110: Why You Should Just "Say No" to IUL

110 - Why You Should Just Say No to IUL

[00:00:00] Hello, everyone. I'm John Montoya, and I'm John Perrings. We're authorized Infinite Banking Practitioners and hosts of the Strategic Whole Life Podcast.

John Montoya: Episode 110, IUL Buyer Beware. Hello everyone, John Montoya here, joined with John Perrings. Today we're going to discuss indexed universal life insurance policies and the genesis for this episode. Credit to my friend and client who sent me a text. That he was forwarded from a friend of his, actually a police officer friend who came across this ad on social media.

And the ad is probably one of the most misleading ads I've come across. In regards to life insurance. And anyway the text that my buddy sent me he wrote, I got a client friend that's thinking to convert his 401k to an IUL. I think he is seeing stuff like [00:01:00] this. And FYI, my friend is in the finance business too on the mortgage side.

But he sent me this text and it includes the, An ad and in this ad, there is about a 30 something year old woman taking a selfie in front of a mirror and the text of the ad says

"Setting aside 500 from each paycheck into a max funded IUL instead of your 401k can turn into 1. 5 million of tax free and pay you 105, 000 income every year in retirement."

And there's a call to action. In this social media ad that says comment below with bank. And so when I saw this I was more than a bit peeved for a number of reasons.

And we're going to go into a number of the issues that IUL policies have in this episode. That way [00:02:00] you are not blindsided. And misled into believing that an ad like this can can actually do what they're promoting not to say that, there, there isn't a snowball's chance that it might happen.

But what we're talking about is a life insurance policy. Something that you want to have as a foundation in your overall financial plan. Something that is permanent. And this is a type of policy that really needs to be labeled as impermanent. In my opinion, we've talked about it as a quote unquote permanent, but I think the proper word is impermanent.

And I really want to spell out why IUL policies are impermanent in this episode. So we'll cover the reasons why but let's start with just this. If it sounds too good to be true, it often is. And one of the, one of the things that really struck a chord with me [00:03:00] is the the premium amount that this ad is going after,. $500 per month.

Because that hits a demographicthat I think for the majority of Americans - they fall into that five hundred dollar, maybe up to $1,000, savings budget. and. There, there's a lot of potential sales there, which is why they're targeting that class of people. And the sad fact of it is if you're able to put away just 500 to a thousand dollars a month, that's $6,000 to $12,000 a year.

You're really relying hard on this performing. And if what you have is an impermanent policy that has a high likelihood of lapsing. When you need it most, this is devastating. And all because you were led to believe that you could turn something that is [00:04:00] not meant to truly be an investment into a tax free income for the rest of your life.

And there, there are ways to go about accomplishing that, but. I'd say the main thing the TLDR is that don't be fooled by this. And let's get into reasons why.

So number one indexed universal life policies are touted for their flexible premiums upside potential with no downside risk.

And this ad makes a claim for tax free income forever. It sounds perfect. But again, buyer beware. Here's some list of reasons why you should be suspicious. Before buying one, and if you already have one, what you should know that your advisor probably hasn't shared is that this policy is including stock indexes, indices into the performance of this vehicle.

And for the large portion of advisors who are selling this product, [00:05:00] they're not licensed to sell securities. Now, you don't have to be licensed to sell this product in securities, but you're talking about, if you're an advisor, you're attempting, to explain how the stock market works and you're counting on past performance.

To make a sale, right? The people who are selling these policies they're not talking about guarantees. Why do we buy life insurance? It's to be the foundation of our overall financial plan. They're not talking about guarantees that they're selling hopium and including these stock indices that they are not licensed to even talk about.

And. What's happened is these IULs have been around for over 25 years now. And for many of the people that bought these products they were sold using illustrations that that used a hypothetical 8 [00:06:00] percent return forever. And that's pixie dust or whatever you want to call it.

It's imaginary because money doesn't grow. At 8 percent per year, but when, if you happen to receive one of these illustrations prior to 2015, you probably had an illustration that's at 8 percent every year for life. If you believe that I suppose you might. Deserve what's going to happen. And I say that pretty harshly, cause I don't believe anyone deserves it, but you take the person who you take the person's word, who sold this to you, that this is a realistic expectation.

