The Whole Truth about EIUL Part II
By Todd Langford
Go here for Part One of this blog:
One of the major problems with the agents and the companies that sell EIUL (Equity Indexed Universal Life, which is what it was originally called) or IUL (Indexed Universal Life, which is what the industry is now calling it to avoid SEC scrutiny) is the gross negligence in conveying the risks to the clients. All one has to do is carefully read the full insurance illustration or proposal to find these out.
The insurance companies have avoided liability by spelling out the risks in very specific, albeit, confusing and overwhelmingly lengthy language in the 20+ page illustrations. The only conclusion I’ve been able to make as to why these are so lengthy is in hopes no none actually reads them. Even those that do read them will find them hard to understand. Consequently, clients rely on the agents who either A) don’t understand it themselves or B) don’t convey the risks fully to their own clients or prospects.
Before we begin re-addressing the 10 points, something critical needs to be pointed out about the “earnings assumptions” in the EIUL proposal. Most of the EIUL companies use a 30 to 40 year look-back period to determine an average rate going forward. Pacific Life, the company used by the agent in this discussion, uses a 40 year look-back. That means they are including the highly positive returns in the 80’s and 90’s which skew the averages upward. We also need to remember what “average” means when we speak of market returns. CASH FLOW CALC HERE I know of one mutual company currently illustrating whole life dividends under 7% that could illustrate over 9% if they were allowed to look back 40 years on their own actual dividend paying history as well.
The only “proof” that the EIUL contract works is based on flawed assumptions. The argument that the EIUL illustration performs better than a whole life illustration is not a solid argument because the EIUL is based on the fantasy of the average of the last 40 years in the stock market with out any down years occurring. Whole life illustrations are based on current dividends continuing without any improvement at all. Ask yourself why the EIUL illustrations don’t project current investment rates? And further more why can an agent plug in any investment rate (below a certain threshold) they want on the illustration?
While we are on the subject of returns, another gross misrepresentation of the facts exists around the guaranteed minimum investment returns. Typically, the information conveyed to the client is misleading. For example: if a 2% minimum guarantee is listed, it is spoken of as if this would be a minimum amount of growth the policy would earn per year. That is absolutely untrue. The 2% is the minimum GROSS earnings attributed to the policy but mortality charges and administration costs usually exceed that 2% resulting in a loss of cash value. Yet in the clients’ mind he gets an increase in cash value of at least 2% every year.
Now we have a brief understanding of the differences in how the illustrations GROSS returns are calculated. Yet we have not addressed the fact that the costs inside the EIUL can change drastically at the discretion of the insurance company. So even if the index ran forward at the last 40 year average rate without any fluctuation, it still doesn’t mean the internal costs would stay the same.
MORTALITY CHARGES AND ADMINISTRATIVE EXPENSES
The numbers on the EIUL illustration are not guaranteed in any way. In fact, in 2012, several EIUL companies reduced their caps (the maximum interest rate they’ll contribute to the cash value growth) by more than a full percent. And they did not ask their policy holders if that was acceptable to them before the insurance companies made the change. According to my knowledge, the insurance companies’ software doesn’t even have the ability to illustrate what would happen if the market fluctuated.
What is really unknown in this environment is how devastating the losses might be since they cannot be illustrated. Again, the illustration of an EIUL policy might look good but only a whole life illustration is based on actual current earnings AND guaranteed expenses versus the EIUL which is based on hypothetical returns which look better than current stock market returns and ESTIMATED not maximum, expenses.
Costs exist inside any life insurance policy. The challenge is in understanding these costs and whether they are guaranteed or not. Mortality charges are one piece. In EIUL, they may have a guaranteed maximum, but it is not usually illustrated. Additionally, administrative expenses exist but as with all companies will fluctuate.
The argument from the EIUL agents about the illustration looking better than a whole life illustration starts on faulty ground. EIUL should look a lot better because the whole life illustration is based on the actual current economic conditions which are some of the lowest that have been illustrated in years. EIUL is ignoring these current poor conditions and instead focusing on what the stock market did the last 30-40 years without the reality of the down years which accompanied them.
To address the specific EIUL agent rebuttals which are typed below in italics, I provide the following:
#10- Internal cost have similar guarantees to the whole life design without
dividends. IUL policies have mortality and minimum interest guarantees in
This is a prime example of basic facts being conveyed in a misleading manner. There are guarantees in some EIUL contracts, but they are rarely illustrated on the proposal or policy illustration. A whole life illustration is based on the guaranteed (maximum) mortality charges where as an EIUL illustration is based on current mortality charges which are less than the guaranteed charges that the policy might actually experience. Additionally, a whole life illustration shows guaranteed NET cash value which is a dollar figure, not an interest rate. A guaranteed gross interest rate means nothing when mortality charges and administrative expenses aren’t guaranteed. This is a major difference and “similar” doesn’t mean “the same”.
#9- Mortality charges are guaranteed, however the insurance company uses
their current experience rates if they are more favorable to the
policyholder. Similar to how a whole life policy will pass back to the
policyholder any improvement in pricing through the dividend which is not
The comment in #9 above proves my points made in #10. The word “similar” is used again, yet only exact opposites are stated in the argument in italics. Whole life illustrations are based on maximum guaranteed mortality charges with a credit back if mortality experience is better. EIUL illustrates ideal mortality charges and then takes cash value away if experience is worse. The insurance company will use current mortality charges IF these charges can support the policy AS WELL AS the company’s profitability target. Many times agents dismiss the maximum mortality charges as “not likely” since people are living longer and yet those maximum charges do occur, most often late in someone’s life when there is nothing they can do about it except drop the insurance. Exactly opposite of what should happen, insurance kept until death.
