Whether we like it or not, TikTok and Instagram are havens of really bad financial advice. I’ve seen so many “financial influencers” and “wealth strategists” announce they’ve got some super-secret money hack of the rich that can also make you rich. Just buy their one-time offer first to find out what it is! (You can’t see it, but I’m shaking my head while rolling my eyes.)
But the truth is all these “hacks” are usually stupid and overcomplicated ideas that put you and your family’s financial future at risk. Exhibit A for today’s discussion is an indexed universal life insurance account (IUL).
An IUL account takes two simple things (saving money and life insurance) and overcomplicates them both so you can “get rich” . . . somehow. But why? I’m all about saving money and insuring your life, but I’d never recommend putting those two services together in one package. Trust me, that combo is worse than Heinz “Kranch Saucy Sauce.” Just, no.
If you’ve ever wondered what an IUL account is and how it works, we’re about to walk through the ins and outs of this absolutely terrible mashup.
- An IUL account is a part of an indexed universal life insurance policy and receives money left over from premiums (after fees) that will supposedly create a life insurance policy as well as a nest egg for retirement.
- The money earned from the IUL account can be used to pay your premiums (which regularly go up), but the IUL account balance will begin to shrink unless you pay enough on the premiums to avoid using the money you’ve “saved.”
- You’re much better off keeping life insurance and retirement separate—putting money into an actual retirement account like a 401(k) or Roth IRA.
- Term life insurance is a much better deal and will keep your family covered—which is what life insurance is for.
What Is an IUL Account?
Put simply, an IUL account is the part of an indexed universal life insurance policy that’s supposed to build cash value over time (kind of like a savings account).
If you’re asking why a savings account is teamed up with a life insurance policy, I’m right there with you. The folks who sell IUL policies claim they’re a convenient way to cover two big needs at once—a death benefit plus a way to save and even grow your money in a cash account. We’ll get into how your money is supposed to grow a little later.
But like all other forms of permanent or universal life insurance, IULs are major rip-offs that do a lot more for the finances of the person selling them than they do for the customers buying them. The truth is your cash isn’t likely to grow much or very quickly, but those insurance salespeople make all kinds of promises that it will.
A way better (and more affordable) option to make sure your family is covered is a term life insurance policy. Remember, insurance is not a wealth-building tool—it’s there to protect your family and your finances.
Now let’s get into the details of how these policies work. Like with any life insurance policy, you have to make regular payments (premiums) to keep the IUL policy active. Before we look closer at the IUL account, let’s see where those premiums go.
- Fees: Fees like sales commissions, mortality charges (how the insurance company covers its losses in case you die early in the policy), and administration costs eat up part of your payment immediately. Yeah, IULs are an expensive scam (and did I mention that an IUL is way pricier than term life insurance?).
- Death benefit: The next chunk of your premiums pays for the death benefit portion of your policy.
- IUL account: Whatever’s left goes into a cash value account, and that’s supposed to grow into a tidy nest egg by the time you retire.
Okay, so after all the fees are taken out of your pricey policy premiums, an IUL account receives that leftover money and it earns interest based on the performance of a specific stock market index. (That’s a list of companies investment experts use to figure out how well the stock market is performing.) IUL accounts can follow many different indexes—some are general and others focus on just one part of the market. The S&P 500, for example, is a well-known index that tracks stock performance for 500 large companies on the stock exchange.
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So, how exactly do indexes work with an IUL? Let’s take a look.
How Does an IUL Account Work?
Your IUL account is tied to (but not invested in) an index. The insurance company you buy your IUL from uses the stock market index’s performance to figure out what interest rate to pay on your account—and that interest is how your money is supposed to grow over time.
There are some rules about how IUL accounts work. A couple of them are even used as selling points—but I think they all suck. Here they are:
- Many IUL accounts have a guaranteed floor, which means the company promises your account value won’t go below that amount, even if the index it’s tied to tanks. I understand wanting to keep your money safe, but there’s another side to that coin . . .
- Most IUL accounts also have a cap on how much interest they can earn. These caps usually cut off your account’s earning potential before it even gets close to how the actual index is performing. This means that even if the index is doing super well, you’ll still only have modest gains over time—and your account might not even grow at all.
- Remember the life insurance portion of this deal? Well, one of the supposed benefits of IULs is that you can use the cash value to cover your premiums—which, by the way, increase as you get older! But wait . . . what if the IUL account hasn’t grown enough to pay the bigger and bigger premiums? Sure enough, the balance will begin to shrink unless you pay enough on those rising premiums to avoid using the money you’ve saved in your IUL account.
- Another big problem: The insurance company holding your IUL account is totally okay with you borrowing against your own money. This is a terrible idea! Never ever go into debt, especially to borrow your own money. You’ll be charged interest on this self-loan, and if you don’t pay it back before your death, the entire debt will be deducted from the death benefit! Yep—that’s a special kind of stupid.
And if all that sounds bad, it’s even worse when you compare an IUL to other forms of investment.
Is an IUL Account a Good Investment?
Let’s get one thing clear: an IUL account is a terrible investment.
The fees that come with keeping the policy active are bad enough. But the real problem with IULs is that even after you pay the fees, the little bit of cash you can add to the IUL account will be super unimpressive. Then consider the so-so returns you get because your account is tied to (but not invested in) an index, and you can see the truth: An IUL is no Tesla in the world of investment vehicles—it’s more like a Nissan Leaf (and not in a good way).
So, why would anyone buy an IUL policy in the first place? Well, people really do need life insurance and to save for retirement. So, sleazy salespeople take advantage of the fact that most people are impulsive (or lazy) shoppers who don’t always know a lot about how life insurance and retirement investing should work.
But you’re smarter than that. You’re much better off keeping retirement planning and life insurance completely separate. Both are great goals, but they don’t belong smushed together in a single policy designed to take advantage of your fears about the future.
For long-term investing, your best bet is to invest in good growth stock mutual funds through one or more tax-advantaged retirement accounts, like your 401(k) at work or a Roth IRA. You’ll get way better returns there than you’d ever see with an IUL account.
And as far as the life insurance part goes? I’m telling you to stay far, far away from indexed universal life (or any permanent life insurance) and go with term life insurance all day long. It’s way more affordable, and your premiums will stay the same throughout the whole term of the policy. And then, once you’re self-insured, you can drop the policy and pocket the savings.
You Don’t Need Indexed Universal Life. You Need Term Life Coverage.
Indexed universal life is a horrible deal all around. At best, it’s a stupid investment. And at worst, it’s an overleveraged, high-risk, high-cost and high commission account that locks you into 15 years of pricey premiums.
And all that makes the insurance company rich, not you, because (say it with me) insurance is not a wealth-building tool. It’s a means of protecting your family in case something happens to you. And for something as important as that, you need an insurance policy that’s solid, predictable and easy to understand—and that’s term life insurance.