Episode Transcript
[00:00:00] Hello and welcome everybody to the Annuity Straight Talk podcast, episode number 206. My name is Brian Andersen, founder and creator of AnnuityStraightTalk.com all the information you need to make good decisions for retirement. And today we're going to talk about a topic that people bring up to me quite a bit. And although my expertise comes in annuities, most people don't realize that I started my career in life insurance and learned from some very intelligent people about the mechanics of how it worked.
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[00:00:46] We're going to talk about indexed universal life today.
[00:00:52] And it's one of those things. It's like, hey, here's the silver bullet for retirement.
[00:00:59] I've heard a lot of wild claims about financial products. None of them are as ridiculous as what people say that index Universal Life can do. Can it be a good tool? Yes, you have to do it right. But don't believe the hype and the gimmicks. Probably say that word a lot today.
[00:01:16] And when I talk about overblown expectation, this takes the top spot as some of the craziest stuff you will see. Now, if you're thinking about doing index Universal Life, pull it back a little bit and take your time. If you already bought into it, then pay attention. I'm going to tell you what you might need to do to save it or to keep it good.
[00:01:35] Give yourself the best chance to make it work out.
[00:01:38] Right now we've got a celebrity high profile figure suing an agent and Pacific Life Insurance over deceptive sales practices. He was sold some unrealistic expectations and it cost him millions of dollars.
[00:01:53] Now maybe for a lot of you, we're not talking about millions of dollars. For most people we aren't. But high profile thing kind of puts a spotlight on it. Right now I don't do as good a job at following the news as I should, but thanks to every one of you guys. I really appreciate it. The major stories and what's important seems to find me. So several weeks ago, got an annuity contract issue for a lady in Colorado. She wanted guaranteed lifetime income. Went back and forth, dug into it, got her a great deal. And when it happens, like the company sends the contract to me, I send it to her. And she about that, she's like, hey, hold on a second, I Got one more question. Is there like a NASCAR driver who's suing an insurance company over something like this? And I had a hunch, but I had to look it up. It wasn't about the annuity, but it took a quick search to see the story. It's all over the place and people have commented on it. I'm not just trying to get the buzz or cash in on that. I'm here for the people on my list. But yes, Kyle Busch bought a giant index universal life policy and has basically lost all the money.
[00:02:52] So everything you put in is gone, plus some more. It does not 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. If he can't get it, then how are you supposed to do it? He should have the top of the top, most sophisticated guys advising on him. And I'm not saying I have everything he needs, but I wouldn't have screwed him over if he called me, you know. So most of the people who sell this type of life insurance policy have no idea how the mechanics of the product work. I have literally heard almost no one explained to me how it works. They go with a hypothetical illustration and just sell on feelings and imagination. Oh, it's tax free. Oh, you're gonna love it. Your family's gonna get all this money, you can get all this income. And this is a secret of the rich.
[00:03:40] Well, it's a selective use of the facts. So tax free income, tax free legacy are parts of it, but nobody explains the risk. When it's an iul, if you know how the policies work, then you can design it in a way that has a higher likelihood of success.
[00:03:56] So 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 because it's tax free. But there's no need to take those features and inflate expectations with unrealistic growth scenarios.
[00:04:12] Now, if it doesn't work out, if you buy into one and it doesn't work out, you're going to get a lot less in return than you expect. And in a worst case scenario like Kyle Busch, you might lose all your money.
[00:04:23] I've looked at a lot of them and I tell people, like, look at the guaranteed minimum illustration. It shows the cash value going to 0 in 15 years without any withdrawals. Why is that the case? I did a podcast on a use of life insurance in retirement and I took this paragraph out of that letter. So Whole Life insurance has been around for centuries and Universal Life has been around for about 40 years.
[00:04:45] Whole life has a level cost of insurance for all years. And Universal Life has annually renewable insurance premiums that increase each year as you get older. Now, if that happened in the 80s when interest rates were really high, what they did is they took a Whole life policy and they thought, well, the dividends are so high because interest rates are crazy. We don't have to charge as much. It doesn't take as much investment to create that eventual yield, that death benefit. Makes sense. But they had to separate the cost of insurance plus the account components. And they said, we'll charge you less money. Well, in the late 90s, a majority of the Universal life policies lapsed because the cost of insurance that increased every year got too high and dividends dropped because rates came down. They were a lot lower than initially projected. What was sold as a cheaper alternative to Whole life failed because rates didn't hold up. If Universal Life was fully funded, that means put as much into it as you put into the Whole Life, then it will work just fine. So why not just stick with Whole Life since it's worked for hundreds and hundreds of years?
[00:05:47] 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. It's a hypothetical projection. 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.
[00:06:15] If someone buys an IUL at age 40, by the time they turn 60, the cost of insurance might rise to somewhere in the neighborhood of 40,000 per year annually. That's a large hurdle to overcome, especially if you also plan to withdraw money. So if you're using it for retirement income, you got 40 grand coming out of it for the cost of insurance, and then you got your income coming out of it, say 5, 6%. Like that index has to make 10% per year just to maintain the balance.
[00:06:46] Think about the likelihood of that happening even in the best case scenario. If you're going to lean on it for heavy withdrawals and going to underfund it, you are likely going to see the policy lapse. So this has been popular in the past 20 years. We're going to talk about it more because a lot of people are going to see that stuff not work out like they thought. I've heard of people that Say, hey, I'm going to drain my $1 million 401k and put 75,000 a year for 10 years into this IUL. And then when that happens, I'm going to get 80,000 tax free for life. It's like, hey, whoa, slow down. So again, I talked about it in an episode almost two years ago. The link is in the newsletter. You can go see Tax Free Legacy Planning how you can appropriately plan for retirement. 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. It comes as advice from some of the most sophisticated advisors, like really intelligent guys.