And I want you to be aware that it's absolutely not. Money doesn't grow at 8%. Guaranteed forever. And what's further infuriating about this is that some of these illustrations will include an example of loans where you can [00:07:00] borrow at a lower rate than what the index crediting rate is.

So let's say you can borrow at 5 percent and the index crediting rate was 8%. Now suddenly you have a 3 percent arbitrage working in your favor. Free money, right? And this is going to go on forever. When this ad tries to goad you into believing that you can have, 105, 000 income every year for life in retirement, how are they doing that?

They're playing an illustrative game with the software that the insurance company provides to create this positive arbitrage on loaned money. That magically works out in your favor forever, because of course, the stock market's going to go up every single year. And when you take out loans, you're going to reap the benefits of positive arbitrage.

And so you're not even earning 8 percent now with a borrowed loan illustration. You're actually earning 11 percent because you take that eight. You add 3 percent positive [00:08:00] arbitrage and that's how they're able to magically create this phantom. I shouldn't call it phantom income. But it's it's deceitful is what it is.

And John, I know you're gonna chime in here and talk about caps to the upside. So I'll leave that to you. But I mentioned before 2015. These illustrations were showing 8% returns for life. What happened in eight? What happened in 2015? There was a ruling AG 49 and the AG means actuarial guideline that the, I believe it's the NAIC came out with that basically said that these illustrations that were provided to potential buyers of these policies were misleading.

They came out and said, this is misleading, that the software has to be changed. So anything moving forward can't illustrate at 8%. And okay that's great. But what happened is, uh, the industry [00:09:00] was I guess a step or two ahead. The game that's being played and trying to sell more of these toxic policies.

And they came up with different ways to boost the hypothetical performance. And so AG49 circa 2015, that lasted about five years. And then what happened is they had to issue a new actuarial guideline, AG49A in 2020. Oops. So everyone who purchased the policy after 2015 up to 2020, basically, you they were sold a misleading product if that illustration somehow showed an illustrative rate that was, somewhere in the range of 7 to 8%.

AG49A 2020 further restricts the illustrative software so it can be less misleading. That all works fine and dandy until guess what? [00:10:00] AG49B comes out in May of last year, 2023. And what happened? Apparently the illustrative software. was still too misleading. So we haven't even got into the worst part of the problem with these IUL products.

But what these actuary guidelines should be telling you is that This is a product that is purposely being created and marketed to deceive you, to basically believe that you have an opportunity here to really save for retirement. Protect your family, accomplish so many wonderful things and it's all going to work out.

And really what it is it's all hopium. I'm going to take a break here. John I'll let you chime in and share your thoughts on all this.

John Perrings: Well, it's, you know, IUL and the different UL type products [00:11:00] are really they're products that are designed to shift risk back onto the policy owner. And even if we could say, IULs, have a, have some kind of purpose. Let's say, these policies are great for these particular instances, that would be fine.

And I'm sure there are some agents out there who sell it like that, which I think would be correct if you're going to sell IUL, but the problem is they're often sold. And pitched to consumers like they're the same thing as whole life, except you just get market upside with no downside. And so to your point, the deception happens because it's not understood what's actually going on with IUL.

It's a weird thing inside the life insurance industry where, I've had agents get on my LinkedIn and try to say what's your problem with IUL for infinite [00:12:00] banking? And I'll tell them exactly what my problems are. And they'll just say well, you don't understand how IUL works.

Okay. Great talk. And it's like, yeah, I do understand how IUL works. And you haven't addressed any of my concerns with how IUL works. . But at the end of the day, the thing with IUL that we have to understand is It's not the same as whole life.

With whole life, everything is baked in. All the costs are baked in. All the all the assumptions are the worst case assumptions. And so all the dividends you get are when the insurance company does not experience those worst case assumptions with costs and et cetera. And if the whole life insurance or excuse me, the life insurance company does experience the worst case scenarios or even worse, then the risk is transferred to them and they still have to perform on that whole life insurance policy with UL.

