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Are IUL Safe For Infinite Banking?

It’s important to understand that all permanent life insurance policies work the same under the hood. This means that any time someone tells you that you that:

  • IULs will lapse from the rising cost of insurance, or
  • You need to use Whole Life because of the Guarantees

That person doesn’t understand how life insurance works. Both types of policies are safe to use for The Double Play and Private Banking.

I came across this “Top 10 Reasons NOT to buy an IUL” list online. This comes from a market leader who should know better. The vendor is pushing a Whole Life product for Private Banking while discrediting IUL. It’s crucial to understand that Private Banking strategies utilize Maximum Over-funded Life Insurance Policies. Taking this further, it means that is disingenuous to compare an over-funded Whole Life with a Traditionally-funded IUL.

I’m going to go through their list of reasons not to buy and IUL and show you where they are wrong.

The information below is intentionally misleading, if not outright lies. Unless you talk to a well-rounded and unbiased expert you’ll never get the full story.  When all you have is a hammer, everything looks like a nail.  

#10  Internal costs are not guaranteed

It’s important to realize that the life insurance market is very competitive. That means guarantee or not, insurance companies are not changing prices enough to price themselves out of the market. Does putting a guarantee on something that is unlikely to change matter? Not really. Just remember that all insurance policies recover the same costs: Policy Issue Charges, Premium Charges, Cost of Insurance. These may go by different names, but they are all in every policy. [Learn about Policy Charges]

#9 Mortality charges are not guaranteed

One thing that you should know: All insurance companies use the same mortality tables. They update these tables from time to time, but changes only impact new policies. Again, does guaranteeing something that is unlikely to change matter? Not really.

The other important thing to understand: They are comparing apples and oranges. Are you trying to get the most death benefit for your money? Or do you want as much cash value as possible for your money? It’s important to recognize that the Policy Design impacts the cost of insurance. In a properly designed, maximum over-funded policy, the policy owner can slash the death benefit when they want to stop premiums. It’s important to realize that this decrease in the Death Benefit will cut the cost of insurance to less than 0.25% of the cash value. [Learn More: What to look for in a Properly-designed Policy?]

Just understand that when the policy owner cuts the Death Benefit, they must spend a defined percentage of the Cash Value on Death Benefit. This percentage is usually less than 0.25% of the Cash Value. That means that increases in the Mortality Charges simply result in less Death Benefit. Every illustration shows this in the policy fees and expenses report.

#8 Market drops cause double pain

As I stated earlier, under the hood all permanent life insurance policies work the same. It’s important to understand that all life insurance companies invest their assets in the debt markets. That means they buy Bonds, Treasuries, Mortgage-backed securities, Preferred Stocks, etc. You need to realize that an IUL DOES NOT invest in the stock market. [Learn More: How does IUL Work?]

You should be aware that IUL and Whole Life only differ in how they credit their investment gains to each policy. A Whole Life policy credits the net gains on their assets to each policy as a Dividend. In an IUL, the insurance company uses what would have been the dividend for hedging in the Index options market. The goal of the hedging is to capture as much movement in the market as possible with the money. Realize that if the market indices decline, the insurance company only loses the money it spent on hedging. This means the drops in the Stock Market do not impact your Cash Value.However, it’s important to point out that when the markets are up, the interest crediting may significantly exceed dividend rates. [Learn More: How Dividends and Interest Crediting Work]

Again, I want to stress, even if the stock markets drop 40%, they do not impact the cash value. Perhaps the author is confusing a Variable UL with an Indexed UL.  If not, then understand that this is just plain wrong.

#7 Late premiums kill any guarantees

I want to make clear that that there is no direct linkage between premiums and guarantees in an IUL. It’s important to point out that a Maximum Over-funded policy can run for years off of just the first year premium. What happens is that each year, the Insurance Company deducts the policy charges from the Cash Value. While you would not want to continue this, it is important to know that it would not impact the guarantees on the product.

As long as there is cash in the account, the policy will remain in force. The Guaranteed rates are meaningless. It’s important to recognize that Guarantees are just the Actuarial growth rate that the policy must achieve to be viable. State regulators heavily regulate insurance companies. The insurance companies intend these actuarial rates to represent the worst case scenario. And in any case, the Insurance Company credits everything they earn to each policy anyway. See above. [Learn More: Do Guarantees Matter?]

