Question for the Money Doctors
Question submitted on Jan 25, 2014.
QuestionI got an Indexed Universal Life policy through Nationwide. Death benefit of 250k which increases as the cash value increases. The interest paid mirrors the performance of the S&P 500 with a cap of 12% and a floor of 0%. Looking back at the performance of the index over the last 50 years it has averaged about 10%. I know there are no guarantees of future performance but I figured how could it not keep going up at about the same rate in the next 20 to 30 years. I guess my question is, is this a good option of where to put my money in order to have protection and have my money grow? Thoughts?? Thank you for your time!!
Hi, that is a great question. Indexed Universal Life (IUL) products are the hottest thing in the life insurance industry. The sales in IUL''s have increased dramatically while other products like traditional or Variable Universal Life has declined. You seem to have a pretty good understanding of the terms of the IUL, but the key is to make sure you understand the details of your individual policy. If you are utilizing this product for cash accumulation (which it sounds like you are) then you should fund the policy at a pretty high level. For example, if the minimum premium for the $250,000 face amount is $1,000 per year and the maximum premium (without creating a Modified Endowment Contract) is $10,000 per year you should fund it closer to the maximum than the minimum in order to build cash value. You should also understand how the IUL works.  It is built on a term life platform, so the death benefit gets more expensive every year. The later years can start to really eat into cash value if you didn't fund it enough or if it doesn't perform as well as expected.
That brings me to the 10% index return. I haven't seen illustrations that use 10% for the index returns. Most of the IUL''s I have seen have a maximum illustrated rate of around 8% or so. Keep in mind, the index returns quoted by the IUL's typically do not include dividends reinvested (they only include the price of the index). You should ask for a more conservative index return of around 6 - 7% for comparison. You will probably see a dramatic difference in the numbers long-term.
These products are fairly new and relatively untested in the marketplace. In theory they work very well, but there isn't enough long-term data to say they are completely safe or predictable. This isn''t to say that the IUL is a bad product you should just have a good understanding of the good and the bad side of it. Sometimes you just need to step back and see if it makes sense - 10% average return with no downside...that sounds a little too good to be true. I hope this helps.
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