About 20% of the amount of money spent on life insurance policies today is being spent on one of the hottest insurance / ‘investment’ product…indexed universal life. Our clients, especially the new ones have all at one point or the other been pitched this absolute garbage of a product which promises that regardless of what the markets do, you will always make money. And while at that, you get to insure your life. No kidding.
And a typical pitch goes like this – by buying this product, you are going to get the benefits of the rise in the stock market in the years when the markets are rising but not suffer any losses in the years that the stock market declines. Sounds like a perfect free lunch. The trained salesperson will show you just how fantastic this thing is through what are known as policy illustrations. But these policy illustrations will show a fake return on your money that is greatly inflated making it look like that you, the pauper, will suddenly become a multi-millionaire just by buying this product. And no, according to that salesperson, life insurance is not about death benefits for your survivors. It is about a tax-advantaged way to get rich.
Well, the state of NY just launched a full-scale investigation into all the dishonesty going on with the sale of these policies. Insurance is supposed to be regulated by the states and it seems the other 49 states are silent and looking the other way with all the crooked stuff that is going on.
What really happens once you buy these policies? You get a tiny portion of the gains of the underlying stock market index in a given year with no credits for any dividends which comprise the bonus payments you get for owning stocks. The stock market goes up and down like someone’s EKG but when the gains are capped in a good year, you are leaving huge money on the table. And this guarantee that you won’t lose money, that’s another big fat lie because there are so many conditions you have to meet to avoid the losses in down years that it’s not worth counting.
So your one hand gets tied behind your back with the minuscule returns you get by buying these products and the other hand almost gets severed by the gigantic fees (about 3% a year) embedded in the underlying investments.
And you know why there is an army of these salespeople trying to sell these products so hard. Commissions. And they are huge. The first couple years of premium payments you make are exclusively devoted to paying back the broker who sold you this crap.
So okay, you were somehow roped into buying this policy but later, when you found out just how bad this product is, you want out. Nope, not so easy. You have to buy yourself out by paying a surrender penalty. That penalty by itself would wipe out several years’ worth of returns if there are any.
Is there a circumstance where indexed universal life or anything related to universal life or whole life ever makes sense? We have never found one.
So the next time a salesperson pushes this garbage on you, try to find out whether the person selling this product personally owns this junk. You will get your answer.
You want to buy insurance, buy term and of course invest the rest.
Image credit – Cat Branchman, Flickr