Indexed Universal Life policies (IULs) are highly complex and an inappropriate part of a retirement plan. These policies are expensive, illiquid and often sold for the benefit of the salesperson rather than the investor.
IULs are relatively new to the market. The inexperience of salespeople and the investing public lead many to entrust their life savings to an IUL that is not adequately understood. Many insurance salespeople do not understand how these policies work despite their legal obligation to do so. What is understood by salespeople is that the sale of IULs pay a substantially higher commission than other retirement investments.
Insurance companies pay salespeople high commissions for IUL sales. Commissions equaling 15% of the premiums received is not uncommon. Compare this to a financial advisor who generally gets paid less than 1% commission for the sale of a stock share, and the incentive becomes apparent.
The large commission has other impacts on your IUL purchase. Like a new car, as soon as a IUL is purchased, the cash value of the IUL drops substantially. This is due to the costs that the insurer must pay, such as the commission, cost of insurance, mortality expense, and other costs.
IULs have also had a history of having misleading illustrations and inaccurate information on rates of return.
These policies were never designed to be an investment product. Many are confused by the “index” function of these policies to believe that they are purchasing a product that is similar to a mutual fund. But an indexed mutual fund largely succeeds because of the lack of costs which serve as a drag on earnings. That lack of cost is not true in the IUL setting.
Further, retirees generally need liquidity during retirement. Liquidity from loans against the policy incur interest that depletes the cash value of the policy. Surrendering the policy for cash value often means the investor receives substantially less than the premiums paid. The death benefit of these policies also do little to help an individual in retirement since such benefits cannot be accessed until after the death of the retiree.
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