Setting Off The Alarm Regarding Indexed Universal Life Insurance

Forbes released a piece in July of this year with the goal of “Sounding the Alarm on Indexed Universal Life Insurance.” If you would want to cite this article, here it is. The post promotes several half-truths and makes numerous false claims on universal life insurance, just like all the ones that came before it. We’ll talk about the author’s mostly untrue statements and their correctness.

Indexed Universal Life Insurance Is The Most Lucrative Product In The Market

The article states right away that one of the most successful products in the life insurance business has been indexed universal life insurance (IUL). It offers no references to back up its assertion. Despite my familiarity with life insurance sales statistics, I’m not sure if I would submit this claim. I am aware that, based on written premiums, IUL is frequently cited as having one of the quickest rates of growth among life insurance products. However, we demonstrated more than two years ago that this statistics may exaggerate the IUL’s success while ignoring the fact that it is replacing the sales of ordinary universal life insurance.

Complexity And Difficulty By Using Strange Indices

The interest rate paid on cash value of index-linked universal life insurance is based on changes in an index. Frequently, this index resembles the S&P 500 Value Index. To offer a wider range of possibilities, some insurance companies have, nevertheless, established alternative indexes to track. The author of the piece tries to portray this practice negatively by claiming that unaware customers might be investing the proceeds from their policies in more “esoteric” investments like “the Heng Seng, Gold, and Emerging Markets.”

Since I was about 14 years old, I have been aware of the Heng Seng. Investors frequently monitor this significant Asian market in order to assess the state of the world economy. It is not esoteric in the slightest. I wouldn’t classify emerging markets and gold as arcane market segments. I’m not sure how many IUL products are available with indices other than the S&P 500, but I do know that there are some. I’m not sure what the issue is, but I’ve seen some folks do really well with these non-S&P500 indexes. This, in my opinion, is more about saying something that might sound horrible and hoping that no one would ask you to defend it—because in the end, it’s not.

IUL Allows You To Trade Options?

A well-known scare tactic against indexed insurance products centres on the use of options (such as puts and calls) to determine the interest payable on these products. Generally speaking, the investment industry considers trading options to be risky. This can be true when purchasing options contracts rather than stocks with the expectation that stock movement would enhance the options contract’s return relative to owning the stock. The ultimate drawback is that if the options contract expires before the anticipated movement occurs, you will have lost 100% of your investment.

However, trading options entails more than just purchasing the put or call and crossing your fingers that the market will change before the contract expires. To reduce risk, a lot of people employ alternatives. Actually, that was the original purpose of options agreements. Options can be used as a hedge for your particular stock strategy in a variety of ways. Professional investors can utilise options in a variety of ways to reduce the risk of loss in a portfolio, which is exactly what life insurers are doing.

Is Indexed Life Insurance Costlier in Some Way?

“IUL policies can have much more fees and expenditures than a normal life insurance policy in order to pay for the budget for the money management involved in options trading as well as to recompense the insurer and its agent. Steven Roth, president of Wealth Management International, is an insurance analyst and litigation consultant. He claims that one insurer charges up to 8% of the premiums and cash value in the policy in the first year alone. That surpasses the majority of hedge firms.

This is just another assertion that has no supporting data. Is an ordinary life insurance policy less expensive than an indexed universal life insurance policy? I have never seen any proof to support that. Actually, based on what I’ve looked at, it seems to be the complete opposite.

About the 8% percentage. I’m not sure why, presuming the author felt the material he gathered was adequate, he wouldn’t expressly name the business or product as an example. I’m not sure what this is founded on. I think this sounds a lot like hearsay. And it’s life insurance when it comes to comparing the costs to a hedge fund. The life insurance company owes the insured’s beneficiary a substantial amount of money if the insured passes away soon after opening the policy.

These Regulations Are Hard to Understand

In an attempt to portray indexed universal life insurance as an unduly complex product, the essay concludes with some instances. The head of a consumer protection organisation is quoted in the story as saying:

Therefore, it makes sense that IULs are difficult. A Pacific Life policy that is difficult for the buyer or even the insurance agent to read, with 72 pages of legalese and several profit estimates referred to as “illustrations,” was obtained by Birnbaum’s Centre for Economic Justice. Pacific Life did not return calls or emails that were made repeatedly.

How much effort has the Centre for Economic Justice spent advocating for increased insurance product disclosure? This argument appears to be dishonest. Insurers do not reveal enough information, on the one hand. We argue that it’s too difficult when they do try to provide us all the information we request.

Additionally, there is a mention of premium finance IUL policies, which implies that anyone is being advised to consider this. That is undoubtedly untrue. Regardless, we have expressed our opinions about premium financing IUL in an effort to increase cash value.

A mention is also made of one of the experts who was questioned being involved in cases brought against life insurance companies for their excessively intricate billing procedures. Although the author doesn’t list specific cases, I was able to locate what is most likely the primary litigation that is discussed. It is a case involving universal life insurance in general rather than indexed universal life insurance specifically. The plaintiff alleges Prudential failed to comply with the new standards, and this is another reason the case only exists because the state of California amended its laws in 2013.

Created Panic

I won’t claim that negative things can’t or haven’t happened to indexed universal life insurance, or to any other type of life insurance policy. There are instances of dishonest and inept representatives hurting unsuspecting clients. The insurance sector is not the only one with such tales.

However, there is a bit too much sensationalism in this piece. There should be a lot more blood in the streets if this product was the monster that it is depicted as. The simple truth is that there is no such dread.

The author spent a great deal of time explaining why negative things can occur if we suspend our critical cynicism. However, it did not present any particular dire situation in which individuals were harmed. We have to assume that IUL ownership is, at the at least, in the tens of thousands, if not more like the hundreds of thousands, if this product is the sales superstar the author initially said it is. If we genuinely think there is danger looming, and if this is the case. Over the course of the product’s roughly 20-year existence, there should have been enough of proof of its detrimental effects on the consumers. But there isn’t any of that kind of evidence.