When I published my financial network map I didn’t think that 1.) people would associate my blow money as being money for blow, and 2.) that people wouldn’t know what Equity Indexed Universal Life insurance was. This is kind of a sore spot for me because I have been a believer in term life insurance due to the vast difference in the cost of the insurance. I signed on to this whole life insurance policy back when I was not really involved my my families finances, my wife was in control and being led by her mom who is in the financial planning business. I was more than happy to allow others to influence my decisions and now I am trying to figure out what it was that I signed up for.
What it is
EIUL is a form of whole life insurance which includes an investment portion where your earnings are tied to a market index. I use the term tied very loosely. This is not a true index fund like you would find at Vanguard or Fidelity but just tied to the fluctuations in the market and in no way actually invests in any stock or equity investments.
The Guarantee
You cannot lose money with the policy, except the money you pay for the insurance, but you could possibly not make much either. The cost for the insurance is pretty steep, I still haven’t quite figured out how much of the $300.00 per month I pay goes towards the actual cost of the insurance. You are charged a decreasing surrender fee for the first 7 years so there is a good chance you wouldn’t be able to get anything out of it if you were to give up on the idea, this is where I am.
Earning Interest – Tied to an Index
You earn “interest” on the net premium you pay into the policy, in my case I pay $3600 a year into the policy, they take out their cut of fees and costs for the insurance and then the rest is part of the cash value portion of the policy. That cash value is where you are going to earn you potential returns.
Keeping in mind that I own this I am trying to see it in the best light possible, it just isn’t working. The way the indexing works should be illegal. The percentage gain for any given month is capped at a predetermined percentage rate which is set at the beginning of each policy year. For the 2008 year I was capped at 3.7% per month. No matter what the “index” did for that month I could not make more than 3.7%. Unfortunately this cap doesn’t go in the other direction so you lose with the market but you only gain up to your cap. If for the first 6 months of the year you earn 3.7% each month you would be at 22.2% earnings for the year, if the following month the index falls 22.2% you are at 0. The following table shows you the actual summation of my rate for the 2008 year:
| Month | S&P500 Index | Capped Rate |
| 03/08 | 1304.34 | - |
| 04/08 | 1370.40 | 3.700% |
| 05/08 | 1418.26 | 3.4924% |
| 06/08 | 1360.68 | -4.0599% |
| 07/08 | 1262.90 | -7.1861% |
| 08/08 | 1289.19 | 2.0817% |
| 09/08 | 1242.31 | -3.6363% |
| 10/08 | 1056.89 | -14.9254% |
| 11/08 | 904.88 | -14.3827% |
| 12/08 | 876.07 | -3.1838% |
| 01/09 | 934.70 | 3.700% |
| 02/09 | 868.60 | -7.0717% |
| 03/09 | 683.38 | -21.3239% |
| S&P500 Total Cap Rate | -62.80% | |
As you can see from this table the negatives have a much bigger affect on the cumulative total than the positives. If the market makes a 20% crazy swing up one month I get 3.7% but if it makes a -15% correction the next month I get -15%. You can start to see where the odds of making a 3.7% every month may be asking a lot.
Why I Don’t Like It
The two biggest reasons I am unhappy with this whole thing are
- no matter how much I look at the contract and the paper work I still don’t understand how much this is costing me. I pay $300.00 and some of that goes to an actual insurance premium the rest goes into crazy index investment land.
- The whole indexing concept is just WHACK. Add to my previous explanation the fact that the insurance company sets the cap and it can go as low as 1% and you can really start to worry.
I don’t know what I should do, if I should just stick it out for the long haul and hope I actually start to build some cash value or if I should just chock up the $6200 + I am already into this for as a learning experience and close it out. What do you think, what are your thoughts and experiences with EIUL’s?
Photo: (Mike Boehmer)
{ 13 comments… read them below or add one }
Kyle-
With my current firm, I have the option to “sell” these to my clients. Notice that I didn’t say “recommend”. Personally, I would never touch these and would feel guilty selling one to somebody I didn’t like. It’s hard for me to say that knowing that this was sold to you by a family member.
The closest experience I’ve had with this is with people that have been funding whole life policy’s with the same premise “That cash value is where you are going to earn you potential returns.” Every case I’ve seen has paid their fair share of premiums, but has little of “cash value” to show for it. Most of that premium goes to pay for the insurance instead of growing for your benefit.
It sounds like you’ve done your research well and see the cap that these type of insurance products will put on you. At your age, you have no business being in this investment. I don’t know how much you have invested or what the surrender would be to get out, but I would run. Run really fast. Or at least stop funding it. I can list 100 different things that would be a better investment for $300/mo. Hope that helps!
