Fixed Index Universal Life Insurance
Fixed Index Universal Life Insurance offers you participation in the good years of the market with no participation in the down years of the market. Each product is different, so remember we are talking in generalities here in order to educate you about what this type of product is, but this product can be an amazing way to safely grow money with stock market type returns without the risk of the market.
1) Review the Fixed Index Annuity discussion to re-familiarize yourself with the way a Fixed Index Product works
2) Review the Whole Life Discussion to re-familiarize yourself with the many qualities of life insurance. UL products are not ownership products the way Whole Life products are and thus you don’t receive a dividend. However, many other issues are exactly the same such as the..
- Tax Benefits – Including the ability to access principal and repay without tax conseuquences
- Liability Benefits
- Probate Benefits
- Legacy Benefits
As a matter of fact, this type of product has a history of offering returns that are far greater than the stock market without the risk of downturns. The reason for this is that although the gains in this type of product are capped, the losses are not experienced.
For instance, if the stock market goes up 100% one year, and then falls 50% the next year, those investors who are in the stock market celebrated their fortune one year and then cried all the next only to end up exactly where they started at the beginning of the two year period. It was a lot of excitement, but it got them nowhere. Unless of course, they did like most people and took some of the money they made and spent it, then the remainder would have lost 50%, and their portfolio would now be sitting on a two year loss.
If on the other hand, you owned a Fixed Index Universal Life (FIUL) product from a good company, you might be in much better shape. Let’s say the company you are with offers you a 15% cap on market gains. You would have seen gains of 15% when the stock market investors were making 100%. But you would have seen no change in your account values the next year, when the stock market participants were seeing huge losses. At the end of the two year period, you would be up 15% (minus the costs of the insurance product.)
These are very solid gains. Now imagine a stock market like we’ve had for over a decade now that continues to go up one year and then give everything back the following year. And then it repeats. Those in the stock market have not seen any gains over the last 12 years (as of this writing) because the market keeps going back and forth but ends up back in the same place. Meanwhile, owners of this type of product are locking in strong gains because they keep gains in the good years and don’t give anything up in the bad years. Owners of these products are running circles around their much riskier counterparts.
It is certainly true, that in a very strong, extended bull market run, this type of product will not do as well as the stock market. However, we looked back at the last 62 years of the stock market and analyzed whether it would have been better to own the stock market outright or a hypothetical product that only got the gains of the market up to 15%, but received a 0% in years the market was down. During the bull run of the 1950’s to mid 60’s, the actual market was solidly ahead, but this hypothetical product still quadrupled in value. But in the rough years, of 1967-1982, the 15% cap product grew substantially more than the actual market. This scenario repeats itself during the next bull run and is currently repeating itself in this current bear market run.
At the end of our 62 year test period, our hypothetical product outperformed the actual S&P 500 index returns over a period of 2 bull markets and 1 ½ bear markets. That’s really incredible! Now, it’s important to note that our hypothetical product did not exist during that time. We are simply comparing two types of index returns (one that was actual, and one that has no losses, but in which gains are capped at 15%). In real life, the S&P500 Index would also receive dividends and today’s life insurance product that we began discussing above would also experience a drag in performance because of the cost of the policy. Of course, in real life, the Index gains would also be subject to management fees which the life insurance is not subject to.
But the point is not exactly which one will be exactly what percentage greater. The point is that by drastically reducing risk, we can have stock market like returns without the stomach dropping losses! And that in doing so you might actually beat those taking the risks. Or as said above, you might come out a little behind, but far ahead of any other safe, non loss option! You can see we’re excited about this.
Now, we mentioned the cost of the insurance a couple times. This is either a good thing for you or something that can be minimized so it’s not a large cost.
The cost would be a good thing for you if you want the life insurance. In general, we don’t like this type of life insurance as much as whole life for providing life insurance. They typically don’t carry the same guarantees and the levers are in the hands of the insurance company instead of in your hands as the product owner.
However, some policies do offer the option of adding a rider that does guarantee you the lifetime death benefit. In this case, you don’t have to worry about bad performance or increased fees taking away your death benefit many years from now. It’s locked in and guaranteed.
We’ll continue this discussion next week…
This is the 11th post in our series of innovative new insurance products. You can find the previous posts at: 1) Innovative Insurance, 2) Long Term Care, 3) Long Term Care Solutions, 4) Free Long Term Care Insurance, 5) What is an Annuity?, 6) Immediate Annuities, & 7) Fixed & Variable Annuities, 8) Fixed Index Annuities, 9) FIA History & Promises, 10) High Guaranteed Interest, 11) Fixed Index Life Insurance, 12) Tax Free Growth, & 13) FIUL Free Loans & LTC.