What Agents Need To Know To Sell IUL!
7/12/2023… Here is an article from our friend David Kinder, RFC®, ChFC, CLU about the benefits of IUL… And the misinformation and lies used by Primameica to replace IUL and Whole life insurance policies to sell term and invest the difference! I think it is some of the best agent training to help you sell IUL!
Primerica IUL hit piece De-bunked – Updated: Jun 26, 2023
There are very few companies that have such an industry disruption reputation as Primerica has. One of the best things that Primerica does… is promote the purchase of life insurance! I can’t argue with that and I want them to sell more! The problem often arises when Primerica’s “buy term and invest the difference” mantra is primarily a mantra without much substance. As a result, their company culture permeates through many of their representatives which often results in “troll-like” behavior. In addition, they will produce certain articles to get consumers to get rid of their current IUL and other cash-value policies and buy insurance from them.
I will point out a big observation that I’ve noticed: I have never seen a lawsuit from someone recommending that they dump their cash value life policy and buy a term policy. In a way, I hope that day comes! Because I believe there are a lot of quality products that are being replaced through misrepresentation. However, I will also point out to the Primerica representatives that I have conversed with… When they replace a policy, I ask them questions about the policy they replaced. Based on the information they provided… some of those policies NEEDED to be replaced. Or modified to make them work. Quite frankly, I would have done the same thing in some cases.
I will get into the “nuts and bolts” of their IUL article. But there is a particular way that I am going to be looking at each of their “talking points”. There are 3 major facets of every asset that should be evaluated. Looking at one facet without the other two is not the entire picture. Those three facets are… risk, return, and costs. There’s actually more, and I’ll probably look at those other factors as well. Here is my blog article on “The 7 Criteria to Evaluate and Compare Capital Investments.”
IUL Hit Piece De-bunked
Let’s get started. The article text I will write in italicized font and I will respond with my comments in a normal font and perhaps with my emphasis on certain areas.
Here is the article cover page. “Indexed Universal Life Insurance (IUL) is touted by many in the industry as a great marriage between life insurance protection and an investment, or cash value.”
First, the terminology is vital. IUL is not an “investment” or rather not a security. It is an asset that you can accumulate cash values in, but it is not classified as a security subject to SEC or FINRA regulatory oversight. It IS subject to oversight by each state’s department of insurance.
“But is IUL as great a deal as it sounds? When you look at how IUL actually works, the answer to that question is a resounding NO.” That is their opinion, and, of course, they are going to make their case in the following pages.
“Indexed Universal Life Insurance: Is it worth it?” My first response is… it depends. And there are several factors (that I highlight in my 7 criteria article above) that when I review a policy, I need to see that it is set up properly.
Sidebar…“What is IUL? IUL insurance is a type of cash-value life insurance typically marketed as an investment(2). This is because the cash value portion of the policy is tied to an index such as the S&P 500. In theory, that should mean if the market has a great year, your cash value account should as well, right? Not so fast.” This blog interface has a hard time doing footnotes and superscript fonts, but I will discuss the various references that this article has on the last page. I will have to admit: yes, it is typically marketed IMPROPERLY as an “investment”. I have seen such videos and other ways it is promoted on social media (particularly TikTok).
And I share the concern regarding the misrepresentation of how these policies are marketed. To be very clear: these are not securities requiring oversight by FINRA or the SEC. They are regulated on the state level by each state’s department of insurance.
How IUL Typically Works
“Money never enters the market – With an IUL, the money funding the cash value portion of the policy is never actually invested into the market. Instead, the insurer holds your “cash” and pays a return on the annual growth of a specific index.” This is TRUE and it’s a BENEFIT to the client! (More on this later.) But as I have already stated, these policies are regulated by the state departments of insurance. They are not securities subject to FINRA or SEC regulation.
How DOES it work? Instead of earning a fixed amount of interest, the insurance company takes that interest earnings and purchases stock market index call options on various indexes. There is computerization and pricing to provide this. The insurance company then prices out its indexed earnings segments according to the costs of delivering this option to earning indexed interest. This is all “behind the scenes” using the insurance company’s general investment account. It is NOT happening IN the policy. This is why they are not subject to FINRA or SEC regulation.
“Growth potential is capped – While most policies have a “floor” of 0% which prevents your cash value from dipping below what you put into it, your growth potential is capped, too. For example, if your policy limits growth to 7.75% on the index and that index outperforms that percentage… You’ll still only receive the value of 7.75% in your account. The insurer keeps the difference.” LOL!
Okay, I just explained in my last response how the insurance company uses stock market call options to provide this kind of interest performance. Because there are COSTS involved in providing that! YES, there IS a limit on the earnings. It’s limited by caps, spreads, and/or participation rates. Why? Because of the costs of offering this. That being said… There is NO “DIFFERENCE” BEING KEPT BY THE INSURER! This is a COMMON misrepresentation of these policies by those who have never studied them in the first place. I have seen this many times.
