IUL Insurance: Recession-Proof or a Risky Bet for Your Retirement?
NerdWallet's Smart Money Podcast
This episode of NerdWallet's Smart Money Podcast examines indexed universal life (IUL) insurance, exploring whether it truly offers 'recession-proof' retirement benefits or poses significant risks. Hosts Sean Pyles
Key takeaways
- IULs are complex permanent life insurance policies with cash value components that can grow based on market indexes but are not guaranteed to do so.
- The 'zero-percent floor' does not guarantee protection against losses; policyholders can still lose money due to fees and poor performance.
Main topics
- Indexed Universal Life (IUL) Insurance Basics
- Cash Value Growth and Market Index Ties
Notable quotes
'The worst happened' — that's when life insurance pays out.
'You can't have your cake and eat it too' — but IULs try to offer both death benefit protection and investment growth.
Conclusion
While indexed universal life insurance may offer some benefits in rare, specific
Transcript preview
Speaker 1 (0:00) Today's episode is brought to you by Vinted. Sean, Speaker 2 (0:02) do you have clothes in your trunk that you've worn but have no idea what to do with? Speaker 1 (0:07) You know what? I do not because my car is super clean right now. But I'm betting that you do, Elizabeth. I Speaker 2 (0:13) sure do, Sean, unfortunately. And I've been wondering what to do with these clothes. And then I found out about Vinted. So they're like this secondhand marketplace app. And their mission is to make secondhand your first choice. Speaker 1 (0:26) Yeah, Vinted helps their members find great deals and easily sell the clothes they no longer wear. And that helps give quality items a second life again and again. Speaker 2 (0:35) And it helps the planet too. And we care about the planet, don't we, Sean? We Speaker 1 (0:38) do. Well, Elizabeth, whether you're clearing out a bag of clothes in your trunk that's been sitting there for months and months, or you just have pieces in your closet you don't want anymore, Vinted makes it super simple to refresh your wardrobe, earn extra cash, and give your clothes a second life. Plus, there are no seller fees, so you keep what you earn from every sale. And Speaker 2 (0:56) also, the app is free to download. I think that's a great perk. Speaker 1 (1:00) Vinted makes listing items quick and simple. And once an item sells, Vinted creates a prepaid shipping label for you, which takes out a lot of the burden of sending your items. See Speaker 2 (1:08) what's hiding in your closet or like me, your trunk. And you might be surprised how much you can earn with Vinted. Download the Vinted app for free to start listing with absolutely no seller fees. Speaker 1 (1:19) Hey, smart money listener, you could win a $250 Amazon gift card and help improve our show. Speaker 2 (1:24) We're inviting you to take our annual listener survey. It's shorter than last year's and could bag you a sweet grand prize. We're giving away not one, but two $250 Amazon gift cards. To Speaker 1 (1:35) participate, just visit nerdwallet.com slash podsurvey or check out the link in the show notes and submit the form by September 30th for a chance to win. Official rules are at nerdwallet.com slash podsurvey. Good luck. What if an insurance product could make sure your family is taken care of after you're gone and provide guaranteed investment returns while you're alive? Well, if that sounds too good to be true, you might just be right. Speaker 1 (1:59) Welcome to NerdWallet's Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius nerds. I'm Sean Piles. And Speaker 2 (2:06) it's me again, Elizabeth Ayola. Our question this time around comes from someone named Jess. Here it is. What are your thoughts on indexed universal life insurance? And how do you think about that in terms of incorporating it into retirement planning? Do you think it's something a mid-30s high-income couple should get? What are Speaker 1 (2:25) the pros and cons? Thank you, Jess. And joining us to answer Jess's question, we have NerdWallet insurance writer, Elizabeth Aldrich. Elizabeth, welcome to Smart Money. Thank Speaker 3 (2:33) you. I'm excited to be here. Speaker 1 (2:35) So we have two Elizabeths whose last names both begin with A. Two EAs here. This could get a little confusing. Does one of you want to go by Liz for this conversation just to keep things simple and easy? Speaker 2 (2:46) Elizabeth, does anybody call you Liz? I go by both. How about you? I go by both too. How are we going to do this, girl? EA, Liz, Elizabeth, Eli, Beth. I