Wednesday, May 29, 2019

No. 314: Indexed Universal Life Policies—The Views of Two Prominent Professionals About the Risks for Buyers

During the years of The Insurance Forum, and more recently on my blog, I have never written an article about indexed universal life (IUL) policies. I have been asked by many readers to write on the subject, but have not done so. The reason is simple. I have obtained and looked closely at samples of IUL policies. However, I have not understood them well enough to feel comfortable writing about them, and I have always avoided writing on topics I do not understand. Promoters of IUL policies have occasionally said I am too stupid to recognize a good thing when I see it. My response to such promoters is that they are welcome to their opinions.

Recently I have seen articles by two professionals for whom I have the highest regard: Lawrence Rybka and Richard Weber. I have obtained permission from them to share the articles with my readers. Here I introduce the authors briefly. I also show executive summaries and in one instance a few comments from the article. The full articles are in the complimentary package offered at the end of this post.

Lawrence Rybka
Lawrence J. Rybka, JD, CFP, is Chairman and Chief Executive Officer of Valmark Financial Group, which includes a broker dealer, an investment advisor, and Executive Insurance Agency (the nation's first producer group). Valmark serves 120 premier independently-owned and independently-run wealth management/transfer firms in 31 states and has helped place over $60 billion of life insurance death benefits while managing insurance policies with a cumulative cash value of over $8 billion. Valmark's affiliated Registered Investment Advisor, Valmark Advisors, has over $6 billion in assets under management, including about $3 billion in variable sub-account assets within its TOPS funds. He earned his Bachelor's degree with honors in Finance from the University of Akron, and his Juris Doctorate from Wake Forest University.

Richard Weber
Richard Weber, MBA, CLU, AEP, is President and primary consultant for The Ethical Edge, Inc., providing fee-only insurance analytics and consulting services to family offices and high net worth individuals. He holds an MBA from the Haas School of Business at the University of California at Berkeley with a specialty in Insurance and Finance. He served for 11 years as an Instructor of Insurance at the University of California at Berkeley's Program in Personal Financial Planning. From 1993 through 1998, he served as Adjunct Professor of Ethics at The American College. He currently serves as Senior Adjunct Professor of Risk and Insurance in California Lutheran University's MBA program and is on the faculty of Texas Tech University's Personal Financial Planning degree program.

The Rybka Article
The Rybka article is entitled "How to Retire in the Magical Retirement Income Castle in the Clouds," and subtitled "What looks too good to be true, usually is." Here is the executive summary, followed by the first paragraph of the article:
Executive summary: This article examines the use of premium financed Indexed Universal Life (IUL) policies to provide retirement income for clients. It explores the major assumptions in the IUL policies and in the bank loans used to finance them. Most importantly, it reveals undisclosed risks often taken by clients in these transactions.
I recently attended a top meeting in the U.S. life insurance industry. During it, I experienced no less than three sessions where insurance agents shared presentations of major sales they claimed to have made during the year, each of which generated hundreds of thousands of dollars in commissions. All three presentations were variations on the recommendation that clients borrow significant sums to finance the premiums on IUL policies. The proposals showed that the loans would be paid back using projected policy cash values and have plenty remaining in the policy to provide a lifetime income of hundreds of thousands of dollars a year to the policyholder and a multi-million-dollar death benefit at the end. The presentations proposed the clients borrow money from major commercial banks who were willing to lend $2 to $3.5 million to each client over five to seven years to purchase these policies. These proposals are not outliers but part of massive sales efforts by some insurance companies and banks to push products that may be good for them, but carry significant risk for the client.
The Weber Article
The Weber article is entitled "Are You in Good Hands?" It was published as a newsletter on May 14, 2019 by Leimberg Information Services, Inc. The article discusses not only risk tolerance questions in IUL policies, but also risk tolerance questions in whole life policies, guaranteed death benefit universal life policies, universal life policies, and variable universal life policies. The technical editor of the article is Ben G. Baldwin, Jr., CLU, ChFC, CFP. Here is the executive summary:
Long associated within the financial practitioner community for addressing and attempting to overcome policy illustration abuse, Dick Weber began his decades-long exploration of these issues when assuming the Chair of the Society of Financial Service Professionals (FSP)'s Illustration Questionnaire (IQ) Committee. IQ emphasizes that the "illustration is not the policy," and educates its members about the responsible use of policy illustrations. Yet Indexed Universal Life (IUL) products have created new challenges for professionals seeking to apply a customer-focused standard of care to their recommendations for policies designed for a lifetime. IUL is most often characterized as giving owners the best of both worlds by offering investment upside potential, a minimum guaranteed growth feature and underlying life insurance protection. These features, along with the (largely incorrect) slogan "Zero is the Hero" has made IUL the fastest growing permanent life insurance product of the past decade.
Recent regulations intended to moderate the calculation and display of non-guaranteed benefits projected in IUL policy illustrations have largely backfired, inspiring what objectively appear as unachievable promises of future performance. How should insurance and non-insurance professionals react and respond? This newsletter goes beyond just the potential for misusing policy illustrations and delves into the suitability and fiduciary issues of serving a client's best interest.
Available Material
I am offering a complimentary 37-page PDF consisting of the full Rybka article (12 pages) and the full Weber article (25 pages). Email and ask for the May 2019 package about IUL policies.