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Five things you should understand about EIULs March 9, 2009

Posted by shaferfinancial in Finance.
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One of the most popular post on this blog is the post on equity indexed universal life insurance policies (EIUL).  I think that life insurance sales folks are really pushing these policies.  Unfortunately, there is much misinformation on these financial instruments because the great majority of insurance sales people don’t have the finance background to really understand how they work nor do are they worried about their clients wealth creation.  I will keep this post short.  Here are 5 things everyone should know before they purchase an EIUL.

1.  They are for long term planning only.  There are substantial fees included in them that need a minimum of 10 years to overcome;

2. They are extremely unlikely to give you anywhere near double digit returns.  Once again the fees and the insurance costs eat into the returns so you can always get better returns investing directly into the market (not necessarily with mutual funds which have their own return reducing issues).  So the real reason for having an EIUL is to legally avoid taxes and to have a place to put your wealth that will appreciate well beyond inflation rates. 

3. When structured right, you can minimize the fees and maximize the cash value.  But most insurance agents either don’t know how to structure them in this way or won’t because they are trying to maximize their commissions;

4. EIULs are great complements to wealth creating activities.  But, they shouldn’t be the only savings/investing tool you are involved in; and

5. There are many moving parts in these products that have the potential to effect your returns.  Find a company that have a history of not making changes to their products once launched.  Also make sure the policy is from a top rated company. 
 

Hope this helps.  Contact me if you are interested in an EIUL.  I sell them in most states.  And I will always give you honest answers to your questions!

Comments»

1. DJ - June 13, 2009

Are there any benefits in beginning a EIUL for my 1 year old?

shaferfinancial - June 13, 2009

DJ, yes there is. The decision matrix is a little different than for adults. I usually set them up so you don’t pay into them beyond the child’s 21st birthday. But the bottom line is you control the policy until you decide to relinquish control to your child. When that happens they should have quite a nice little nest egg for which to borrow from without tax consequences. Honestly, you could probably leave it alone until the child retires and have a significant retirement income. Or you can use it to purchase cars [and pay yourself back avoiding those interest payments to banks!] or a down payment to a home [and again avoid interest payments] or start a business; the list is endless. And remember, when its time to apply for college aid, life insurance is not considered in the formula! It is also a great teaching tool for your child to teach financial awareness!
I posted some ideas on this a while back here

2. Rafael - October 9, 2009

Hi David.

Is there any maximum amount you are allowed to put into a EIUL? I mean how big the Cash Value can be?

shaferfinancial - October 10, 2009

Rafael,

No there is no limit. The cash value can go into the tens of millions without any issue.

3. Kenneth - April 20, 2010

Hi David,
I wish I had known your website earlier before I decided to own an IUL. I hope it is not too late to gain more understanding about this product before I continue funding the policy. I have some following questions for you.
1/ You wrote that if the clients know how to structure the policy, they can reduce the fees and costs. So, how could we do it?
2/ Secondly, my policy is actually Global Index Universal life which offers the cap rate 13.25% and the guaranteed min is 1%. I have it with Western Reserve Life Insurance. How do you evaluate the reputation of this company?
3/ In your opinion, is it a good idea for people over 30 starting to own these policies given that they have already a 30-year term insurance.

shaferfinancial - April 20, 2010

Thanks for commenting Kenneth,

I go backwards on your questions. Yes, it is a good idea. I consider EIULs with monthly premiums a savings vehicle [as long as it is set up correctly]. In fact, I think and have run the numbers enough to feel certain that it is the best savings vehicle out there. It is flexible where it needs to be and inflexible where it should not be flexible. Term insurance has its place, but EIULs are very different products used for different reasons. Western Reserve LI is highly rated and should be a secure company going forward. They were big into variable universal life products, which have not performed well because of the bear market. Much of the complaints on the web about them seem to stem from this product. As for the actual EIUL, it has several issues that cause me to not consider selling it. 1. no overloan protection rider 2. only fixed rate loans 3. the actual cash value build-up compared to what they predict has a large difference meaning there must be some heavy expenses in the policy.
Finally, structuring an EIUL properly must start from the beginning. There are many things that need to be taken into account including reducing potential expenses, accounting for inflation over long period of time, etc. The bottom line is the best I can do for folks is to give them some questions to ask before they purchase the policy. You are limited to how much you can improve a policy after purchase.

