Being pitched index universal life insurance at an MLM seminar

John Cook
John Cook
Apr 12 · 18 min read

So I recently got into a long winded debate about the merits (or lack thereof) of Index Universal Life Insurance, “IULs” for short. This debate involved myself against 3 life insurance agents who were pitching IULs to a larger audience. It was quite entertaining (for me anyway).

Their pitch on “IULs” are essentially the following:

  • Index universal life insurance are polices which offers the holder the opportunity participate to see their “policy appreciate” by investing in the stock mark , this is called “cash value”.
  • Index universal life insurance is advantageous to term life insurance because you’re “not throwing the money away” with a death benefit that expires at a predefined point in the future.
  • Index universal life insurance offers offers “asset protection” and “tax sheltered” investing traditionally available only to the wealthy.

Every time I hear this pitch I gag. I become angry, filled rage that life insurance agents can peddle this nonsense and get away with it. If you’ve ever been asked by a distant friend/cousin/former colleague to attend a “seminar” on an “amazing opportunity” to “change your life” from Transamerica, Primerica, World Financial Group, this is the product you’re being ask to sell: index universal life insurance.

For those who want a TL/DR one sentence take away: Buy term life insurance and invest the difference.

Before we divide into the actual conversation, let’s answer the following question:

What is index universal life insurance?

Imagine if opened a savings account at your bank and contributed $500 a month for 36 months. At month 36 you goto your bank to withdraw your $36,000 and the teller says “your balance is zero sir”.

You try to cancel your account, but you realize your “cash value” is $0, but you have a $1 million dollar death benefit. Furthermore, you’re also told that “buying an IUL is a wise investment because it provides a floor to minimize your losses in the stock market”.

So you play ball and keep making $500 a month payments in perpetuity to take advance of that sweet sweet protection, cash value, and death benefit. So now you’re 15 years out, you’ve contributed $90,000 ( $500 x 12 months x 15 years) to your IUL, but the cash value is < $90,000.

What the heck?

Rational minds not prevailing, you decide to withdraw $45,000 of your $90,000 because you were told “it’s your money, and it grows tax fReE!” . So you take out a “loan against your $90,000” of “$45,000”. Only to find you have to pay yourself 5% “interest” for the duration of the loan..wait? I thought I can take out money without penalty?

You’re then told that you’re principal payment isn’t great enough to cover the premium and if you don’t increase your monthly contribution, your death benefit will be decreased.

What the heck?

Ok , at least your “investment” is protected from a market crash, right? Oops. There’s also a ceiling. Your “investment”, which is NOT actually investing in the market; is investing in a financial instrument which MIRRORS is the market. This is important because: You do not benefit from the dividends provided by the market. Dividends in the SPY yield ~ 1.00% in additional return.

What the heck?

Well, now you’re 70 you have cancer and you’re about to die. At least you have that $1 million dollar death benefit right?

You bought this awesome “policy rider” with ‘livable death benefits’ so you decide to “withdraw” the “$1 million dollar death benefit” while you’re alive to help with living expenses, after all — you paid for it right?

Oops, you don’t get the $1 million dollars. You only get $293,000.

Uh-oh. Now you die. Over a 50 year window you’ve contributed a total of $300,000. Received $293,000 of benefits. Your cash value? $0. Your death benefit? $0. You used it when you were alive remember?

What the heck?

That is an IUL. 100% of the time. I have many good friends who sell this “product”, and I always say to them: “We can still be friends even though you sell a terrible product”. I digress.

We all need life insurance. But do your DD. Read the paper work they provide you. Look at the numbers. Don’t fall for the emotional trap of “taking care of your loved ones”. You will see 100% of the time this is a bad deal.

Now that we’ve established a baseline understanding of why IUL is garbage, let’s move onto the actual conversation. Names changed to protect the innocent. If you’ve ever attended a pitch from Transamerica/World Financial Group/Primerica, you’ll laugh out loud. If you’re doing some research prior to attending a pitch/seminar you’ve been invited to, use this as horsepower, ask these questions, and watch them squirm. Enjoy.

The conversation

Life insurance agent: “An IUL is not an investment but many people consider it an investment”.

Me: “This statement is insane. The reason IULs are sold by insurance agents or “marketing professionals” and not a securities broker is because there is no FINRA or security licensing requirement. This is 100% the definition of something “not being an investment”. Some people consider the world to be flat, that doesn’t mean the world is flat. People who think the world is flat are wrong, so are people who think that IULs are investments.”

