Why I don’t design custom universal life insurance plans anymore

Back when I lived in New York state, there were only a handful of life insurance carriers available. Most of those insurance companies sold indexed life insurance. 

Nearly all of them implicitly promised 8% returns. In fact, I can remember a conversation I had with one of the companies I worked with where all the marketing folks really pushed the 8% return thing very hard. 

To get an 8% return on an indexed UL product, the insurance company has to set aside enough money to pay for the index call options. This is called an “options budget”. The options budget is what determines what cap rates and participation rates an insurance company can afford. 

This, in turn, determines the realistic return potential over the long-term. 

A budget of, say 4.36% means the insurance company can afford a cap rate of 9.20%. So, getting an 8% return is possible within the bounds of what is most likely to happen if the budget is sustainable. 

Today’s options budgets for index life insurance are 3.24%. Since every life insurer shops the same handful of investment banks for their index options, everyone is essentially paying the same rate for options contracts. 

At this budget, the insurer can afford a 6.4% cap rate. 

This is the maximum rate the insurer will pay, based on the upward movement of the underlying stock index. 

Of course, fees, commissions, and so on will be deducted from any earnings. 

The reality is… the long-term return of indexed UL is most probably not going to waver too far away from the options budget. 

Meaning, a 3% options budget should result in a long-term return around 3%. If lucky, maybe 4%. 

More:

It has come to my attention (from people waaaaaaaaaaaay smarter than me who help design and price these things for insurers) that with some of these Indexed Universal Life products, the contract charges equal 120% of the annual premium. 

And… those charges assume the product is “max funded” (in insurance-speak, we call is “solve for cash value”). Basically, the policy is designed to produce high cash surrender value… except that in this case, the fees and charges might prevent that even under optimal scenarios.

Let’s think about that for a microsecond. 

If the policy charges and fees are more than the annual premium, how are policyholders making money on their cash value? 

The spreadsheet on the illustration will show you whatever the agent wants to show you. 

Which is fine. I’m not against agents doing that, and I’m sure there are plenty of honest agents out there. 

Me personally?

I stick with dividend paying whole life insurance, even though I am assured these products won’t blow up like every other universal life policy. 

With that said, it’s entirely possible that it is a good idea for you. And… if you know for a fact this is the type of policy you need, then you should buy it. 

It all comes down to why you’re buying the life insurance in the first place. 

If you are planning for the worst-case scenarios, whole life insurance makes the most sense. It has a structural advantage over all other types of life insurance for this purpose. It is designed specifically to withstand the harshest economic environments. And, if issued and managed by a “true blue” mutual company, should last for your entire life. 

If, on the other hand, you do not value the guarantees of whole life insurance, think the rate of return is “too low” compared to the secksy spreadsheets of indexed ULs, or the idea of waiting 5-7 years for the policy to break even seems boring to you, then don’t buy whole life insurance. 

Whole life is strictly for those who want or need a super strong safety net with the potential for competitive long-term returns on cash value and death benefit over the very long-term.

If you want to know more, and aren’t afraid of getting your eyeballs dirty with nitty gritty details, go ahead and join Monegenix® Labs. Inside Labs, you’ll find exclusive video trainings and special reports that aren’t available anywhere else. There’s no cost to you, and it comes with some free goodies.

David Lewis

This post brought to you by //The Rogue Agent//. David has been a life insurance agent, and worked with some of the oldest and most respected mutual life insurance companies in the U.S., since 2004. Learn more about him and his business, here.