I've been called "Anti-IUL" many times. Even though I'm not a fan of IUL whatsoever, I'm actually not anti-IUL. I'm Anti-Misrepresentation. I'm Anti-Deceptive Marketing. I'm Anti-Lack of Disclosure. All of these things represent the current sales environment of IUL, resulting in thousands upon thousands of people committing large amounts of their hard-earned money and betting their financial future on something they don't understand and don't have all the facts about.

Can IUL be appropriate for some people? Maybe. At the end of the day, it's just a tool. Like a hammer. But you wouldn't market a hammer to do something it was never intended to do right? You wouldn't tell someone that they can bake a cake or make a salad with it right? Yet, that's exactly what's happening with IUL right now.

It's being sold as this magical financial product that's going to get all of this upside potential in the market with none of the downside risk, it can never lose money, it's going to compound at 8-10%, it's going to provide incredible amounts of tax-free retirement income, and even provide long-term care benefits with a legacy death benefit for your loved ones. Sounds like an amazing product right? Wall Street and every major institution should be lining up around the block to get this thing. Heck, even the life insurance companies that sell these IUL's should be using them themselves! Except that's not the case. Why? Because the success of an IUL exists primarily on the illustration, not in reality.

IUL is built on an Annual Renewable Term Chassis. It's basically a 1 year term policy that renews every year for the life of the policy. What does that mean? That means your cost of insurance increases every year, exponentially once you get to your 60's. Why? Because every year that passes, your chances of passing away increase. To compensate for this additional risk to the life insurance company, they increase the cost for that 1 year term accordingly. It makes sense and is based on actuarial science.

However, this can turn into a disaster for the policyholder, usually during retirement, if you're not careful because if your policy does not have enough cash value to cover the cost of insurance, you will get a bill from the life insurance company to pay additional premium, usually in the thousands of dollars, or the policy will lapse. And if the policy lapses, not only do you lose everything you've ever put into the policy, you lose your coverage AND could incur a massive tax bill if you've been taking "income" in the form of policy loans.

To really see this in action, ask any life insurance agent how much it would cost to renew a 10-30 year term policy after it's expired. The cost is astronomical when you get older, which is why most people never renew it. The cost literally goes from a few hundred bucks per year when you're in your 30's, to thousands, sometimes tens of thousands of dollars per year when you hit your 60's and beyond. This is what IUL is built on.

IUL agents often completely disregard this risk and even claim that your cost of insurance actually goes down in an IUL as you get older because of something called Net Amount at Risk, which we'll get into next. But know that these are two very different things and that your actual cost of insurance increases exponentially as you get older and can produce serious problems within the policy if not managed correctly.

What is Net Amount at Risk (NAR)? To put it simply, it's how much of the life insurance company's money. It's calculated by subtracting the current cash value from the amount of death benefit. For example, if you have a $1 million death benefit and $600,000 of cash value, the NAR to the life insurance company is $400,000 (1 million - 600,000). This is the amount of life insurance that you're actually charged for every year. So, you might have a $1 million death benefit, but that's not the amount of death benefit you're paying for every year, since you have $600,000 of cash value, which supports the death benefit. You're only being charged for whatever the NAR is to the life insurance company (in this example, $400,000). This means that your cost of insurance is only applied to the $400,000.

This is why IUL agents will make the claim that cost of insurance (COI) in an IUL isn't an issue as you get older because as your cash value grows and the corridor between your cash value and death benefit gets smaller (meaning your NAR is shrinking), then the costs to you get lower. The problem with this is if the policy does not perform close to what was originally illustrated, which is what needs to happen in order to shrink the NAR, then the NAR could be much higher than anticipated as you reach retirement age, thus resulting in much higher COI charges, and if not managed, could lead to a policy lapse.

