Indexed Universal Life Insurance

Of all the wild claims I hear about financial products, none are as ridiculous as the ones I hear about indexed universal life insurance (IUL).  When I talk about overblown expectations, this takes the top spot as some of the wildest stuff you’ll see.  If you are thinking about doing it then pull back a little and if you’ve already bought into it then pay attention because I’ll tell you how to give yourself the best chance to make it work.  Right now we have a celebrity suing an agent and Pacific Life over deceptive sales practices.  He was sold some unrealistic expectations and it cost him millions of dollars.

I don’t do as good a job at following the news as I should but thanks to you all, the major stories seem to find me.  Several weeks ago we got an annuity issued for a lady who wants guaranteed lifetime income.  When she got the contract she had one final question.  “Isn’t there a NASCAR driver who is suing an insurance company over something like this?”  A quick search produced the story and I learned that, yes, Kyle Busch bought a giant indexed universal life policy and has basically lost all the money he put into it.  So it wasn’t an annuity but it’s another case of dishonest sales practices in relation to retirement planning. It doesn’t surprise me to see an IUL fail near as much as it surprises me that a high profile public figure can’t find adequate financial advice.

Most of the people who sell this type of life insurance policy have no idea how the mechanics of the product work.  They go with a hypothetical illustration and just sell on feelings and imagination.  Tax free income and tax free legacy is the promise but nobody explains the risk.  If you know how these products work then you can design a policy with a higher likelihood of success.  Sure, within certain parameters, withdrawals from a life policy can be tax-free and the death benefit is definitely the most efficient asset to pass to beneficiaries.  But there’s no need to take those features and inflate expectations with unrealistic growth scenarios.  If it doesn’t work out, you’re going to get a lot less in return and in a worst case scenario you might lose all your money.

Whole life insurance has been around for centuries and universal life has been around for about 40 years.  Whole life has a level cost of insurance for all years and universal life has annually renewable insurance premiums that increase each year you get older.  Universal life was created in the 80s when interest rates were really high.  As rates dropped, the internal cost of insurance rose and started to eat away all the cash value of the policy.  In the late 90s a majority of universal life policies lapsed because the cost of insurance got too high and dividends were much lower than initially projected.  What was sold as a cheaper alternative to whole life failed most people because rates didn’t hold up.  If universal life was fully funded then it worked just fine.  So why not just stick with whole life since it has worked for hundreds of years?

Indexed universal life was the next evolution of universal life but the mechanics are the same.  Instead of the insurance company using conservative general account yields, they project market-linked indexed interest that shows a much higher yield.  The problem comes when the cost of insurance rises and the indexed interest isn’t as high as you had hoped, or caps and participation rates have dropped and the growth potential no longer exists.  If someone buys a $1M IUL at age 40, by age 60 the cost of insurance might have risen to about $40,000 per year annually.  That’s a large hurdle to overcome especially if you also plan to withdraw money.  Even in the best case scenario you are likely going to see the policy lapse.

I talked about this in an episode almost two years ago, Tax Free Legacy Planning.  The point of that was to highlight the value of whole life insurance and let everyone know that some of the wealthiest and most successful people worldwide use whole life as a foundational asset for tax protection and wealth transfer.  That comes as advice from some of the most sophisticated advisors and it’s not an emotional play or gimmicky sales pitch.  These guys are not using IUL because the mechanics work against the outcome and it’s an unproven asset.

You have to get back to where you trust your instincts.  No matter what the product, the building block is interest rates.  The same amount of money goes into a MYGA, fixed indexed annuity, or a life insurance policy.  New products don’t mean there’s more money available, it means they demonstrate the benefit in a different way.  If you want a benefit you have to pay for it.  Indexed universal life was made to think that you don’t need to put in that much money and you’ll still get the incredible benefits.  It’s a totally different type of advisor who recommends this and I’ll let you decide whether they are elite or not.

Kyle Busch must have been about 35 years old when he purchased an IUL policy with a plan to make five annual payments of $1M.  Then the policy would sit until at the age of 52 it was projected he could take retirement income of $800K per year tax free.  Just the cashflow inputs and outputs alone it would take a steady 6% per year to make that work until he is 85 years old.  What is important to understand is that the policy has to stay in-force for the distributions to be tax free.  If the policy lapses then the contract owner is liable for taxes on the gain.  In addition to the yield needed on the cash value, to cover the cost of insurance and to keep the policy active it would have to grow much, much more.  I don’t know the details of the policy so it would be impossible to pick it apart.

Indexed universal life insurance is less expensive than whole life.  If higher returns can be projected than it costs less to fund it.  In order for IUL to have a chance you need to fund it at the level of whole life insurance so it has the gas to cover all the expenses and produce reasonable expectations.  Why mess with it?  Avoid the gimmicks and buy a fundamentally sound product.  Having a high profile person challenging the industry on this is a good thing.  Maybe over time new money going to life insurance will go where the smart money has always been.

Life insurance is an incredible tool for tax planning, retirement, and legacy.  If you don’t have it that’s just fine but it’s a good idea to get your kids thinking about it.

Have a great weekend!

Bryan

Watch Episode 206: Indexed Universal Life Insurance

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Last Updated on December 5, 2025 by Bryan Anderson