Unpacking the IUL marketing plague

By Daniel M. Yerger

It hasn’t escaped notice for many financial planners that Indexed Universal Life (IUL) policies are making a marketing comeback, albeit one that resembles a plague of locusts.

Legions of insurance-licensed-only insurance producers have swarmed to platforms such as TikTok and Instagram to market the living benefits of IUL policies, marketing them under names such as “infinite banking” and “MPI.”

While ethical CFP® Professionals and fiduciary investment advisers are well aware that these strategies and policies do not perform as advertised, that doesn’t stop their clients from being intrigued by the promises of “investing in the market with no risk” and “exponentially greater retirement income.” So today, let’s talk about how to talk to our clients about the sales myths of these policies.

'Invest in the market…'

A key promise of many pitches for IUL policies is the ability to “invest in the S&P 500 index with no losses.” While we know this promise is false, it’s an attractive line to hook the uninformed consumer. Some areas to highlight for clients who ask about this opportunity are that these insurance policies are just that: insurance policies.

When someone purchases an IUL, they are not investing in the underlying indexes. They do not receive the dividends or interest of the underlying index, nor any of the shareholder rights. Rather, the insurance company guarantees it will credit to the policy an amount equal to the face value of the underlying index based on the participation rate and only up to the cap.

That means that the normal dividends or profits of the stocks and bonds underlying the index actually can cause a drag on the returns of that guarantee, as the immediate discount to the value of a stock upon payment of its dividend reduces the value of the tracked index, rather than being captured as a cash payment to the policy’s value.

'…Risk free'

Of course, the most attractive promise of the IUL might be that it promises to avoid any market losses. As guaranteed by the insurance carrier, if the market falls between the annual lock in periods, the policy’s cash value won’t decline with the market. However, none of that stops the internal expenses and fees of the policy.

For example, on this author’s own Universal Life policy issued four years ago, of the monthly $469.28 premium, a whopping $229.77 goes to pay for the expenses of the policy!

Thus, even a policy with premiums no longer being paid in by the owner may still suffer losses, not from the market, but from the expensive “investment vehicle” that is a Universal Life policy!

Expenses on expenses

While we’re on the subject of the expenses, let’s compare the costs of the life policy to a traditional investment. While an investment in something like an S&P 500 index fund may only cost a few basis points, the equivalent in policy expenses can equate to several percent annually of the cash value in the policy.

While some expenses such as policy issue charges will go away eventually, the cost of insurance in a Universal Life policy will go up and up each year as the risk pool the insured is part of ages and begins to experience greater mortality costs.

Tax free* income!

Another popular perk in the marketing of IULs is that of tax-free income. Every financial planner worth their salt knows there’s no free lunch, but the idea of not only investing without market losses but also having tax-free income in retirement can be particularly appealing to clients. That said, let’s look at where the “tax free” income of an IUL actually comes from: return of premium and borrowing.

For those policyholders who elect to distribute some of the cash value from their policy, that distribution may come out “tax free” not because of some special advantage that the IUL grants them, but because their cash value may in fact be less than the invested premiums they’ve paid! In the same sense that selling a stock at a loss could be considered “tax free income,” a refund of premiums that are less than those paid into the policy is “tax free.”

For those policyholders with borrowing options available as part of their policy, the same myth holds true. In that light, is a mortgage tax free income? Is a credit card tax free income? Of course not. All loans must be repaid, and if the policy lapses for some reason, not only is that loan coming due (or subtracted from the cash value in the policy) but it will become taxable income.

The right tool for the right job

All of this said, IULs do perform well at what they’re intended to do: as a form of permanent life insurance. While selling death benefits may not be nearly as exciting for the plague of TikTok stars hocking policies at everyone they can, IULs are useful tools for things like Pension Maximization Strategies or as part of Hybrid Life-LTC strategies.

For those clients who get excited about the possibilities of risk free investing or greater retirement income, consider talking to them about investment strategies that can help them achieve higher levels of assets to provide income, or annuity products that have guarantees built into them so they can feel safer investing for their retirement.

Ultimately, you’re going to make the best recommendations for your client because you know them and their unique needs best. An IUL might make a great compliment to their financial plan, but like a good doctor, you should always help your clients diagnose their needs before you prescribe solutions.

Daniel M. Yerger, MBA, CFP®, ChFC, AIF, CDFA, is the owner of MY Wealth Planners, a fee-only RIA in Longmont, CO, and a student in Kansas State University’s Personal Financial Planning Ph.D. Program.

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