There is a lot of talk and posts about IUL out there, particularly on social media. Normally, I wouldn't use an acronym, but awareness of Indexed Universal Life is greatly increasing so I'll use the 'street term' of IUL. I have three major concerns regarding IUL when used for retirement cash flow:
Performance risk of the policy.
Using "wash loans".
Purpose and use of overloan protection riders with IUL
I have a lot of insurance agents that read this blog, so I'll be providing plenty of caveats in my descriptions.
First, we need to look at the economic forces in a cash value life insurance contract. We do this through the calculation of the net death benefit.
Net death benefit = Cash Values (and its earnings) + Net amount at risk (and its increasing costs of insurance over time) - any outstanding loans (and loan interest)
To put this in another way:
If you have a $1,000,000 death benefit, it may one day have $750,000 of cash values (and whatever it earns) + $250,000 of net amount at risk (and its costs) - any outstanding loans and its interest costs.
EDIT: This was such an in-depth topic, that it was far easier to do a podcast episode on it. Above is our first episode of the Financial Advocacy Podcast and we did a "Consumer Advisory Bulletin" on IUL. It's rather extensive, but it's thorough.
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