Fortunately, the death benefit in an IUL can be manually lowered if needed in order to reduce your NAR. But doing this just means that the policy has significantly underperformed and now won't provide anywhere close to the amount of "tax-free retirement income" that was originally promised, not to mention you're reducing the amount of legacy you pass on to your loved ones. In short, for an IUL to work, you have to manage the NAR like a hawk. Otherwise, you can get into a lot of trouble during your retirement years if you're using it for income.

This is a HUGE problem with IUL companies right now and is one of the most misleading and deceptive aspects of IUL in my opinion. As you probably know by now, most IUL's have what's called a cap rate. To keep it simple, let's assume our IUL has a cap rate of 12% and the S&P 500 goes up 20%, we would earn 12% of that (minus costs, fees, etc.). You might think 12% isn't bad since you get the downside protection right?

The problem is that most life insurance companies use these high cap rates to make the policy look really good on the illustration, only to significantly reduce your cap rate shortly after you buy the policy. This has a MASSIVELY negative impact on the long-term performance of the policy. But it doesn't stop there. It gets worse.

While the life insurance company lowers the cap rates of current policyholders, it comes up with "new" IUL's and markets the higher cap rates to new policyholders once again. So, while you're 3, 5, 10 years into the policy and your cap rate has gone from 12% to 7% or 8%, new policyholders are getting the original 12% cap or higher. But they too will soon become a victim of this extremely deceptive marketing practice.

But next time you talk to an IUL agent who's trying to pitch you on high cap rates, ask them what the cap rate is for current policyholders and see what they say.

This is a perfect transition from talking about cap rate integrity because the cap rate is just one of the many aspects of an IUL that the life insurance company can change to manage its risk, usually at your expense. It's exactly why "policy design" has far less to do with the performance of an IUL than what agents claim.

But before I explain why, I want to be clear that policy design is important. If an IUL is going to have any chance at all, it absolutely must be designed AND funded correctly. With that said, here's the question I pose to every IUL agent that talks about the importance of policy design, "What happens to your policy design when the life insurance company changes cap rates, participation rates, spread charges, etc.?"

The answer is it goes right out the window. You could have the best IUL policy design in the world. But as soon as the life insurance company starts adjusting things in order to manage its risk, for example, lowering your cap rate from 12% to 8% over the course of however many years, it does not matter how well the policy is designed.

So, while policy design is important, don't be fooled into thinking it's the saving grace of IUL. The decisions of the life insurance company have a far greater impact on the long-term performance of your policy. And we've already seen an example of one of those common decisions and it's not good for policyholders.

Want to be an Options Speculator? No? Are you sure? Because when you buy an IUL, that's exactly what you're becoming. Here's how.

The I in IUL stands for Indexed. This represents the interest crediting strategy of this version of Universal Life insurance (which has a HORRIBLE track record by the way). Essentially, it offers limited upside market potential without actually being invested in the market. How do they accomplish this? With options contracts (sometimes futures contracts).

The life insurance company takes your premium, minus costs, and puts that into their general fund. That general fund generates a return, usually close to what the Moody's corporate bond index generates since bonds make up a very large portion of the general fund's investments. The return that's generated is then used to purchase options on your behalf (as opposed to passing that return back to you as part of a dividend like with whole life insurance). This is known as the options budget.

There is also a cost to purchase those options and that cost will fluctuate based on supply and demand, as well as market volatility. The higher the volatility, usually the higher the cost for options. This is why using a stock index like the S&P 500 to illustrate the potential performance of an IUL is very misleading because:

So, when you factor all of those things into the equation, how on Earth can you predict (illustrate) with any reasonable amount of accuracy how an IUL is going to perform long-term based on a stock market index? The answer is: you can't. It doesn't make any sense because you can't predict what the options budget will be and you certainly can't predict what the long-term cost of options are going to be. So again I ask, do you want to be an options speculator? If the answer is no, then you might want to reconsider buying an IUL.

As a side note, this is also how they're able to offer downside protection since if at the end of the options contract, there has been no gain, then the options will just expire worthless, so all that was lost was the money used to purchase the contracts.