Life insurance agent: “The tax advantages of an IUL are similar to a Roth IRA or Roth 401k in that your contributions grow tax-free, and your disbursements can also be tax-free”.

Me: “This statement is a complete deflection. If you put $100 into a Roth IRA/401k and never contribute another dollar, the $100 will either: increase, decrease, stay the same.

If you put $100 in to an IUL and never contribute another dollar, it is GUARANTEED that the $100 will decrease to $0 for “not meeting the premium requirements” An IUL is nothing like a Roth, investment vehicles don’t have constraints which define a GUARANTEED loss of principal if you don’t make minimum monthly contributions. That is why it is not an investment vehicle.

Although not a “tax” you are charged “interest” when you withdraw money from your “cash value”. If I have $100,000 in cash value, and I want $10,000, I’m not charged “tax” but I’m charged “interest”. Where does the interest go? To me? It’s my money? No. To the insurance company.”

Life insurance agent: “Other IUL benefits include being protected from market volatility and negative market returns”.

Me: “This is because IULs are not investment products. The money you give an insurance company is placed into a “financial instrument” which mirrors an index like the SP500. Keyword is MIRROR. This is a huge problem because you do not participant in the dividend yield created by investing in the SPY. Do you understand this? Its 100–200 basis points per year.

In addition to the forgoing the dividend yield, the IUL CAPS returns. The IUL CAPS returns. How insane is that? Market goes above 10% to 15%, oops you only get 10%. Who gets spread + dividend? The insurance company”.

Life insurance agent: “IULs are also beneficial because they are not counted as assets that can reduce your children’s FAFSA benefit package”.

Me: “Because an IUL is not an asset. An IUL is not an investment. Assets create income and do not require “minimum monthly payments” to keep the premium in force and avoid a loss of principal.

Example: $1MM IUL is $6000 a year. If you buy term life insurance, take $2000 of the $6000, put it into a 529 plan, by the time your kid is 18, they will have enough money for college”.

Life insurance agent: “To fully take advantage of an IUL, you should put in as much money as you can for that specific death benefit.”

Me: “Asinine. The first 36 months of an IUL go towards insurance commissions which is why, ONE HUNDRED PERCENT OF THE TIME, the principal is less than the contributed amount. Encouraging people to over-contribute” to “maximize the death benefit” Is circular logic which hides the fees being consumed by insurance commissions.”

Life insurance agent: “If you put in the minimum, the cost of life insurance will eat away at the cash value.”

Me: “ What’s eating away at the cash value are the insurance commissions being paid to the agent and underwriting agency, not the “cost of the life insurance”. A $1MM term life insurance for a 35 y/o adult male is $400/year. A $1MM IUL for that same person is $6000/year. The $5400 spread is not the “cost of insurance”, its commission pay outs.”

Life insurance agent: “A competent life insurance agent should be meeting with you at least annually to review an in-force illustration to see how your account is currently performing, to see if any preventative measures should be taken due to changing or unforeseen circumstances.”

Me: “This is a fancy way of saying your paid in contributions do not cover the required premium so you need to put in more money or else your cash value will decline and/or you will have no death benefit”.

Life insurance agent: “A lot of people say “buy term and invest the difference”. This is great if you do not need a death benefit after 30 years (you expect to have large savings in 30 years so that your family will be financially protected if you pass away), and you are confident in your portfolio management skills.”

Me: “Yes, this is what people should strive towards, which is not possible with an IUL.

Portfolio management skills entail investing in 1 total market fund, 1 international fund, 1 bond fun, which outperforms 89% of actively managed funds. And/or 1 target date fund. This is a non-starter that agents use to scare people. There are 2 studies which quantify how wealthy people became wealthy, both are based on data. Do you know how many of them said “I became wealth from my IUL policy”, ZERO.”

Life insurance agent: “The AVERAGE 401k balance at age 65 is $228,000. If an average 35-year old man gets term life insurance for 30 years, they only have $228,000 in their 401k for retirement. That is not enough to financially protect a family if you pass away at age 65. Getting another term at age 65 will cost way more than what IUL payments would have been had you gotten one at age 35.”

Me: “If a 35 year old opts to contribute $6,000 a year to retirement instead of $6,000 a year in an IUL, they will have > $1.5MM when they retire. If you put $6,000 a year an IUL for 35 years, how much will you have? Not $1.5MM, add in any “living benefit riders”, it’s a complete joke.”

