About 20% of the amount of money spent on life insurance policies today is being spent on one of the hottest insurance plus “investment” product…indexed universal life. Many of our clients are getting pitched this absolute garbage of a product where regardless of what the markets are doing, you will always make money and of course, you get to insure your life on top of that.
And a typical pitch goes like this…by buying this policy, you are going to get the benefits of the rise in the stock market in the years that it is rising but not suffer any losses in the years that the stock market declines. Sounds like the 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 absolute piece of crap. 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 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 by owning stocks. The stock market goes up and down like somebody’s heart 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 of years of premium payments you make are exclusively devoted to paying back the broker who sold you this crap.
OK, you somehow were roped in to buy 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 itself would wipe out several years worth of returns.
Is there a circumstance where index-universal life or anything related to universal life or whole life ever makes sense? Never.
And 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 then.
You want to buy insurance, buy term and of course invest the rest.
Image credit – Cat Branchman, Flickr