Indexed Universal Life Insurance

[disneysteve]

I beleive colleges, when determining financial aid, do NOT count CASH VALUE life insurance against financial aid when doing means testing to see if you qualify or not.

That would make sense since the cash value doesn't belong to you. It belongs to the insurance company. it isn't your money.

[dczech09]

No colleges do not count cash value for means testing, and they should not either. The reason why is because cash value is not really an asset of the policyowner. The life insurance contracts state the cash value is the property of the insurance carrier. The only time that the policyowner will EVER take the cash value is they cancel and surrender.

I will look into this more as it does interest me. I do not believe that cash value can even be taken in a bankruptcy. Please do not quote me on that just yet

[Kooshiball]

I own IUL and there is obviously good and bad on that.

Good
1. In some IUL, there is a floor to the return (In my case, return is 1% guranteed return no matter what happened in stock market). Therefore, you won't lose dime NOMINALLY even if stock market crash to zero.
2. You can take out money tax free
3. Along with other investment benefit, there are death benefit with this.

Bad
1. I can't find any of this kind of plan without ceiling. My ceiling is up to 12.5%. In other words, when market performing well above 12.5%, then I only will receive up to 12.5% return.
2. Even if I don't lose money NOMINALLY in this vehicle, it is very possible that current inflation will wipe out purchasing power of the fund in REAL TERMS (I do think current inflation rate is above 10% in spite of government reporting of 2 - 3% which is absolutely bogus)

Therefore, it is depending on individual's financial situation and can't say necessarily that this kind of investment is bad. That's my opinion.

[dczech09]

I own IUL and there is obviously good and bad on that.

Good
1. In some IUL, there is a floor to the return (In my case, return is 1% guranteed return no matter what happened in stock market). Therefore, you won't lose dime NOMINALLY even if stock market crash to zero.
2. You can take out money tax free
3. Along with other investment benefit, there are death benefit with this.

1. The stock market will not crash to zero. I do not care how many doomsday believers there are, it will not drop to zero. The market has survived some pretty nasty storms and has always come back.
2. Yes you can take out the money tax-free. Do you know why it is tax-free? Because it is a LOAN! Last time I checked, loans are not income and are thus not subject to tax. You will either pay this loan back while you are alive, or your death benefit will be reduced by the amount that is owed.
3. What investment benefit? We have already pointed out that it is not an investment. I could go all day if you really want me to as I have studied this stuff in great detail. I understand how the rates are determined and how premiums are applied. If you truly understood the product, you would not have it for an investment purpose because there is none. The investment or savings theory already fails when you understand that the cash value is not yours. Please do not let the insurance salespeople fool you.

As for the death benefit- term life has this as well, just for a limited time frame.

Am I saying that IUL has no purpose. Absolutely not. It does have a purpose for a very minimal population of people (less than 1%). But for people to try to sell it as an investment?

That is where I am going to draw a line. As I pointed out earlier, permanent life policies only make sense to people who have a PERMANENT need for life insurance. It also works for some estate planning benefit. I will fight the investment thory on this until the end because I have seen too many people get taken in by false information.

[disneysteve]

I own IUL and there is obviously good and bad on that.

Good
1. you won't lose dime NOMINALLY even if stock market crash to zero.
2. You can take out money tax free
3. Along with other investment benefit, there are death benefit with this.

Therefore, it is depending on individual's financial situation and can't say necessarily that this kind of investment is bad. That's my opinion.

1. If the stock market crashes to zero, we'll all have far bigger problems to deal with than whether or not we have cash value on our insurance policy.
2. You aren't actually taking out money. You are borrowing against your death benefit. If you have a 100K policy and take out 10K from your cash value, when you die, your beneficiary only receives 90K death benefit.
3. The fact that there is a death benefit isn't that great since you could get the same benefit for a fraction of the cost with a term policy.

This IS NOT an investment. Calling it one is actually illegal. They are not allowed to sell these policies as investments and nobody should consider it to be one.

[Scanner]

I have to agree with the consensus here.

If the stock market crashes to zero, or there is a monetary crisis (not unfathomable. . .we had 3 currency crises in our American history), your money IS NOT PROTECTED.

AIG, Northwestern Mutual, etc. . .they are all invested in the stock, bond, and cash market as well.

If the worst happened, they come tumbling down and hard. . .and they would only survive, if, IF the government could bail them out.

