5 Reasons Not To Buy Indexed Universal Life Insurance

JUNE 17, 2014
James M. Dahle, MD, FACEP
5. IULs have participation rates
If that wasn’t bad enough, there is also something called a participation rate. If your participation rate is 80%, that means that if the stock market goes up 10% (not counting dividends) you get 8% credited to your cash value account. After 30 years, a nest egg growing at 8% instead of 10% ends up 42% smaller.
Adding It All Up
So how can IULs offer “market returns” while still guaranteeing you won’t lose money, at least on a nominal basis? They don’t.
You simply don’t get anywhere near the market returns due to the costs of the insurance, the additional fees, the loss of the dividends, the cap rates, and the participation rates. These products don’t pass the common sense test.
How can an insurance company give you most of the upside of investing in stocks while eliminating the downside? They don’t have any magic investments; they have to invest like anybody else. In addition, they have to generate enough money for profits and to pay hefty commissions to their sales force.
These policies are likely to provide a return very similar to that of whole life insurance (with the possibility of much worse performance), which is easily seen to be in the 2% to 5% range long term for a policy bought today and held for life. While it may have the word “index” in its title, an IUL has much in common with whole life insurance and almost nothing in common with a high-quality index mutual fund.
While guarantees are always nice, you don’t want to overpay for them. With IUL, you are doing so in the form of much lower returns.
James Dahle, MD, FACEP, is not an accountant, attorney, insurance agent, or financial advisor. He blogs as The White Coat Investor and is the author of the best-selling The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing.

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