If you are considering the purchase of an equity index UL policy for tax free retirement income, make sure you do your homework before making your policy choice. Our firm, MEG Financial, Inc., has recently talked to several potential clients that have been shopping for indexed life insurance and we have discovered that many of the policy illustration projections being shown to prospects are highly aggressive and quite frankly not realistic. Furthermore, we have found that many prospective clients are putting too much emphasis on these "projections" and have not fully reviewed any of the potential downside risks associated with overly aggressive index life illustrations.
An insurance policy illustration is a marketing and sales piece distributed by an insurance company to show how an insurance policy might perform given a certain set of circumstances. Illustrations can be run to show many different scenarios with respect to interest rates, loan rates, premium payments, insurance amounts, etc. Illustrations should be used for comparison purposes only and should not be considered true predictors of policy performance. In fact, in all likelihood, any illustration that is shown will vary significantly from the actual results within the first policy year.
A good example of the inaccuracy of policy illustrations took place in the early 1980's with respect to interest rates and universal life insurance. At that time, interest rates were at all time highs reaching about 18-19%. During this period, universal (UL) life insurance was a very attractive life insurance product. Given the extremely high interest rates, universal life insurance policy illustrations projected significant cash value growth and in some cases projected "paid up policies". For this reason, many purchased these UL policies as savings vehicles that provided financial security and potentially tax free income. As you can imagine, the cash values increased dramatically at the illustrated 14-15% interest rate projections. However, as interest rates declined, the circumstances changed and universal life insurance cash values never reached the illustrated or projected levels. Many policyholders did not understand the impact lower interest rates would have on their UL policies and therefore were shocked when their policies underperformed. Many of these policies eventually lapsed or significantly higher premiums were required to continue the insurance.
Equity indexed life insurance is an excellent vehicle for accumulating cash for retirement income. However, when considering any equity index life policy, our recommendation is to review several illustration scenarios with more than one agent and compare each given the different variables. Only after reviewing the possibilities can you get a true feeling for how these policies may perform. No one has a crystal ball and you should know what to expect given interest rate swings or variations in the returns of the underlying index. If you do your homework and deal with professional insurance agents, you can have peace of mind knowing that whatever happens with respect to your policy, there will not be surprises like most of the universal life policy holders experienced in the 1980's.
If it looks to good to be true.... it probably is.....LET THE BUYER BEWARE!
