Indexed Annuities vs Indexed Universal Life | Retirement Income

The great part about a lot of indexed annuities is the fact that, listen, when you put money into an indexed annuity, you put that money in, sometimes there are bonuses, there are guaranteed roll-ups at higher rates than what they have here, but as long as you allow your money to grow and you allow the insurance company to control it, they're going to give you guarantees a lot of times that will roll up, bonuses that will get you better performance and guaranteed income, but the cap rates that are shown here. Hey, what's going on, Cash Flow Hackers? It's Chris with Life 180, and for this video, we're going to be talking about indexed annuities versus indexed universal life. Now, a lot of people, I think, are confused about the difference between the two, and I think when I talk about indexed annuities and I talk about the fact that I love indexed annuities when utilized the right way in somebody's life, granted they can be absolutely missold like every other financial product. I want to go through and explain why I love indexed annuities when utilized the proper way, why I don't like indexed universal life, and really kind of separate out what is the difference between the two and kind of how you can actually utilize indexed annuities to kind of build a framework of understanding about how indexed universal life is actually going to perform, not perform based on how it's sold to you, but perform based on the actual performance of the indexes themselves and how the indexes work and what the insurance companies are doing to get returns of both indexed annuities and indexed universal life. So let's get into this. What I think is the best way to go here is I'm going to hop to the board here. I'm going to draw some stuff out. So check this out. What I'm going to do is I'm going to do IA for indexed annuity, all right, and I'm going to go IUL, okay? So you can see here for an indexed annuity, a typical good cap rate right now for an indexed annuity is about, let's just call it 4.5%. So think about that. That's a cap rate. That is the most the annuity can do. That's the most. That's the highest. That's the best, right? And so it's saying you got a floor. You can never earn less than zero, but you can earn as much as 4.5%. Now, what do you have in an annuity? You have surrender charges. So if we have surrender charges, I think I spelled that wrong, surrender charges. If we have surrender charges, then in an annuity over time, those surrender charges go down. In an indexed universal life, you also have the surrender, okay? Surrender, boom. So we also have the surrender. And in IUL, that surrender also gets lower and lower and lower over time. So they are very, very common in that respect. But the difference is with a cap rate on IULs, it's between 8% and 11% right now, depending on the company. Granted, you have some companies that offer no cap, and you may have that over here as well as an option for annuities, but I'm going to get into explaining how all that works in a minute. So here's the difference. This is a big function of what I think is important to understand. If you go to any life insurance company, if you go to any life insurance company, what you're going to find is that that insurance company offers an IUL product, an indexed universal life product, and an indexed annuity. And in those two products, they're going to utilize the same indexing strategy for both of them. So think about this. If you have a company, let's just say this is just nationwide, let's just use nationwide as an example. This could be utilized with almost any company doing this, but I'm just going to say nationwide. So you take a company like Nationwide, and you take their index annuity and their IUL, they have the same index strategies available for both of them, but you're going to notice there's a different cap. I haven't looked to see what that cap is, so this is just hypothetical before everybody starts yelling at me. Just know that that's hypothetical. And the cap rate over here, granted, they have a no cap option as well, but you look at it, and these are the options. How is it that they have a cap rate here and a cap rate here with the same indexing strategy that are different? One of the things that I learned is that IUL cap rates at the beginning are utilized as marketing fees. So the cap rates in annuities are lower. Why? Because they know they have to meet those guarantees for income. If you look at the benefits of what index annuities do for you, index annuities actually can be fantastic because certain annuities, I'm not going to get into details with different annuities, but this isn't necessarily a nationwide one. It may be. I haven't gotten into all the nuances of the updated version of it, but the great part about a lot of index annuities is the fact that, listen, when you put money into an indexed annuity, you put that money in. Sometimes there are bonuses, there are guaranteed roll-ups at higher rates than what they have here, but as long as you allow your money to grow and you allow the insurance company to control it, they're going to give you guarantees a lot of times that will roll up bonuses that will get you better performance and guaranteed income, but the bottom line is it's never going to be as high as the cap rates that are shown here in an IUL. And so with an index annuity, I always kind of say, and I got this from Tom Hegna, the only way that you can actually optimize retirement income is by utilizing an annuity because if you think about it, the reason insurance companies offer index annuities and index universal life, the reason they offer annuities and life insurance in general is because the risk to the insurance company is different for each product. With an insurance product, the risk is that you die too soon. With an annuity, the risk is you die or you live too long, so you die too late, right? And so when you look at it from that perspective, the insurance companies, if you really break it down, they're actually hedging their portfolio in their risk management based on the amount of money that they have in each asset. That is a way that the insurance company manages their risk portfolio. It's not all they do, but it's definitely a part of it. And so that's why you'll see certain products when they get released, especially in the annuity space, especially in a market like we're going through right now, insurance companies will release product, that product will sell like gangbusters, right? And when that happens, a lot of times, the insurance company will have to cut off sales of that product