Whole Life (WL) vs. Equity Indexed Universal Life (EIUL)

National Underwriter (NU) used to do an article each year where it compares the illustrated returns in WL policies vs. the actual returns. It’s our favorite article each year and it’s too bad they are no longer putting it out. The following information is from the last time NU issued the article. It’s very interesting information because the actual rate of return in WL policies going back 20 years is typically 2% LESS than the “illustrated” IRR.

We receive multiple calls each month from whom we call Whole Lifers (WLers). What are WLers? Advisors who have the following characteristics:

1) They use WL as their primary wealth-building tool for clients 2) They know nothing or very little about EIUL 3) They have an uninformed opinion that EIUL is a “new type of policy” without a track record (even though they’ve been around for over 12 years) 4) They don’t know what variable loans are or how beneficial they can be for clients 5) They don’t know about the living benefits offered by EIUL policies (like a FREE LTC benefit)

As a general statement: The following are agents who use the following systems and typically recommend WL, NOT EIUL, as a wealth-building tool: Infinite Banking Concept (IBC) or Become Your Own Bank (BYOB), LEAP system, and agents who are “captive” (or act like they are) at companies that do not offer EIUL policies (Northwestern Mutual, New York Life, etc.).

Why do the above named types of agents typically use WL vs. EIUL?—because they don’t know any better. Why? Because some are lazy (they don’t want to do research), or too trusting (trusting a company, sales system, or IMO/GA that WL is the best/only way to build wealth with cash value life (CVL) insurance).

Offering the best options to clients—we don’t care what type of policy a client buys as a wealth-building tool. What we get upset at is when agents blindly sell clients the same policy (WL or EIUL). We believe clients should be offered both WL and EIUL when discussing life insurance as a wealth-building tools.

The numbers—enough pontificating-let’s get to the historical Internal Rate of Return (IRR) of various WL policies using a 20-year look back vs. what they actually returned:

IRR is not the greatest measuring stick because it simply measures cash accumulation. As you know, the power in using CVL insurance is in the ability to borrow money tax free from the policy in retirement. This is where WL really gets destroyed by EIUL and, specifically, Retirement Life™. WL vs. EIUL for Tax-Free Dollars in Retirement

We used our favorite Retirement Life™ EIUL policy for this comparison. Assume our example client is 40 years old, pays a $10,000 premium each year for 25 years, and then max-borrows from the policy from ages 65-84 (20 years). The following chart shows some of the WL numbers.

(Why National Underwriter didn’t publish numbers on Mass Mutual or New York Life, we don’t know).

How much tax-free income could be removed from an EIUL policy (Retirement Life™) over the same time period using the back-tested rate of return of 8.78%? An incredible $90,846 each year (default crediting numbers we do NOT recommend you use, but they are the default back-tested numbers so we thought we would put them in here for review).

If we lowered the assumed rate of return in the Retirement Life™ policy to 7.00% to make a “conservative” example, you’d think the numbers would be terrible, right? Wrong. The conservative number is $50,365 each year which still destroys the numbers from the WL policies listed in the NU study.

Wake up call—the point of this information is to remind advisors that they should be offering their clients ALL the viable options when discussing CVL insurance as a wealth-building tool (not just blindly recommending WL because that’s what they’ve been told or that’s what a sales system uses). Clients deserve this so they can make an informed decision about which policy to use (WL or EIUL).