How Instagram’s New TOS is Like an Indexed Universal Life Insurance Policy

Who do I trust? I trust me. #scarface

Trust me.

“Don’t trust the person who has broken faith once.”
–William Shakespeare

On December 17, 2012, Instagram decided to update its Terms of Service (TOS) and hope that nobody noticed the change. For those of you who are not particularly technically savvy, Instagram is a photo sharing service that enables users to take pictures with their mobile devices and share them through social media. In the update, in short, Instagram told its users that it had the right to sell their images to be used in ads, amongst other things. You can read a more detailed account of what happened here.

Within a day, users had caught on to what was happening and set forth a hue and cry about the new TOS. With over 100 million users, it’s no surprise that someone noticed. The co-founder was forced to make a statement which claimed to resolve the issue:

I’m writing this today to let you know we’re listening and to commit to you that we will be doing more to answer your questions, fix any mistakes, and eliminate the confusion….

To be clear: it is not our intention to sell your photos. We are working on updated language in the terms to make sure this is clear.

However, intent and terms in the contract are two different things. If the terms of service don’t change, then the users who agreed to the new TOS will be stuck relying on the good intentions of the Instagram team to prevent your smiling face from appearing in the next beer commercial.

“He said ‘Trust me’” doesn’t hold up well in a court of law.

How Does This Relate to Indexed Universal Life Insurance?


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First, let me give you a primer on indexed universal life insurance (IUL). At its core, IUL insurance offers both an insurance and an investment component, similar to whole life or variable universal life. You’re supposed to get a certain amount for each payment that you make which goes into the cash value of the policy. With an IUL policy, you’re allowed to have your cash value invested in the market (it’s not really invested there; the life insurance company takes out an index collar instead) through an index fund, usually something like the S&P 500 index.

What makes an IUL all shiny and attractive to Monkey Brain is that there’s a floor, so if the underlying index loses money, your cash value isn’t supposed to lose money. The flip side is that there’s a cap, usually illustrated between 13% and 15% to limit your upside as well. Therefore, if the market gains 20%, your cash value only gains the cap amount. Furthermore, there’s a participation rate, which is simply a factor by which the gain is multiplied before being applied to your cash value. If the participation rate is 100%, then the factor is 1. If the participation rate is 140%, the factor is 1.4, and if the participation rate is 70%, the factor is 0.7.

However, once you dig a little further into the terms of the actual policy, you discover the difference between the “trust me” factor – the illustration of a policy assuming certain factors happen, such as the insurance company never lowers the cap, participation rate, or the interest rate – and the actual terms of the contract.

If you dig into a policy, you’ll find that the insurance companies give themselves a LOT of wiggle room. Oftentimes, the guaranteed caps are MUCH lower, sometimes as low as 3%, the participation rate can be as low as 25%, and the guaranteed interest rate is 2%, not to mention all of the fees and extra charges that they tack on and throw in at page 48 of a 50 page document.

What this means is that you can buy the policy based on the chart porn shown up front, and the next day, the insurance company has the legal right to change many of the terms that you were relying on in the chart porn to their advantage, and you won’t have a leg to stand on when you invariably complain about it, leaving you with a policy that doesn’t serve your interests nearly as well as many other options could.

In a future post, I’ll evaluate an IUL policy and tell you what I think of it, particularly how it held up in afcasting for 139 years (it ain’t pretty).

In the meantime, you can rest assured of one thing: as long as the actual wording in the contracts change, in both instances, you’re relying on someone telling you “trust me” when the contract says something entirely different.

Caveat emptor.

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About Jason Hull

Jason Hull is a Fort Worth financial advisor. Before becoming a Fort Worth financial planner, Jason co-founded, built, and sold a software development company. He is a CFP candidate, has a MBA from the University of Virginia, and a BS from the United States Military Academy at West Point. He is the owner of Fort Worth financial advisor Hull Financial Planning.

Comments

  1. Dana A. Aptaker says:

    Jason, I was my first customer to buy Index Universal life product. Yes I generally buy what I sell. While many of your points concerning wiggle room for companies is true, these products can be configured in such a way as to have very little surrender costs. With that said, a client can just cash in and take his marbles to another game.

    Would be happy to run and illustration for you and then review it with you.

    Dana

    • Hi Dana–

      I appreciate the offer, and I appreciate you coming by to comment!

      I ran the numbers policies from Life Insurance Company of the Southwest, and there is no way I would ever recommend those policies to a client. While, certainly in this case, the surrender costs are brutal, the lack of guarantees in a policy are equally as destructive. In no instance, given the guarantees, did the IUL policy come remotely close to outperforming a buy term/invest in index fund strategy. The results weren’t even close. In the policies I evaluated, the best combination was better than the index/term strategy 17 out of 139 years, and in the worst case, it lost every single year of the 139 that I aftcast.

      If you can show me an IUL that is vastly better than the ones I evaluated from the Life Insurance Company of the Southwest, I’m happy to revise my stance. I promise that a blog post with numbers is forthcoming in a few weeks so I can illustrate how poorly this IUL performed.

      Now, if there’s an IUL out there which can, with the guarantees, outperform, compared to 139 years of aftcasting, a term/index strategy, then I’m happy to change my tune. The whole reason I went through a very rigorous and time-consuming evaluation in the first place was so that I had numbers and certainty behind what my gut told me; it’s the same standard of care that any good planner and insurance agent should go through with their clients. I also showed the agent how I came up with the calculations to ensure that the agent agreed with my analysis, just so I wasn’t blind-siding that person.

      So, if you have the numbers which can conclusively prove that, replete with appropriately rigorous aftcasting, the IUL is superior, please show it to me so that I can properly educate my clients. That would be a great service to everyone, plus it’d be a heck of a PR coup for you, since you’d have the first published analytically rigorous justification of the IUL completely with all of its appropriate data. I looked. It’s not there yet, so this would be an AWESOME marketing opportunity for you!

      Thanks!
      Jason Hull

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