Life Insurance · IUL

Is IUL Right for You If You Live on a Fixed Income?

By Ali El-Hallani, Principal, Michigan Benefit Services

Maybe someone has told you about IUL. That stands for Indexed Universal Life. It's a kind of life insurance where part of the money inside the policy goes up or down with the stock market (FINRA).

It can work for some folks. But if you live on Social Security or a small pension, it's usually not the best place to start. Here's why, plain and simple.

The price inside the policy keeps going up

Every year, the policy takes out a charge to pay for your coverage. That charge gets bigger as you get older. Wisconsin's insurance department says it plainly: "As you age, the rate of the cost of insurance charge will increase." The company can raise it too, up to the limit written in the policy (Wisconsin insurance department).

Think of it like a bucket with a hole in the bottom. The older you get, the bigger the hole.

You might get a letter asking for more money

If the money in the policy runs low, you may have to pay more to keep it going. Some people found out their policy had ended "with little to no value." Others had to make "large additional premium payments" just to keep it (Wisconsin insurance department).

When your check is the same every month, a surprise bill like that can be hard to pay.

The growth has a ceiling, and the ceiling can drop

Even when the market does great, the policy only gives you so much. That limit is called a "cap." Regulators were shown caps of about 8% to 10%. In one case the cap started at 18% and later fell to 7.5% (handout to NAIC regulators).

The sales sheet may look better than real life

The printout you're shown often pretends the policy earns the same amount every single year. Real life doesn't work that way. One handout given to insurance regulators put it this way: "Policy illustrations are NOT THE POLICY." In one test, about 9 out of 10 policies ran out before age 100 (handout to NAIC regulators).

If it ends, you could owe taxes

If you borrowed from the policy and it ends, you may owe income tax on part of that money that same year (handout to NAIC regulators).

What often works better

Most folks we meet just want their funeral paid for and no bills left for the kids. For that, a simple whole life or final expense policy is often easier. These usually have a payment that stays the same and a benefit that doesn't ride the stock market. Always check the policy to see what's guaranteed.

Ask these 4 questions before you sign for any IUL

• If the cap goes down, what happens to me?
• How much would I have to pay each year to keep it until I'm 100?
• Can I see the numbers using only the guaranteed rates?
• What happens if I miss a payment?

This article is for general education only. It is not tax or legal advice. Policy features, costs and guarantees vary by company and by state.