The problem is, if there is a monetary or stock market crisis, CAN the government bail them out?

Probably not.

If you are trying to insulate yourself against catastrophe, gold and silver and perhaps some other commodities are the only way to do that. Even then, okay, I'm holding a big bag of silver. . .if the dollar is worthless, how are we going to price it for exchange? See the problem? If we are bartering, holding food, guns, and ammo are probably your best insulation against catastrophe.

I am also not a fan of a product that's difficult to understand. . .I think these complex life insurance policies are only good for specific financial circumstances, not the average investor.

[jpg7n16]

I do not believe that cash value can even be taken in a bankruptcy.

FWIW - not really an advantage, because neither can your 401k or IRA

The cash value exemptions seem to vary by state, so you'd need to speak to an attorney in your area for specifics.

From:Chapter 7 Bankruptcy Exemptions and Non-Dischargeable Debt

Retirement Benefits: Most retirement benefits are 100% exempt from the bankruptcy estate.

Life Insurance Proceeds: If you own a life insurance policy with a cash value, the cash value is 100% exempt from the bankruptcy estate.

From: Frequently Asked Questions | Wink and Wink, P.C.

Life Insurance and Bankruptcy

Q: What will happen to my life insurance policy if I file for bankruptcy?

A: You can keep your life insurance policy, subject to the Colorado bankruptcy exemption limit of $50,000 cash value.

From: Frequently Asked Questions | Wink and Wink, P.C.

Retirement Accounts and Bankruptcy

Q: Will I lose my retirement account if I file for bankruptcy?

A: No. Your 401(k), pension plan, deferred compensation plan, IRA and ROTH IRA is protected from bankruptcy. You will not be required to use any of your retirement funds to pay your debts in a bankruptcy proceeding.

[frankhoward]

Indexed policies allow policy holders to decide the percentage of their funds that they wish to allocate to fixed and indexed portions. Also, these types of universal insurance policies typically guarantee the principal amount in the indexed portion, but cap the maximum return that a policy holder can receive in said account. Since these policies are seen as a "hybrid" universal life insurance policy, they are usually not very expensive (due to lack of mangement), and are safer than an average variable universal life insurance policy. However, the upside potential is also limited when compared to variable policies.

[disneysteve]

Since these policies are seen as a "hybrid" universal life insurance policy, they are usually not very expensive

Really? Not very expensive compared to what? Certainly not to term coverage.

ETA: frankhoward, please stop the keyword spam for the structured settlements. Keep your posts focused on the topic at hand.

[jpg7n16]

Indexed policies allow policy holders ...

"Hey look at me! I can post directly, word for word from another site!! I can't think for myself, so I'll just cut and paste..."

From: What is indexed universal life insurance?

...Indexed policies allow policy holders to decide the percentage of their funds that they wish to allocate to fixed and indexed portions. Also, these types of universal insurance policies typically guarantee the principal amount in the indexed portion, but cap the maximum return that a policy holder can receive in said account. Since these policies are seen as a "hybrid" universal life insurance policy, they are usually not very expensive (due to lack of mangement), and are safer than an average variable universal life insurance policy. However, the upside potential is also limited when compared to variable policies.

Happens to be a user answered question at Investopedia, not an official recommendation.

Answered by this guy: Author Archive and Biography: Lovey Grewal

The author meant less expensive in terms of other Universal policies. ie. "Of the Universal policies out there, this type is usually less expensive than the others."

[dczech09]

It amazes me how uninformed people are when it comes to any type of permanent life insurance policy. Sadly, agents are uninformed too. They are simply told to say what the insurance company wants said. I know a lot of these policies are sold as an "investment," because not many people would buy them otherwise.

I have spoken with many agents before about life insurance and the grand majority of them seem to repeat what their insurance company says about their products. There are very few agents who actually have an original thought and actually seek to understand the policies before they even sell them.

I was thinking that perhaps this brings to light a potential business opportunity to teach agents how these policies actually work. Obviously no two companies policies are exactly the same, so it would require a degree of "reverse engineering" these policies and contracts. I will have to look into this. It would be a very difficult business proposition as it is definitely going against the grain.

[disneysteve]

It amazes me how uninformed people are when it comes to any type of permanent life insurance policy. Sadly, agents are uninformed too. They are simply told to say what the insurance company wants said. I know a lot of these policies are sold as an "investment," because not many people would buy them otherwise.

