Morningstar syndicated Robert Powell's MarketWatch piece on indexed universal life insurance, which has become a booming product with a very specific purpose that gets sold to a lot of people it does not fit. IULs carry caps, participation rates, surrender periods, policy expenses and rising insurance costs, and the sales illustrations often lean on optimistic return assumptions.
I have spent years reviewing IUL illustrations and watching clients make decisions based on projections that do not survive contact with the policy they actually own. The illustration shows a smooth line. The actual policy credits a capped return in good years and nothing in bad ones, while the cost of insurance rises every year. By the second decade, the cash value can sit far below the chart, and the client cannot cut the premium without risking a lapse.
Who should buy one? The best candidates are usually people who have already maxed out traditional retirement accounts and can commit to funding the policy aggressively for at least 15 years. That last condition is the one most salespeople skip. For someone still carrying credit card debt or under-contributing to a 401(k), an IUL is the wrong order of operations.
If you are shown one, ask to see it illustrated at a 4% return with current costs. If it still works, it might be for you. If it only works at 7%, it is a sales chart, not a plan.
Read the full article at Morningstar →
