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Equity Indexed UL vs. Whole Life November 23, 2010

Posted by shaferfinancial in Finance.
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Tip of the hat to a reader who suggested this exploration!

There is a parallel group of insurance thinkers that suggests using participating [whole] life policies for what they call the “infinite banking” concept. The concepts are basically the same, build up cash value in your policy and then use the cash value as your own bank, borrowing and paying it back as you need to. The concept is sound, but the product has limitations in my mind.

First of all whole life has much less flexibility built into it. Once the premium is set, then you must make that premium payment or put your policy at risk. Instead of getting interest tied to a stock index, you get dividends, which are basically the excess interest earned by the life insurance company over their expenses. These participating policies has a long and successful history. If you choose a solid company [Northwestern Mutual, Guardian, Penn Mutual, etc.] you should be assured of getting a consistent dividend.

There are three areas of performance that we should be looking closely too. The first is the cash value build up. The second is the actual historic internal rate of return over a long enough period to even out the good and bad years. The final is the amount of income that can extracted from the policy. In all three areas the performance of Whole Life is wanting. The cash value build up is around 15-25% less for the best whole life policies compared to the top EIULs. Now, I will say that whole life has a much longer history than EIULs and so we are comparing actual performance [going back 30 years] of WL with theoretical performance since EIULs only go back 15 years. But if we look at the actual life [10-15 years] of EIULs compared to Whole Life we see the same real performance differences as our longer analysis, so I believe the analysis is sound.

The comparison goes downhill for WL from there. The actual historic rate of return is between 2-3% [except Northwestern at 4.65%]. Northwestern is a great company, but the expenses are much higher inside the policy so the final results are similar to other companies despite the higher rate of return. Remember, our 30 year look back for Minnesota Life is 8.86%. Finally the amount of income that can be extracted from whole life is about 50% of that from the top EIULs because the the poorer performance and the lack of a variable loan option.

One note, you can’t lower the insurance amount down, like you do in EIULs, so you have to do what is called “paid-up additions.” The end result is about the same, but EIULs allow you to be more precise.

Bottom line is that the strategy of “infinite banking” is solid. The idea’s of using life insurance for a tax efficient savings vehicle is the same. But the lack of flexibility and the poorer performance should be a deal killer compared to the EIUL.

Oh, and one more observation. Whole life policy illustrations include a projected return for 20 years down the road. The projections always seem to be much higher than the actual returns. With the long history of WL, you would think they would project it a little closer to actual returns. For example the Guardian projected return in late 1989 was 5.25%, but the actual 20 year return was 2.97%.

I hope this discussion is helpful for folks looking into using life insurance as a savings vehicle.
As always let me know what you think and give me a call if you want to further discuss EIUL!

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Comments»

1. David - January 3, 2011

Dave, I’m not sure what policies you were looking at, or how the policy was structured. But, I do see that for Mass Mutual, their policies did better than the illustrated rates, especially their limited pay products with actual performance of about 5% to 6.5% IRR depending on age and policy type since 1981 (I didn’t see studies from 1989). I would suspect that the Guardian wouldn’t be THAT far off the mark since they are similar to MM in terms of financial strength. I don’t know about Penn or NWM, but my understanding is that these companies are very conservative in their assumptions. You seem to be saying the opposite–that they are optimistic. I don’t understand how that could be true given that the mutuals depend on being conservative. They can’t afford to act like stock companies.

That said, I do like the idea of EIULs. I think what scares many people are the moving parts. How can you be sure that management won’t change its mind in the future, change the cap rates, lower participation rates, or raise the cost of insurance?

For whole life: what whole life policies were you looking at and why do you think the illustrated rates are so far off what you found as the actual rates of return?

2. shaferfinancial - January 4, 2011

The data came from articles written in national underwriter by Roger Blease. The data thats interests me is the internal rate of returns. In the article I read he compared the actual internal rate of return over the last 20 years with the predicted returns on the illustrations. He did say that of late the predicted rate of returns were getting closer to the historic returns. I think consumers are demanding that the illustrations are closer to what one might expect to get and with the added enforcement on all financial products is encouraging a less “aggressive” illustration.

