The Index Universal Life (IUL): Good or bad for the Canadian marketplace?

The text is now available at: http://consumerights.ca/wp/2015/01/the-index-universal-life-iul-good-or-bad-for-the-canadian-marketplace/

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6 comments

  1. Louis G. LaBash
    CEO at Financial Scenarios LLC 1-855-LESS-IRS Creator of “The Last Great Tax Saver Software” Call to get a Free Trial!

    At the end of the day the market is going to go up, go down, or stay the same. That covers all of the choices.

    In regard to the market going up, the article says:
    Market winning: From an IUL perspective, we consider the market to win if the impact of the CAP is higher than the impact of the floor. For example, the market yields 10% but the policy owner gets 7.5% because he missed many the peaks of the market which was greater than the bottoms of the market.

    In an IUL, if the market goes up the consumer gets to participate up to the CAP. If it goes up 10% in an Annual Point to Point Index then the consumer gets 10% if the cap is 10% not 7.5%.

    In regard to the market going down,the Article says:
    Market losing: This is the opposite. Because of the floor and because the impact of the bottoms were greater than the peaks, the policy owner is credited a return higher than the return of the market. For example the market yields 5% but the policy owner gets 7%.

    In an IUL Annual Point to Point Index Account, there are no peaks and valleys, only a starting point and an ending point. If the market goes down the consumer loses nothing due to market declines and gets “0” not 5%.

    Since there are no peaks and valleys only annual starting and end points, the consumer never has to worry about the valleys because there are none in the Index Account as they only get to have the peaks up to the CAP or the value stays the same if the corresponding indexes were to go down.

    In regard to the insurers changing and reducing the caps to save their options investment losses, they have had plenty of chances to do that in the last 18 years and even with 3 major downturns in the market during that time they haven’t had to do so.

    From what I can tell the insurers are making money on the policy fees and insurance premiums built into the policies not so much on trying to make money on option spreads.

    This is a great consumer product and I can show how it can be a better place to put your money (in the US) than a qualified plan, CD, Annuity, Tax Free Bonds, and a Roth IRA using a number of different software tools that I provide to my agents. The better IUL products offer low insurance premiums, CAPS in the Teens, a great deal of flexibility, the potential for Tax Free Income, as well as Critical Care and Chronic Care coverage along with the Death Benefit.

    I beg to differ with the article when it says this is not a good consumer product. In fact it is a Great Consumer Product!

    A competitive IUL can be “The Best Supplemental Retirement Plan of the 21st Century!”

    Louis G. LaBash
    1-855-LESS-IRS

  2. Richard Proteau
    Founder Financial Services Consumer Alliance
    Top Contributor

    Louis I don’t know how to answer your comment. Do you understand that we are talking about an average rate of return? Please note that what is illustrated are average rate of return. If a market yields 10% over 10 or 20 years (in the case of life insurance we are talking 40 years +) this is an average rate of return. This means the rate of return will vary below and above 10%. SInce it is winning market, the CAP will have a greater impact on the credited rate year to year than the floor. This means in a winning market, the owner would get less than the market because instead of getting 20% he will get 12% in the years where the peaks are higher than 12%. Since there are more peaks than lows, the CAP has more impact and the average credited rate of return will be less than the average rate of return of the market…

    Please note that the S&P price index (less dividends) has credited last 25 years 6.54% which is a losing market for a IUL context. Applying a 12% cap and 0% floor the policy owner would have gotten an average credited return of 7.32% because of the floor. This is a gain of .8% for the client. To this however you have to apply the opportunity cost of the dividends around 3%. So the IUL cost to the client was 2.8 %

    Please note I did mention very clearly that the analysis is based on worst and best case scenario. THis is called a breaking point analysis. It is not a real case situation which I did mention. This is like testing the load that a chain can take to get the breaking point but this will not represent the safe load that the chain can take.

  3. Louis G. LaBash
    CEO at Financial Scenarios LLC 1-855-LESS-IRS Creator of “The Last Great Tax Saver Software” Call to get a Free Trial!

    You stated at the end of your article that this was not a good product for the consumer. But I would say it all comes down to the question “compared to what?” Because there may be some limits on the upside (13.5% is not a hard pill to take) along with limits on the downside, then you feel this is not a good product for the consumer. Do you have a better safer product to offer consumers.

    The market was down 17 of the last 40 years and whose to say the next 40 won’t have similar results. While an IUL doesn’t get any dividends it doesn’t have a downside as well as the 3% to 4% sales and marketing fees that would have been taken out by the mutual funds that managed those stocks and bonds. The market crashed in those 17 different year periods because the people sold not because they held their positions and if you sell, you don’t get any dividends anyway. Tell those consumers that were planning to retire in 2008 how much better they would have done in the market (with no cap & no floor) getting those dividends along with those 40%+ losses. You also have not taken any of the tax benefits (both deferral as well as potential tax free access) as well as income tax free insurance (Life, Critical, Chronic) benefits that come with these policies. Those Tax considerations can mean 25% to 40% or more income from these policies verses other taxable products.