And so there's VUL, IUL, [00:13:00] UL, all these universal life type products. The risk for those performances are actually transferred back to you. So if the costs are higher than expected, guess who's paying those costs? You are. And. And so the, this idea that you can have a zero floor, the problem is they'll talk about a zero floor, but the zero floor is not a dollar amount.

It's a percentage. And that percentage has other variables that can affect what the dollar amount of that percentage ends up being. The main one being costs that can happen. So it's just, it's really just A completely different product. It's built on a renewing term chassis. And so that's part of where those costs come from.

We don't know what the term costs are going to be in any given year. So you might have a, you might have a floor of 0 percent on the growth side, but if you get 0 percent and the costs are higher, you're still going to lose money because the [00:14:00] costs are going to come out of there.

So it's It's a big problem that I see where it's just sold in the completely wrong context and it's sold with, the same idea of how whole life is. Like I've been on real estate forums where people say, these are the words they use. IUL is just unbundled whole life. Holy moly. That is what people are.

That's what agents are telling people out there that it's unbundled whole life. Are you crazy? That's the whole, that's the whole difference between those two products. So it's pretty wild. Regarding costs as well, something that's not, Addressed is because the gains in your policy are untethered from the performance of the company.

It's all just based on this arbitrary index. And so the insurance company has to protect themselves. If the gains are too high, they don't want to pay out too much. From the [00:15:00] general fund or that'll start eating into dividends from their whole life clients. And if it's too low, they're making a promise that they don't want it to go too far.

So how do they protect themselves against, the index going too far in any given direction? The way they do that is they buy options. And so they don't want the, the gains to go too high. Cause then they'll have to pay too much into the policy. They don't want it to go too low.

So they can, offer you the quote unquote zero floor. Those options have a cost and. Who are those options protecting? Todd Langford from Truth Concepts talks about this all the time. Who are the options protecting? They're protecting the insurance company and they're protecting all the whole life insurance policy owners.

So thank you. They're protecting those entities, but you're paying the cost for those options, right? So the, we just have to get into, how the mechanics of this really work. And I think it's unfortunate, This Instagram or TikTok post that you were talking about, she's saying set aside [00:16:00] 500 and you'll have a hundred, 1.

5 million tax free. This is just a crazy assumption. What this person has done is they've taken 500 a month applied essentially the, S& P 500 with dividends, which is around an 11 or so rate of return over 30 years. And you get 1.5 million dollars because of the way that the caps work, you don't get all the upside of of the index.

This is going to turn out to look more like. Maybe $250,000. If that sounds crazy to you, you really have to understand what the caps do and the costs do to these policies. You cannot just say you're going to get the market rates of the S& P 500 because you're not invested in the market. It's just an index. A market index is being used to calculate the gains on your policy. This is absolutely [00:17:00] bananas that this person is putting that out there saying you're going to get 1. 5 million. They absolutely do not understand how the caps and the participation rates of an IUL work.

John Montoya: Yeah, and the call to action and the add bank inferring, exactly what we've been talking about for over a hundred episodes with teaching people how to become their own bank with whole life policies, right? This is a riff on banking. With IUL, which again is really misleading.

Nelson Nash, he, um, came up with with the idea that the concept of becoming your own banker, utilizing whole life. And later the Nelson Nash Institute was created in part to separate people who were going about Teaching Nelson's concept, his idea with whole life the right way and to separate the practitioners from those who were promoting this type of product IUL, because [00:18:00] sad fact I don't have the numbers in front of me, but I believe there, as a percentage, more IUL policies are sold in America than whole life and it's that's troubling just by itself because when you think about all the people who are buying these impermanent policies and what the setup is going to be later on decades down the road, when they're in their seventies and eighties, not just for them with what they are Expect to happen with these policies, but also, one of the main reasons why you buy life insurance for your beneficiaries for that death benefit.

And these policies basically have the ability to eat the cash value every single year because of that cost of insurance. And this is the other edge of the sword, the double edged sword. We talked about the how the interest is earned with the caps and the rates and everything [00:19:00] else.

That's a, Capped and, it all can change on you basically.