Hope this helps and if you have any specific questions I would be glad to try to answer them for you.

4. Corey lovern - January 8, 2011

Hi David. I have just received a personal injury settlement for 200,000. I have an agent trying to sell me an EIUL policy. Why should I consider an IEUL over a fixed annuity. I am 48 years old with a good monthly income. Also, I would like to have all the money working now. Is there a way to put all the money in at once?

shaferfinancial - January 10, 2011

Corey,
I can’t give a definitive answer without a more in-depth discussion. In general, an EIUL with SOME of your PI settlement might be a good move. But of course that is dependent upon other variables. Feel free to call me at 727-804-9271 or contact me through this blog for a further discussion.

5. Aaron - June 16, 2011

Dr. Shafer,
I wanted to buy a Western Reserve LI GIUL that has a 1% bottom and a 12.5% cap but have some reservations because it seems to good to be true. Over the past decade it seems to have out performed any other investment vehicle out there with and average yearly return of 10.1% (this is from the agents fancy charts and graphs). It seems with the 1% guaranteed minimum interest rate, this plan would be “risk-free”. If I contribute until the age of 60 and not touch the cash value,Ii should be able to pull out the interest and use that as my monthly income when I retire while leaving the actual insurance alone for my family when the time comes. Am I living in a fantasy world to believe this?

shaferfinancial - June 16, 2011

I cringe at the words risk-free. There is no vehicle that is risk free, period. Having said that I believe this is a great retirement income vehicle that is vastly better than mutual funds inside a tax deferred wrapper. You seem to have the basics down, but I like to go in-depth with potential clients so they have the full understanding of how this product works. There are risks that need to be talked about. It is critically important that these are set up correctly initially so I would be a little worried dealing with someone who is illustrating an EIUL at over 10%. If you look at the last post on this blog you will see an analysis of MLs interest credit from a historical perspective. I currently illustrate at 8.25% with the ML product which is the best performer on the market.

As to Western Reserve’s EIUL, it is solid but no where near as good performer as Minnesota Life. The ML cap is currently 15%. It has slightly smaller expenses than the WR. The result is ML has gotten a little over 1% higher interest credit than the WR historically. I see no reason why this won’t continue. On that same blog post is the history of the cap rate at ML for you to see.
Contact me if you want a more in-depth discussion on EIULs and to gain from my experience in structuring these for maximum efficiency.

Aaron - June 17, 2011

Dr. Shafer,
Thank you for your response. I will look into ML’s IULs. Would you recommend this as the only investment strategy for retirement? I am 26 years old and have not started an IRA or 401k. The benefits of non-taxable withdrawals made this look so much more appealing.

6. shaferfinancial - June 17, 2011

The answer is both yes and no. I think it is a better alternative to 401Ks/IRAs.
However, once you get established in a career I believe adding on different layers of investments make sense [like real estate and dividend paying equities].
But for a young guy this is a great first step!

7. jamesdurand.com - July 3, 2011

Dr. Shafer,

Would you please comment on North America’s Builder EIUL and on Allianz’s new LifePro+ EIUL in comparison with Minnesota Life’s EIUL?
Thaniks in advance for you unbiasesd analyses.
James

shaferfinancial - July 5, 2011

James, I like the NA EIUL and think it is one of the top 2 EIULs. I could sleep well selling it to a customer.
It works a little different than the ML with a lower cap but a guaranteed bonus of .75% after year 10. It has a COMDEX of over 90.
The only issue I have is that because it has many more index options than ML it encourages people to try to guess which one will perform best.
This is a losing proposition as far as I am concerned. But if you would have chosen the midcap indexing option then you would have gotten the best performance over the last 30 years.
I would choose that index option if I owned the NA EIUL. The expenses are about the same as ML. The Comdex is the same. So a solid choice.