This is a very important term to understand because it leads to wildly deceptive IUL marketing practices. To keep it simple, it essentially means that you're not paying premium anymore, but a premium is still due. But instead of paying premium out of your own pocket, that premium is being covered by the cash value of the policy.

This isn't really an issue when you're younger because your cost of insurance is very low. However, that premium will always be due and it will get more and more expensive as you get older because your COI is going up every single year, and if you don't manage your NAR, that premium will destroy your cash value and put your policy at risk of lapsing.

The most important thing to understand about Vanishing Premium is that just because you don't see a premium due or being paid on your IUL illustration (hence the word vanishing), that does NOT mean a premium is not due and that your policy is "paid up". Let me be clear. YOU CANNOT PAY UP AN IUL POLICY LIKE YOU CAN A WHOLE LIFE POLICY.

Why? Because of what we discussed earlier. IUL is built on Annual Renewable Term. This means a premium is due every year for the life of the policy. With whole life insurance, it's completely different. A whole life insurance policy can be completely paid off with no premiums due every again. Kind of like paying off the mortgage on your home. You've paid off the mortgage but you still own the home and never have to make another mortgage payment ever again. Try doing that with a home that you've leased (which is what Annual Renewable Term is since you're essentially renting life insurance 1 year at a time). Never going to happen.

It is absolutely astonishing to me how many IUL agents I've heard say that you can pay into an IUL for 5 years and have it be paid up and never have to make a premium payment ever again. This is ignorance (or deception) at its finest.

This is one of the biggest promises of IUL. The incredible amount of "tax-free retirement income" it can create. There are so many problems with this promise. The first problem is that 99% of IUL agents pitch retirement income from an IUL using participating policy loans. The fact that you use a policy loan to create income isn't the issue. The fact that it's a loan is what allows it to be tax-free since it's a loan, not actual income. It's the type of policy loan that's used that creates the problem.

When an agent shows you an illustration showing income using a participating loan, there are two primary issues:

Let's run a hypothetical here (which you should be okay with since everything about an IUL is a giant hypothetical). Let's say you've been taking $50,000 per year in income from your IUL via this participating policy loan feature for 5 years. You now have a $250,000 loan balance at let's say a 5% interest rate. Now let's say that the market tanks 20% because it's long overdue for a correction. You're not concerned because IUL's can't lose money due to market crashes right? That's half true. You don't lose money in the market. But how are you going to cover the $12,500 of interest that year? 5% of $250,000 is $12,500. That's right - your cash value. And this doesn't even factor in the other costs and expenses of the policy! Remember that never-ending and ever-increasing cost of insurance we talked about earlier? Yeah, that's due that year as well!

This is why it's so important to understand how IUL's actually work because these types of scenarios are rarely disclosed to clients and can lead to not just wildly unrealistic expectations, but also devastating financial consequences later in life.

There's no denying that IUL looks really good on paper, especially when you see how much tax-free retirement income it can provide. When you look at an IUL illustration, it looks like the greatest financial product ever created. Unfortunately, IUL illustrations are based on fantasyland, not reality, for a number of reasons.

It shows uninterrupted compound growth. Sorry, but the last time I checked, the stock market has never gone up every single year and never will. Yet agents will have you believe that illustrating at 6.5% every year is "conservative". Yeah, not even close. Not just due to the fact that the market does not go up every year, but remember everything we discussed earlier.

What happens when a policy that was originally illustrated when the cap rate was 12%, but is now only 10% or 8%? How are you supposed to get an average of 6.5% for the life of the policy when you're capped or 8% or 10%? Also, remember that the performance of an IUL has less to do with stock market performance and more to do with the options budget and the cost of those options. So, where is that 6.5% average compound growth coming from? That's a good question!

All of these things were red flags as I learned about how IUL actually works. I quickly realized that these things were being sold based on how good they looked on paper, not what they did in reality. Sorry, but I don't make major financial decisions based on something that looks good on paper. I make decisions based on facts and reality.