John Perrings: What, let me go through that actually, because I glazed over it. Let me just, let me walk through an example, if you don't mind, and help people understand what's actually going to happen. The growth of your policy is just going to be based on an index. It's a total arbitrary thing.

It has nothing to do with, the performance of the company. The company is going to buy options to keep everything, from going too far in any direction. That's another cost to you. But what happens is, let's look at a number because I've just done the calculations on this again, I was actually sitting with Todd virtually with the founder of Truth Concepts, and he's one of the people in this industry who's just done a great job of, really uncovering the numbers behind everything, and so we used an example of funding $20,000 a year for 40 years.

And if you use real S& P 500 with dividends [00:20:00] reinvested, if you use the real numbers from the last 40 years and you did $20,000 a year, that would be 11.5 million dollars and if you were, if you had that in the S& P 500 with dividends reinvested without buying insurance, around 11 and a half million dollars over 40 years. This is what that person on Instagram is basically calculating. She did it. I just backed into the numbers.

She was only looking at it for 30 years. She was essentially saying you're going to get the market in your IUL and you're not. So the difference is if you move this over into an IUL and index, Universal Life. You don't get dividends because it's just an index. So 20, 000 a year with no dividends reinvested.

That's like a 2 percent difference, by the way. If you just look at the 40 year comparison of those two S& P that cuts it in half to 6 million. Not getting the, not getting those dividends. And [00:21:00] then now here's the interesting thing. If you add a floor to it, a 0 percent floor, which is what people tout the benefits of, they say you get the upside without the downside.

And if you put a 0 percent floor on that, where you get no negatives, just zeros, and we're not talking about costs or any of that stuff right now, we're just talking about pure performance. You get an incredible, it push, it doubles what it would have been before. And that pushes it up to 20 million, right?

So that. That's pretty awesome if you can do that. However, what's not, I think explained well enough, especially this gal who apparently doesn't realize this, you don't get that floor without some caps. And so what the cap means, there's a cap to how much of the returns you can get applied to your policy based on the index.

And those have been going down lately because it's too expensive to buy the options to get. To cover a higher cap. So we've seen cap rates go down. [00:22:00] And by the way those can go down at any time after you've had put your policy in force. Those are non guaranteed elements of the policy that can be changed on you at any time.

So if, but if we use a conservative eight and a half percent cap, meaning you don't get to experience the upside above eight and a half percent, which is a completely reasonable number based on industry caps. The total that you accumulate over 40 years goes down to 3, 000, 000, goes from 12, 000, 000 to 3, 000, 000.

So it's a quarter of what it would have done if you just put your money in the S& P. That's even with the 0 percent floor. Now here's the other thing. There are participation rates that are associated with this. So if we do an 80 percent participation rate, so that means. If the cap were 10%, you'd only get 8%.

So whatever, 80% of 8.5% is if you add an 80% participation rate, it cuts at a half again. So [00:23:00] now we're down to, somewhere in the neighborhood of one and a half million dollars, which is, closer to a, less than 3% growth rate on that money. Meanwhile, it's being marketed like you're getting, S& P types of returns.

So I just, I wanted to walk through that. So everybody understands what's actually happening with these floors and caps and participation rates, and just run through a super simple example. I'm sure somebody could get a, listen to this podcast and, correct, some kind of detail, but that's the general principle of what we're looking at with IUL floors, caps, and participation rates.

You, you don't get anywhere near what you would expect to see from the market history of the of the index.

John Montoya: I'll add one more element to that too in part because the ad says 500 a month, and it just made me think of something where if you're billing mode on a life [00:24:00] insurance policy and especially with an IUL, if you're paying premium 500 each month, that's 12 entry points that have to be accounted for.

Every single year for as long as you pay premium into the policy and the more entry points you have, you're going to get an average of the overall return. So even in, a perfect world where let's say you could get. What was illustrated, you're not going to get it when you're paying premium on a monthly basis, because you have 12 different entry points, which means you're going to have 12 different returns that are going to average out.

