How Indexed Universal Life Insurance Is Destroyed by Fees

We have long maintained that a lot of the fear techniques are quite coercive and are intended to discourage individuals from purchasing universal life insurance products. The majority of the “evidence” consists of stories about “I know someone who knows someone who” who formerly owned one of those goods and experienced negative outcomes.

Bad things usually involve having to pay more premium later in life since, you know the story, the product didn’t live up to expectations. This demonstrates the ignorance of these so-called experts about the product and is a basic misunderstanding of universal life insurance.

Of all the life insurance products on the market, universal life insurance offers the most design flexibility. However, this design also means that it is the owner’s and the agent’s responsibility to utilise the product for the intended purpose.

As an alternative to full life insurance, it is not inexpensive. When looking for equivalent characteristics, $1,000,000 in universal life insurance shouldn’t be significantly less expensive than $1,000,000 in whole life insurance. Every online horror story about universal life insurance revolves around the notion that people can purchase death benefit at a significant savings compared to other life insurance options through some sort of magical means.

This has been brought up a few times already.

However, I want to use actual data to show how weak the popular defence of universal life insurance is now. a real set of guidelines. a real policy that was put into effect ten years ago but was not carried out by the owner according to plan. However, it was also a policy that utilised the majority of the elements that would guarantee its survival in any case.

A True Indexed Universal Life Policy with Historical Data

The current universal life policies are indexed by us. Furthermore, it is possible that we have a few clients who did not carry out their policies exactly as intended when you have been in this business for as long as we have. The same applies to whole life insurance, for what that’s worth. The percentage of policyholders who deviated from the original insurance plan is the same for both products. It’s a natural part of life, not a product issue.

We have one that has been operating for a number of years, but has received significantly less funding than the others. The policy: is it doomed? No.

It’s actually doing quite well.

At first, the policy’s cash worth was estimated to be little less than $250,000. In actuality, it has little less than $120,000. The really bad news is this. The policyholder would have more over $250,000 in cash value if they had paid the initial scheduled premium through this year. We can therefore observe that the rate of return is significantly higher than anticipated after accounting for the large drop in the actual vs. intended premium.

However, considering the actual premium paid, this policy does contain a significantly larger death benefit than is necessary, which undoubtedly portends a serious issue. Not really. The policyholder had the option to make additional payments to make up for the ones they had missed. They could contribute significantly to the policy. A six-figure sum of money. Around year three, they stopped paying the premiums as scheduled, and for the past three years, they haven’t paid the policy’s premium at all. That being said, they did not fail to secure funds for their policy.

Because universal life insurance is adaptable, premium payments can be made with a great degree of freedom. The policyholder might therefore go back and make up those missed premium payments if they so desired. The only life insurance policy that allows for this kind of payout flexibility in terms of timing is universal life insurance.

By taking this action, you would undoubtedly greatly increase the policy’s cash value and allay any concerns that it might have problems down the road.

The Declining And Increasing Costs Of Life Insurance

After ten years of service, the policy’s current yearly costs come to about $3,700. It’s possible that you are aware that indexed universal life insurance earnings haven’t been great this year. Due to the severe decline in the market, many products have had almost no interest paid on them. In this instance, the policyholder will always receive at least 2% on their investment regardless of market conditions thanks to the 2% guarantee provided annually. This year, those profits come to slightly over $4,100. That’s correct, they will still make $400 after costs in a year with a weak market. So much for years when the market was terrible and policy fees caused losses.

Remember that his policy is still at an expenditure level that is a little bit higher. We believe that fees as a percentage of cash value will continue to drop in the future, meaning that the 2% guarantee will easily outweigh costs even then.

However, let me remind you that this policy is by no means near the most financed possibilities we discussed previously when we emphasised the minimal likelihood that policy expenses would actually become an issue. Even though this indexed universal life insurance is executed mediocrely, it’s still good.

This life insurance policy has additional options.

To reduce costs, the policyholder may choose to modify this insurance at any time in the future. They have the option to lower the death benefit if they genuinely believe they will never contribute to the policy again. By doing this, significant costs will be avoided and the increase of the premiums paid thus far will be optimised in terms of cash value.

We could likely cut policy costs by at least half of what they are now, if not slightly more, in my opinion.

As a result, the policyholder benefits from an even larger difference between guaranteed interest—which is generated by the 2% guarantee—and continuing policy costs. Furthermore, this policy is currently in a phase wherein an additional guaranteed bonus is applicable. As a continuing gesture of appreciation from the insurance company for being a policyholder for so long, the policyholder will receive a bonus interest payment.

Over-State Issue

I’m not suggesting there aren’t any problematic universal life insurance plans out there. That is to say, any attempt to invoke such issues as a justification for rejecting universal life insurance as it is currently implemented would be, at best, naive and, at worst, purposefully misleading.