This question, first in our series on Indexed Universal Life Policies, should be asked by everyone when an insurance policy sounds too good to be true. While the agents that sell these policies will often answer yes, the real answer is more cloudy than a rainy day in Seattle. It is time to shine some sunlight on these supposed guarantees.
Normally when someone buys an insurance product like term or whole life the internal costs of the policy are fixed at time of issue and the policy holder can rest assure the costs will not change. However this is not the case in most IUL policies.
Internal administration cost: These fees make up a portion of the cost of insurance. They are charged against premium or cash value on any type of Universal Life policy. When an illustration is shown it assumes these charges under current expense levels. However these levels can change at the discretion of the company. If the costs to run its operations increase, such as prices of office supplies and real estate, the insurance company may choose to adjust these internal costs after you have bought the policy.
Mortality charges: What the insurance company charges for the death benefit are removed from the cash value or paid by premiums. In UL, these pay for annually increasing term insurance costs. This is true for any type of UL, no matter what the side fund is invested in. The cost for this one year term insurance can be changed at the discretion of the insurance company.
Minimum Guarantee: These guarantees are not always calculated annually. Most IUL policies have a guaranteed minimum return, in the event of the index dropping below this rate, the insurance company will still credit the minimum rate. However, with some policies this guarantee is not calculated annually but instead over an “indexing period” which could be a number of years. So you could have negative years during the indexing period which would be applied to the side fund.
Late premium: In some cases these remove any guarantees in the policy. In some UL policies, even if the premium gets paid up, once it is late, the insurance company is off the hook for supporting any guaranteed premiums, cash value amounts or death benefits. In some cases, the insured may not even know that a premium was late and that the guarantees have been forfeited.
No-Lapse Premium Period: These policy periods set a time limit on the guaranteed values of the policy. At the end of this period, which is normally 5-15 years, the initial premium may not be sufficient to maintain the guaranteed policy values and additional premium payment must be paid. The cost of insurance is more than the premium (due to the annual renewable term) therefore to maintain the face amount and cash value the policy holder must pay more premium. If the policy holder does not increase their premium then insurance company will reduce the face amount and or cash values to make up the difference in cost. This happens because the insurance company assumes the crediting interest will make up the difference, but when it doesn’t the policy holder is left to make up the difference.
With all of these guarantees being less than a guarantee it is easy to see why consumers and agents alike should be very suspicious of these too good to be true policies. Next week we will answer the question “Are you really protected?” in an IUL.