And what happens with an average, you don't get the top, you get somewhere in the middle. And, this is something that I have never heard talked about, but I know this happens with an IUL, you're paying that premium [00:25:00] every single month, you're adding entry points, and you're basically I don't know averaging down, I think is what I'm trying to say here.

You're averaging down that future Return in that policy. So what you want to have happen becomes less likely to happen the longer you have that policy. And now

John Perrings: Hey, real quick, John something else about that, what you just said, these entry points if you have, let's say you're making monthly payments every year for every month for 30 years, that's 360 entry points. And some of these policies, it just depends on the carrier and the product, of course, all these things.

But some of the bonuses that are put in place that are part of the structure that are illustrated in that probably shouldn't be for every single year. And then some of the guarantees, if you are late with a payment or you miss a payment, some of those bonuses and guarantees actually go away contractually.

And so there [00:26:00] are a lot of ways for these policies to. Not perform the way that you think they're going to perform. And what's the chance over, 30 years, 360 payments that you might be late on one, it just, there are so many ways to transfer risk back to the policy owner.

I just can't, I can't get my head around why anyone would want to do it, really.

John Montoya: I think it's because they have to be. Misled into believing that this is something that is pardon the expression, but found money, oh, you can suddenly find 105, 000 tax free and future lifetime income by only contributing 500 a month.

John Perrings: Yeah, it gets back to that hack culture that is so popular now where everybody thinks, everyone's looking for tricks instead of principles and discipline. And yeah, it's gonna, it's gonna bite a lot of people.

John Montoya: yeah, absolutely. That's why we're talking [00:27:00] about this. And so that, that's, we spent a lot of time talking about just the performance of these products on the interest side and how the crediting methodology works with an IUL and. Hopefully you can more than get the sense that this is all a smokescreen to get you to buy into something that has a really low probability.

Of actually performing and how it's illustrated to perform. And the other edge of the sword is the cost of insurance. And I think this is really the most heinous aspect of, An IUL all ULs, but we're talking about IULs specifically today. The cost of insurance is based off a one year renewable term, which is going to increase in cost every single year for the rest of your life.

And what's going to happen, what's guaranteed to happen is that your costs will [00:28:00] increase. And so when you have an underperforming policy, Not to mention, this this ad is calling for a max funded policy, but what happens when, you don't even max fund it because life does happen. But let's say best case scenario, you do max fund the policy, but it underperforms, which it has the high likelihood of doing.

One thing that is completely out of your control in addition to the performance is the cost of insurance, because it is guaranteed to increase on you with that one year renewable chassis. And what's going to happen once you get to the later stages of your life you're going to be you're going to experience these annual statements with an increasing cost of insurance.

And what's going to happen is that cost of insurance is, has to be paid no matter what. And it's either going to come from the cash value that's available in your policy or it's If you [00:29:00] have an IUL or ultimately that cash value in an under, in an underperforming policy, the cash value is eventually going to get to a point where the worst case scenario is going to happen.

You're going to be met with a demand letter saying you need to come in with more premium in order to keep your policy in force. And the jeopardy there is you get hit with that demand letter. To bring in more premium to keep your policy afloat, what's going to happen the next year? That cost of insurance is going to go even higher.

And so now you're stuck with a policy where, your cash value has basically been dwindled down to zero. And in order to keep. Any sort of death benefit for your beneficiaries, you're going to have to come out of pocket for an increasing cost of insurance, that premium payment every year for as long as you can afford to make that premium payment.

And it's [00:30:00] the exact opposite of what you wanted to have happen in your golden years. So I think the, what's underneath the hood. In these IUL policies, the cost of insurance, that's really I think what doesn't get explained properly I think all the emphasis is really on the performance and where the IUL advisor is.

Really should be spending more of their time is going over the full disclosure on the cost of insurance and, take a look at these policies and, look at the guarantees within them. How well do these policies work? When, if you look at the guarantees and after 15 years, the policy essentially lapses.

John Perrings: The, the, what you're talking about with the renewable term chassis is that the cost of insurance, it goes up, but we actually don't know by how [00:31:00] much. I've seen, there are some limits, but I've seen, I've seen policies where the cost of insurance can go up by as much as 40 times what's illustrated.

