One of the main questions in the decision tree is something like this: Do you have children or a spouse who depends on your income and would suffer financial harm in the event of your death?
Many people buy life insurance looking to be fiscally responsible and to protect loved ones.
The problem is that some types of life insurance are exceedingly complex. And many of those offer high commissions to salespeople.
So well-intentioned folks can get lured into policies that are not in their best interest due to the incentivized marketing and sales practices of the insurance industry.
Clark recommends level-term life insurance policies for specific amounts of coverage. And with companies that are well-positioned financially in the long term.
Is Indexed Universal Life Insurance a Good Option or a Scam?
What about indexed universal life insurance? Is that an acceptable type of life insurance? Or is it the type that makes Clark flustered?
That’s what a listener recently asked Clark Howard.
Asked Albert in Mississippi: "I have recently seen tons of advertisements for Indexed Universal Life Insurance policies. I tried doing research into them, but I'm just met with the same barrage of advertisements and videos.
"Are they a scam or something to actually invest into?"
Universal life insurance is a form of whole life insurance. These policies include built-in cash value which earns interest based on the current market or minimum interest rate, whichever is greater. Universal life insurance has an investment element.
These are complicated products. You can delve deeper into indexed universal life insurance (IUL). For this article, we'll focus on Clark's opinion of the product.
“Universal life insurance is a con job on the American people. It is considered to be a legal product, but it is unadulterated garbage,” Clark says.
“This is a horrific product that is only pushed because of the enormous, humongous, extreme commissions that the agents earn selling them.”
The Downsides of Indexed Universal Life Insurance
Be wary of marketing or salespeople trying to convince you to pay for something that you don’t understand. Blind trust can harm you in that situation.
“The indexed universal life is the latest flavor that the insurance industry is pushing,” Clark says. “And the idea is, ‘What can possibly be better than this? You get the returns of a stock market index without the risk of losing all your money!’ That’s how it’s pitched.”
Downside protection — capping how much money your investments can lose in a given year — is that juicy piece of the puzzle designed to lure prospective customers.
Salespeople won’t emphasize the following negatives, which Clark is happy to underline:
- Stock market collar: "What they don't tell you is you don't get the return of the stock market. You only receive a portion of the return of the stock market in a good year."
- No dividends: "You don't get what is perhaps equally as important as the rise of the stock market over the years. You don't get the dividends."
- High fees: "What you get in return is ultra-high expenses in the indexed universal life."
- Tax risk: "The tax treatment is questionable. With a universal life policy of any flavor, if the policy does not perform as expected, you can end up with a tax time bomb. And capital calls. Meaning you have to come up with big money. Or your policy can be wiped out."
Keep Your Insurance and Investing Separate
Clark wants you to separate your investments from your insurance.
Insurance companies, banks and bank-affiliated brokerages are the three places Clark says you should never invest.
“The craziest thing of all is generally people looking at [universal life insurance] are not maxing out other tax-free ways of saving money. Not tax-advantaged, potentially, but tax-free,” Clark says.
“Like ultra-low cost Roth IRAs and employer-provided Roth 401(k)s. Even index funds in a regular investment account will usually outperform net of taxes what you would have in one of these junky universal life policies of various flavors.”
If you need life insurance to protect your family, Clark says, consider term life insurance rather than any type of whole life insurance.
“Because the only winner when you do that is the high-commission salesperson that conned you into buying the trash,” Clark says.
Final Thoughts
If an insurance person is aggressively selling you on any type of life insurance, chances are it’s a high-commission product that will benefit them, not you. Avoid mixing insurance and investing. And if you want to protect your family with life insurance, consider level-term life insurance instead.
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