Indexed And Universal Life Insurance – Episode 057

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[00:01] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler and No BS Money Guy, Todd Strobel. Hey everybody, welcome to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel, again with our resident financial expert and bestselling financial author, Kim Butler. Welcome, Kim. Thank you, Todd. I’m happy to be here today and excited to address a question that comes up a lot, not a lot, but more in the recent years of why not to use Universal Life for storing cash. And sometimes the product is called indexed Universal Life, which has an extra

[00:56] component to it, the index part. So I think that’ll be a fun discussion today. Well, and I must admit that indexed part makes it sexy because it sounds like, you know, on one hand, you’re buying the safety of life insurance. And on the other hand, you’ve got the lottery ticket out there that might just pay off big. Absolutely. In fact, I think one of the things that people use when selling this product is that you get to capture all of the upside, but none of the downside of the stock market. And of course, that sounds appealing. So no wonder consumers that don’t know any better and frankly, sometimes insurance agents that don’t know any better are interested in this. And yet we really have to dig into the product and again, the Universal

[01:46] Life product and its problems. And then we can talk about the index aspect of it. And that just frankly makes it more problematic. Got it. And I want to point out first and foremost, the biggest difference to me between Universal Life and whole life is that whole life, we know what pretty much what the premiums are going to be year after year under an indexed or a universal policy. We’re actually purchasing life insurance at your current age. So the cost of the insurance is always increasing. Now, the theory behind that is that if your investments do well enough in the beginning, it can handle the bigger premiums at the end, but that’s a little bit of speculation, isn’t it? Absolutely. And when you go back to the underlying fundamentals of whole life, where we

[02:53] say that it’s a good place to store cash, when we store our cash, we don’t want any unknowns. We don’t want any aha surprises toward the end and especially towards the end of our life, because liquidity and our cash position is typically for most families, what provides them the most peace of mind. So when you compare whole life to universal life on the whole life side, we identify that there is a guaranteed premium, but I’m not sure that people always understand that. And then we identify that there’s also a guaranteed cash value, and then furthermore that there is a guaranteed death benefit. So let’s just cover those three briefly, and then we’ll say the opposite of those three things on the universal life side.

[03:46] Super, continue. So the guaranteed premium addresses what you said in that that’s a fixed amount and it’s never, ever going to change with whole life. With universal life and again, with index universal life or variable universal life or 18 of its cousins that have different styles, it absolutely can change. So with the premium being able to change on universal life, the client is at risk for age 70 or age 80, actually getting a premium notice from the insurance company with a higher figure because it’s universal life. To me, that’s the saddest part, because when you’re young, those increases tend to be relatively small. And then all of a sudden you cross that line where you’re getting a little bit older and the premiums start to double and triple, don’t they?

[04:44] Yes, they absolutely can. We’ve seen clients in their seventies and eighties get horrific increases in their premiums on universal life, whereas with whole life, that will never ever happen. And then on the cash value side, it is on the whole life, a guaranteed dollar figure. Whereas on the universal life side, it’s a guaranteed interest rate. So the easiest way to understand the difference here is to ask the question, if I don’t have any money in my account, do I care what my interest rate is? So how would you answer that? Not particularly. Right. So if we have zero dollars or very little dollars in our account, which is what happens with universal life, because universal life policies are typically minimally funded.

[05:36] In other words, people take the, this is life insurance. I don’t like it. So I’m going to put in as little as possible approach. Then that causes little dollars to be in the account. So while universal life may have a guaranteed interest rate, it’s not that helpful. Whole life has a guaranteed dollar figure, which dictates that there will be money in that account. To me, this is the biggest problem is that in whole life, the state or the insurance commission or whatever is literally locking the insurance company into the figures with universal life. Their figures are negotiable almost annually. Correct. And then when you add the index aspect to the universal life, you’re saying, okay, this amount of money that I have in my account, be it little bigger or

[06:34] somewhere in the middle is going to be invested in an index to try to get these aspects of the stock market that I think are appealing. So you have to, first of all, think that the stock market is appealing. I’ll set that comment aside for a later day, but then you have this index. Well, in order to get the index, the insurance company actually has to pay for that. And one of the things that we have to remember about whole life is that it is when bought from a mutual company where most whole life products are, not all, but most, it is able to get 100% of the profits of the company. And so when we take a look at index universal life or just regular universal life, we realize that it is getting less than that because

[07:24] there’s costs associated with buying an index. So you have a client that wants profit from the company. Well, if they want a hundred percent of the profit from the company, they are better off buying whole life, not universal or index universal or variable universal. And I see if you agree with me on this, the majority of the people who buy this, buy this because it’s sexy, it’s attractive. You think that somehow or another you’re playing the market and buying life insurance at the same time. Absolutely. And I think it’s because people get confused between the difference between saving and investing. And we need to be clear that whole life insurance is a place to store cash. It’s a savings vehicle and every family needs to have a savings vehicle.

