This Doesn’t Look Like Anything to Me (IULs Part 2)

Daniel YergerFinancial Planning Leave a Comment

It’s rare that writing on finance that I get to do a “part 2”. So many topics are recurring topics that, while bearing repetition, fail to be meaningful to write about. Yet, as the old saying goes “History doesn’t repeat itself, but it rhymes.” This week, we’re reflecting on a year’s worth of improvements to a specific financial product’s market, and the reaction of those grifters in the marketplace who are steadfastly in denial about the whole thing.

Indexed Universal Life

Over the past several years, indexed universal life policies (IULs) have exploded on the financial marketplace. And not in a bombastic and exciting way, but in the figurative sense that they have blown up and gotten a mess everywhere. Because IULs can be sold by anyone who can pass a test that takes about 20 minutes to pass after a day of study (I’d know, I passed it once under those conditions), IULs are particularly attractive to financially self-interested salesmen (the titular “IUL Grifters”), but also to those who want to build sales organizations convincing other people to sell these policies for them (in return for “training and education”, of course.)

Further, because these products are regulated as structured insurance products, the regulators take a “caveat emptor” approach to their regulation. People buying the products are regularly signing massive packets of disclosures and disclaimers that assure the carriers and regulators that they fully understand what they’re buying. In fact, the structure of life insurance policy applications is, in a technical and legal sense, one in which YOU are applying to buy the policy, it is not being sold to you. Thus, when someone buys these policies, the disposition is that you have willingly sought out this product, thoroughly read-reviewed-and-understand what you’re buying, and have willingly signed multiple times that you understand the products.

And to be sure, the products themselves can be useful. They can be valuable risk management tools for the right consumer with the right need at the right time. These products do exist to solve a problem and provide a solution to that problem. Yet, with the rapid proliferation of what can only be described as IUL propaganda, the industry has found itself under rare scrutiny by regulators to be more conservative in how these products are sold. Thus, with the proliferation of new rules tightening up the presentation of these products, some familiar bad actors are… well, in denial.

AG 49-A

No that’s not a serial number. Permit me to bore you with insurance regulation for a moment. The key villain in much of the IUL’s explosive growth as a sold product by unethical actors has had to do with the legalese of how they are allowed to be presented. While generic educational material is not subject to any sort of regulatory oversight, and thus the bad actors have gone wild with creating outrageous claims over the past several years, the actual presentation of an actual and specific life insurance policy is subject to regulation. When you apply for a life insurance policy, you are presented with an illustration showing your expected premium payments, the year by year assumptions as to the performance, function, and costs of the policy, and the long term anticipated outcomes of the policy. This is designed to inform you as a potential consumer what you’re paying and what you should expect to get.

Yet, until recently, this left open a door for a loophole. Unscrupulous insurance agents could propose a strategy in which you would buy the smallest possible life insurance policy, then put as much money into the policy as possible, and then, to magnify the anticipated results of the policy, would borrow money with the policy’s value as collateral and then put that money right back into the policy to utilize leverage to increase the potential returns. This presents a number of specific and problematic sales claims:

  • “Insurance agents get paid more when the policy is a big policy, but look, I’m selling you the smallest policy possible, so it must be because it’s good for you!”
  • “See how this illustration from an insurance company shows you, in writing, how your money will grow?”
  • “These policies cannot lose money due to market losses so even if the market goes down, you won’t lose money from investment losses!”
  • “There are no fees, see the policy has no fees! We’re no-fee advisors, take that!”

And all of that is specifically and problematically true. To a point.

The insurance agent will get a small up-front commission by selling you a tiny life insurance policy, but this omits that not only will your future premium payments trigger more commissions via trails, but borrowing money from the policy that is then reinvested back into the policy also triggers more commissions.

