Indexed life insurance and annuities are hugely popular. I suspect they will sorely disappoint their policyholders over the long term. The reason? Well, this is what always happens with these waves of popularity in life insurance.
To understand why indexed insurance will likely be a lemon, you have to understand some history about other insurance products.
Variable Insurance (Late 1990s and Early 2000s)
During this era, variable insurance became popular. That is, insurance where your cash value can be invested in stock funds. Why? In the 1990s investors were making a lot of money in stocks, and regular insurance policies looked boring. The insurance industry’s solution….make an insurance product where the policy is invested in stocks.
People loaded up on it, and then the tech crash came. Policies massively under-performed their projections.
Fixed Universal Insurance (2002 to 2010)
Now that people were weary of stocks, the insurance industry went back to their old standby of fixed insurance. However, their new fixed products (Fixed Universal Life) was just a little different from the old whole-life policies. With the old school policies, you paid a fixed premium and that was it. With these new universal policies, you might have to pay more in the future….but only if interest rates went down for an extended period of time.
But who was worried about rates going down? In 2003 the narrative was that rates couldn’t go much lower.
People loaded up on it, and then 2008 came. Interest rates plummeted. Policies massively under-performed their projections.
Indexed Insurance (2010 to present)
Now that the insurance industry has built up so much credibility, what are they selling now? Indexed insurance is the new popular product. It is based on the stock market. If the market goes up, your policy value goes up. If the market goes down….you don’t lose anything. Isn’t it great?
Head you win, tails you win. Why wouldn’t you want this? (Do I sound like an insurance salesman)
There are several complex situations in which these policies could do poorly, despite their claim to be a no-lose proposition. These policies utilize derivatives on the stock market. If the price of derivatives rises, these policies could do very badly.
….but I’m sure that won’t happen. After all, the insurance industry has such a great track record of taking care of their customers…..
Photo by Kelly Ryer