Quora Answer: Is Indexed Universal Life Insurance a Good Investment?

The following is my answer to a Quora question: “Is indexed universal life insurance a good investment?”

That really depends on how you structure it, and what you use it for.  Firstly, these sorts of plans are better for younger people, because the older you are, the higher the mortality charges for the death benefit.  Parents get it for their children, for example.  One of the advantages for parents, is that it grants a death benefit, as well as, perhaps a disability benefit, as a rider.  Any sort of critical illness or terminal illness rider, however, will eat into the fund growth.  This is not the sort of plan for that.  The policy also functions as a growth vehicle, with allocation to funds of your choice.  This means paying a premium for a two-in-one.  Parents use these plans to have some measure of influence on their children.  They know that there is a policy on them worth a great amount of money, but the policy owner is the parent, not the child.

Secondly, these plans function as a vehicle to hide some liquidity.  This is especially attractive to businessmen.  This is especially attractive in developing countries where the native banks are not very stable.  These plans are bought from insurers in stable markets.  And since funds may be withdrawn, they are liquid.  These plans pay out more than a checking or savings account, and that is very useful.  Funds withdrawn are in the form of cheques, which can be cashed elsewhere.  Structured well, they have a return on investment of above 5%, although the distribution cost eats into that for the first five, or so, years.  The trick is to keep a low regular premium with a high top up.

As can be seen in these short examples, it is an excellent investment, but not necessarily in a way many think it is.