If IUL was doing so great for everyone, then why are there multiple MASSIVE class action lawsuits against IUL companies taking place? Why are litigation attorneys on the warpath with them right now? It's because thousands and thousands of people are being financially devastated by this product due to the extremely deceptive marketing practices around it. People are finding out too late that IUL isn't anywhere close to what they were told it was and fortunately, they're seeking restitution.

We see the devastating effects of the work of agents who have absolutely no idea what they're doing, what they're selling, and oftentimes are just repeating to clients what their "upline" has taught them to say in order to get the sale. The majority of the IUL policies we see from people looking for help have absolutely no chance of performing anywhere close to what was originally sold to them and have a high probability of lapsing.

Speaking of class action lawsuits, these fancy "proprietary" or "volatility controlled" indexes are exactly what's landing these IUL companies in hot water because they are some of the most misleading financial products I have ever seen. Imagine being shown an exclusive market index that has produced an average of 8%-12% over the last 30 years, only to find out after you've bought the IUL and allocated your money to that index, that it's only been around for 3-5 years and is averaging 2-4%? Would you be pissed? I know I would. I would also be asking myself how on Earth that's legal?

But believe it or not, that's exactly what these companies are showing with these exclusive types of indexes and is why you should stay FAR FAR away from them. Ask any agent who's pitching a proprietary or volatility controlled index how long the index has ACTUALLY been live and what has been the average return so far. Then come to your own conclusion as to whether or not you want to bet your financial future on it.

Nelson Nash (the founder of the Infinite Banking Concept) is probably rolling over in his grave about this one. Even though he's passed, the Nelson Nash Institute continues his legacy and strongly advises against using IUL for Infinite Banking.

Infinite Banking is an incredibly powerful strategy…when it's implemented correctly. How do you implement it correctly? With dividend paying whole life insurance custom designed for high cash value, NOT IUL!

But this is an important point to bring up because pitching the Infinite Banking Concept is another deceptive marketing practice that agents use to try to sell IUL. Let me clear. Infinite Banking should NEVER be done with IUL! Can you try to do it? Sure. But why on Earth would you do that when it injects so much more risk into the strategy?

How? Simple. It's actually similar to what we discussed in the Tax-Free Retirement Income section. Let's use a real estate example since I currently do private lending within my Infinite Banking strategy. Let's say I borrow $100,000 from my policy to lend on a real estate deal and my policy loan rate is 5%. Since I'm lending the money at 13% plus a point, I'm not too concerned with paying the 5% for the policy loan. In fact, I want to do this over and over again as many times as possible to keep collecting that arbitrage while my money in my policy continues to earn uninterrupted compound growth. So, I'm essentially making money twice and acting just like a bank when they pay us 1% on our savings accounts and then turn around and lend it back to us at 4%-5%.

But remember, IUL does not get uninterrupted compound growth like whole life insurance does because the market doesn't go up every year. So, what happens when I get 0% credit one year because the market is down? Using the example, I've just added an additional $5,000 of interest cost to my real estate deal because my policy didn't grow. I've now done the OPPOSITE of Infinite Banking and have gone backwards with my wealth. With whole life, even though there is an interest cost to the policy loan just like with IUL, it's guaranteed to grow every year plus it gets dividends (which are not guaranteed but have always been paid). So, when I do a real estate transaction with my whole life policy, I have no concerns whatsoever about its performance because I know what it's going to do. I don't have to worry about what the market is doing and how or if it will impact my private banking system at all.

Another reason IUL is horrible for IBC is because of the massive surrender charges that IUL has. 99% of the time, you have access to very little cash value in the first few years, which is what you need in order to implement Infinite Banking! Are there ways to increase the cash value of an IUL in the first few years? Yes, but it usually comes with a pretty big cost that adds more drag on the long-term growth and performance of the policy. Remember, there is no free lunch with life insurance! If you're getting a benefit on the front end, you're giving something up on the back end. So, be very careful with agents who are pitching IBC with IUL.