EIUL versus Whole Life for Infinite Banking August 15, 2012Posted by shaferfinancial in Finance.
Tags: EIUL versus Whole Life, infinite banking concept
A reader has asked me to review two articles written about the infinite banking concept and using EIULs.
Since, I have been getting quite a few inquiries about this I thought I would post my thoughts.
Here are the two articles he was referring too:
It’s to bad that the infinite banking folks have panicked and exhibited the behavior of “true believers.” I very much like there work, and found it very useful in my education. However, these two articles are full of assertions that are either factually wrong, obvious or irrelevant.
Article #1 by Langston.
The only part I agree with is that some of the risk has been pushed over to the policy owner from the insurance company in EIULs compared to whole life from mutual companies that he pushes. Of course this is obvious or should be obvious that you can’t get higher returns without adding some additional risk. Here are my answers to the 10 reasons:
10. Internal costs are not guaranteed. True but in the history of EIULs there has never been an increase in internal costs. Does the author really thinks buying office supplies will push up the costs so much that a company will raise expenses in existing policies? I doubt it; he is just trying to induce fear here.
9. Mortality costs can change. True but irrelevant as this is a very small cost and any change will be miniscule compared to the total accumulated value. Again, a scare tactic.
8. EIULs don’t go negative so this is irrelevant to them. Variable universal has this problem and is the reason I don’t sell them.
7. Author thinks late premiums void the guarantee, but this is factually wrong and demonstrates the author has no idea how universal life works. The guarantee is 3% over the life of the policy no matter how much or when the premiums are paid. Besides, the history of EIUL interest credit demonstrates the smallest 10-year return is more than twice that 3%. The author probably thinks that is an issue because whole life has a history of small interest [or dividends] that might make 3% seem important.
6. No dividends are counted in the index is factually true, but irrelevant because that is included in all the illustrations and historic averages presented. Really….a whole life salesman pointing toward the performance of EIULs?????? Historically the returns in EIULs are about twice the size of whole life returns.
5. Participation rates are less than 100% is a factually wrong statement. The vast majority of companies use 100% participation rates and those have never changed since the inception of the product.
4. Index caps are in place and that is discussed in detail when I talk to clients because they do move within a small range as the interest rate environment changes. Once again a whole life salesman pointing to performance issues is pretty funny.
3. Irrelevant that guarantees are not calculated annually as they do in whole life policies. This is because it is a very different product than whole life and the guarantees are not the same. Once again more guarantees on the whole life product means smaller returns. Whole life is designed to guarantee a death benefit later in life not designed for cash value build-up like universal life.
2. Once again he points out that expenses are not guaranteed. True but this is just a fear tactic. Besides there are non-guaranteed aspects to whole life too.
1.Factually incorrect statement. All life insurance off loads some risk to the insurance company. Bottom line the life insurance companies have to invest their reserves and that risk is the same no matter whole life or universal life. The difference is simply that the designs of the two products are very different and universal life is structured so cash value can be maximized while WL is structured so death benefit is maintained.
The second article pointed too is really more of the same. Once again, they point out the importance [to them] of the various guarantees. Even though those guarantees are structured in, there is a big caveat here. During the premium paying time, there is no flexibility in premiums unlike universal life. When I structure universal life to maximize cash value build-up, there is much ability to skip premium payments, pay much smaller amounts; either permanently or temporarily and then catch back up.
They also fail to mention the ability to reduce death benefit in universal life, which is not available to whole life policy owners.
Once again, whole life has been designed to maintain death benefit and the guarantees are in place in order to accomplish this. However, in the ultimate banking concept you use the cash value for your own needs [I suggest retirement income, while they suggest anything you might borrow money for]; therefore the amount of cash value really does matter. Comparing the internal returns of the best EIULs to the best whole life policies is the true test. And you are looking at almost doubling of the returns of whole life inside an EIUL. This means higher cash value and more money for you to use any way you look at it. Remember EIULs are around 16 years old and have done quite well over the last 10-12 years, which have been very unfavorable years to the equity markets. If the insurance companies were going to need to increase expenses in existing policies then you would think they would have had to do it in the 2008-2011 time period because they were so devastating. But that did not happen.
Take away the fear mongering and you are left with simply a philosophical debate between being connected to the equity market or to a banking concept. However, even this is not quite as clean a difference as all insurance companies invest their reserves in equities as well as long bonds and money markets. Consumers need to understand that the ownership of whole life and its guarantees will cost them dearly in cash value.
Clearly, for some uses like estate planning, the death benefit is extremely important so whole life would be the tool to use. For cash value build-up EIULs are the best tool in my opinion. Use the right tool for your needs.
Also folks might want to consider why these whole life sales people would bother writing articles that only muddy the waters and in some cases are factually incorrect. Maybe it is because of the tremendous growth in sales of EIULs?
If you are considering the two different types of life insurance your decision should be based on which policy accomplishes what your needs are best. If it is cash value build-up then it is simple to compare the two over the last 10-20-30-50 year time period as whole life has an actual history that long and the data is available to compare EIULs. Or you could just compare actual results since the inception of the EIUL product you are looking at. I don’t think you will find many whole life salespeople that want to do this for you though.