In our last blog post, we discussed two major advantages of IUL - tax advantage and collateral feature, now we will look at IUL's costs.
In order to show a product has high cost or not, we need to use a benchmark. We will use the typical 401(k) account's expense as a benchmark because both IUL and 401(k) serve the same purpose - to create supplement retirement income.
401(k) Costs
Many people think their 401(k) has low or even no cost. Wrong!
We have discussed 401(k) account's costs previously here, there are several books with extensive discussion of the 401(k) industry and the hidden expenses - see Andy Tanner's 401(k)aos (5 stars at Amazon) and David Loeper's Stop the 401k Rip Off.
Typical annual fund expense could run from 0.25% to 1.5%. People tend to forget about 401k costs because its cost pattern is starting small and growing big later on. For example, at 0.5% expense ratio, an account with $100,000 value has annual expense only $500. However, when the account value grows to $1,000,000, the annual expense would be $5,000!
IUL Costs
IUL has 3 major cost components:
In Summary
If we add up the total costs, 401(k), or other regular investment account's total expenses are almost always much higher than IUL's total lifetime expenses.
In our next blog post, we will run back date testing to compare IUL's historical performances against index performances.
If you are interested in a comparison that is tailored to your situation, please contact us, we can run any scenario based on your specified assumptions, and you will be surprised by the results!
In order to show a product has high cost or not, we need to use a benchmark. We will use the typical 401(k) account's expense as a benchmark because both IUL and 401(k) serve the same purpose - to create supplement retirement income.
401(k) Costs
Many people think their 401(k) has low or even no cost. Wrong!
We have discussed 401(k) account's costs previously here, there are several books with extensive discussion of the 401(k) industry and the hidden expenses - see Andy Tanner's 401(k)aos (5 stars at Amazon) and David Loeper's Stop the 401k Rip Off.
Typical annual fund expense could run from 0.25% to 1.5%. People tend to forget about 401k costs because its cost pattern is starting small and growing big later on. For example, at 0.5% expense ratio, an account with $100,000 value has annual expense only $500. However, when the account value grows to $1,000,000, the annual expense would be $5,000!
IUL Costs
IUL has 3 major cost components:
- Premium cost: each year, when you pay your premium, you will incur, typically 6%, premium costs. If you don't pay premium, there will be no premium cost.
- Cost of insurance: surprisingly, the Cost of Insurance is not as high as people normally expect. For instance, in the same example, the person's cost of insurance at age 65 is $2,070.
- Insurance overhead costs: this component has high initial costs, especially during the first 10 years, then will drop significantly over time. For example, for the same person we discussed, at age 35, the annual overhead cost is $1,265, and at age 65, the cost will be only $113.
In Summary
- 401K (or any other regular investment accounts)'s costs start small, but grow over time to very high levels.
- IUL's costs start high during initial years, but decreases over time.
If we add up the total costs, 401(k), or other regular investment account's total expenses are almost always much higher than IUL's total lifetime expenses.
In our next blog post, we will run back date testing to compare IUL's historical performances against index performances.
If you are interested in a comparison that is tailored to your situation, please contact us, we can run any scenario based on your specified assumptions, and you will be surprised by the results!
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