Why EIUL? July 19, 2010Posted by shaferfinancial in Finance.
Tags: EIUL, Equity Indexed Universal Life, Minnesota Life, Why buy an EIUL?
As most of my readers know, I am a big believer in equity indexed universal life insurance as well as a seller of it. I have my own EIUL [AVIVA] as well. Over the last 6 years of ownership it has performed exactly as it was advertised too. Over the last few years, since I decided to sell the product, I have learned quite a bit about the product. Here are some key points for anyone interested in the product:
1. It is permanent insurance, therefore has all the good and bad of an insurance product. Primarily the bad part is the front loaded expenses [over the first 10 years]. So this product is not one to be entered into on a whim. This is a decision you make and live with. Now the good part. If you have dependents or heirs then the insurance aspect is a great bonus to most retirement plans. How many 401Ks/IRAs do you know of that will pass on 5 to 10 times the invested value to your spouse? But most of all that is why you really don’t need to worry about the front loaded expenses. If you die prematurely, no one will worry that you paid a lot of expenses in the first 10 years will they? In the long run the expenses will cost you between .5% and 1.5%. This is actually below the average expenses from the mutual fund industry.
2. When structured correctly, there will be no income tax owed on money to retrieve from the policy. Perhaps the biggest attraction for folks is this characteristic. What will be the income tax [both state and federal] when you need the money? Since no one can predict it, this takes a big uncertainty away.
3. The cash value [excess premium] in your policy is not invested in the stock market, but can get similar returns. This is perhaps the biggest misunderstanding out there about EIULs. The strategy is not even close to investing in mutual funds. First, if the market index goes down, your cash value doesn’t. No negative returns means less variability which is the retirement income killer. Yes, you are capped in your ability to capture positive movements [currently 15% for the Minnesota Life product], but when you run the numbers your overall return is higher using this strategy than simply mirroring the stock index.
4. Because the cash value doesn’t go below 0, there is less panic in the product, therefore less temptation to change. When we look at actual behavior, people are their own worst enemies. The actual returns gotten by real live people in mutual funds is 5-7% less than what the actual market gives.
5. This product is not for everyone. If taxes are not of concern for you then this product probably is not for you. If you are a “do-it-yourself” investor that loathes expenses and feels they can ride the ups and downs of the market [many people think they can, but data tells us that their actual behavior is something different] then this product is not for you.
6. This should not be your one and only savings/investment vehicle. I have posted many times on my three legged approach; EIUL, individual equities, real estate. Point being this should be your conservative part of your portfolio, with internal returns expected around 8%.