#6 Dividends from the index don’t get credited

Nope. It’s important to repeat that an IUL credits interest based on the movement of a market index. The Insurance Companies do not invest in the market, so they do not pay dividends. Why is this an issue?

The goal of an IUL is very simple. It is to earn a premium over what they would have credited as a dividend. The goal IS NOT to match the performance of the market indices. This is trying to create an issue where none exists.  A claim that the indexing strategy has credited 8.2%, for example, doesn’t have to be adjusted for dividends. [Learn More: How Dividends and Interest Crediting Work]

#5 Participation ratios are often less than 100%

Remember that the goal of an IUL is to earn a premium over what they would have credited as a dividend. There are many different ways to do this with Index options. While some crediting options may have lower participation rates, nearly every insurance company has an option linked to the the S&P 500. I have never seen a company without a 100% participation rate on this option.

More importantly, companies often offer alternatives with much more than a 100% participation rates. Again, I just want to stress that the insurance company sets up the hedge that determines the Caps and Participation Rates.

#4 Returns are usually capped at various interest rates

It’s important to note that this is the whole point of an IUL. Just realized that the Insurance Company wants your Cash Value to grow as quickly as possible. They are not out to screw you. The faster your Cash Value grows, the faster it eliminates their risk. You should be aware that this is true for both Whole Life and IUL. For all practical purposes, the Cash Value is quite literally the Policy Owner saving up the death benefit over the life expectancy of the Insured Party. This means that the Insurance company is only responsible for the gap between the Death Benefit and the Cash Value. Do you understand why they would want that gap as small as possible?

are IUL safe?

This graph shows the Net Amount at Risk to the Insurance Company. It is the amount between the Cash Value and the Death Benefit. [Listen to a detailed explanation]

It is important to understand that an IUL has a lower risk of lapsing. The interest crediting should be higher due to the options hedging.The cash value should grow more quickly thus reducing the Net Amount at Risk.[Learn More]

#3 Guarantees are not calculated annually

It’s important to understand that the Cap and the Floor are the mechanism that determine interest crediting. That means some years may have zero crediting. Other years may dramatically exceed dividend crediting rates. If the guarantees were calculated Annually, then it would be a 2% or 3% floor, right? That defeats the point. [Learn More: How does IUL Work?]

This is not a problem. This is exactly how it was designed to work.

The way Guarantees works in an IUL, is that they retroactively look at the growth to see that it met the Guaranteed Rate. Let’s say that the Insured died after the policy was in force for 5 years. A Whole Life policy would have credited a Dividend every year, as expected. The trade-off with an IUL is that you exchange that certainty for the opportunity to earn a premium over the dividend rate. Now if by some fluke, the markets were down for 5 years and the policy received no interest-crediting, THEN the Insurance Company would impute the guarantees on the Cash Value and Death Benefit.

#2 All of the above can be changed by the company

Considering my responses above, you can clearly see that this is ridiculous.  Companies have their reputations and competition at stake.  If I need to save X amount in Y years to pay a death benefit, I know exactly what I need to get for a return.  They are simply exploiting the word “can”. Dividend rates can be changed at the discretion of the company.

#1 The risk is shifted back to the insured

Now they’re just making stuff up. Again, just realize that both types of policies work the same under the hood. Remember the graph above? That is what all Traditionally-funded policies look like: Whole Life or IUL. If there is a difference, it is that the Cash Value in an IUL should be increasing at a greater rate.

Conclusion

To call this list “biased” is a tremendous understatement.  The author uses relays on deceit and misrepresentations.

The key thing to know is that there is little point in attacking the IUL. Both Whole Life and IUL are safe tools for The Double Play and other Private Banking methods.  Any knowledgeable insurance professional should understand that both products will work perfectly.  

The choice between a Whole Life and an IUL Policy comes down to your comfort level. If you like the consistency of steady dividend growth year in and year out, then Whole Life is your better choice. On the other hand, if you don’t mind the variable interest-crediting in exchange for the opportunity to earn higher interest crediting, then choose the IUL.

You should also be aware that a Maximum Over-funded IUL is the perfect vehicle for Life Insurance Retirement Plan. The superior growth of the Cash Value will translate into more tax-free income in retirement. But you should also realize that a Whole Life will work well for this application too.

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