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.
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|
|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)