Indexed Universal Life

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Indexed Universal Life

Postby exaramco » Fri Dec 21, 2012 1:04 pm

We have a salesman who is trying to push Aviva Indexed Universal Life on me (69 years old) claiming that this is a good way of protecting wealth from taxes and also build up cash value. I have looked at the prospectus and see that a huge chunk of my contributions go toward administrative expenses and cost of insurance. The cost of the insurance increases every year as I get older.

The cash value is available in the form of tax free loans, but the insurance company charges a hefty interest rate on the loans. Furthermore, the policy must remain active to avoid tax consequences on the loans.

We have a revocable family A/B trust so I don't really see the point of saving money from taxes.

We don't need life insurance.

I am also concerned that at age 69 I may not have that much time left to build up cash value.

So, can someone explain in terms I can understand the objective of Indexed Universal Life and under what circumstance might this instrument be appropriate?

Thanks,

Vic
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Re: Indexed Universal Life

Postby letsgobobby » Fri Dec 21, 2012 1:14 pm

If you don't need life insurance, then universal life insurance is not going to make sense. It is that simple.

The need for permanent life insurance pretty much begins and ends with a need for a permanent death benefit. If you don't need it, you shouldn't pay for it.
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Re: Indexed Universal Life

Postby dhodson » Fri Dec 21, 2012 1:17 pm

IUL is a very bad idea as an investment.

You pretty much understand all you need to know.

It's just a different credentialing method for a UL policy.
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Re: Indexed Universal Life

Postby Elbowman » Fri Dec 21, 2012 1:20 pm

The salesman makes a large commission for selling universal life insurance. That is why he is pushing it, not because it is a sensible investment for you.
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Re: Indexed Universal Life

Postby BruDude » Fri Dec 21, 2012 1:38 pm

Life insurance is not an investment. /thread
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Re: Indexed Universal Life

Postby EmergDoc » Fri Dec 21, 2012 2:52 pm

exaramco wrote:We don't need life insurance.


So why are you talking to a life insurance salesman again?
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Re: Indexed Universal Life

Postby bluemarlin08 » Fri Dec 21, 2012 5:16 pm

Unfortunately, this concept is being actively presented by many agents. I don't buy the concept and would never recommend to my clients. I would tell the agent you weren't interested, period.
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Re: Indexed Universal Life

Postby BruDude » Fri Dec 21, 2012 5:28 pm

bluemarlin08 wrote:Unfortunately, this concept is being actively presented by many agents. I don't buy the concept and would never recommend to my clients. I would tell the agent you weren't interested, period.


First I'd ask the agent to explain how all of it works since 90% of them can't even do that.
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Re: Indexed Universal Life

Postby bluemarlin08 » Fri Dec 21, 2012 5:56 pm

First I'd ask the agent to explain how all of it works since 90% of them can't even do that.


I get wholesalers call me constantly trying to pitch what a great deal. When I start asking them tough questions, most of them can't even answer the questions.
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Re: Indexed Universal Life

Postby GrantM » Sat Dec 22, 2012 10:30 am

I'm an advisor, agent, own two of these IULs myself and at age 69, you are too old to benefit from the product features, no disrespect. They take 4-5 years to beak even and 10-15 years to supersede the comparable investments. Regarding taxes, your revocable trust won't save your heirs a dime so be sure to get in touch with an advisor or attorney to clarify your scenario if you've got some dough in the bank. That trust doesn't help you avoid taxes on investments or Ira money, so that's what your salesmen was likely referring to, or the death benefit. Hope this confirms what your gut was telling you.
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Re: Indexed Universal Life

Postby dhodson » Sat Dec 22, 2012 10:51 am

BruDude wrote:
bluemarlin08 wrote:Unfortunately, this concept is being actively presented by many agents. I don't buy the concept and would never recommend to my clients. I would tell the agent you weren't interested, period.


