while you have $1,060,000 of cash value in your policy, your $84,000 of loans means that you still have $976,000 of remaining collateral that you can still borrow against. You tapped into your collateral by $24,000 in order to get $80,000 of tax free income.
Now, on the other hand, if you had $1,000,000 in an IRA and you took out $80,000, You would only have $920,000 in the account that can grow. You have reduced your base. And, that $80,000 distribution would be taxed at ordinary income tax rates, so at 40%, you would only net $48,000.
Without going into the detail year by year, just use the Rule of 72 and flash forward 12 years. At a 6% net interest crediting rate (1), the cash value will be approximately $2M at that time . The 6% interest crediting means that the policy will be earning $120,000 that year.
If you are borrowing only $80,000 for policy loans, it means that the loan is entirely collateralized by the previous year’s interest crediting. You are no longer tapping into the collateral in order to take loans. This is the reason why the policy loan income ratio can be greater than the interest-crediting rate.
Note (1) – In a properly designed policy, the Cost of insurance at this point in time will be ~0.25%. So if you earn 6%, the net gain to the cash value is 5.75%. This blows apart the myth that increasing mortality costs will cause an IUL to lapse. Mortality rates could double and it would barely impact a policy.
This is a goofy argument for cash value life insurance. Assets and income are fungible. For example, one can easily take $100K in stock index mutual funds, with relatively low income, and purchase a SPIA with it, with relatively high (and guaranteed) income.
I don’t buy that an IUL can provide 2-3 times the after-tax income because to compare apples to apples you’re talking about a dramatically lower sized account. Do you really want a $200K IUL instead of a $1M taxable account or IRA? Almost surely not. But that’s the real comparison. You’re not comparing a $1M IRA to a $1M IUL.
You’re making my point. If you converted $100,000 of mutual funds to an annuity, the principal and interest of the annuity would be approximately 4%… supporting the 4%-Rule. They would get approximately $4K/yr for life.
If someone has cash value life insurance with $100,000 of cash value, they can take the safe route and exercise a lifetime income benefit rider. Different companies have different names for this but it essentially takes the cash value and converts it to an annuity that is guaranteed for life. And like an annuity, it will pay about 4% per year forever.
Assets and Income are not fungible. If someone has a pension from their employer, they wouldn’t need to save 1-cent toward retirement, but they would have income. Assets are just a number on your account statement. Its nothing but a piece of paper. Statements don’t pay bills. Income does.
The commonly accepted rule of thumb is 4% for traditional assets. Cash value life insurance and specifically an IUL is more like 8%. That’s because you are not physically removing the cash from the account. You are borrowing against it.
Don’t take my word for it. Build a spreadsheet and prove it to yourself.
If however, the client simply borrowed against their policy, they could expect to take about $8,000 per year. I’m no doctor, but I’m pretty certain that $8,000 is twice as much as $4,000. And once you factor in taxes, its quite close to three times as much.
The SPIA rate you get depends on age. At 70, a SPIA generally pays quite a bit more than 4%. Immediateannuities.com is quoting me 7.2% for a 70 year old male.
But again, you’re missing the point. You need to compare $100K in mutual funds to $30-40K in whole life insurance.
Assets and income ARE fungible. Sorry. You’re entitled to your own opinions however silly they might be. But you’re not entitled to your own facts. Got an income stream? Someone will buy it off you. Got an asset? Someone will trade it for an income stream. You don’t need to buy unnecessary life insurance to get a guaranteed income stream.
You’re clearly not a doctor, but rather someone who specializes in selling the high-commission financial products they later regret buying.
Your site says: “Permanent Life Insurance should make up the core of your retirement savings.” I think that pretty much tells everyone here everything they need to know about you and your advice. I put you in the same category as the local radio guy around here who is encouraging everyone to pull all the equity out of their houses, liquidate their IRAs/401(k)s, and use the proceeds to buy IULs.
Its Interesting to note that you feel compelled to state the obvious: that an annuity will pay more at age 70 than at normal retirement age. Duh. Its basically a loan amortized over the annuitant’s lifetime. The longer you wait, the higher your payments.
Yet, you make a blanket statement that $100K in mutual funds will compare to only $30-$40K in whole life! Is the policy overfunded or minimally funded? How many years of contribution and compounding? These are all factors that impact the growth in both scenarios.