“No dividends – Dividends are eliminated in an IUL policy. Not having the chance to reinvest any earned dividends, as you could choose to do with an individual investment, means you could miss out on a great deal of money from dollar-cost averaging over time.” This is true. But again, why are there no dividends in an IUL policy? Dividends are only paid to the owners of the underlying stocks in the indexes. What is really happening with an IUL policy? The insurance company is buying stock market index call options. They are not buying the index, so there are no index dividends to pass on to you. You’re not missing out on what isn’t there.
“Fees, fees, and more fees – IUL policies are packed with fees that will eat into any cash value accrued.” True… but missing the vital parts to evaluate this statement. If you put a MINIMUM premium into the policy, the fees will eat this policy alive. No question about that. These policies are designed to put in the MAXIMUM premium for a given death benefit. The higher the premiums being put in, the better the performance to help offset those fees. Granted, the policies that I have heard of that need replacing… are minimally funded at best.
“Rising costs – The internal cost of insurance continues to rise as you age, which can limit the amount of money going toward any potential cash value.” That’s not the correct conclusion regarding costs. This company continues to ignore the fundamentals of how a cash-value life insurance policy actually works.
Let me provide the formula: Net death benefit = cash values (and its interest earnings) + net amount at risk (and its costs of insurance charges) – any outstanding loans (and loan interest charges)
Now, with that formula, the more money you have in cash values, the more it can earn to offset the costs of insurance net amount at risk. Let me put it this way: If you have a $1 million policy, and you have $750,000 in cash values, how much is the insurer’s net amount at risk? $250,000! And the policy earnings (which will fluctuate over time), $750,000 should help out-perform the costs on the $250,000 net amount at risk… If the policy is properly funded!
“PLUS: Almost all IUL cash values have these “features built in.”
“You’ll accumulate NOTHING in cash value for the first few years the policy is in force.” Absolutely false. There IS a difference between the accumulated value column and the surrender value column in these illustrations. The difference is often the surrender schedule for a given number of years. After that period, the columns are the same. The accumulation value will earn indexed interest for you. However, depending on the policy structure that your agent put together for you… you may not have ACCESS to that money. You have access to the SURRENDER VALUES, not necessarily the ACCOUNT values. That is an important distinction that I wish more agents and consumers would know – so consumers wouldn’t be misled. However, I digress.
“The cash value earns a lower rate of return (often just 2%-4%) than the potential return you could achieve if you put your money into a vehicle such as a Roth IRA in the U.S. or a TFSA in Canada(3). Okay, I’m going to make an assumption: I’m going to assume that they mean 2%-4% after costs of insurance are factored in. They didn’t say that, but I’ll assume that because that’s how that makes that statement true. A Roth IRA… can be invested in many ways, but it is subject to contribution limitations, income limitations, and other factors. I have written about that extensively here: https://www.davidkinderfinancial.com/post/roth-ira-on-steroids
“If you borrow from the cash value, you’ll pay it back plus interest.” True. But the proper way to phrase this is to borrow against your cash values. Your policy (depending on the company and loan interest rate option chosen) will continue to grow as though you didn’t touch it! Now for the interest, you don’t necessarily have to pay it back, but I do highly recommend that you maintain your policy to keep it healthy. I’ve written about using cash values for loans in my blog post here: https://www.davidkinderfinancial.com/post/2018/09/21/infinite-banking-explained
“If you die with the policy in force, beneficiaries receive the death benefit (less any outstanding cash value loan balance) while the insurer keeps any accrued cash value.” Ugh. Again? I completely destroy that myth in my most popular blog article here: https://www.davidkinderfinancial.com/post/2018/09/22/permanent-life-insurance-myth-1-debunked-the-life-insurance-company-keeps-my-cash-values I listed the formula for life insurance above. They always forget the term “Net amount at risk.” It does feed to serve their agenda though.
So much for page 2 and their half-truths On IUL. Let’s move on to page 3:
Page 3 is all about various articles that many people have written over the years. Obviously, we can google anything we want to either support or detract from what we want. It’s a confirmation bias. I will just address the bolded section that they are trying to point out.
Article #1: “Consumers should avoid IUL” is a product judgment rather than a professional evaluation of a well-structured product serving a given objective.
Article #2: “You will not benefit financially in the same way you would with actual investments.” Again, this is a BENEFIT! Because you are not actually invested in these investments, but in the policy using stock market index call options. Yes, there are limits on the upside, but the downside is 0% (minus the costs of insurance).
Article #3: “IUL insurance policies can come with a slew of fees.” Already discussed earlier.