Life insurance agent:”IULs are not for everyone. But neither are 401ks or IRAs.”

Me: “Absolute, next level, insanity. There is not one rational person on this planet who has created any meaningful amount of wealth that has made the statement “401ks and IRAs are not good vehicles for wealth creation”

Now life insurance agent #2 enters with the following statement:

Life insurance agent 2: “Listening to people who are not in the industry can only give you their opinion and can honestly be sued for giving you bad advice. “

Me: “I can sue you because for any reason. You can sue me for any reason. Winning the lawsuit is another story. I have no contractual fiduciary duty to you and your statement of “being sued for giving bad advice” is at worst wrong and at best a threat. I will give you the benefit of the doubt and assume you’re just wrong.

Life insurance agent 2: “That’s why Dave Ramsey doesn’t say anything about investing. He always tells you to talk to a financial professional”

Me: “Dave Ramsey, tells you to talk to a financial professional within the Dave Ramsey “endorsed local provider” network. He has consistently provided his investment philosophy (4 funds, 4 types) with a follow on to speak to one of his ELPs”.

Life insurance agent 2: ”Last I checked you need a licensed real estate agent to buy real estate. People have bad experiences with the home buying process too and the investment can tank as well.”

Me: “You are confusing a bad experience with with a bad product. Houses and investments are not inherently BAD investments or BAD products. IULs are BAD products and BAD investments because of the guaranteed lose of principal, abysmal rate of return, and excessive fees.”

Life insurance agent 2: “Same with the IUL. If you didn’t fully understand it in the first place, you should not have gotten into one. It’s meant to be a PERMANENT policy. From what I’m hearing you all closed it after one or three years, tops. In the short term, it is a bad investment because it doesn’t work that way. It’s a long term policy.”

Me: “IULs are not investments and I cannot restate this enough times. IULs are insurance products which contain financial instruments that mirror investments but do not provide the inherit benefits of the actual investment. You are investing in an index engineered by Transamerica/mass mutual/whoever which tracks a real index but you do not get the benefits of the real index. You experience a guaranteed loss of principal if you fail to meet minimum monthly payments. You contribute to an IUL for 36 months yet the cash value is $0. Can you imagine the insanity of contributing to a real investment for 36 month only to produce a cash value of $0?”

Life insurance agent 2: “Kinda like your 401k or your Roth IRA. Typically you aren’t supposed to touch those until you’re 59 1/2. Otherwise you’ll get penalized and taxed. IULs you still have to give it time to grow before you draw from it. You don’t have to wait until 59 1/2 but at least 10 years to let the cash value grow.”.

Me: IULs are nothing like a 401k or Roth IRA. This statement is a complete deflection. If you put $100 into a Roth IRA/401k and never contribute another dollar, the $100 will either: increase, decrease, stay the same.

If you put $100 in to an IUL and never contribute another dollar, it is GUARANTEED that the $100 will decrease to $0 for “not meeting the premium requirements” An IUL is nothing like a Roth, investment vehicles don’t have constraints which define a GUARANTEED loss of principal if you don’t make minimum monthly contributions. That is why it is not an investment vehicle.

Although not a “tax” you are charged “interest” when you withdraw money from your “cash value”. If I have $100,000 in cash value, and I want $10,000, I’m not charged “tax” but I’m charged “interest”. Where does the interest go? To me? It’s my money? No. To the insurance company.”

Life insurance agent 2: “Well there are 3 factors that will effect your retirement that nobody teaches you except knowledgeable professionals. So the amount at money won’t mean a damn thing if the government and your investment company takes it all. IULs help you avoid all three Roths and 401ks do not.”

Me: “ ROTH 401ks grow tax free. Roth IRAs grow tax free. If you exceed the AGI max for a Roth IRA you can do a backdoor IRA every year. Furthermore your statement regarding “investment companies taking it all” is hypocrisy when calculate the fees absorbed by an IUL. Example: Contributing to an IUL for 12 to 36 months will produce a cash value of $0.”

Life insurance agent 2: “If Warren Buffet approves of them, they must be good. And he’s the most successful investor ever.”