For most people, the same $1000 per month going into an overfunded IUL versus $1000 per month going into a typical mutual fund is going to result in more income for the person choosing the IUL. End of story. I make this comparison for every client. I even let them pick the growth rate they want to assume on their traditional savings. A mutual fund is simply unlikely to outpace the IUL by 2:1.
To your point, if I can buy a cashflow, the obviously the cash value is worth much more than the alternative.
Overfunded life insurance is far from a high commission financial product. Someone paying a financial advisor to manage their money is going to end up paying them far, far more than an agent will ever receive selling an overfunded life insurance policy.
You simply don’t understand life insurance well enough to be advising your readers to not use it in their retirement plans. Throughout this entire thread and all over your website, you only make comparisons of investment to cash value. That tells me all I need to know about you. You don’t get it. As I’ve shown, that comparison is meaningless… Income is what matters.
Break out a spreadsheet and prove I’m wrong. You won’t be able to do it.
Let’s take a look at some IUL policies purchased 5, 10, or 15 years ago and and see what their returns were. Then we’ll compare to a few mutual funds. It’ll be pretty easy to extrapolate out those returns for 30 years to see that the higher returning investment will grow to substantially more money. Or are you seriously trying to argue that an IUL will grow as quickly as a solid mutual fund portfolio despite having to provide insurance, massive commissions, company profits, and guarantees? Surely you’re not doing that.
You’re nuts if you think $1,000 going into an IUL is going to provide more income than a mutual fund invested in the same index over the long run. Seriously. Not only is it not the “end of story” it’s ridiculous to make the assertion. But your comment gets even worse:
“Overfunded life insurance is far from a high commission financial product”
Only the guy selling it would argue the commission isn’t high. Just because it can be structured in a way to make the commission even higher doesn’t mean it isn’t high commission. Do explain to readers what the commission is on the products you sell and we’ll let them judge if the commission is high or not. But I do agree with you that it is entirely possible to pay a financial advisor more. Of course, given the complexities of IULs, chances are you’re going to be paying an advisor either way to figure out what the heck to do with the thing later.
We’re clearly not going to agree that your entire professional life is a huge disservice to my readers. Beats me why you came here. You’re the subject of this blog, not its target audience. I suggest you rethink what you’ve chosen to do with your life because your clients, if they’re like most of my readers that run into your ilk, don’t appreciate it once they learn what you did to them. The fact that you think 8% of $30K is more than 4% of $100K tells me all I need to know about your mathematical abilities. The fact that you think an investor should not focus on total return but only on income tells me even more.
Have a nice life. I”m done here and so are you.
For those following along at home, this well-informed insurance agent:
https://theinsuranceproblog.com/indexed-universal-life-insurance-policy/
calculates that over 30 years, an IUL is likely to provide a 3-5% return, similar to a whole life policy. There is only a 13% chance of getting a 6% return and essentially no chance of a 7% return. And that’s using historical data. If you use that same historical data, you will see dramatically higher returns from a real index fund. The Vanguard S&P 500 Index Fund has an 11%+ annualized return since inception.
At 11%, $50K/year for 30 years grows to nearly $10M. At 5%, that same $50K/year for 30 years grows to $3.3M. It doesn’t take a genius to see that $10M in index funds is worth a heck of a lot more than $3.3M in an IUL. If you want guaranteed income at that point, then annuitize the $10M and get yourself $700K/year in income. Or maybe, if you’re lucky, you can get 8% “income” out of that IUL. $3.3M x 8% = $264K. Heck, why not get your $10M, annuitize half of it ($350K/year) and let the other $5M ride? You have more income than the IUL guy and you have far more left over.
Returns matter and the longer the time period the more they matter. And you should expect much lower returns out of an Index Universal Life Policy than an Index Fund. No amount of spin from those who prey on doctors to sell these crummy products will change those facts.
If it didn’t seem so difficult for agents to design an investment grade contract, IUL’s might already have wider fanfare. The bar for becoming an agent is low enough that someone with the math and statistical insights of a Dave Ramsey listener/client can easily qualify. They emotionally might need a guarantee of performance because their risk profile is at the extreme conservative end. Everybody else though, can sleep very well at night IF they have found the right agent who puts a goose that lays golden eggs in their portfolio with a max-funded IUL and teaches them to manage the product if optimization is desired.
As for my personal IUL, it’s 5 yrs old and is currently within 1% of parity. That is actual, not illustrated. Whole Life illustrations couldn’t reach parity for at least 7 yrs and most didn’t illustrate it till around 12 yrs. And I’ve already borrowed against it to buy real estate. (bridge loan, paid back)