Read the previous article in this series.
For those who want to implement my Wealth and Liberty Strategy, understanding the index universal life insurance pros and cons is very important.. Indexed Universal Life (IUL) is an advanced equity life insurance strategy. Before reading the rest of this article, I recommend that you go ahead and Google IUL, so we can get that nonsense out of the way.
The 10 or maybe even top 50 entries that Google shows you are probably all going to say something negative about an older version of the IUL. The people who wrote those reviews are talking about a different iteration of the vehicle, and they don’t understand that there’s been innovation in recent years which has brought substantial improvement to the product and significant financial power to those who take advantage of it. Unfortunately, as is the case with most financial products, many people have had the IUL sold to them in the wrong way (by salesmen who didn’t understand them either), or have misused it, or have lost money because they bought something that they didn’t understand and consequently did not use it properly. This is why I think it is so important that you only buy things that you understand.
I want you to understand the IUL, so I have written a few articles to explain how it works. This is one of two articles that focuses on the costs of an IUL. Cost is an important issue with all financial vehicles, but it’s particularly important for you to understand how the costs work in an IUL, because if it is set up and used properly, the costs not only diminish over time, they actually cease to be costs at all, and turn into income. Sound too good to be true? Here’s how it works.
An IUL Is Comparable to Investing In Real Estate
An IUL is different from other assets because it becomes an asset which you can control. This allows you to build equity and have flexibility. You can determine the stipulations of the contract, how you fund it, for how long, and for what reason it can be used throughout your life. Think of it like owning a property. The property doesn’t have to be a single family home. You might turn it into a duplex, make it into a lawyer’s office, or tear the whole thing down and build something else on the land. Unlike with a term insurance policy or a TSP, which have rigid stipulations and a single purpose, with an IUL you have options.
An IUL is also comparable to an investment in real estate in that it requires more investment capital. You have to put in more money up front to get into an advanced contract with a highly reputable financial institution, but you can maintain and even control those costs over time because you’re building equity and buying down the amount of insurance. This is similar to buying a home. When you finance a real estate transaction you pay off the bulk of the interest on the loan in the earliest years that you are making payments. The longer you make payments, the more of each payment is going towards paying down the principal rather than servicing the interest. Also like buying real estate, an IUL policy will be there for you in the end, as long as the asset is used properly. As long as you pay the mortgage, you will eventually pay off the loan, and the house is going to be yours to pass on however you want.
How Does an IUL Compare to a Term Policy? It doesn’t.
Because an IUL is life insurance, as with a term policy, the insured (you, a spouse, a child, etc.) has to qualify and be healthy so that you or the insured on the policy are a decent risk for the insurance company. But don’t worry if you have health issues. We’re not using this strategy because of the death benefit. That’s just a bonus. We want to take the offensive approach on the healthiest insurable individual (it doesn’t have to be you) to get the best return on investment.
Apart from that similarity, term life insurance and IULs are such vastly different products, it’s like comparing apples and oranges. The only other similarity between them is the fact that in both cases the policyholder is being underwritten for a certain amount of death benefit should a catastrophic event occur. With term insurance, death is the only time there is a benefit. But with an IUL, the policyholder is leveraging it for the inevitable, of course — we’re all going to die — but he or she is also getting tremendous tax benefits, asset protection, legacy and wealth transfer benefits, and so much more than just sinking money down the drain for a term policy that in all likelihood will never provide a return on your investment for the beneficiary, and certainly never will for YOU.
How Do the Costs Work?
One of the main criticisms of the IUL is that it requires more money up front, and that’s why it’s easy to complain about it being expensive compared to term insurance and from the point of view of the mainstream media and standard financial planning 101 stuff. But the reality about these costs is that the IUL costs less than most things over the long term, and I am going to explain that below. The commentary about high “costs” are more around the fact that the IUL works better when funded aggressively.
The key to the financial advantage here is time and liquidity of assets. In the short term, an IUL requires significantly more commitment than a traditional retirement plan. This is a tool meant to be used, not managed like a 401(k) that you haven’t looked at in years. However, once the IUL is set up, provided you commit to it and hang onto it, after ten years the costs drop to almost zero, and you begin to recoup some of those costs in the form of bonus interest credits. A traditional retirement plan works in just the opposite way. In the early years of the plan, when your balance is low, your costs are fairly low. But as your balance grows, so do your costs. As you can see in the table below, at around year 20, the IUL becomes and remains the much better deal, cost-wise.
There are far too many factors around long-term investing and saving to make cost the most significant thing to compare, but since everyone is so focused on it, here’s what that cost comparison looks like. But remember what’s being paid for. The fees for investment accounts are considered the cost of money management, along with any administrative fees. TSP and index funds are far cheaper because there’s little to no management.
The argument usually made is that most managed accounts don’t do better than the market, so why not avoid the fees and just get the index fund? If that’s all you’re looking at, and you’re willing to take the risks that responsibility offers, then in that context, that choice makes sense. But most people have the majority of their money in accounts they pay management fees for. They don’t even think about it, let alone try to justify it to themselves. It’s just another tax they pay for something that they think is being taken care of for them.
A quick comparison shows why comparing costs of insurance to other investments is really a joke. In this example, a 40-year-old male makes a $10,000 annual investment for 10 years for a total of $100K invested and growing at 5.5%. The fact that with an IUL you get bonus interest credits to repay costs is a game-changer. By year 30, not only have you gotten all your costs back, you’ve made money!
And that’s not even including the growth.
The IUL is not for everyone. It is for those aiming to be in the wealthiest 1%. Following Pareto’s principle or the 80/20 rule, we can expect that 80% of people are going to be doing the basic status quo stuff, and if that approach provides you with what you want or need and want in life, and you are happy, then hey, great. Keep doing what you’re doing.
But there are veterans out there who are relatively financially stable and who understand that “Hey, I’m making a good paycheck in the military, and I can easily put 10%, 20%, or 30% of my income into savings. I don’t want to just hope that the stock market works out and that my money grows. I don’t want to wait 30 or 40 years before I can use it, either. I want to understand what’s going on with my money. I want to protect it, and I want it to be there for me whenever and however I need or choose to use it.”
These folks are part of the 20% of the general population who are doing things differently. These are the veterans who want to position themselves financially to continue to serve their country in post-military life.
Learn more about the index universal life insurance pros and cons in the LAST ARTICLE in this series.