Me: “Warren buffet has never, ever, said that an IUL is a good investment. You are spreading misinformation. Buffet’s firm Berkshire Hathaways (which is a company I invest in) provides insurance and reinsurance in the commercial auto, property, and workers compensation arena. It’s a fantastic investment because of the premiums collected which produce above average free cash flow. Would I and do I invest in a company that sells life insurance? Yes. Would I buy Index Universal Life Insurance? No. Because it is a terrible financial product.

Life insurance agent 2: “I can give you every example in the book and spew numbers all day. But without the proper financial knowledge, you are just going to be left with no money and bad attitude toward investing.”

Me: “Yes. You should provide the numbers, because this is the only measurable data point that matters. If you truly consider an IUL an investment, provide the rate of return net of fees. Will you?”

Life insurance agent 2: “Us Life insurance agents that are actually in the financial industry can give you a proper explanation of how these plans work without the confusing rhetoric”.

Me: “Do you have a series 7 or 63? If the answer is no, then you are a life insurance agent who sells life insurance marketed as an investment. You are legally not allowed to sell investment products in the absence of these certifications”.

Now enters life insurance agent number 3 — armed with a chart!

Life insurance agent 3: “I have helped protect millions of dollars in assets and delivered several benefit checks to families in need. But for those needing data to prove that an IUL outperforms the stock market, here is your proof”

Lies, numbers and more lies.

Me: “With respect to your chart, do you know what this illustration actually represents? Please, educate me. Tell us all how the blue line and the red lines are calculated. What does this chart illustrate?

Do you know what it does NOT illustrate? The actual return of a $100,000 investment, which is the illusion you’re trying to depict.

Here is an actual backtest of $100,000 invested in the S&P500, simply put: if you invested $100,000 in the “S&P500” in 1999, never invested another dollar, how much would you have in 2021? X axis is time, y axis is $ return. The answer $454,361.

Life insurance agent 3: “Our Red line is your investment strategy and blue line is the indexing strategy with a 12% cap. As you can see, even with a cap and a 0% floor. The indexing strategy out performs yours. I see a lot of dips if your graph. Notice mine didn’t have any. So mine would out performed yours anyways because I didn’t take any loses. So if you’re t trying to show me that your investment would be $454,361, the indexed strategy would have more. Your blue line is my red line. My red line is not even on your chart.”

Me: “You are living in an alternate reality. If i gave you $100,000 in 1999 — you hand me back $344,000. If i put $100,000 in the SP500 in 1999, the SP500 hands me back $454,000. There is NO OTHER WAY to explain why this happened other than acknowledging that an IUL produces sub-par returns. There is no planet where a $344,000 return of capital outperforms a $454,000 return of capital. Stop this double speak.”

Life insurance agent 3: “ You aren’t accounting for asset under management fees, which will in fact, take a percentage of your grand total every year whether you are up or down. It’s compound interest working against you and take in account market volatility. IULs arent subject to any of those. Yes IULs have fees, but it’s a lot less than your brokerage fees you would be paying with whoever you’re with. So you wouldn’t really have $454,000 would you. Looks like you’re hiding some numbers there”.

Me: “Account for assets under management? This is COMPLETE NONSENSE. The expense ratio of the vanguard total index fund is .0003. Thats $3 per $10,000. On a $100,000 investment with a 20 year time horizon (which is the scenario you’ve described) the cost of fees is approximately $11,525. The return of capital NET OF FEES is still $100,000 higher than your illustration.

By every, single, measurable data point you’ve provided — I’ve proven that investing in a simple total market index fund outperforms your best case scenario.”

Life insurance agent 3 then displays a link to an article where he claims Warren Buffet endorses IULs:

Life insurance agent 3: “Did your research lead you to this Article? Probably not cuz you were looking for everything wrong with an IUL. warren buffet, says it’s a good INVESTMENT.”

Me: “ Warren Buffet has never, and will never, say that IULs are a good investment. He did not make that statement in the article. He stated that low cost SP500 index funds are the optimal investment vehicle, WHICH IS EXACTLY WHAT I’M saying. I think you’re confusing an SP500 index fund vs an IUL SP500 index benchmark.

Which for the millionth time, are not the same. Again, an “SP500 Index benchmark” engineered by an insurance underwriter is a “financial instrument” which mirrors an index like the SP500. Keyword is MIRROR. This is a huge problem because you do not participant in the dividend yield created by investing in the SPY. Do you understand this? Its 100–200 basis points per year’.

