The Good, the Bad, the Ugly

We are always getting new material proposed to us by the insurance companies about new products or marketing suggestions. Recently an email came in, from a company we don’t represent, suggesting that permanent life insurance is a great way to sustain your income when the market drops and you find yourself eating away at the principal portion of your investments instead of living off the growth.

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This, actually is a fact!  You can sustain a higher standard of living if, during a market correction, you draw funds from or against your life insurance instead of continuing to distribute funds from your invested accounts, destroying principle. But that was the end of the facts contained in this email.  And the reason was, they begin to recommend a certain Indexed Universal Life policy as a way to provide those guaranteed funds you’ll want to rely upon during a future market correction.

Here are some reasons why such a plan could fail and hurt big time down the road.

1. The return assumed in an IUL policy is not the return that your cash value increases by. There are fees to contend with in an IUL policy that can conceivably eat up more than your annual gains in a weak market.
2. The cap on your IUL returns can knock out 40% or more of the earnings you could have experienced if you had simply invested directly in the Index of your choice.
3. When the market does actually go through a corrective period of time (which typically happens every 8-10 years), an IUL insurance policy also forfeits the growth that a dividend paying whole life insurance policy would continue to provide.

Therefore, about the time you need to draw from your life insurance policy to offset the income distributions that you can’t take from your investment without destroying your principle, your life insurance policy is no longer adding the value (do to the ever-increasing cost of the term insurance platform IUL is built upon). That’s ugly.

Fortunately, this problem is abated by simply purchasing and funding the right product to begin with and that is participating whole life insurance (PWLI).   PWLI provides you guarantees backed up by the company as well as the right to share in the profits of the company after those guarantees are paid each year. That’s good.

Here is an example of what could happen.  You fund a life insurance policy at $3,010 a year for 40 years. At age 66 you find yourself needing to pull $40,000 annually from your policy because a market correction has  just occurred and you don’t want to down draw the principle you’ve saved outside of your policy.

If your policy was an IUL and growth took place as illustrated using the maximum allowable rate over the past 40 years, then you have no guarantees there will be any money to use from your policy as the guaranteed cash value is $0.00 even though you have paid $117,376 into this policy since you were 26 years old.

Perchance, the non-guaranteed returns illustrated may have occurred in the policy and that means you might have $126,199 of accumulated cash value to draw from at age 66. But, at $40,000 a year, you will be out of money in the policy in just a little over 3 years.  After that, your policy will lapse having no more accumulated cash values and no insurance coverage on your life.

Of course, you could have purchased a Participating Whole Life Policy (PWLIP) for the same premium of $3,010 a year and your guaranteed cash values at age 66 would be $222,260 instead of zero like in the IUL policy.  With dividends earned over the years, your accessible cash values could be more than double of what is projected to be there for you in the IUL policy ($284,970 instead of $126,199) and of course the dividends paid on the PWLIP can be used to offset the interest on the $40,000 policy loans you need to take to live on during a market down turn. This allows you to protect the principle you have accumulated in other assets over the years instead of spending them down and risking running out of money before you die.

Furthermore, the PWLIP won’t lapse like the IUL policy will because there are no premiums required after age 66.  That means, the guaranteed cash values keep accumulating as do any dividend payments.  In fact, due to the dividends, your PWLIP provides you the opportunity to earn, your policy will not lapse after you use this money but will continue to provide you with life insurance coverage for the rest of your life, as long as the company keeps earning a profit, which historically has happened now for over 100 years consecutively.

The cold hard fact is, owning an IUL policy means that you are assuming a risk that the insurance company would gladly accept for you if you simply purchase a PWLIP instead of an IUL.  By assuming that risk when you purchase an IUL, you accept the liability that you could run out of money and coverage before you really plan on doing so.  And that’s bad!

Not all permanent policies sold today can guarantee that you will have coverage until the day you die.  Only PWLIP’s give you this iron clad guarantee:

• That if you pay your premiums and any interest due on any policy loans you have outstanding against your life insurance, then your coverage will last you your entire lifetime.

There is nothing bad or ugly about that!  Its all good.

Dr. Tomas P. McFie

Most Americans depend on Social Security for retirement income. Even when people think they’re saving money, taxes, fees, investment losses and market volatility take most of their money away. Tom McFie is the founder of McFie Insurance which helps people keep more of the money they make, so they can have financial peace of mind. His latest book, A Biblical Guide to Personal Finance, can be purchased here.