The Golden Rules Of Buying Indexed Universal Life Insurance: OPINION
January 29, 2018 by Drew Gurley
Getting an indexed universal life insurance policy tailored for you can be a daunting task. Why? Because universal life insurance was designed to be flexible, which means there a lot of options to consider. In fact, if you took some time to shop online, you’d likely end up empty-handed.
To help you get a handle on the topic, I reached out to Tom Murphy, President of Murphy Financial services, who specializes in indexed universal life insurance.
Below are four golden rules to remember when considering indexed universal life insurance.
Rule #1: Shop your broker, not your companies.
This is where the internet can get you in trouble. There are tons of calculators and companies to be found on search engines that will try to persuade you to make a hasty decision, typically by pitching the cheapest rate. The most important item to remember about IULs, however, is that one size does not fit all.
“The fortunate thing for consumers is they have many strong options when shopping for permanent life insurance such as an IUL. The unfortunate thing is they have many options,” says Murphy.
I wholeheartedly agree with Tom. This is why it’s more important to shop your independent agent versus trying to shop all the companies on your own. Find an independent agent who specializes in indexed universal life insurance, not just term or whole life, and let them shop for the best options that meet your specific goals.
Having a strong independent agent can have a drastic impact on the quality of your policy.
Rule #2: Living Benefits Or Bust
Living benefits are the biggest thing to come along in life insurance in many years. In simple terms, living benefits are riders to your policy that provide benefits before you pass away. These enhanced benefits allow you to accelerate all or a portion of your life insurance death benefit while you’re still living.
Below is a quick glance at the most common living benefits included with indexed universal life policies:
- Terminal Illness:Insured policyholder is diagnosed as terminally ill and has 12-24 months to live.
- Chronic Illness:Insured cannot complete some minimum specified activities of daily living.
- Critical Illness: Critical illness benefit has many triggers such as heart attack, cancer, kidney failure or stroke. Normally, the greater the severity of the illness, the greater the living benefit payout. For example, Stage 3 cancer has a higher paying lump sum benefit that Stage 2 cancer.
- Critical Injury:Client experiences severe burns, traumatic brain injury, paralysis or coma. Most companies do not offer critical injury benefits, so it’s important to ask your agent if your policy options include this benefit.
According to Murphy, “Living benefits complete your safety net portfolio and provide an alternative to other standalone insurance solutions such as Long-Term Care, which is especially important for families living on a tighter budget.”
Why would you want a life insurance policy that doesn’t allow you to access the death benefit funds if you were to get sick or injured?
Rule #3: Level out the roller coaster.
We’re all aware of the roller coaster that is investing and maximizing our ROI. The stock market goes up and down, and while you’ll likely have more gains than losses, it’s still good to consider ways to level out the dips in the roller coaster.
“Indexed Universal Life policies are one solution to that anxiety-filled roller coaster ride by offering products with minimum crediting guarantees from 0-3%,” says Murphy. This means, regardless of the market performance, the money within your policy is contractually guaranteed. (Variance in minimum guaranteed is another reason to shop around).
What does that mean? It’s true that you might not earn as much as you would have invested in the stock market, but you are protected from what you could potentially lose. It’s diversification 101.
Murphy adds: “When the index increases, the insurance company executes its options and credits your policy up to the maximum amount of your policy.”
This means your policy is subject to a cap or crediting ceiling. Depending on the company, the caps are often in the range of 8%-18%. A cap of 18% means that, if the market returned 20%, you would only receive up to the cap of 18% — not 20%. If the market was negative, however, you would still get your policy guarantee.
So, there you have it. Make sure to review policy floors and caps, as they can make a drastic difference in long-term performance.
Rule #4: Cost Of Insurance And Underwriting
Although an IUL is a great vehicle to diversify your retirement savings, it’s not a solution for everyone.
For example, it’s much more expensive to insure a 60-year-old than a 30-year-old. The cost of insurance can quickly offset the policy’s ability to positively perform as the bulk of the policy premium is absorbed by the minimum cost of insurance (death benefit and associated fees), leaving less of the remaining premium to accumulate growth.
Underwriting is the next hurdle. If you’re facing health challenges, you may receive a sub-standard rating during the review. However, if you’re young, healthy and have substantial assets, an IUL could be a great option to diversify your portfolio.
These are the important items to consider before making a decision on an IUL. Remember to seek advice from an experienced independent resource who will provide all options — not just what’s in their company’s best interest.
Wink’s notes: Going for the ‘cheapeast’ IUL is definitely not the best tactic and Independent agents are just one channel (of six) that distribute IUL. Practically all IULs give access to the cash in the policy via an Accelerated Benefits Rider. IUL caps are not ‘often in the range of 8%-18%’ although the typical cap is 12% according to Wink’s LifeSpecs analysis tool, January 2018.