A Bad Rap for Indexed Universal Life Insurance (IUL)?

Thinking through the polarizing takes on Indexed Universal Life Insurance | a thinking & conversational-style blog post

I think it’s good for the insurance industry when there are people out there writing and talking about important topics in the insurance industry—and I don’t mean agents. So when I hear The Insurance Pro Blog Podcast discussing Indexed Universal Life Insurance, referring to an article in the Wall Street Journal I know there’s attention.

Here’s the premise. The Wall Street Journal (WSJ) published an article titled, “It’s the Hottest Thing in Life Insurance. Are Buyers Aware of the Risks?” This article was published on January 7, 2020, by Leslie Scism.

The Insurance Pro Blog Podcast released a podcast episode responding to the Wall Street Journal article titled, “Indexed Universal Life Insurance Must Be Contained: It’s Getting Out of Hand“.

I’d encourage anyone interested in the life insurance industry, Indexed Universal Life Insurance, and content related to insurance, in general, to read the WSJ article and listen to the Insurance Pro Blog Podcast. And I’d also encourage anyone that consumes the blog and the podcast to do so with an open mind. In other words, don’t feed your already established narrative. It’s okay if you have one. Perhaps you work at a leading life insurance carrier that specializes in Indexed Universal Life Insurance (IUL). Or perhaps you own a Whole Life Insurance policy and want to convince yourself you made a great decision not to go for that IUL. There are of course many other positions in and around this topic–the point is, try to think through it all with an open mind.

This is Not a Fact Check Article

I’m not creating this blog to fact check everyone—to say who is right, who is wrong. I’m here to think through this some more. It might be for my own edification, it might be for my team at KazSource, and maybe it’s for you if you want to learn a little more about IUL products.

Overall, I believe there’s a lot more thinking required in the life insurance industry. And by thinking I don’t mean learning how a product works or learning how to sell a product—of course understanding the products are important. What I am saying is I believe not enough effort goes into thinking through the industry as a whole. A new product comes out or a new sales idea comes out—this inevitably leads to executives, managers, and sales representatives finding ways to drive production. And this isn’t to say all those people I referenced are bad—far from it. But I think many could all take a step back and think through what we believe, what we see, what we read, and what we plan on bringing to the market.

This is why I appreciate the content that the WSJ published. Even if the headline is a lead to think, here we go again—life insurance advisors are taking advantage of the consumer—which is my opinion. Or you may read the headline and think, no big deal. Which is why this is not a fact check. But my opinion remains. If someone is taking in the WSJ and comes across this headline, it tells me the insurance industry (at some level) is up to no good—as a whole. And that’s the key. This isn’t about some executives or some managers or some salespeople or some others in the life insurance industry. This headline tells me the whole thing is some big bad beast and consumers are the prey.

That I have a problem with.

Are there bad insurance companies, bad insurance salespeople, bad so and so? You betcha. Just like there are bad real estate agents, bad landscapers, bad accountants, bad homebuilders, bad auto mechanics. Some industries are littered with less than ideal behavior, but that doesn’t make it all bad.

But This Wall Street Journal Article is About a Person, Not a Product

So while this WSJ article is about the product of Indexed Universal Life Insurance, it’s really about the people that build the product, manage the product, sell the product, and overall all those involved with the product. And that’s where we need to think through this more. You have this Indexed Universal Life product that:

  • kind of looks like a security, but isn’t
  • has many moving parts
  • is not easily understood
  • has many different versions offered by multiple life insurance carriers
  • pays the selling agent good money the year they sell it

All of that makes this IUL product a way for the consumer to be put in a bad situation. So it’s a good thing that consumers are made aware of the potential “not so good” behavior of an agent. And this is where the focus should be. The trust of the person offering the product to the client.

Indexed Universal Life Insurance isn’t necessarily bad, but it could be sold badly. There’s a big difference.

I re-watched the movie “The Big Short” for maybe the 8th time. Mortgages aren’t bad—they are a great instrument in owning a home if done correctly. But the ways mortgages were being sold in the early 2000’s—no income verification, any credit score will do, interest rate changes 5 or 7 years out, and so on—that was bad.

There are always bad people out there willing to push a product or service to or past a limit for their own benefit. The banking and mortgage industry did this. And sure enough, the life insurance industry has done this. But it’s not everyone. Well, the mortgage crisis is more extreme, obviously in that we saw the economic collapse of 2008.

Do Advisors and the Like Take Advantage of the Indexed Universal Life Insurance Product?

To me, it leads to a question: do life insurance agents take advantage of the IUL product? I would say yes. We’ve seen illustrations from advisors and clients that didn’t pass the smell test. But that’s why AG49 came out. There were too many of those in the insurance industry who were pushing the envelope. The interest rate on the illustration for lack of better word was oversold. Here’s an article from InsuranceNewsNet on AG49 and the talks around re-working it—again. Clearly, there are advisors and those in the industry that are cause for concern. This is why the WSJ article is needed. The consumer should be armed with more knowledge. They should be armed with more questions to ask. Their advisor of twenty years may be a great golfing partner and they may have a successful business, but that doesn’t mean they haven’t oversold the fundamental aspect of a product. It also doesn’t mean they did oversell. In fact, the life insurance carrier may have oversold.

I remember training an internal illustrations associate. We sought the help of an internal wholesaler at a major life insurance carrier. The help they provided was to run the IUL illustration at the maximum allowable interest rate. When I questioned it, it was answered matter-of-factly: “that’s how we run all of our IUL illustrations at this company.” Wow! So the financial advisor that has a client that wants an IUL seeks help from a trained representative of a top-rated carrier and they are immediately convinced this rate is fair to show the client. And while it’s within the rules, this does not mean it’s the best plan of action. However, even if it was the best option, were there any what-if scenarios shown? A stress-test of the illustration perhaps?

The advisor should still think through the questions, along with the leadership of a carrier, the executives, the management, the trainers, the internal wholesalers, the life insurance brokerage reps, the case managers, the sales reps, and so on. Every one of these people has an opportunity to think through this more. And often they do. But according to the WSJ article, the headline leads a consumer to believe this IUL product might be always bad.

Now to the podcast from the Insurance Pro Blog Podcast. This episode gets into specifics of returns. It address’s incorrect assumptions made by the WSJ article—as I mentioned above, give the podcast a listen. For example, the podcast explains how the product works and how caps and floors work relative to interest rates.

Perhaps It’s Time for a Conclusion

The point is there are those that take advantage of the Indexed Universal Life Insurance product, but it’s not everyone. Just like the IUL product is not for everyone. And just like the product itself isn’t bad. Unless of course, you don’t trust the system the product plays in—which is a deeper conversation altogether.

To me, the conclusion is clear — IUL has the unfortunate possibility of being sold in an improper way. As do many insurance products. As do many products in many industries.


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