What bothers me, though doesn't surprise me, is that years ago, there was a huge class action suit against multiple insurance companies for misrepresenting these policies as investments. Millions of dollars were paid out in settlements to people who got suckered into buying these policies. My wife and I were among the suckers, sad to say, and got a settlement that repaid us for what we had paid out before cancelling the policy when we wised up.

Still, absolutely nothing seems to have changed in the industry.

[dczech09]

I found this article to be pretty interesting...
Life Insurance: An Industry Built on Fraud « Breadwinners' Insurance

The think that the issue ays in the fact that life insurance is not bought, it is sold. So people get all of their information from the agent. And where does the agent get their information? From the insurance carrier.

The carriers want permanent life insurance sold. Period. And if an agency underperforms in selling permanent life, the carrier drops the agency. Why? Because permanent life is where the insurance company makes money. Lets face it: the insurance companies do not make money by providing coverage. They make money by investing excess premiums; permanent life insurance brings in A LOT of excess premium. So if an agency isn't selling the policy they want sold, it is easy to drop them for a high producer. This of course puts a lot of pressure on agents to get clients to sign on the dotted line. I can hardly blame the agents either.

There are obviously agents who truly believe that permanent life cash value is an investment; they are just uninformed. But then there are those who have an ego about themselves and sell these things anyway. The sad thing is that we could tell agents until we are blue in the face that cash value policies are NOT investments or even "hybrids." But they will not readily listen becaus the stakes are too high.

If they truly understand that cash value insurance is not an investment, they either have to sell term and make less money or they have to quit their job. If they go the term route, they get turned down for bonuses and promotions and eventually get kicked out of the broker/dealer. So when we look at it this way, ignorance really is bliss for most agents.

I am not in anyway condoning this behavior. I am pointing out that the deck is stacked in the houses favor. So teaching one agent or agency is not going to help. Rather it is the industry in general that needs to change. And as DS pointed out, that just is not happening even when law suits arise.

[Scanner]

I thought there was a company that specialized in "broker-less" cash value life insurance, but I can't remember the name of them for the life of me.

Not that the company didn't make money on this, but at least it took the commission out of the equation.

[Wayde]

First of all, no one invests in a 401k. They invest in mutual funds. A 401k is a tax shelter, not a type of investment. Saying whether or not a 401k is any good is gonna depend on whats under the hood.

Yes, it does depend on what's under the hood. Oh, call the SEC and say 401K's are not Investments.

Having a Personal Investment Advisor will not save you from market crashes. Market crashes happen. Did the stock market crash in 2008? Big time! Did the market rebound yet? Yes, and then some. If you would have left your money alone, it would have recovered its losses for the most part. If you were actively managing your money and making trades, you probably would have lost. If your mutual funds were experiencing high turnover, then you probably lost money as you were trading by proxy.

Nothing will save you from market crashes? Doesn't selling your investments before it crashes, save it? Yes, if you leave it alone...you are just recovering your lost when the market comes back up. Why not sell before the crash and buy when it's recovering?

If you actively manage your investments yourself, or through an advisor, you are prone to market fluctuations. Its like trying to snowboard uphill.

Yes, there are no crystal balls. Having an Adviser is different from having it Actively Managed.

As for your post about the IUL being good if you know how to use it- spoken like a true life insurance salesman!

If I was an insurance agent, why all the hate? There are good Ins Agents and bad ones. You make it sound like they are all bad.

Good if you know how to use it? You know, I read and research a lot. The people who say that very thing about any cash value life insurance are selling systems such as "bank on yourself" or "be your own bank." The idea is to overfund a policy and use the excess premiums as a bank account. That is smart until you make a bad step, overextend, and end up losing the policy. Also as myself, DS, and jpg have shown stated, these things have lousy returns.

You can't control people's actions. You can only give them good strategies to use.

You know, a garbage can could be a good vehicle if I use it the right way. It could also be a good instrument. However I would rather use the garbage can for its intended purpose. The same goes with life insurance.

Comparing it to Garbage is a little extreme. But you said something good. "It could also be a good instrument."

The intended purpose of life insurance (any kind) is to provide coverage. It was never intended to be used as an investment. The financial services industry has seen huge opportunity in misrepresenting these things in order to make money.

Agree, Life Insurance is not an investment.