As to the “moving parts” you can never be sure of anything even the companies abiding by their contracts. However, the returns are not guaranteed for the whole life either and the companies choose how much they pay out each year with that product too. I don’t see any difference in safety. But what I do see is a very different actual performance with EIULs performing much better over their life compared to the same period of time for WL.

Hope this helps explain my thinking on the matter.

3. rk - January 17, 2011

Hi, dave currently i have metlife whole life , and so far i have paid almost 9 year premium, that is almost more then 100,000. now i am thinking to swap to eiul from axa. does that make any sense ? i would like flexebility of taking my money out at age 65 .

shaferfinancial - January 17, 2011

There are several issues to be careful about. 1st is there are probably still surrender fees on your existing whole life policy. Generally these were issued with 15 years of surrender fees. The second is that because fees are front loaded in life insurance policies you have already paid the majority of the fees. By getting a new policy you will have to pay the fees again. So you will have to look carefully to see that you can recoup all these new expenses with better performance. That leads us to the final issue which is that the AXA product is not a great performing one compared to some of the others on the market. If the new EIUL is better structured for retirement income and you have enough time to recoup the additional fees then yes this could make sense. Lot of “but’s” and “if’s” in there to think about. That is why I rarely suggest this type of change. Let me know if you want me to look at it.

rk - January 29, 2011

i think yes , i would like you to analyse my current whole life vs axa eiul. let me know what info you need.

4. dguapo - May 9, 2011

Dave,
What do you think about Midland National EIUL? My financial advisor is talking about this one.

shaferfinancial - May 10, 2011

It is a top performing EIUL. However, I don’t like the large variety of indexes available. It encourages folks to “predict” what index will perform best in the future and the most likely result is a wrong guess. Expenses are a little higher than average inside. Bottom line is that it is a good choice, just not the best choice. Let me know if you want me to send you a Minnesota Life illustration to compare it with. And of course the critical component is the willingness and ability of the agent to structure it correctly for best performance. Check out my website http://www.shaferfinancial.com for the basics.

5. pmmg1234 - August 30, 2011

The thing that I do not like about EIUL, unlike the Whole Life Policy is the “Difference” in the Disability Rider. In an EIUL, it will only pay the cost of insurance..meaning you only have the cash you have accumulated and the monies stops growing. As opposed to a Whole Life Policy, your monies and insurance will continue to grow with the paid up additions. Correct?

shaferfinancial - August 30, 2011

Well, it depends upon the company and what they cover. Some of the whole life companies structure it just like the EIULs. But for me a lifetime of underperformance by as much as half is not worth the small difference in the disability rider. Get real disability insurance to cover your expenses if you get disabled and take the better performance.

Mr. Actuary - August 30, 2011

Please elaborate which mutual companies structure their waiver of premium, and I doubly stress premium, for their participating whole life in a similar manner as UL. Fact is, you can’t. Whole life is a bundled product.

shaferfinancial - August 30, 2011

Your right, I had a brain fart. Gotta say don’t really care much about whole life, so don’t really think about it much. Can’t get by the poor performance.

6. John - August 15, 2012

I realize I’m late to the party, but I just found this post on a Google search. I’m very interested in infinite banking (IB), and have only looked at it from the WL perspective so far.

Below are two articles that argue against using EIUL for IB purposes. I’d appreciate any comments or rebuttals. Thanks.

http://infinitebanking.org/news/the-top-10-reasons-not-to-buy-equity-indexed-universal-life/

http://www.ufirstalliance.com/pdf/WhyNotULIBC.pdf

shaferfinancial - August 15, 2012

John, I have been getting quite a few folks wanting to talk about whole life versus EIUL using the infinite banking concept.
I have just written a post on that and am posting it today.
Hope this helps.


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