24 May 2013 0 Comments

Indexed Universal Life: What It Won’t Do

considerationIndexed Universal Life (IUL) seems to be the permanent life insurance policy of choice today.  That’s because the return from investing in debt instruments (bonds and mortgages), which is the primary investment vehicle for life insurance companies, has tanked.  So, tacking returns to outside indexes primarily tied to equity investments produces higher, projected policy cash values.  Will this IUL advantage hold up?  It’s hard to say.  Though equity investing can be more volatile than debt investing, over the long haul the equities usually outperform debt instruments.  What affect does this have on the permanent life insurance policy being purchased today?

To determine whether or not IUL should be considered, one must determine the purpose of the life insurance policy.  If the need is strictly to produce a death benefit guaranteed for life, then today’s traditional UL policies will outperform the IUL contract.  Take the case of a 50 year old male who wants a $500,000 policy to be in force when he dies—whenever that might be.  If he is classified as a Preferred Non-Tobacco user his annual premium for a traditional UL policy would be about $4,900.  This premium would guarantee the $500,000 death benefit to age 121.

If this same person instead purchased a $500,000 Indexed Universal Life policy and paid the same $4,900 annual premium, the death benefit would be guaranteed for only 20 years, taking the insured to age 70.  However, if the cash values grew by 6.7% every year and the cost of insurance and other policy expense factors were not increased above the current charges, the death benefit would continue for 43 years, to age 93.

Cash Values in the IUL policy would outstrip those of the traditional UL contract, but if the policy is to be in force whenever the person dies, then he must die before age 93. Who knows if that will happen?  And the policy must credit 6.7% every single year; that will not happen.

If he wants to extend the death benefit in the IUL policy by paying $5,500 annually instead of $4,900 the assumed death benefit would reach beyond age 93 to match the age 121 guaranteed by the traditional UL policy.  But the IUL’s guaranteed death benefit would still reach only to age 70.

There may be other IUL policies that would produce a longer range guaranteed death benefit than the one illustrated here, but at this time the Secondary Death Benefit guarantees produced by a straight UL contract will outperform the IUL contract.

When should the IUL policy be used?  That’s coming up next.  

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