And so this is a huge thing where, John Montoya just talked about getting a demand letter. That means the cost of insurance went up more than what was illustrated. And that's very rarely understood. The only thing that's focused on are the, The participation rates, the caps, the floors, all that stuff, which it doesn't matter if the cost of insurance goes up past that.

Now, here's the other piece of that though. What if something happens and you can no longer afford to pay the premium, that, that is going to have some. Major effects on how the cost of insurance is covered on these types of policies. And with a whole life insurance policy, you always have a way to stop paying a premium.

It's not really the case with [00:32:00] IUL. It, you need to cover that cost of insurance. And because that cashflow is never guaranteed in the future with the permanent. Guaranteed death benefit. The present value of that is smoke and mirrors. You don't really know what that's going to be.

With a whole life insurance, you get a guaranteed future cash flow, whether you die or the policy endows, and that means your cash value, your present value, and your policy is rock solid. And it can never go down. Not true with an IUL.

John Montoya: Yeah, it's so misleading because the, the transfer of risk, and this is something that you mentioned maybe 10, 15 minutes ago at this point, but the transfer of risk when you buy life insurance should be from the policy owner.

To the insurance company and with these IUL products, you're only transferring the risk temporarily, and it's not a guaranteed transfer of [00:33:00] risk for your whole life because this policy has a high likelihood of lapsing either due to underperformance or to being underfunded. Or a combination of both all added with to what we know is going to happen.

The cost of insurance is going to increase every single year because of that one year renewable term chassis. The cost of insurance goes up every single year. And that cost is going to get paid from some place and it's either your cash values or out of pocket. And you just don't want to be in that situation when you're in your seventies and eighties and a whole life policy.

It takes care of that transfer of risk permanently. And that's why I think the life insurance industry should really reclassify it. These policies so that it's better understood, crystal clear, in fact, [00:34:00] that a whole life policy is the only permanent cash value policy that exists. Any type of UL policy, and specifically IUL, is an impermanent policy.

It is a temporary transfer of risk.

John Perrings: The more you try to make life insurance be something other than life insurance, the more you have to transfer risk back onto yourself. That's, there's no getting around that. Everything is a trade off between cost and risk. So when people try to sell UL products like lower cost whole life, There's a trade off to it.

And it, the, that principle goes into regular whole life too, where people try to front load the early years of cash value and make it act like a, savings account rather than life insurance. It's the more you try to You know, just torture this product into something it's not supposed to be.

The worse you [00:35:00] make it. There's no free lunch. You've got to build it up, so I feel like the IUL, it's all just. Tricks to, and hacks to try to get something sooner than what you think you can do somewhere else.

John Montoya: I concur. I'd like to finish this episode with a call to action. If you currently have an IUL policy, what I'd like you to do is call up your life insurance Company and request an in force illustration. And what I'd like you to do in your request is have it illustrated at five and a half percent.

And when you get a copy of that, take a look, does that policy lapse at what year does it lapse? And if you'd like to send it over to us, please do. We'd be happy to to share our thoughts on it. But I think most importantly, you need to be aware. Of what can happen with that policy based on [00:36:00] what, what's underpinning it.

And for a lot of buyers of IUL, you haven't really looked underneath the hood. Maybe you haven't ever requested an in force illustration on your policy. This is your homework. Request an in force illustration, and you really need to understand how this policy has the potential to blow up on you in the future.

And if you know that this has the potential to happen, you need to start taking steps while you're still in good health. to to replace it with a product that is actually permanent and you can avoid this happening to you. So I'll leave you with that call to action.

John Perrings: All right, everybody I hope this was helpful. And if any of this is resonating with you and you'd like to learn more about how any of this can apply in your life specifically, you can head over to StrategicWholeLife.Com and you can book a free 30 minute consultation with us right there. Or if you're the type of person that likes to just read and learn as much as they can before having to talk to [00:37:00] anybody, you can get access to our course, IBC Mastery.

Right there at StrategicWholeLife.Com right at the top. All right, Montoya. Great talk as always. Thank you.

John Montoya: All right. Thank you everyone. Take care.