Article #4: “You won’t keep up with standard investment portfolios in rising markets.” That’s a true statement. But rising markets don’t stay. They decline in value every few years. With principal protection with indexed insurance policies, you don’t have to participate in the downside… which means you have more of your money to participate in the upside.
Article #5: “(IUL) are products designed to be sold, not bought.” No surprise there. The vast majority of insurance policies are sold by agents to bring their features and benefits to light in the context of a client’s situation, needs, wants, goals, and objectives. Granted, I know that there are misrepresentations that happen, but it’s certainly true that these policies are sold by agents. I would hope that they are being sold by those who truly want to serve their clients, not just make a big commission: https://www.davidkinderfinancial.com/post/2018/09/22/life-insurance-myth-2-ethics-and-life-insurance-agent-compensation-they-only-sell-cash-v
Article #6: “Considerably less affordable than term life.” Absolutely true. I believe there are two kinds of policies out there: Protection purposes… and tax code purposes. IUL is mostly for tax-code purposes, not necessarily for pure protection purposes. This means you should want to put in the MOST you can, not the least.
Article #7: “Your cash value gains won’t go above a certain percent.” Already discussed and the reasons why. No surprises there.
Article #8: “It’s a confusing product.” YES!!! It most certainly is! Completely agree with this one! Their own article is PROOF of that fact because it’s clear that THEY don’t understand it either! Nor does the person (or committee) who approved this piece for use with the public. I wish there were more penalties for companies who put out such literature, perhaps from the NAIC, but that wouldn’t allow me to vent and write my content either.
Article #9: “Fictional future.” Okay, I’ve got to admit this one is a sticking point for me. IUL illustrations OFTEN show a HYPOTHETICAL illusion (or did I mean illustration?) of what the policy can do. It often shows a nice % interest earnings happening EVERY SINGLE YEAR FOR 40-50-60 YEARS!! Index caps, spreads, and participation rates can and will change year to year based on the interest rate environment and the operational costs of the insurance company. That doesn’t make the product bad. It means that I think illustrations should be tempered. Some companies allow for the agent to vary the illustration to show years of max performance alternating years of 0% performance. I think that’s good. I am quoted in this article on Ethics.net for Misrepresentation and Ignorance on this very topic back in 2015: https://www.ethics.net/articles/misrepresentation-and-ignorance-a-dangerous-blend-for-ethics
Article #10: “These products don’t pass the common sense test.” That quote was from White Coat Investor. Well, he’s looking at a product rather than a strategy. I have his thoughts regarding whole-life insurance and they can easily be applied to Indexed Universal Life insurance as well: https://www.davidkinderfinancial.com/post/white-coat-investor-on-whole-life-insurance
Article #11: “A term life insurance policy paired with an outside investment plan is more affordable and can provide a better ROI.” I will AGREE with you! You can POTENTIALLY accumulate more money with outside investing! However, I’ve done the math. You cannot SPEND it as well as you could with a quality cash-value life insurance contract in retirement. https://www.davidkinderfinancial.com/post/2018/09/24/buy-term-and-invest-the-difference-always-wins-sort-ofhttps://www.davidkinderfinancial.com/post/2018/07/16/what-investment-rate-of-return-would-you-need-to-equal-the-tax-and-economic-contract-benehttps://www.davidkinderfinancial.com/post/how-to-manage-your-cash-value-life-insurance-policy-in-retirement
Article #12: “Known for having a lot of costs.” Already discussed.
Article #13: “Returns on equity indexes are often capped.” Already discussed why that is and how it works.
So much for page 3 on IUL. Last page: Page 4.
Page 4 is all about Primerica and their stats. Yes, they are a publicly traded company and they are not just a sales force, but they are an insurance COMPANY. They issue their own policies and pay claims. They are well-rated. Of course, they reinforce their “Buy term and invest the difference” mantra again.
However, it is interesting that they also have some of the most expensive term insurance you can get! And they don’t have the most common living benefit riders available. Terminal illness accelerated death benefit rider pays a portion of the death benefit upon the diagnosis that the insured is expected to live only 12-24 months. This rider is very common and I’m sure they have this rider. Chronic illness rider accelerates a portion of the death benefit when the insured cannot do 2 out of 7 ADLs or Activities of Daily Living: Personal Hygiene, Continence, Eating, Dressing, Ambulation, Transferring, and Memory. Critical illness rider accelerates a portion of the death benefit upon the diagnosis of the 3 most common critical illnesses: heart attack, stroke, or cancer (not including skin cancer usually). These funds can be used for any reason.
Primerica policies do NOT include chronic illness or critical illness riders as of the writing of this post. So, Primerica… continues to spread half-truths as a matter of company directive and official company literature. But they don’t know what they don’t know. I’m not saying that policies cannot be replaced. I’m saying that they need to be evaluated to make sure that they are actually structured to do what the agent said they would do. Sometimes, unfortunately, they aren’t. And those… should be replaced.
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