    Recent surveys have shown that consumers are more concerned about a return of their money more so than the return on their money.

    You can dwell on the caps all day long but the product I sell not only includes competitively priced life insurance, has a 13.5% cap, has a 3% underlying guarantee, has the most flexibility of all IUL products when it comes borrowing money from the policy (tax free), and has overall expenses that are1/10 to 1/4 the cost of the expenses of most mutual funds over time and that cost also includes the expenses for the cost of insurance. At the end of the day we can safely provide our clients with 3 to 5 times more income than they can get elsewhere.

    The consumer does not have to time the market with an IUL. Because of Annual Reset, they never get hit by a down year and they never miss an up year. When you add it all up there isn’t a better financial product on the market for the consumer today.

    Louis G. LaBash
    1-855-LESS-IRS

  4. Richard Proteau
    Founder Financial Services Consumer Alliance
    Top Contributor

    Louis I wrote this text for the Canadian market. I can’t state whether UL is a tax efficient product in the U.S. because I am not an expert on U.S. Income Taxes. However I am an expert when it comes down to Canadian insurance taxation and UL is not and will never be a tax efficient product in Canada except if the product is bought solely for estate planning purposes and not for investment/retirement purposes. Also, I don’t know about U.S but Mutual Funds in Canada usually don’t have MER of 3 to 4% unless they are in house mutual funds and an Index mutual funds would have a very low MER. Still it is difficult for me to believe that any type of UL would be 1/4 of the cost of the expenses of a mutual fund when UL pays commission (in Canada anyway) of 120% to 190% of first year premium versus 1% to 5% of premium. it does not add up.
    Finally my final message which is a global message:leveraging as a retirement strategy does not work. It is deceiving to state there is no tax cost when you have substituted the tax cost by interest cost; it is the same and even higher cost but under different form. I am proud to have trained life agents in Canada not to use leveraging of life insurance and instead I have trained them to use insurance for estate planning. When you sell life insurance for estate planning, you sell life insurance for what it is. In Canada, the message is clear: Keep insurance separate from investments..

  5. Louis G. LaBash
    CEO at Financial Scenarios LLC 1-855-LESS-IRS Creator of “The Last Great Tax Saver Software” Call to get a Free Trial!

    Richard:

    You didn’t exactly state that the product was going to be a poor choice in Canada but just said that IUL was a poor choice for a consumer. Based on the fact that you were not exactly correct about how the crediting works in the US IUL products as well as how tax advantaged the product can be in the US, to write a critique on a fictional product that is yet to be released in Canada by lambasting a product that does exist in the US without totally understanding how the US product works and how it is taxed is a bit of a stretch.

    I admit that I am not entirely familiar with the taxation of life insurance products in Canada and until I do I won’t be writing about any Canadian insurance products. If it isn’t tax advantaged in Canada as it is in the US when and if it is released than it may not be a good choice for consumers as a competitive savings vehicle. If UL, GUL, or Whole Life are a good fit for estate planning , than a competitive Guaranteed Death Benefit and Guaranteed Premium GIUL could possibly be an excellent product for that purpose as well. But until that product actually exists I won’t comment any further on it.

  6. Richard Proteau
    Founder Financial Services Consumer Alliance
    Top Contributor

    Ronald, Louis, I believed that the title of my text was clear but it seems it is not. Consumers in Canada still can’t figure out why they always pay more than their southern cousins (you would be horrified by the cost of our cell plans…) and why they only get substandard products… in Canada, universal life policies cash values are taxed but this tax is hidden and represents about .75% MER… but this is not disclosed to the client. From what I understand in the US, if a policy is surrendered the taxable portion is the cash value less premium paid (I may be wrong). In Canada, the value of the premium paid is reduced by the sum of the Net Cost of Pure Insurance which that after 10 to 20 years the cash value becomes fully taxable and i could go on and on…In Canada Variable Universal Life without guarantee is sold as insurance without any requirement for the disclosure of risks. Not the case of the US. Considering the complexity of the IUL and the risk involved, no this the Canadian market would not be ready. Also i would be preoccupied about whether the options market in Canada which is very small compared to the US would constitute another source of risk.
    Finally I don’t agree with your statement that the ability that the insurer has given themselves to change the guarantee is irrelevant because they have not substantially lowered it in the past. If this was true, then why do they need such a provision considering that the insurer can take a lot more risks than the policyholder.

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