 Insurance producers and companies are pushing indexed universal life as the next hot product. But is it? What the insurance company does is tie your cash-value growth into the S & P Index. However, the index provided by the Insurance company does not include dividends because they don't actually invest directly in the S & P Index. What the insurance company does is buy options on the S & P Index. They take part of your premium and hedge against the index. This way they guarantee you a positive return every year. Some of your premium goes into their general account. This is how they guarantee 2 percent return. Then they take some money and buy options so you can participate on the upside of the index. They allow you to participate up to between 12 and 13 percent depending on the carrier. What most producers will do is show you an illustration showing 8.6 percent returns. They will tell you that this is the historic average return on an Index investment. They calculate this average by crediting an account with 2 percent growth for every down year during the last 25 years and by crediting the account withgrowth up to the maximum of 12 percent for every up year ( even if growth was above 12 percent they only credit you 12 percent) so one never loses. This is an unfair comparison and not the proper way to run the illustration. If an insurance producer shows you this product ask for an illustration at 6 percent growth every 4 years and 2 percent growth every 5th year. If one looks back the S & P Index you will see on average in every 10 year period there are between 2 and 3 negative years. This is why buying insurance based on an illustration is a risky proposition. The illustrations don't tell the whole picture so buyer beware. |
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