#8- Market drops don’t cause double pain. If the client is fully invested in
the index, the worst that can happen to his account in a negative year is to
stay flat, it doesn’t participate in the loss.
This comment proves my concern stated at the beginning of this article. Agents convey an idea to clients with a statement such as “you don’t participate in the loss” which is completely misleading. The earnings rate may not be negative because of a stated guaranteed floor of 0-2%, yet costs and expenses will cause the cash value to be reduced so there is a loss. Here words put forth by the agent imply that the cash value cannot go down, and yet it can even though the policy didn’t “participate in the loss”.
#7- Late premiums don’t kill guarantees. Some UL policies are designed for
minimally funded death benefit policies. In those type of policies your
premium can impact your guarantees, however in a Maximum Funded IUL policy
there is no impact to the underlying guarantees based on the timing of your
Most guaranteed UL policies have penalties for late premiums regardless of whether they receive minimum or maximum payments. Please check with your carrier to see how they handle late premium payments.
#6- Dividends from the underlying stocks don’t get credited, because the
insurance company is not investing in stocks. They are taking the annual
interest the policy would have earned in the general account and they are
using that interest income to purchase a “put and call” option on a
particular index. (ex. S&P 500). They are purchasing the put on the growth
of the index over a specific time period. This is not a negative.
Puts and calls are all expenses that lower cash value. Insurance companies have to use the additional put and call strategy to protect themselves from large stock market swings. Ask yourself why the insurance companies don’t use this strategy with their entire portfolio?
#5- Participation ratios on IUL are at 100%.
Each insurance company sets its own caps and its own participation ratio and can change them at will without checking with the policy holders.
#4- Returns are capped on IUL contracts based on what the insurance company
can purchase at any given time in the market. In the high quality Mutual
companies that offer the product, their caps range from 12% to 14%.
Each insurance company sets its own caps and can change them at will. As mentioned earlier, many companies lowered their caps in 2012. Ask your carrier what their minimum guaranteed cap is? Again, this is the minimum they would contribute to your policy cash value growth. We’ve seen them as low as 4%. Again, they may illustrate higher caps in a lower market, since there is less risk of having to actually pay it.
#3- Guarantees are calculated annually if the client invests in a one year
index. If they invest in a 2 year index, then they true up at the end of the
second year when the index comes due. In Todd’s example, he illustrates that
in year 2 and 4 the account earns a negative return. In actual practice the
account would have earned a 0% return in those years because it does not
participate in the negative numbers. There is NO negative compounding taking
Remember a gross return of 0% still means negative cash value after mortality charges and administration costs are taken into consideration.
#2- Just like with a Whole Life policy all the numbers after the first
payment has been made are changed by the insurance companies actual
experience. This is not a negative if you are with a well run Mutual
With whole life because the guaranteed mortality charges are illustrated at maximum, changes in mortality expenses made annually can only reflect an increase in cash value, whereas in EIUL changes in mortality expenses made annually could cause a decrease in cash value. Again, there are many aspects the insurance company can change inside EIUL, cap rate, mortality charges, expenses, etc.
#1- The risk is not shifted to the insured, the insured is given a few more
options as to how he would like the company to credit growth to his account.
Any year the insured feels there is to much uncertainty in the market, he
can tell the insurance company to put his account in their general account
and he will know that he will earn their stated rate that year. It doesn’t
have to be all or nothing. He can actually do a blend that makes sense for
Ask yourself why your death benefit isn’t guaranteed to be paid from an EIUL policy? Doesn’t that put the risk on the client’s side rather than the insurance company’s side? In whole life, there is a guaranteed death benefit that will be paid as long as premiums are paid. In EIUL, you could pay premiums and still lose your death benefit. With whole life, there is a guaranteed cash value account, which is the responsibility of the insurance company. With EIUL, there may be a guaranteed minimum GROSS earnings rate, but it means nothing if the mortality expenses and administrative costs are more than the earnings.
One of the ridiculous statements EIUL proponents make is how similar EIUL is to whole life, when in fact, they are complete opposites. If someone wants to buy, EIUL, then help them buy it with full disclosure so they completely understand it. To imply that EIUL is similar to whole life is false. If you want something like whole life, then buy whole life with all of its guarantees.
Do remember, the insurance companies do state each of these pieces of information in the full disclosures contained inside the illustrations. All one has to do is carefully read them (even though it is a major chore) to see that what I have spelled out is the whole truth. Again, I state: either agents don’t fully understand it themselves, or agents don’t fully convey the risks to their clients which leaves clients confused.
Comparing illustration to illustration is not comparing apples to apples. It is easy to make the EIUL illustration look good, the question is, will it look good for your whole life? Since there is no way to accurately illustrate the potential changes, we really don’t know. However, don’t take my word for it. Please read the illustration to get the whole truth and while reading, remember what the illustrations’ numbers are based on: a guess about the future, based upon the AVERAGE (not actual) historical returns over the last 30-40 years.
January 4, 2013
Mt. Enterprise, Texas