[08:17] Whereas when you try to quote, invest inside your insurance, you’re adding an element of risk, whether it’s the index universal life or the variable universal life, or just even regular universal life, or even whole life that’s sold as an investment. Now, one could argue in our super low interest rate times that maybe it’s equivalent to an investment. But the fact is that life insurance is a place to store cash. It should be looked at as a place to store cash, analyzed, compared to, et cetera, as a place to store cash. And so if you want a safe place for your cash, you want it where there are guarantees associated with it, not where there’s any upside because we know with upside comes downside.

[09:07] Again, even though the sales statements out there often talk about index universal life as getting all of the upside or even a part of the upside without the downside. I know to this point, we’ve sounded kind of negative on this product. And I would like to point out that if it worked like it was supposed to, in other words, if in the early years you were getting these 10, 15, 20% rates of return, your cash value was swelling incredibly. So that as your premiums increased each year, you were prepared by this ever-increasing cash value, it would be a good product. It’s just from a practical standpoint, that’s just not happening. Right. And then we have an additional problem in that when the rates are down.

[10:03] So think about the stock market and it’s typical rollercoaster ride. There are still insurance costs and buying of index costs that must be removed. So even if the particular product has a 0% guarantee, that’s 0% on the index. That does not take into consideration the fees that are charged for the life insurance plus the fees that are charged for the taking on of the index. And so it is absolutely feasible to go negative on an index universal life policy because of the fees for insurance and costs. And many, many times that is not spelled out clearly. So again, clients think they’re getting the upside without any of the downside, not accurate. It is absolutely got some downside. Whereas the whole life has a guaranteed increase every single year, even if

[11:02] the whole life company didn’t pay dividends, which most whole life companies have paid dividends well over a hundred years, but let’s just say they didn’t one year, there’s still a guaranteed increase in cash value that occurs literally every single year. And once that guaranteed increase has occurred, it sets a new floor or a new watermark, if you will, that cannot go down. So even if the following year, there are still no dividends. It will not go down. It will go up again. And it might only be by a little bit, but it is guaranteed to go up. And there are a lot of moving parts. There are a lot of moving pieces. There are a lot of options being purchased, all of which makes this a more expensive product agreed.

[11:50] Yes. And part of the reason that we’re chatting about this today is that there is right now in the insurance industry, a whole host of new requirements that are put forth on the illustrations that are done for the index universal life. And it will make them more honest, but it still doesn’t make the product worthwhile in our opinion, as a place to store cash. And if you want it for other reasons, that’s fine. But as a place to store cash, we don’t want all of the moving parts. Think about it like levers. We don’t want all those moving parts to be controlled by the insurance company. The insurance company in a universal life gets to pick all of the various levers and where they’re going to be at any point in time, we want the control still

[12:42] to be held on the client side where they know what their minimum and their maximum premium is, what their pay to petition rider, and they know what their guaranteed cash value is. And they know it’s going to increase every single year. And we want to be so confident that we can store cash there that we look to put in as much as possible into our policies, not as little as possible. Super. Well, as we get down towards the end of the show, any additional resources or anything you would recommend to our audience? Well, I always like to have people try to get at the whole truth. So, you know, the saying it’s too good to be true is not really an accurate statement in the following of it, which is if it looks too good to

[13:30] be true, then it’s going to be. If it’s too good to be true, just dig into it a little bit further. And I think you’ll find with the index universal life, assuming you want to read the 50 page illustration, because they used to be 40 pages, but with the new regs, I think they’re going to be about 50 pages. If you dig into it, it becomes very clear how many moving parts there are and how detrimental some of them can be. And so you just have to dig into things when you hear that they’re too good to be true. And I think in this case, upon digging into it further, you would realize that, yes, this is potentially too good to be true. Super. And I would encourage everybody to check out partners, that’s the

[14:09] number four, prosperity.com. Anything you’d like to add before we wrap up? Yeah. Yeah. I just wanted the alternative laid out, whereas the whole life illustration is maybe 12 pages, 15 at the most, and has the guarantees in it, in fact, literally that guaranteed cash value column. So get your illustrations, take a look at them. If you need help with them, send them to us. We’re happy to take a look at it. Just forward us an illustration. It’s very easy to point out the good things and the not so good things about it. And you can do that on our website. As you said, partners, number four, prosperity.com. Super. Well, this is No BS Money Guy, Todd Strobel again, with best selling financial author, Kim Butler saying, take care of everybody.

[14:54] Thank you for listening to the Prosperity Podcast to take control of your money and have it work for you. Visit us at partners for prosperity.com. If you liked this episode, make sure you subscribe and leave a review.