@resjudicata So kudos for the very indepth answer. However part of it is just flat out wrong.
The problem is that if you read the fine print in the illustrations, annual policy fees are not included in the projections in the illustrations. So if you have a year with 0 growth, you will likely still see a ~2% hit to your cash value.
They do illustrate the fees and charges on the performance of the policy. They have illustrated fees in the performance for longer than a decade. Some carriers illustrated non-guaranteed performance bonuses but that was before AG49 rectified that. hose would be akin to illustrated dividend rates on WL policies as they were based on performance of the underlying company.T
Another thing is that the cash value growth in an IUL illustration is just a projection and will never occur that way. ...... Plus many IULs cap what you can actually earn. Say the index earns 25% in a year, you might be capped at 12% cash value growth.
This is true. Every illustration is just a projection. Since its based on market performance, you will see years where you max out the cap rates like last year, and others were its a 0% return when market is down. What is important to note on an IUL illustration is that they are illustrating an expected average over duration of time. So up 12% in one year, down 0% the next, 8% the following.... but they are illustrating an expected duration (or whatever length of policy time). A good advisor (not insurance agent, AVOID INSURANCE AGENTS)
ALSO,
WHOLE LIFE IS ALSO JUST A PROJECTION. Dividend rates that they illustrated are not guaranteed, the difference is WL policies give you the ability to illustrate ABOVE the current dividend rates, IULs are limited to the stress tested AG49 rates (average over any 25 year period). Note the average of ANY 25 year period in market performance is significantly above any dividend rates. And its not even close.
Plus many IULs cap what you can actually earn. Say the index earns 25% in a year, you might be capped at 12% cash value growth.
So this is 100% true. However, the caps are currently 9-12%, and usually have a minimum cap of around 5%. Caps can change every year. In low rate environments like we've had, caps have hovered above 7-8% worst case. As rates rise, caps will also rise. Compare that to dividend rates that have been less than 7% every year for the last 20 (closer to 4-5%). Market has maxed the cap rates significantly, and any IUL illustration will actually show you the cap performance going back 20 years.
You are also completely leaving out the % earned above the spread.
Note: Most spreads are currently around 7-9%, but some bad ones at 20%.
IULs like Nationwide's New Horizon that have an
uncapped rate and 0% spread. with a floor of still zero.
My point is that IUL while it is pitched as risk free because your cash value will never fall with the market, there are some inherent risks over the lifetime of the policy because you have no guaranteed cash value growth.
This is also not entirely true. Every IUL has a fixed rate bucket, and you could put 100% in the fixed rate and earn a low rate of return. It would defeat the purpose of the IUL, but its an option. Depending on risk tolerance, you see some clients put a % into the fixed bucket and the rest into the index, you can split your investment up that way to reduce risk. Lastly, on the anniversary of the policy every year, you can actually change your index (most policies have several indexes to choose from + the fixed account).
The difference with cash value of a whole life policy is that it is not accumulated to pay the premiums later on like IUL. It is accumulated to pay the inevitable death claim. If you have 300k of cash value to your name in a 1million policy, the company is only on the hook for 700k because they will use the 300k of you cash value to pay you too. The thing is, you can use the $300k cash value while alive as a policy loan. You borrow $300k from the policy and die, the company wipes your loan and pays your family 700k.
This is just, well i don't know what this is. Did you just make this up? The accumulated values of an IUL are not used to pay premiums. Advisors will strongly encourage clients to pay all of their premium payments, and not rely on the taking loans from the cash value to pay them..... even though they can. Insurance Agents on the other hand, REGULARLY pitch Whole Life as "Pay this for x number of years and then the dividend will pay your premiums", which none of that is guaranteed, but its positioned as such.
This part: "You borrow $300k from the policy and die, the company wipes your loan and pays your family 700k.", literally applies to EVERY SINGLE insurance policy with accumulation and loans.
So if you are going to use cash value as part of your investment fund, get a whole life policy because it will not blow up as you get older
As long as you make all of your payments on time, and take no loans, its unlikely that a WL policy will blow up. That said, there is an entire insurance strategy in the industry right now called "Loan Rescues" or "Mirrored Loan" strategies where Whole Life policies have actually "Blown Up", and they 1035 remaining cash values, lower death benefits to keep the policies from blowing up and causing a tax issue. So Whole Life policies do and can regularly blow up if you depend on dividends to make your payments.
Example of one companies marketing material around this strategy.
Brochure of Prudentials Loan Rescue Program
VUL is also risky, but not as bad as IUL. I honestly wouldn’t touch any UL product unless it was guaranteed UL or it had secondary guaranteed benefits. And these I would only get if I needed coverage for the rest of my life, basically call this “life long term”. I wouldn’t get these for their cash value abilities.
The exact opposite here is actually true. VULs have much higher fees, and the sub accounts are actually invested in the market, so the floor rate of 0% actually does not exist in the VULs. YOU CAN AND WILL LOSE CASH VALUE IN A DOWN MARKET. From a risk perspective VULs are incredibly risky compared to IULs. How can you even justify this statement unless you clearly have no actual understanding of either policy. IF everything else you had posted was correct (and it wasn't), then this statement alone should have everyone questioning your credibility because its just flat out wrong.
Edit: this will get downvoted by IUL salesmen. But everything I said is true and can be verified by reading the fine print of illustrations for each policy. Most of the life insurance market is made up of IUL salesmen
So I would never downvote anyone because I don't believe in digital points. I'm also a RIA, or as reddit loves to spout, a fee based fiduciary. I would be insulted if anyone called me an insurance agent, even though I am insurance licensed. Its a small part of what I do, but an important part. I don't even know what an IUL salesmen is, i'm not aware of any IUL specific insurance companies or brokerages. I am however aware that companies like Guardian, NY Life, and Northwestern Mutual are insurance agents who focus on Whole Life and are usually not FINRA licensed with a 7, 63/65/66, 24, etc. They are insurance only jockies who masquerade as financial advisors.
The overwhelming type of policies sold will be some flavor of UL because they get more expensive as the person gets older and cash value doesn’t grow as good as it is projected.
The costs of insurance + fees is lower on any UL type of product on the market today then any Whole Life period. Whole life is literally the most expensive type of insurance that anyone sells anywhere.
Whole Life is not a bad policy, its just a lot more NICHE then other policies out there. I'm somewhat bashing Whole life in your misrepresentations of IUL policies here, but they 100% have their spot in clients portfolios. Most Financial Advisors last choice for any accumulation strategy would be WL.
RIAs like me, actually hope and pray that Reg BI is extended to insurance in the coming years. Reg BI (Best Interest) would significantly hinder whole life insurer sales practices, and probably require major policy changes in the Whole Life space to make them more competitive.
@fud10 - more detailed responses as the previous poster was quit off base.
% correct. They are only ever on the hook for the face amount.