don't know. What are we going to do? Speaker 1 (2:58) Battle of the Elizabeths. Speaker 3 (2:59) I could go by Liz. I can also go by Lizzie. Sometimes I go by that. So that's less confusing. I Speaker 1 (3:04) love Lizzie. I like Lizzie. Let's Speaker 3 (3:05) do Speaker 1 (3:05) that. Speaker 3 (3:05) Okay. Let's do Lizzie. Speaker 1 (3:06) Well, Lizzie, thank you for joining us on Smart Money. Let's set some groundwork to start here. Lizzie, can you describe what indexed universal life insurance is and how it works? Because it's one of the more jargony terms in the personal finance world. Speaker 3 (3:19) It's a pretty complicated product. So I'll just zoom out and start broadly. An IUL is a type of... permanent life insurance. That's an umbrella term. There are two main types of life insurance. You've got permanent life insurance and term life insurance. Term life insurance is the most common type. It's what most people have heard of. It's temporary coverage. So it lasts for 10, 20, 30 years, depending on the term that you choose. So for example, if you buy a million dollar 20 year term life policy, then that policy lasts for 20 years at the end of the 20 years, unless you renew it or buy more coverage. your policy expires and you no longer have life insurance coverage. It works a lot like other forms of insurance. It only pays off if you need it and you kind of hope that you don't need it because that usually means something bad happened. Speaker 1 (4:08) Especially in the case of life insurance. Speaker 3 (4:10) Exactly. That means the worst happened. It's really just there to offer risk protection. And for most people, that's fine. That's enough. They only need risk protection and they only need it temporarily because in 20 or 30 years... their kids are going to be grown up and hopefully financially independent or they foresee their mortgage being paid off. They don't think that they'll still need that life insurance protection. Speaker 2 (4:35) Well, I used to have permanent life insurance, Lizzie. Tell us how that works. Give us a breakdown. Speaker 3 (4:40) Permanent life insurance, as it sounds, is designed to be permanent. It's designed to last your entire life as long as you pay the required premiums. So whether you die when you're 40 or 95. your family, loved ones, or beneficiaries are going to get that life insurance payout. It's generally quite a bit more expensive than term life insurance because of that. But for some people, that lifelong coverage is important. They might have lifelong dependents, maybe. a child with disabilities that they want to continue to be able to provide for throughout that dependent's life. Or maybe they have a lot of extra money and they want to leave an inheritance for their family. Well, Speaker 1 (5:18) another key component of permanent life insurance is the cash value that it can have. Describe how that works. Most Speaker 3 (5:25) permanent life insurance policies have a cash value component. And part of your payments that you're putting into that life insurance policy are going to a cash account that earns interest, ideally grows over time and can come with some tax advantages. If you build up enough cash value in your account. you can borrow and withdraw money from it within certain terms. So you kind of get to have your cake and eat it too. People don't always like the idea of paying into a policy for life insurance when they're never going to get to use the money because it only pays out if you die. So this cash value component is really attractive to those people because they get the death benefit that goes to their beneficiaries after they die, but they also get this cash account. that they can use to access some liquidity while they're alive. And Speaker 1 (6:15) this is where things can get kind of complicated too, because if you do take a loan out, that could reduce the potential death benefit. Speaker 3 (6:21) Yes, exactly. So there are definitely risks involved with this cash value component. You know, in theory it grows, but it doesn't always grow. And if you're taking out a lot of money, that can come with risks like a decreasing death benefit and other risks we'll get into like potential tax risks. and the Speaker 2 (6:40) potential to drain your life insurance policy. The cash value is what lured me in, honestly, but I signed up for this life insurance policy before I knew anything about investing, but I know we're going to get into that later. All right, now going down this insurance rabbit hole, Lizzie, can you explain how universal life insurance fits in