Insurance companies do in fact reserve the right to lower caps so they can adjust them with steadily falling interest rates like we’ve seen over the last couple decades. I intend to dispel all the common myths about IUL’s pros and cons and replace them with indisputable facts and critical thinking when looking at the pros and cons of Indexed Universal Life.I am an independent life insurance agent who personally owns a plethora of different life insurance products covering 6 family members. For a whole life policy, the lifetime’s worth of mortality charges are essentially averaged throughout the life of the policy. (Note: Keep in mind that all Indexed Universal Life insurance policies have some sort of fixed account like the old UL policies that participated in rising interest rates). Indexed Universal Life is meant to benefit insurance agents and companies much more than the policyholder. Like whole life, universal life is designed to cover you for your entire life while growing your cash value. By limiting the amount of growth potential in the options strategy, the IUL carriers bring down the net cost of the options backing this growth strategy to the point where it is economically viable for them to offer you. If for whatever reason your Whole Life policy with a supplemental term rider doesn’t grow as expected, Whole Life agents will tell you that you can simply drop the rider and be left with a much smaller base Whole Life policy that is sustainable. They use it to vilify Indexed Universal Life insurance and to distract from the true value proposition that makes IUL crediting so unique and powerful. In fact, the next time you hear this kind of blanket statement from someone, ask them to explain exactly how IUL fees are assessed. Often it is ignorance. Lifetime protection; Flexible premium – you can increase or decrease your premiums depending on your budget. So looking at the “late premiums kill guarantees” comment through this particular lens, it is clearly false. Unlike term life policies, indexed universal life never expires. So, going back to the debacle of the 1980s. However, as with any investment, it has both pros and cons. Ask your investment advisor how much they would charge to provide a cheaper investment alternative that can offer the exact same combination of benefits offered by Indexed Universal Life insurance. So late premiums don’t matter with IUL unlike with say a Guaranteed Universal Life product or even Whole Life, both of which have some sort of rigid mandatory premium structure to support such guarantees. It’s worth mentioning that there are a few select companies that do offer an optional “No-Lapse Guarantee” rider that you can attach to your Indexed Universal Life insurance policy. Even after you buy a policy, you may be able to adjust your length … However, this next little factoid of information is something that the critics conveniently omit in their attacks on Indexed Universal Life insurance. Most informed agents will tell you (even if they have a strong preference for Whole Life) that Indexed Universal Life insurance for retirement can work very well through life expectancy as long as it has been funded properly. That way consumers could more nimbly benefit from the rapidly rising interest rates. Policy Risks Although a portion of your premiums go toward your cash value, very little of your money goes toward cash value in the first few years after your initial purchase. All of the cash value would be needed to support the guaranteed death benefit, and there would be little or no dividends to distribute as income. I think not. Universal life insurance (also known as UL policy) is a type of life insurance which combines two elements: a lifetime coverage and a savings account feature. These agents will highlight the fact that companies that offer Indexed Universal Life retain the right to lower index caps as if it’s an inevitable trap for consumers. The max loss you can experience when buying options is the cost you pay for the options themselves. Thanks -- and Fool on! But universal life is typically much cheaper than whole life. It’s worth noting too that I also still own some term insurance on myself and my wife, but each of these polices has a guaranteed conversion privilege to either Indexed Universal Life or Whole Life insurance from highly-rated companies.For the record, I am also licensed as a registered investment advisor and am part owner in a boutique Registered Investment Advisor (RIA) firm. This article was updated on May. Most of the online slams you find against Indexed Universal Life (IUL) come from sources with a clear agenda to stir up hype and/or push their wares instead. Take the time to understand the benefits and risks, as well as to look closely at alternatives that may be a better fit. As the insured gets older, he/she is more likely to die, and therefore the cost of insurance with an IUL will go up. That said, the cost of options in the new interest rate environment will also need to be considered. However, since Indexed Universal Life is suited to harness this upside movement while eliminating any downside free-falls, volatility now becomes your friend. When it has a significant correction, it plummets downward quickly. Since the insurer makes its money by keeping a portion of the gains, returns will always trail the index. Even though the IUL cost of insurance per unit has increased because you’re now 4 years older, you are will now only be charged IUL fees for $300,000 of death benefit. Most articles about life insurance discuss two basic policy types: term life and whole life. Here’s where the annual reset feature really matters. Let’s think critically for a moment. Pros of Universal Life Insurance. You can choose how the death benefit will be paid out by selecting either Option A or Option B. So if the S&P Index rises by 12% or more without including dividend payments, and the cap on your IUL crediting is 12% that year, does it matter that the 500 companies making up the S&P Index paid an additional 2% dividend? These non-term policies usually include a savings or investment component in order to help insurers mitigate some risk. These variable universal life insurance pros and cons indicate that this type of policy can be beneficial to a certain segment of consumers. Indexed universal life insurance is one of several permanent life insurance products with a cash value component. What portion of my assets would I be willing to cap my annual growth in the 10%-13% range so that I can completely erase the possibility of downside market risk? In fact, most would be hard-pressed to list even half of the benefits that can be provided by IUL. This is the worst period anyone can find in the stock market. Sound familiar? This may have been true in the past with some IUL agents, especially those who naturally have a tendency to over-promise and under-deliver. The reason why S&P 500 dividends are not paid in an Indexed Universal Life policy is simply because of the options-hedging strategy that the IUL carriers must use to create this unique crediting strategy. Lower risk than stock investing, since cash value won't decrease if the target index falls. Premiums can be lower than traditional universal life insurance plans. However, the fees and charges of Indexed Universal Life insurance (video) can often be greatly reduced by simply funding your policy to the maximum allowable limit within the first 5-7 years (more on this within the section about IUL Cost Criticisms). Indexed Universal Life for clients wanting rock-steady guaranteed growth every year rather than the potential for greater upside growth in any given year. It’s really not any different than companies offering Whole Life lowering their dividend interest rates over the same time period. As interest rates fluctuate, Indexed Universal Life caps rates have and will likely continue to trend with prevailing interest rates. Depending on your situation, the total costs paid may net less long-term benefits versus other insurance and separate investing alternatives. Guess what…they can’t without using some sort of life insurance product. Other than hiding money under my bed while waiting for a crash, how can I truly take advantage of the great buying opportunities that market crashes can provide? Their Sources: Lipper, Thomson InvestmentView and Standard & Poor’s (S&P), a division of The McGraw-Hill Companies, Inc. Each calendar year listed in chart reflects average annual performance from December 31 of the prior year to December 31 of listed year. Since the insurer makes its money by keeping a portion of the gains, returns will always trail the index. I agree that in all likelihood this will be a true statement. This is because when you earn that double-digit crediting on your balance that experiences no losses in the 0% years, it has a much more profound effect on your cash value than even a linear 7% average even when zeroes are peppered in between. That’s right, many IUL carriers currently have a 5% or 6% loan option that would be locked-in for life as soon as you initiate one of these policies. This fixed crediting rate fluctuates usually trends with prevailing interest rates. Most IUL carriers currently offer a fixed crediting rate in the 3%-4% range. The twist is that the cash value pays a return based on increases in an equity index, like the S&P 500, versus a fixed rate as with standard universal life insurance plans. With your investment portfolio, major market fluctuations can be a perilous risk factor to your retirement. I say this because there are a couple different ways you can this take comment. What are the pros and cons of indexed universal life insurance – What is index universal life insurance? [Pro Tip] Your escape hatch if IUL’s increasing insurance cost structure got out of hand. Invested in the context of long-term family wealth planning has gone on years. Forward each and every year throughout the life of the bullish years with double-digit gains. 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