In our 3rd week on Indexed Universal Live (IUL) we will answer the question “Are you protected?”. This question may seem very basic when it comes to life insurance because we assume if I have a policy I am protected.
Like many words in the English language protection can have different interpretations to different people. To frame our discussion today let us define it. Protection is the act of keeping safe from harm, injury, or adverse condition.
If we take that definition and think about life insurance, we see at a fundamental level, people purchase insurance to protect them from the risk that something bad will happen. With traditional whole life insurance they are trying to protect against financial loss of early death, while also accumulating a guaranteed cash value that can be used for retirement. The policy holder is protected in two ways, the face amount will pay out in the case of early death, and the cash value accumulates to be used at a later date. These two components were always guaranteed and stated at the time the policy was issued. As we examined, in our post last week, IUL policies these guarantees no longer exists naturally posing the question “Am I really protected?”. This was never traditionally in question when it came to whole life. So why is it in question now?
This question keeps surfacing due to the nature and structure of the IUL policies. The insurance companies have sacrificed some of the security of whole life in an attempt to provide more cash accumlation. As a result they have taken away the guarantees, as we discussed last week, that created the protection in the first place. Guaranteed internal administration costs, mortality rates, interest assumption, no-lapse premium have all been put into question in an effort to provide cash accumulation similar to the stock market.
We all know that the market is not guaranteed and often volatile. But the insurance companies believe they are smarter than the market and can use its growth to pay for the increasing costs of an IUL policy, while still trying to provide the protection and security of insurance. They often use clever marketing language like “guaranteed life income stream” and “tax free retirement income” perpetuating a lie hoping agents and consumers alike will think of these IUL policies as the best of both worlds. While the truth of the matter is quite the contrary.
So are you protected? Well… the answer is… sort of. You are protected as long as:
- the stock market is up
- the insurance company does not experience and increase in overhead
- you make all of your payments on time
- you are willing to increase your monthly premium at a future date
- the insurance company does not change the mortality charges
- you are willing to accept a very low interest guarantee
A change to any one of these will reduce a portion of all of the face value or cash value in the policy, essentially removing a portion or all of the protection the policy is intended to provide. If you have any further questions or concerns please feel free to contact us.