First I'd ask the agent to explain how all of it works since 90% of them can't even do that.



ive done this with a variety of products and dont find it a worthwhile conversation. If they dont know, they still paint a very positive picture that can be misleading. For instance ive been told several times that it is like market returns without the downside and when i ask how is that possible if i get any answer it typically is that the insurance company is taking the risk so you dont need to know. The truth with these index products is they are fixed and products and produce fixed returns. Most of the investment part is placed in the typical bonds/treasuries and a small percentage is placed into options. If the options do well then you get credited more to your account. If the market does poor then typically the bonds/treasuries are enough for them to make good on the gurantee. If they cant, they are allowed to change the crediting. In a test tube these are supposed to do 1% better than normal fixed products but in reality they may do better or worse but will be just like other fixed products in this case a typical UL although its the same concept with indexed annuities. The OP already seems to understand why a typical UL isnt a good investment and this is no different.
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Re: Indexed Universal Life

Postby jaj2276 » Sat Dec 22, 2012 11:28 am

What is the policy indexed to, the stock market? I had an equity-indexed UL policy pitched to me when I was looking for term insurance and it seems like a good deal UNLESS you work through the numbers yourself. An agent will likely never do this for you since it will likely be obvious how bad of a deal it is for you. I believe the part of the policy that draws people in is the "don't lose money" aspect of the linked account. The cost for that safety is too high in my opinion.

For example, in the product pitched to me, the indexed portion of the UL account would give me the following returns:

min(0%, max(6%, 1/2*S&P 500 Returns))

If the market returned -10%, you lost 0%.
If the market returned 8%, you made 4%.
If the market returned 20%, you made 6%.

In their illustration, they applied the above formula to each 12-month rolling return over the past 30 years (so 30 x 12 returns). They took the average of these returns (3.77%) and used this number to show how much my account would grow.

However, if I took the average of each 12-month rolling return over the past 30 years and didn't apply their min/max formula, the return was somewhere around 9.5%! So basically they earned 9.5%, gave you 3.5%, and pocketed the rest. There were some years where you lost a good chunk of your money, but there were many years where you only made 6% but the market returned 20% or 25%.

Great gig if you can get it.

Outside of the "is life insurance necessary at 69" or "should get term vs ul" discussions, my feeling is that you should be skeptical of ANY index-linked product.
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Re: Indexed Universal Life

Postby dhodson » Sat Dec 22, 2012 12:37 pm

You also forgot that the policy doesn't give you dividends.

The cost of insurance constantly goes up.

Guess what happens when in retirement you are taking out those expensive loans but only get the floor for crediting instead of the constant upward trend they illustrate.... Policy crashes and you get a tax bill.
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Re: Indexed Universal Life

Postby nedsaid » Sat Dec 22, 2012 8:42 pm

The problem with these products is that they are complex and hard for the average person to analyze. Insurance agents themselves don't always understand these products very well themselves. Since insurance agents get huge commissions from these products, they are not a source of objective advice. Who can you trust to give you objective advice on these policies?

There might be people for whom these products might work or be appropriate for. I am always suspicious of complicated products that are hard to understand. Part of the problem is that the more moving parts there are in a product, the more chance that something can go wrong.

Probably the best way to analyze the product would be to break it down into its component parts and analyze each piece individually. You have the investment piece, the life insurance piece, and the expenses. There might be more pieces. I think you will find that even a combination of a deferred annuity and term insurance or even savings bonds and term insurance would do better than this complicated policy.

If you have a CD at the bank, you could borrow against it tax free and probably lower interest than what the insurance company would charge you. They used to call these passbook loans. A loan is always tax free.

So frankly, I don't see the big selling point of these things.
A fool and his money are good for business.
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Re: Indexed Universal Life

Postby mephistophles » Sun Dec 23, 2012 12:12 pm

exaramco wrote:We don't need life insurance.


Vic


If you don't need life insurance, don't buy any nor waste your time talking with an agent about something you don't need.
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