Allianz is a good product too. Just has higher expenses and a lower COMDEX rating. Performance lags both NA and ML a little but it is still a top 5 performer IMO.

8. Joe Brickster - August 24, 2011

You seem to know they expense load for several of the top EIUL. I tried to read the prospectus of all the EIUL you mention, but can not figure the expense load. How did find this information? Also, are GIUL products better because of the additional indexes or not worth it b/c of the added expenses?

shaferfinancial - August 24, 2011

Minnesota Life is one of the few companies that allow illustration of the expenses. I provide all my customers with this illustration.
Many of the companies you have to contact them and find the various expenses and then back it our from their illustration software.
I have a peer that does that work [and charges agents for the results].
The extra expenses on the GIUL are not worth the additional insurance in my mind.
Hope this helps. Contact me via e-mail for more specific expense info. Keep in mind the expenses are dictated by the structure of the policy so you have to have an idea of what you want to figure out the expenses. Most of the one’s I structure have max. total expenses at age 75 of less than 1.5%. Some less than 1%.

Joe Brickster - August 24, 2011

Thank you for the quick reply. I understand the structure of the policy affects the expense load, however, let’s structure two EIUL policies the same from competitive companies. (ie ML vs Hartford). How can you tell the expense load from one is less expensive that the other? I get concern when someone tells me a company has lower expense charges than another, but yet I can’t find out how they got that information.

Secondly, why do you think the extra expense is not worth the tracking of global indexes? Is it because the expense charge is outragous and will affect the policy drastically. Or do you think all the global indexes move conjuction with each other? We live in a global economy. Dont they say, somewhere in the world is a booming ecomony, that’s why we’ve been told to invest globally? Bottomline, if a policy can track the best index perfomance globally, won’ it pay off?

9. shaferfinancial - August 24, 2011

Joe, you accidently used an acronym that stood for a different type of life insurance. I now know what you meant. Both Minnesota Life and North American have a index option that connects to non-US companies. You can choose what percentage of your premium would go to that index. Unlike variable universal life you are not actually investing in the indexes. The insurance company is and the indexes are only used to determine your interest given on the premium. Because of this there are no load charges directly attributable to any of the index options. Maybe that is why you can’t find what you are looking for in the perspectus?

The expenses are different from company to company inside EIULs, and that is one of the things we look at when we compare EIULs. However, there are many other factors at work here [cap rates for example] that figure into performance. And performance is, for me, the most important issue to assess.

10. mike bobier - October 23, 2011

wow, are these diverse questions real? I’m an agent just getting started in the market and I’m just trying to navigate what’s right for who and when. There’s a lot of variables, but one I am studying is aviva’s iul connected to the S & P. They have an instant credit of 6-7.5 % . I’m still trying to work it all out in my head. Gives me a headache. You might not care but anyway, I do appreciate your blog.

shaferfinancial - October 24, 2011

No problem, get educated as well as you can on EIULs. There is an art form to structuring them to work for your clients.

11. Joshua Castaneda - April 30, 2012

Howdy Dr. Shafer,

So I have two friends who are each telling me their policies are better than the other. One policy is Freedom Global IUL II with Western Reserve Life (WRL – small article on its release http://premierbrokerage.com/news.asp?NewsID=93) and the other is a whole life policy with Northwestern Mutual. I’m a 22 year old in good health with a salaried position as a computer programmer. I’m wondering which would be a better decision for me.

From what I understand, the whole life policy is supposed to be a safer investment that doesn’t lose cash value over time, but the GIUL is supposed to yield a higher rate of return much sooner. I’ve read so many conflicting opinions that it’s hard to make an accurate assessment without a background in finance.

