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Say No to This Life Insurance

Date: February 1, 2015      Publication: Bottom line Personal      Source:  James H. Hunt, CFA, Consumer Federation of America      Print:

A type of life insurance policy called indexed universal life (IUL) has soared in popularity, thanks in part to the long bull market in stocks. But the policy may be more of a good deal for insurance companies than for their customers. How it works: The policy includes a traditional death benefit and, in addition, a portion of your monthly premiums is invested in a tax-deferred investment account that typically tracks the Standard & Poor’s 500 stock index. In years when the index falls, your insurer uses financial derivatives to protect you from losses.

The catch? Your insurer caps the ­annual gains on your account and can ­lower the cap…does not credit your account for dividend payments as a mutual fund would…and charges steep sales commissions, fees and other expenses. And because the money to cover expenses is drawn directly from your investment account, the expenses can eat up much of your long-term returns, especially during weak periods for the stock market.

Better: Buy much cheaper “term” life insurance, which pays a death benefit for a specified period (for example, 20 years if the goal is to protect your children until they are adults). Invest the cash you save on premiums in retirement accounts such as IRAs and 401(k)s. ­Alternatively, if you want “permanent” insurance, which does not set a defined period of coverage, and have already maxed out your annual retirement contributions, consider “variable” universal life policies offered by low-cost insurers such as TIAA-CREF or Ameritas Direct. Their policies are sold free of agents’ commissions and give investors the flexibility to invest in equities.

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Source: James H. Hunt, CFA, a life insurance specialist at Consumer Federation of America, a consumer advocacy group, Washington, DC. He is a life insurance actuary and a former insurance commissioner of the state of Vermont. ConsumerFed.org