Life insurance agent 3 then displays an additional link where he states how IULs made Jim Harbaugh the highest paid college football coach in history.

Life insurance agent 3 displays a final link that summarizes how “Walt Disney used IULs to build Disneyland”

Life insurance agent 3: “Last I checked these people are doing good financially and invest in IULs. So… IULs can be a benefit if used strategically like we been saying. Or a burden if you borrow from it too soon. Plans have gotten better depending on the company. There are plans with no caps and some even give your above and beyond what the market brings back. Not all IULs are the same.”

Me: “Again, no. They are wealthy because they saved money. Re-read the articles, multiple times. Jim and Walt (from your article) saved money, then used that money to do stuff. That is the essence of wise financial planning. These articles which articulate that an IUL was their path to prosperity is factually incorrect because the IUL was not the catalyst of wealth creation.”

Life insurance agent 3: “You clearly don’t understand the fee structure of brokerages. You really think companies would waste their time with a $3 fee? C’mon bro. There’s more that one fee and you know it. $11,525 is a good fee for you? IUL fees are a fraction of that.”

Me: “ I’m a little concerned that you’re unclear on the roles of a brokerage, mutual fund, etf, and the interrelationship of expense ratios. Brokerages (like fidelity, interactive brokers, etc) will let you deposit money into their “brokerage”, and charge you $0. There is no fee to deposit money into a “brokerage”. You can look this up. I think what you’re trying to say is that “fee structures are high for mutual funds”. Again, no.

The fee structure for a total market and/or SP500 (which is what you referenced in your Warren Buffet article) is .03%. That is $3 per $10,000 invested. You can read this on a prospectus. Using your example of $100,000 invested over 20 years will yield a return of capital of $454,000. Net of fees this is $442,000. This is still $100,000 higher than your best case IUL of $344,000. Does that make sense?

Candidly I’m surprised that you advocate yourself to be a financial advisor when you’ve provided multiple examples of: misinterpreting charts, incorrectly interpreting the difference between an index fund and a insurance index bench mark, and the overall lack of understanding in the difference between a brokerage, mutual fund, ETF, and expense ratio.”

After an hour + debate I attempt to close the discussion

Me: “We can conclude this debate with the following statements, all proved to be true by data:

1. Investing in a simple total market index fund will produce superior returns compared to investing in an IUL, 100% of the time.

2. The IUL fee structures yields a reduced return of capital of 20%-30% over a lifetime

3. Failure to pay premiums in an IUL GUARANTEES loss of principal

4. Last but not least: an IUL is not an investment, IULs are not sold by securities brokers. They are sold by life insurance agents whose license requirements consist of 32 hours of online training.”

Life insurance agent 3: “So what your saying is it’s not a valid living because of the time it takes to acquire a license? Your opinion about a certain product isn’t the end all say all about an entire industry. Again it works for some people just not you.

Doesn’t mean it’s a bad product. It might only take 32 hours for a license but that doesn’t make any less valuable than what you do. You can get a drivers license with more time spent but there are still idiots driving. Hours of study to get a license doesn’t equal the value of a profession.

If that’s how you think, check your privilege. It’s just what the state requires to do business. I know janitors with more class. And guess what there’s no license required for that job.”

Me: “Nope, I did not make that statement. Implied or otherwise. Again: Investing in a simple total market index fund will produce superior returns compared to investing in an IUL, 100% of the time. The IUL fee structures yields a reduced return of capital of 20%-30% over a lifetime. Failure to pay premiums in an IUL GUARANTEES loss of principal

Last but not least: an IUL is not an investment, IULs are not sold by securities brokers. They are sold by life insurance agents whose license requirements consist of 32 hours of online training.”

Life insurance agent 3: “IUL are sold by life insurance agents because they they are a life insurance product genius. But just because one only studies for 32 hours doesn’t make it an inferior profession. Your statement strictly implies that 32 hours of online training is somehow inferior to 100+ hours a stock broker has to endure. Who cares the amount of hours studied? Business licenses literally take no classes, online or in person, to obtain. are they inferior to 32 hours of online coursework? It’s all good. You just revealed how shallow your thought process is. It is what it is. Good luck with your “investments.”

Conclusion

If you were able to stay the course throughout the entire conversation, kudos to you. What do you think? Unfortunate how it diminished into a conversation of “privilege”, a symptom of a much larger issue in todays society: cancel culture, but that’s for another time.

John
April 2021, San Francisco California.

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