[00:07:47] And it's not an emotional play or gimmicky sales pitch. Those guys are not using iul. The mechanics work against the outcome and it's an unproven asset. I talked about it. That newsletter says Jim Harbaugh's compensation University of Michigan football coach 2 million a year for five years into a Whole life policy. They used Whole life.
[00:08:06] The Trustees of Michigan's endowment did not buy iul.
[00:08:10] Why would you? You have to get back to where you trust your instincts now. Any financial product, no matter what it is, the building block is the interest rates we have. The same amount of money goes into a myga, a fixed index annuity or a life insurance policy. New products do not mean there's more money available. It only means that they demonstrate the benefit in a different way. Bonus versus non bonus. The bottom line is the same. If you want to benefit, you have to pay for it. So Index Universal Life was made to think that you don't need to put in that much money and you 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.
[00:08:50] I can't tell you enough. The mechanics of life insurance are very specific and how they work. If they're not explaining to you the mechanics, the risks, the upside, the downside, and preparing you for those expectations, they're not smart enough to be making money selling you financial products and I certainly wouldn't do it. If any high profile celebrity athlete, anything else calls me, there's no way in hell I'll ever sell an IUL to that person. So I looked at what I can see from the articles you can find. Kyle Bush must have been about 35 years old when he purchased the Index Universal Life policy and his plan was to make five annual payments of $1 million a year like this. One of the stories says that he was surprised. He got a letter from the company asking him for an additional premium in the sixth year. Then he was going to let it sit until the age of 52. And it was projected he could take retirement income of 800,000 per year tax free. So I had to do some reverse engineering. So just the cash flow, inputs and outputs, a million a year for five years, 800 grand a year. After some deferral, it would take a 6% yield to produce that until he's 85 years old. So 33 years of income, just the cash flow takes 6%. Okay. What is important to understand is that the policy has to stay in force for the distributions to be tax free. Now what happens with a lot of these policies is when you get down to $1 cash value, the company is going to cut off. They'll technically keep it in force dollar in it so that you don't get stung. But none of the other stuff happens. So if the policy lapses, the contract owner is liable for taxes on the gain. Now if he puts 5 million in and over 33 years pulls out 24 million dollars, that would be a 19 million dollar gain. Heck of a tax hit, right? So in addition to the yield needed for the cash flow, you're talking about the cost of insurance providing death benefit. Keep policy active, it can't bleed at all. The 6% is just. If you put 5 million in, wait that long, pull a zero balance. There can't be a zero balance. There could be something left. No doubt. It was probably. Oh my goodness, look at, there's still $30 million left it, there's $50 million death benefit, whatever the deal is, right. So you have to do all those things. Just the cash flow was 6% required. Everything else has got to be in place too for that to even happen. Have to grow much more. I don't know how to project that. I don't know the details of the policy. So it's impossible to pick it apart. But we're talking like 15, 20% per year in an IUL with CAPS participation rates. The market doesn't even do that index Universal life is less than whole life. Name me a product where quality increases with less expense for anyone. I say this to a lot of my clients. You want to spend a little bit more for an annuity or for life insurance or whatever you're going to buy, hey, you're successful, you make money, you do a good job, you're diligent and you Save. I buy nice things. The things that I buy because I work hard are nice. Why would you buy something less expensive? That does not mean quality. If higher returns can be projected then it costs less to fund it. That's how they do it. In order for IUL to have a chance, you need to fund it at the level of whole life insurance. You need to put just as much money into it. It's like filling a car full of gas so it can cover all the expenses and produce reasonable expectations. Why mess with it? Avoid the gimmicks and buy a fundamentally sound product.
[00:12:04] Having a high profile person challenging the industry on this is a good thing. Perhaps bring some transparency and some light to it so us little people are not bothered by it. Maybe over time new money going to life insurance will go where the smart money has always been.
[00:12:20] Buy term life to cover a short term if you want value by whole life from a mutual company. That's all there is to it. Welcome to a challenge. If anybody wants to debate it. Because I said this in the other podcast. The most successful wealthiest people that have contacted me and talked to me about financial matters since I've been running this website have one thing in common. They have a substantial amount of money in tax free cash value and whole life insurance policies. There is no secret to it. It's about understanding. Again, it's the base interest rates and how they work time. Life insurance is an incredible tool for tax planning, retirement and legacy. And if you guys don't have it, most of my clients don't. Which is why I don't talk about it a ton. This is one thing you want to get your kids thinking about.
[00:12:57] Buy it now. Throw a few hundred bucks a month into it. I can talk to you, the people, my buddies, myself, the guys that we did it 20 some years ago and started putting money into it. It's a good deal. It's a bedrock, right? It's the last thing I got aside from a pile of gold and silver. So Index Universal Life Insurance? Forget it. Not going to deal with it. And I hear the question a lot from advisors as well. You're welcome to send me your fantastic illustrations. Really, honestly, I want to see one that's been enforced for 20 years because I can compare that to a whole life policy. It's been enforced for 20 years because I've got them so episode 206 IUL thanks so much for joining me. Like subscribe or comment on any of your favorite podcast platforms or on YouTube. Coming to an end of a great year. Love you guys, it's been great. Christmas is coming. Got a couple easy podcasts to finish out the end of the year. Thank you guys so much for joining me. Get in my calendar, top right corner of any page on the website, annuitiestraighttalk.com and Schedule A call if you want to talk. I'll be here. And I'll see you guys next week for episode number 207. Okay, have a great day. Bye.
