Indexing with life insurance — DEFCON level 5 alert

By Steve Savant

I just want to give everyone selling IUL a heads up. As you know, financial advisors have been trumpeting the IUL “no down side” in a bad market, i.e., no policy losses.

However, policy expenses like premium loads, admin fees and (the biggest one of all) cost of insurance are debited from the account cash values. Depending on the policy, these expenses could be at the least 2 percent to 3 percent or more, resulting in a loss. That’s why I like IUL policies that have floor rate guarantees to pay part or all of the annual policy expenses. Remember, the S&P went negative three straight years from 2001-2003. That's like a 2 percent to 3 percent compounded loss over three years, so it’s an issue.

Here's another red alert! IUL is excellent for tax advantaged supplemental income, if it's done right. If it's done wrong it's a very expensive way to save for retirement. But using IUL as an indemnification policy is counterintuitive in protecting guaranteed lifetime liabilities with a non-guaranteed product.

Guaranteed lifetime indemnification planning scenarios, which require life insurance, should be covered with guaranteed universal life (GUL) and/or whole life. Using IUL, variable universal life and/or current assumption universal life depends on non-guaranteed events of indices, interest rates and market performance, all of which are exposed to economic conditions that can't be guaranteed.

One more DEFCON warning: Hybrid products like IUL on a GUL mortality chassis sound like the best of both worlds, but either the death benefit or the accumulated cash values suffer. You can't have your cake and eat it too. Either this is an indemnification or an income scenario.