“Luke” was weighing his retirement saving options when he asked me for a 2nd opinion about a “life insurance investment plan” recommended by a local agent.

 

History Lesson #1: Besides insuring a person whose death would financially impact others, life insurance has also been proposed to minimize taxes, build up cash, produce retirement income and even shield assets from creditors. Unfortunately, at times, over-zealous product “creativity” has resulted in hardships. In the 1980s, some Universal Life (UL) policies were being sold based on projected interest rates as high as 14%! Other policyholders were shown illustrations with premiums that “vanished” at some point while the policy remained in force indefinitely. Large cash build-ups were also projected inside these policies and touted as future sources of tax-free income ... To the contrary, when interest rates fell, the premiums did not stop and, in many cases, it was the expected cash surpluses that vanished!

 

History Lesson #2: Variable Universal Life (VUL) policies became popular in the 1990s. Instead of a fixed rate, policy owners invested policy values into “sub-accounts” (similar to mutual funds). Given the stock market’s strong performance at the time, lofty 12% annual returns were often shown supporting policy death benefits, the required premiums, projected cash values, and future retirement income. When the stock market fell more than 40% (2000 - 2002), many policies imploded. Insurance companies asked for more premiums.

 

Today: Indexed Universal Life (IUL) is the latest innovation. It links policy interest to the performance of a stock market index, such as the S&P 500 Index, without putting cash values at risk. It is definitely not a bad trade-off to get part of the market’s gains with none of the losses. However, as was often the case with its UL and VUL predecessors, this new IUL product is now being illustrated with eerily similar predictions of generous retirement income and bulging cash values. And, again, these attractive outcomes depend heavily on robust projections of future returns. (This is the product Luke had been shown).

 

In the cases of UL and VUL, perceived promises were not kept and lawsuits ensued. Will this be the fate of IUL? Only time will tell. I hope insurance companies and agents will heed history’s lessons and refrain from using overly optimistic projections. So, what was my answer to Luke? Based on his situation and the policy proposed, I told him, “No, not a good idea.” Before you consider any type of life insurance policy that depends on future performance, do what Luke did and get a 2nd opinion; you’ll find it’s time well invested.

 

 

 

 

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David D. Holland, a CERTIFIED FINANCIAL PLANNER™ practitioner, hosts a weekday radio show at 9AM on AM1380 Ormond Beach, AM1230 New Smyrna Beach and AM1490 Deland. He has also authored two books in his Confessions of a Financial Planner series. Holland offers investment advice through Holland Advisory Services, Inc., a registered investment adviser in Ormond Beach. He can be contacted at (386) 671-7526. Email your financial questions to info@DavidHolland.com.