I still don’t know much about these. But they do make me tingle in a spot that’s uncomfortable.
Ugh, sorry about your EIUL. You’re in a tough situation to be sure. To sum it up, an EIUL, VUL, or VA and the like are usually terrible investments for younger people.
Usually the only reason to consider one of these types of vehicles is if you’ve already exhausted all other tax-deferred/tax-free investment options. And even then, the benefits are debatable.
It looks like you’ve already identified many of the negatives of this investment. You’re paying for insurance plus investing, you’re capped on the upside. Over time, this is not going to work to your advantage. While it’s possible to start to recover over time if the market recovers, you’re never going to be able to take full advantage of a strong market.
IMO, if you aren’t currently maxing out your 401k, still qualify for a Roth IRA, and are insurable, you can do far better than to keep dumping money into this product.
You could pick up a term life policy for about 25% of what a comparable premium would be on any cash value policy, and you can still invest in your retirement accounts or with low-cost fund companies like you mentioned. Your $300/month will go a LOT farther.
Without a doubt, it sucks to take a loss. But being so young you really don’t need the features that this product claims to offer, so the longer you stay with it, the more money you’re going to end up losing to fees or miss out because of the cap.
As a side note, if I’m not mistaken the cash value of an EIUL doesn’t increase due to dividends. If you were to invest in an index fund on your own, you would be receiving and could reinvest those dividends. Over 30+ years that is huge, which you’d completely miss out on with your current policy.
So, that’s just my opinion, but I think you can do a lot more with your $300/month. You hate to lose money by bailing out, but at the same time you have to think about what’s best for the long-term since you have so much time on your side.
Cut your loses and RUN!
Call it a stupid tax.
What would it take to get out of the policy?
If you don’t have term life I would start shopping for it now. I like Accuquote (and USAA if you’re a member)
I’m an actuary and I actually priced these products at the last company I worked for.
Back in the 90’s these actually used to be pretty cool products. They offered a legitimate happy medium between fixed and variable products. You could usually lock in a guaranteed 2% return and take advantage of about 75% of the stock market gains.
With the big booms and busts this decade the stock options and hedges that insurance companies buy to back this product got more and more expensive. Stock hedges are expensive when the market goes up and when it goes down and we have had a lot of very steep ups and downs recently.
Given that the hedges are now so expensive they have had to set so many restrictions and caps on the EIUL products that they are pretty bad products now. If you had bought one of these products back in the 90’s you probably would have had one of the best sit and hold investments over the past decade. You could have enjoyed 75% of the tech and real estate booms and earned your 2% during the tech and 9/11 busts and the current recession.
The way your product sounds you are basically guaranteed to earn 0% whether the market is trending up or down because we all know that even in good times the market will still take big dives from month to month. Until the surrender charges run off you are probably better holding on to it and then 1035 exchanging it into a better product.
Here is my next problem, if I want to get rid of this policy I need to also convince my wife that this is not the best option. This quandary is made more difficult by the fact that her mom is the one who sold us on this. I don’t want her to think I am attacking her mom or her decision but I want to get the point across that this is not the best thing for us.
How can I explain that this is not the best thing for us and the $6k we have sunk in it isn’t worth staying with the policy to get back?
Do you guys listen to/read Dave Ramsey? You could email him or call into the show and tell your situation and then he’s sure to bag it (he hates whole life policies) and to tell you to cut and run and call it a stupid tax (just like Kelly said!) and then if your wife hears that, maybe she will listen and agree.
Just an idea. Good luck!
Usually, people buy life insurance for the death benefit and they expect to have some high level of guarantees if they make their premium payments on time.
Having said that, I have seen Equity Indexed Universal Life policies from quality companies with guaranteed premiums below or near the competition. If you need or want permanent life insurance, an EIUL with this type of guarantee might make sense because it allows you the possibility of making more cash value on the side (potentially reducing future required premiums to keep the guarantee).
Outside of that scenario, I’m not sure it makes sense. Buying one of these to try to “make money” is crazy because the highest average credit to your account *might* be 7% – and that’s before the charges come out. The thing about Universal Life policies is that the internal costs can change at any time for any reason the company sees fit. Company quality and stability has nothing to do with it. I’ve seen high quality companies jack up the internal costs on 5 or 20 year old policies.
To really see what’s going on, ask for a few “in force” illustrations. Make sure one of them shows 0% crediting to your account and “maximum” or “guaranteed” charges to see how guaranteed your contract really is. (Oh, and please notice the huge swing in cash value between 0% and current charges and 0% with guaranteed charges.) In force illustrations are speculative, but should help put things in perspective.
