“Believe (me), it’s not fun try­ing to explain to a client why his cash value went down and what are those high fees about.”
– Agent/Advisor discussing Whole Life vs. Indexed Universal Life with a colleague

Have you ever wondered if a financial professional was selling you what is really best for you? Perhaps we all have at one time or another. In this post, we peel back the advice that agents and advisors give, not just to their clients, but to their colleagues about permanent life insurance, namely, whole life vs. universal life.

Whole life insurance has been around since before the depression, and has helped policy owners through good times and bad like an old reliable workhorse. In more recent decades, however, some consumers have demanded policies that might resemble a show horse more than a trusty mare. The result has been Universal Life, which has promised – if not always delivered – greater flexibility and faster growth of cash value. (See last week’s post for more about the differences between Universal Life and Whole Life.)

The Debate: Indexed Universal Life vs. Whole Life Insurance

It’s the age-old Tortoise vs. the Hare story. Policyholders have been questioning for decades if they should choose slow-but-steady growth of Whole Life or roll the dice for the chance of faster gains. But consumers haven’t been the only ones asking questions. Financial advisors, insurance agents, even Infinite Banking Practitioners have had questions of their own:

• Which policies should we sell?
• Can we trust the “best case scenario” policy illustrations of Indexed Universal Life?
• How will our clients be affected long-term by one choice or the other?
• Is Indexed Universal Life or Whole Life a better for Infinite Banking strategies?

Recently, we had the chance to eavesdrop on a group of agents and advisors practicing Infinite Banking and other Prosperity Economics strategies. One proposed the question – whole life or indexed universal life? A lively discussion followed in a private LinkedIn group administrated by Kim D. H. Butler. Below is the discussion thread (edited slightly for length and spelling, emphasis mine, with clarifications in brackets[ ], names have been removed for reasons of confidentiality.)

If you have ever sat in front of a financial professional and wondered if there’s a difference between what they’re telling YOU and what they really think, this is for you!

The Question: Pure Whole Life Insurance or Indexed Universal Life?

As posed by Agent #1:

“Recently, I have been chal­lenged by peo­ple that have been in this busi­ness a lot longer than I. I ran an illus­tra­tion that is pretty darn impres­sive for some­one to use in their IBC [Infinite Banking Concept]…until I saw an IUL [Indexed Universal Life] illus­tra­tion that they ran. The “Indexed” part of the IUL allows the pol­icy to… grow cash faster….

At retire­ment time when one starts tak­ing “loans” from the WL [whole life] pol­icy, you are not over­fund­ing it any­more so the growth slows and even stops and goes back­wards whereas in the IUL pol­icy the growth at this point blows the WL pol­icy away. All you smart peo­ple already know where I am head­ing with this…Pure Whole Life Insur­ance or Indexed Uni­ver­sal Life Insur­ance for Infi­nite Bank­ing Concept?”

The Responses: (or, What Insurance Agents and Financial Advisors Really Think about Universal Life)

Agent #2’s response:

Upon see­ing for the first time the awk­ward illus­tra­tion from EF Hut­ton sit­ting on a pol­i­cy­hold­ers desk, I thought it could have been left behind by an alien. And that name.…Universal Life.…or, as it was known in PA, Flex­i­ble Pre­mium Adjustable Life.…what was that? Damn, I wanted one. A peek behind the curtain.…to see the Wizard.…computing and illus­trat­ing num­bers that just crushed the com­pe­ti­tion: Low cost of insurance.…it was the early Eight­ies you know.…new money rates at 12% or higher.…make changes as you need or want.…more premium.…less premium.…lower the death ben­e­fit when needed.…damn.…I really wanted one…who wouldn’t want this mag­nif­i­cent spec­i­men?

Well, after check writ­ing schemes, inter­est free loans, money laun­der­ing and a host of other mis­deeds, EF Hut­ton is long gone, so too that first gen­er­a­tion of UL policies are gone…and prob­a­bly the 2nd, 3rd, 4th etc gen­er­a­tions are all gone. And, they didn’t die because they didn’t illus­trate well.….they died because they were bad! That prod­uct, that idea, was respon­si­ble for more replace­ments of solid, well funded whole life poli­cies than any one thing that I can recall.

We as an indus­try let the “stock bro­kers” and Wall Street dic­tate what we had to have and sell to our clients. The prob­lem, then as now, is that they can’t deliver.

Agent #3’s response:

IUL does come with extra risks for the pol­icy own­ers — mar­ket­ing sound bites notwith­stand­ing… the IUL car­ri­ers uti­lize com­pli­cated and unproven hedg­ing strate­gies to address this extra risk, much of which lies with the IUL pol­icy own­ers. In this regard, take a look at the “guar­an­teed” columns in the IUL illus­tra­tions. And read the fine print as to index caps — the IUL products that I have seen come with very low cap guar­an­tees, some even guar­an­tee that the cap will be no less than 0.