If I’m using this policy as a vehicle for investment short term and emergency/retirement/death benefit long term, would I be better off just getting a term policy and putting the difference purely in investments?

I just want to make sure that whatever decision I make now won’t negatively affect me in my near nor distant future. I think both options have their merits, but I’m leaning toward the GIUL because of it’s potential for gain.

Any and all insight is much appreciated.

Thanks,
Josh

shaferfinancial - April 30, 2012

First comment needs to point out that if you are looking for a short term investment then life insurance policies are NEVER the correct financial instrument. There is a reason it is called permanent insurance; because it is meant to keep for life or at least for a very long time.

The whole life versus EIUL discussion can really be simplified into a simple question. What are you looking for, death benefit or cash value build-up. Whole life has been around for a long time and is structured to provide death benefit. EIULs are structured for cash value built-up and can be more easily manipulated to minimize expenses therefore running more efficiently.

If death benefit is your full intent, then the Northwestern Whole life product is great.
If cash value build-up is important and possible retirement income then the EIUL would be the best choice.

If you are interested in the cash value build-up inside and want to learn more about EIULs [never buy this product without talking to someone that can give a good education on it], then give me a call. There are two important factors: 1. some EIULs perform better than others. and 2. Few agents know how or our willing to structure them by minimizing the life insurance down as far as it can go because they severely decrease their commissions. AT your age a properly structured EIUL might require some additional term in order to meet your life insurance needs.

The Transamerica product you linked in your post is not anywhere near the top of my ratings. I would not advise it.

12. NAYYER - August 5, 2012

Dave

Dollar per dollar, is it more efficient to insure a child for cash value growth then 45 year old parent. Again, focus is on most efficient cash value/loans, with little regard for death benefit.

Kids are 3, 7 and 10 year old

Thank you

shaferfinancial - August 15, 2012

No, because the IRS rules deal with ratio’s not absolute insurance costs.
The decision should be based on need.

13. lynn - August 18, 2012

Hi Dr Shafer, I have a whole life insurance with a 5 yr term rider. I just talked to my agent today to increase my whole life and decrease my term same with my husband. Last yr I took a EIUL from WFG/WRL but after reviewing it I decided not to continue with it so I got my money refunded. I feel like it’s too good to be true. My agent explained to me that whole life is better bec it has dividend while EIUL, i can lose my money if i only pay the premium and not put more money into it. She said cost of insurance goes up as we get older and the cash value will pay for the premium so in the end you won’t have any money left and at the same time no death benefit. I just want to know which is really better before I sign up again for another whole life. I want to get the most of my money and I don’t want to regret it in the end. Thank You.

shaferfinancial - August 19, 2012

Lynn, I would be happy to speak with you.
In order to answer your questions, I would have to understand what you are trying to accomplish.
If an EIUL fits your needs we would then spend some time making sure you understand exactly how EIUL works.
Only then could you make an informed decision.
Meanwhile, ask yourself why your agent would not show you an EIUL for comparison instead of using scare tactics?

14. Matt Robbs - August 30, 2012

I am wondering is there a minimum amount per month to put into the policy? As in under a certain amount would the expenses of the insurance eat up all the money and you wouldn’t build cash value? At the rate of 8.75% how much invested per month would be a good retirement amount after the expenses etc?

Thanks,
Matt

shaferfinancial - August 30, 2012

No, it is structured with ratio’s.
A good retirement amount is relative.
Everyone is different.
Contact me if you want to get a better understanding of how an EIUL would [or wouldn’t] work for you.

15. Xianqun Chi - September 20, 2012

i am 24 years old. i just bought a life insurance that name is “Freedom Global IUL II” from the Transamerica Life Insurance Company. I just wanna know if this is good for me or not? i know the representative whom i bought this insurance from always said good for me. and i just want to know some true.

shaferfinancial - September 21, 2012

As I have noted before, Transamerica would not be a top rated EIUL. Read around my blog to see if EIULs in general are something that fits your needs in general.


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