because they become overly weighted on the annuity side over here, and it's heavier, and it's too much risk compared to what's going on, and they just need to make sure that they're never taking on too much risk. And in fact, companies that have taken on too much risk on the annuity side got their balance sheet all out of whack and out of balance, right? With annuities versus life insurance when they're foundationally a life insurance company, those are the times that those companies have gotten in trouble. And so that's a big thing to kind of look at. And so here's the deal, let's get back to this. So when it gets to the cap rates, when it gets to all the other components, even if it's a no cap rate, the participation rates, the spread charges, yeah, so cap rates, spread charges, and participation rates. Those are the three things, cap, participation rates, and spread charges. So when you look at those three things, they could be manipulated on all of them. But here's the thing that I want you to see is that if you want to understand how is the IUL going to perform, you need to understand how is the index annuity being sold, right? Because they're utilizing the same index strategy, but they're being sold in a completely different way. The IUL always has higher projections, higher numbers, higher expectations. Why is that? Because the surrender period works differently because the risk to them, you having the money in that account, the surrender charges are much higher in the IUL than they are the annuity. And when you look at it, they know that you're not going to be able to get guaranteed income right away out of the IUL. So they can allow you to have higher cap rates at the beginning. But here's the bottom line. Index Universal Life always is going to lower cap rates over time, right? So we know they're going to lower caps over time to come more into this realm eventually. Now, it may not get down to 4% to 5%, but I've seen products that were sold at 12%, 13% that are now 6.75% in IULs, right? And that is with a top, top, top company. And so when you look at that, it's just kind of scary and misleading that they're utilizing these higher cap rates. So let's look at this 4.5% and let's just say it's an 8.5% cap rate on the IUL. That's a 4% spread, right? A 4% spread difference for the cap rates between the two. That 4% is written off as a marketing expense by the life insurance company. Why? Because they know that they're never going to be able to sustain that. They know that based on what the general fund is doing, what it's doing to create an options budget. And if you don't understand how this all works, I've done other videos on how the general fund creates a crediting amount for the IUL that creates the options budget. The cost of options dictate ultimately how much the cap rates, par rates, and spread charges should be set at. And then when you look at that, that ultimately is what the real cap rate should be. And a guy named Bobby Samuelson at Life Product Review does an amazing job breaking this down. So go check out lifeproductreview.com. But when you look at this, this 8 to 11%, whatever it is above the cap rate, if you go look at the indexed annuity for Nationwide, for instance, if you really want to understand how the IUL is going to perform, go look and see how the annuity is going to perform. That's it. I mean, that literally is all that matters. If you look at that, that's what the life insurance company is actually going to stand behind because it's what they have to stand behind. They're already proving to you. They've shown you what they're willing to back up on a guaranteed basis pretty much. And so that's the great part. So now you can look at this and you look at the cap rates and you go, okay, we know they're going to lower them. We're going to lower them to here. So run them at the rates of the annuity and have that as your expectation, see how it works. And if you're comfortable with that, well, as long as it's funded properly, I still, I think if you look at that and you compare that performance to a whole life policy, and you look at the guarantees in the whole life, and you look at the guarantees in the IUL, you're going to look at this and you're gonna be like, whoa, I'm going with whole life every time. That's why I'm so passionate about whole life insurance over IUL because when you really break this down, it's a no brainer. Now I said I wasn't going to do this, but for all of you who haven't watched my other videos, I'm going to do it right now. I'm also going to do a more in-depth video after, but I think it's important for you to understand why these numbers come and play out the way that they are. And I think it's important to understand that we go, okay, so the IUL has a crediting strategy, right? So you get a credit, right? And the credit is based on the general fund. I'm going to just put GF, so the general fund. So the general fund, we'll go back through. Now, what is the crediting strategy in the IUL? That is whatever the fixed account is, right? If you choose the fixed account option, right? So that's going to be the crediting strategy. So let's just call that 3.5% in an IUL right now. So if you go and you see a 3.5% fixed account, that is what's known as the options budget if you were to choose that, because that's what they know they can get you. So if you have $10,000 in an account and they go, hey, you know that the fixed amount is a 3.5%, all they're doing is they're saying, we're going to take that $350 out of the $10,000 of cash value, and we're going to give you the options budget, right? That's your options budget. You're going to go buy call options, period. Now, so what is an IUL? All an IUL is it's a universal life product using an index, right? Taking the guaranteed crediting money that they would credit your policy anyway, buying call options with it and risking your money. That's it. And if you understand and you read through the illustrations, they will call it not an option strategy typically, some companies do, but most call it a hedging strategy. Why do they call it a hedging strategy? Because if you understand how options are leveraged and used by insurance companies, it's not to go get massive risks. Don't get me wrong. There are some people that trade options, make massive amounts of money, take asymmetric risks to get big windfall returns by betting on huge shorts, by betting on huge calls, and that can get massive asymmetric returns. However, that's not what life insurance companies do. They use options. Options traditionally are utilized as a hedge, and that's why they call it a hedging strategy. And if you