And the illustration shows how your money will grow, if:

  • Returns are stable.
  • Market losses don’t mount over time.
  • If the market isn’t so volatile as to produce negative returns in rare consecutive years so that the interest payments you owe on the money you keep borrowing for the policy don’t overwhelm the rate of return you’re expecting to get.
  • If the insurance company doesn’t unilaterally reduce your maximum return on the policy (which it can do at its discretion).
  • If and if and if.

And of course, the policy can’t lose money from market losses because the underlying investments are just options so at worst, the policy loses the option contract purchase prices and the cost of insurance. You know, the actual life insurance this is all supposed to be funding. And the absence of fees? Well of course there are no fees, because fees are how fiduciaries get compensated, and these are salespeople. Nevermind the cost of insurance, policy expenses, administration and mortality costs, policy issue charges, and so on. Because they’re not called fees, so there are no fees. Right?

So, the outcome of all of these issues is that the insurance regulators issued a serial number. I mean regulation. Specifically, AG 49-A, which limited the presentation of leverage in the illustration of life insurance policies. This limitation isn’t perfect, because it still commits the mathematical sin of presenting a linear and growing liability alongside a linear and growing rate of return, of which only one is actually likely to occur (hint: the one that costs you money). However, it at least capped some of the extravagant illustrations with a moderately more probable outcome.

How are the IUL grifters doing?

Not well! Many of them have continued to present the same “educational” material on buying life insurance policies as an investment vehicle. Many of them continue to advise clients on a daily basis to cash out and pay penalties on retirement accounts, borrow money to fund premiums, and to overfund the policies. Last year I commented that I expected to see a cycle of grief that might arrive eventually at depression and then acceptance, but this entire group seems to have cycled back around to the denial and anger stages of grief, rather than moving on.

Daily, dozens of videos and infographics are shared by these insurance salespeople. They continue to repeat the same claims as before, some completely unaltered despite the fact that they’re showing off “hypothetical life insurance policies” that are so outrageously unrealistic that the regulators would prevent them from running a matching illustration. Many have even taken to engaging in attempting to rewrite history. “This is all because of those awful no good fiduciary financial planners. All these rules are being written because they’re out to get you! And the other rules requiring people advising on retirement accounts to be bound as fiduciaries? Those are also being written to reign in the excesses of those already-fiduciary financial planners! The rule says something about sales compensation? Never you mind, it’s the fees I tell you!”

A famously bad faith take on this even circles all the way around to our favorite famous IUL grifter (subject of the video, not the tweet writer.) Despite the clear disclaimer on the video that it is “from a longer, more detailed live presentation and should not be used or assumed as complete information,” the subject did not hesitate for a moment to say that the document he said was “pretty freaking cool” last year was actually a dishonest and misleading setup by the author, given that it committed the cardinal sin of comparing the real life strategy of contributing to your workplace 401(k) and reinvesting the immediate tax savings of doing so in a Roth IRA, producing not only $229 more per month in investable capital, but also netting out a million-plus dollars of greater lifetime wealth and with substantially lower risk.

But sure, the aggressive IUL grifters are doing fine. They always will be. Because no matter how much the regulators reasonably try to tamp down on aggressive sales tactics, the solution to the problem continues to evade them: Hold people responsible for other people’s money to a fiduciary standard. What a novel concept. It’s only been the legal standard for investment advisers since 1940. It’s only been a CFP® Professional requirement since before I was born. It only makes all the common sense in the world that professionals you talk to about what to do with your money should have to give you advice in your best interest and also at the risk of serious legal penalties if they fail to do so. But for the time being, we’re stuck with a continually inadequate patchwork of regulation that leaves you, the consumer, to fend for yourself. And the worst part is that these IUL grifters are so deeply in denial that they will maintain that because the product exists, and no one is putting them in jail for doing this, it must be fine to sell a single product as the solution for everyone’s financial woes. Heck, it must be great. Because so long as there’s a loophole to jump through, there will always be a risk that an unethical salesperson is going to look to help themselves to your life savings, and until the broader public stands up to say this is wrong, regulators will continue to say “this doesn’t look like anything to me.”

Good luck.

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