I won’t comment on what you should do now – I’m not in the business of giving advice. If you were to consider moving to another policy before the surrender charges were up, you might be able to save your cash value. See if you could do an “internal 1035 exchange” to a non-qualified annuity with the same company and get them to waive the surrender charge on the transfer. Annuities have significantly lower costs than life insurance policies, and your only hope to avoid the surrender charge is to keep it with the same company.
If that sounded confusing, hit me back. Good luck.
Find an agent that can fully illustrate all of the prudent ways out of your dilemma. You’re going to need a lot of factual information in order to walk from your mother in law and salvage your marriage. But also keep in mind that our wives are very savvy partners and she may have just gone along with the IUL because of family pressure. She may be right on board for looking for a way to cut your losses and get into something more sane.
Aaron’s idea of an internal 1035 exchange has some merit but isn’t a likely happening. Companies can be extremely bull headed to the point of blowing off perfectly good money rather than bend a bit and hang on to the cash flow.
Stupid tax may be the best way out and remember, there is a pretty good chance that your wife is already thinking in that direction.
These are three different people who have no interest in each other that I have followed over a few years regarding Indexed Universal Life Insurance. This is a comment from David’s article “So financially astute executives own it, banks own it, corporations own it, why do the so called experts tell you not to own it? Even some of the corporations that own a lot of it (GE), have their employees giving out advice not to own permanent life insurance!!” By the way, this is an honest guy who checked on our life insurance policies to make sure they were structured properly without trying to sell me anything. Douglas Andrews is a short 3 minute youtube. Wayde’s presentation is an hour. It gives an in depth explanation on the policy you have.
The 401K/Trad. or Roth IRA/Mutual funds have more downsides than the EIUL. When choosing an investment put it through this test.
1) Is it liquid? Can I access the money when I need it? EIUL=YES; Trad. investment=NO
2) Is it safe? Will I lose my principal? EIUL=Cannot lose principal; Trad. investment=Can lose principal (as seen during dotcom bust, during 9/11, and this recession) I know the stock market is coming back but remember…if you lose 50% of your money, it takes 100% to get back to even. Even though it has recovered, it has not recovered fully so a lot of people out there are not back to even. And what is to say that this won’t happen again in the future if triggered by something else.
3) Is there a good rate of return? EIUL may average 7.5% at this time but I would take that all day knowing I will never lose any principle and have a good banking system. And you have to realize that this policy is not about getting rich or being a great investment…it is a great investment tool when used as a banking system which is the part that all of those financial gurus like Dave Ramsey, Susie Orman, and David Bach don’t understand.
4) Will I incur taxes? How much? In a 401K, you can’t take money out until you reach a certain age and when you do take it out, you get taxed on it. Roth IRAs don’t get taxed on withdrawal, but you have to wait until 59 and a half to access it without penalty. Taxes in the future will stay the same, increase, or decrease. I really don’t think they will decrease. There is a good chance they can only increase. With the EIUL, you can borrow money tax free.
http://shaferfinancial.wordpress.com/2008/05/27/life-insurance-who-owns-it-and-why/
http://www.youtube.com/watch?v=JSi5_qooDZw&feature=player_embedded
http://contacttracs.com/uploads/users/3/2009-05-27-1902-Creating-Your-Own-Personal-Banking-System-Can-Make-You-Rich-.wmv
Take the time to learn what you don’t know before following the sheeple. I suggest you stick with your policy as long as it has been structured properly with a minimized death benefit. Like I said, this is a very powerful banking system when used properly. And by the way, I don’t sell these things in case anyone else is wondering.
I certainly understand the “banking” aspect of the account. I liked the YouTube video and I appreciate the additional information and links on the subject. I would love to see a response from some of the professional advisers out there. I am still not sold on the concept entirely but we are sticking with it for now.
i have an EIUL with Western Reserve Life. My cap is 12.5% and floor is 1%. Who do you have yours with?
I have my EIUL with Aviva. It’s funny because my sister-in-law just talked to some guy trying to sell her whole life insurance, and he was saying that I had a risky policy. It reminded me to check this post. Aviva actually has a 313 year history surviving 9 panics, 8 recessions, 3 depressions, 11 bubbles, and 10 crashes. The caps depend on what indexed strategy you are talking about. I have mine set up on a 2yr. point to point with the cap being 27%. I don’t see any earnings every year though. It is only every 2 years that I see my earnings. The minimum guaranteed is 2%.