understand the term hedge and you look at the illustration, you understand that it's not utilized to give you massive upside potential. The whole conversation about upside potential, downside protection in an IUL was upside potential compared to a traditional IUL. Why? Because that upside potential says, hey, we're going to take this 3.5% that we would really typically credit there, and we're going to give you an index option. We're going to buy the options with it instead, call options, and that's got the potential, upside potential compared to a traditional IUL to get you a better return if the call option comes in. Now, if that option loses, you lose this. So the downside protection means you're not going to really lose the money. The only money you're going to lose is the money that you were going to earn and get credited from the policy anyway. So that's how you have the 0% floor. That's as simple as it gets, y'all. I mean, that's as simple as it gets. And so when you really look at and you understand this concept right here, the thing that I want to warn you about with everybody that's selling these no cap rates, I got news for you. If you're buying an IUL, if you're going to do it, once again, you know how I feel. Don't do it is my opinion. But if you want to do it, make sure you only do a product with the S&P 500. So only index. Don't utilize. I don't care what anybody says. These proprietary indexes are dangerous. That goes for the annuity side and the IUL side. Proprietary index, in my opinion, is extremely misleading and dangerous. However, when you look at the S&P 500, let's think about it. What are the variables? What are the variables? If we were to let's say you have a no cap, 10% cap, although I think that's a little high for an S&P cap right now, the way costs are. And then you have participation rates that can be manipulated. And I guess because of the fact that with the no cap, we're going to put spread charges on here as well. There's the things that we need to think about. So when you look at these things, what are the variables here? We have the S&P 500. So it doesn't matter. Now in the S&P 500, when you look through the illustration, you're going to see there are different options. You have a S&P 500 with a cap rate that has the cap and then the guaranteed minimum cap that it could be lowered to. You have maybe an S&P 500 option with no cap, with a spread charge potentially, and that spread charge may be 7.5% to 10%, meaning the first 7.5% to 10% that the S&P 500 does, you don't get any of that. The company keeps it all. You only get credit above and beyond that. Now it's no cap, but that first 7.5% will be going to the insurance company. On a spread charge, the company has the ability to bump that charge up typically to around 20%. It's pretty gross. Now they may not have a spread charge. They may have a participation rate. Now there may be a no cap with participation rate that's anywhere from 80, 60, something like that to 140%. But the bottom line is they have the ability to reduce that participation rate to whatever. So for instance, 100% participation rate, if the S&P 500 did 20% with a no cap product, that means you would get a 20% crediting. And how they control based on these variables, based on their budget of 3.5%, that creates a $350 budget to buy call options. It doesn't matter what the cap is. The bottom line is you can't draw blood from a rock. And whether it's a no cap, 10% cap, or some other iteration of a cap, if it's the S&P 500 apples to apples, you can't have the no cap and the cap and just the participation rate or any other index perform any different because you're still dealing with the same variables, the same inputs, and the same outputs. And so it's just smoke and mirrors. It's just a way to sell you a different widget, right? It's a way to get you to buy into a story that doesn't really exist because at the end of the day, the options cost and the options budget drive everything, everything. And you need to understand that. This is just a Universal Life product on a platform, right? It's on the Universal Life chassis, right? But it's utilizing an option strategy. And if you don't understand options, you should not do this, period. And if the person that you're working with doesn't understand options, you shouldn't do this. You shouldn't sell this if you don't understand options. If you don't understand all the different variables and how this works, you can't be selling these no cap products as if there's something long term that are going to be massively beneficial because at the end of the day, can't draw blood from a rock. They're going to be able to manipulate and they always do. They will always lower caps here over time to come back to the indexed annuities. Now, once again, I like the annuities because the life insurance has better guarantees for income, right? That's the great part about an annuity with, I can't say no, I'll say horrible, right? IULs have horrible guarantees, whereas index annuities have some really actually phenomenal guarantees. And so you have to look at the two differences between IUL and annuities. And so that is one of the reasons. I guess that is the main reason. I think it's really important that you understand this. If you're looking at index annuities, if you're looking at IUL, if you're just thinking about what product am I looking to acquire, to buy, to save in, to invest in, whatever, to reach my financial objectives, you have to dig deeper. You have to ask third, fourth, fifth level questions. A lot of people, I think, get into this business. They want to help people. They look at stuff on a surface level. I get it. These things look really sexy, really appealing on paper. I drank the Kool-Aid, bought the story hook, line, sinker for three, four years when I first started my career. After a period of time, I realized it was just smoke and mirrors. It was a raw deal, and it was not something that I could ethically and morally get behind helping people. And so I hope this makes sense. If you have any questions, go ahead and comment in the comment section below. If you want, text IUL to 26786. Text IUL to 26786, and I will send you a video that will teach you the ins and outs, the important things to understand about IUL. So that's it. IUL to 26786. Happy to help you out. And comment in the comment section below or email chris at life 180. Happy to help you any way I can. So if you have any questions, just do that. If you haven't already, subscribe, hit the bell that way you're notified every time I launch a new video. And until next time, have a blessed and inspirational day. We'll talk soon.