Caps on Upside
All insurance companies impose a cap on IUL's equity index returns, these caps typically range from 11% to 14%. However, I found one company offers a 2-year point-to-point cap of 50% which literally means not much cap on the market performance's upside.
Risk of Policy Lapse
If the underlying equity index has a negative year, IUL will have 0% return. Granted, this is better than a negative return, but it hurts because the IUL policy still incurs costs such as cost of insurance, insurance company administrative costs, etc. A few stock market negative years in a row, if you don't add cash to IUL, the policy face the risk of lapse.
The biggest complaint about IUL (or any permanent life insurance products) is its costs. However, you really need to see the numbers to judge if the costs are high or not. Generally, there are three major cost components of an IUL product:
- Premium cost: it's typically a percentage of your premium payment. This is an one-time expense
- Cost of insurance: in the end, IUL is an insurance product, so it has insurance cost. But surprisingly, its cost of insurance is really not very high at all.
- Insurance company overhead: such cost is usually the deal breaker - because it usually starts with very high number, but if you keep the policy for more than 10 years, this cost will go down quickly and significantly.
There are several dozens of insurance companies offer IUL products, some are good, but some are bad (for example, higher costs, lower caps). The best way to find the right IUL product is to work with an independent agent who can cross compare different IUL products and find the best one for you. Please contact us if you are interested in seeing how the numbers look like for your situation.
In our next blog post, we will take a look at the common comparison between Buy Term and Invest the Difference and IUL.