The sit­u­a­tion with IUL resem­bles the mort­gage backed secu­ri­ties deba­cle of a few years ago. Or as Yogi Berra once said, “It sounds like Deja Vu all over again”.

Agent #4’s response:

If you can read the small print where if you USE the cash value, most if not ALL the guar­an­tees are null and void, you might as well bor­row from your 401k, and hope the money will be there when you need it most. Remem­ber, the BEST INVESTMENT is the one that pays you WHEN YOU WANT IT. Imag­ine telling your client that wants to bor­row money against their pol­icy only to learn the money is not there… oops! Do you want to have that conversation with ­them?

The guar­an­tees are on the death ben­e­fit, but should the com­pany have illus­trated higher guarantees than they can pro­duce (as they did noto­ri­ously with VULS) all they have to do is change the Mor­tal­ity Charge (the cost of insur­ance). What kind of guar­an­tee is that? Reminds me of the old adage “I’ll pay your price… if you will meet my terms.

Agent #5’s response:

IUL’s have many issues. Most of which are never dis­cussed by agents sell­ing them. Over-Illus­trat­ing rates of returns greater than the gen­eral account earn­ings of the car­rier. Using derivatives/options to insure these spreads from 3rd party insur­ers. Pre­mi­ums that are increas­ing in costs each year and become very expen­sive in retire­ment years for the client.

These prod­ucts have a very short his­tory and no proven track record of every com­ing close to their illus­tra­tions. Just because you can illus­trate a 6 – 8% return doesn’t mean it will hap­pen. In fact, over the last 10 years IUL’s have per­formed close to fixed rates prod­ucts. Run an illus­tra­tion at 4% on an IUL and whole life with max [cash contributions in form of paid-up additions] and then com­pare. Look at both the guar­an­teed and non-guaranteed. Whole life has much more cer­tainty and destroys IUL on the guar­an­teed side. With IUL’s the cash value usu­ally gets com­pletely depleted and the death ben­e­fit goes away on the guar­an­teed side. The cost of the insur­ance is too great for the 3% guar­an­tee.

Whole life is the only prod­uct I would rec­om­mend when imple­ment­ing a bank­ing pol­icy. Using IUL’s for bank­ing becomes very prob­lem­atic when illus­trat­ing real­is­tic ROR and when the client reaches retire­ment and the cost of the insur­ance con­tin­ues to sky­rocket each year, putting stress on the cash value to be used for banking.

Agent #6’s response:

Here’s the prob­lem, and this com­ing from some­one, me, who has writ­ten some pretty decent IUL cases in the past and now am only going to use WL… IUL illus­tra­tions are based on the illus­trated inter­est rate never chang­ing. It’s sup­pose to show an aver­age, but you can’t count on that any longer. The stock mar­ket is way dif­fer­ent now than ever before. Many of the caps in the poli­cies have come down over the years to below 10%. Because of the higher cost in the poli­cies, your aver­age returns with those low caps will not beat WL. If you get zero return that year, your cash value will go down. You don’t want cash value going down in retire­ment when you’re draw­ing cash… I know it’s great to say to a client they can never lose money due to mar­ket per­for­mance, because the CV [cash value] isn’t in the mar­ket. How­ever, they can lose cash value due to costs.

WL just goes up each year guar­an­teed and PUA [paid-up addition] rid­ers give you future cash value increases with NO cost. You don’t want to bor­row from a pol­icy with no guar­an­tees of growth…. If you don’t earn enough inter­est to cover the bor­row­ing cost, espe­cially in years you don’t receive a return or maybe two or three per­cent, I can’t see where those cost are recov­ered.

WL will be your best option in my opin­ion. Believe (me), it’s not fun try­ing to explain to a client why his cash value went down and what are those high fees about. This hap­pens in years when the mar­ket is flat or your inter­est cred­ited was low. Stick with WL and you won’t go wrong…. And you can sleep better.

The Conclusion: Whole Life or Indexed Universal Life?

Have consumers been led astray? In many cases, we believe so. With IUL’s insurance portion based on renewable term life insurance with rising costs, choosing UL can be a high-stakes gamble. When profits don’t materialize as expected, climbing premiums can make the policy more expensive than it is worth…. literally.

We recommend Whole Life insurance (with a paid-up additions rider to maximize cash value) for clients who desire permanent insurance and/or wish to utilize infinite banking or income-for-life financial strategies. To discuss your situation or obtain a quote on a whole life policy, contact us to schedule a brief consultation.

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