Was this right for me? Understanding Indexed Universal Life Insurance (IUL) Policies

What Are IULs?

Indexed Universal Life (IUL) insurance is a type of permanent life insurance with a cash value that earns interest based on a stock market index, like the S&P 500. It offers flexibility by allowing you to use the cash value to pay premiums and adjust the death benefit within set limits. The policy remains active as long as premiums are paid. Part of your premiums covers the policy cost, while the rest goes into the cash value account, which can grow based on market performance.

Relevant Factors concerning whether an IUL was right for you

While IULs might seem attractive, they usually come with high fees and inflexible terms and are entirely unsuitable for many investors. They can generate interest but also have the potential to lose money. Many investors are drawn to IULs for the sales pitch of the tax-free death benefit, but this advantage can disappear if the policy lapses. Here are some factors that you should consider when determining whether a IUL policy was right for you:

• Understanding the Products: IULs are complex financial products. Make sure your broker fully explained how they work, including the costs, investment risks, and fee structures. There are much cheaper options available if a death benefit is being sought by an investor.
• Fees and Costs
  • High Fees: IULs come with various fees, including premium expense charges, cost of insurance, and administrative fees. These can significantly reduce your returns. If your Broker failed to provide an in-depth explanation of the costs for the policy this can be a red flag.
  • Surrender Charges: Be aware of surrender charges if you decide to cancel the policy early.
• Investment Returns: The investment component of a IUL is subject to market fluctuations and have a cap on returns (meaning that the insurance company receives the benefit of stellar market performance and the investor’s gains are capped). If your Broker has guaranteed or promised a certain return rate or has not explained that there is a cap on returns this can be a red flag.
• Premium Payments: Ensure you were told about and are able to pay sufficient premiums to keep the policy in force. Underfunding can lead to policy lapses and loss of coverage. If your Broker fails to explain that premium payments are necessary, this could be a red flag.

The Reality of IUL policies

It is crucial to thoroughly research and understand the terms, fees, and potential risks of an IUL policy. An investor should always explore investment options that might better suit their needs before purchasing an IUL policy. Traditional growth investments can often be coupled with much cheaper insurance options if a death benefit is important to an investor. IULs are exempt from federal regulation under the Dodd-Frank Act, meaning they are not overseen by the U.S. Securities and Exchange Commission (SEC) like stocks and options. Insurance agents selling IULs are only required to be licensed by the state, not to undergo the same rigorous training as stockbrokers. Despite this fact, an investment advisor (or Broker) selling you an IUL policy has a duty to ensure that the IUL is suitable for an investor’s age, experience, risk tolerance, and financial goals, prior to selling the policy to an investor. There is often a disconnect between the sales pitch and the reality of an IUL policy, including:

• Marketing vs. Reality: IULs are often marketed as both life insurance and a wealth-building tool, which can lead to unrealistic expectations. The projections provided by insurers can be overly optimistic and not guaranteed. Moreover, the sales person tends to underplay the role that costs and fees will play in whether the cash value of the IUL policy actually appreciates in value.
• High Premiums: Customers may end up paying high premiums with the expectation of significant returns, which might not materialize. This can result in less benefit for the policyholder compared to the financial gain for the insurance company and the agent.
• Illustrations: The illustrations and assumptions in marketing materials can be misleading, making the policy seem more attractive than it might actually be.
• Financial Advisor Incentives: Be aware that financial advisors (or Brokers) earn high commissions on IULs, which could influence their recommendations to sell you a policy that is not suitable or in your best interest.

The Securities Lawyers at Halling & Cayo, S.C. are experienced in obtaining recovery for investors who incurred damages after the purchase of an IUL policy. If you experienced any of the red flags that were discussed above when you were sold the IUL policy, if your IUL policy is not functioning as it was explained to you by your investment advisor (or Broker), if you are losing money in your IUL policy and you cannot explain why the IUL is losing money, or if you believe your investment advisor (or Broker) sold you a IUL that did not suit your needs, contact The Securities Lawyers at Halling & Cayo S.C. for a free case evaluation today.

Contact Us