By Dr. James M. Dahle, WCI Founder
I recently had a life insurance salesman show up in the comments thread of a post I published years ago about not mixing insurance and investing. He thought Indexed Universal Life Insurance (IUL) was the best thing since sliced bread. In support of his position, he posted a link to an article written in 2012 by Insurance Agent Allen Koreis in 2012, entitled “16 Reasons Why Accountants Prefer Indexed Universal Life Insurance” [link no longer available]. I thought it might make for a fun post to debunk these reasons a bit, kind of like my post on Debunking The Myths of Whole Life Insurance. However, first a brief explanation of Indexed Universal Life Insurance.
How Does Indexed Universal Life Insurance Work?
The attraction of IUL is obvious. The premise is that you (almost) get the returns of the equity market, without any risk of losing money. Now, before you fall off your chair laughing at the absurdity of that statement, you need to realize they make a very convincing argument, at least until you look at the details and realize you don't get anywhere near the returns of the equity market, and you're paying far too much for the guarantees you're getting. Basically, if the market goes up, you get some positive return. If the market goes down, you get the guaranteed return, usually something between 0 and 3%. Of course, since it's an insurance policy, there are also the usual costs of insurance, commissions, and surrender charges to pay. The details, and the reasons that returns are so terrible when mixing insurance and investing in this particular way, come down to basically three things:
- Don't Count Dividends – They only pay you for the return of the index, and not the dividends. So if the S&P 500 index fund returns 8%, but 2% of that is dividends, you only get 6%, not 8%.
- Caps – Your maximum return is capped. So if you cap is 10%, and the return of the S&P 500 index fund is 30% (like last year), you get 10%, not 30%.
- Participation Rates – Some policies only give a certain percentage of the change in the index, say 80%. So if the Index Fund goes up 12%, and 2% of that is dividends, the change in the index is 10%. But if your participation rate is 80%, well, you only get 8%.
Add all these effects together, and you'll find that long-term returns on index universal life are pretty darn close to those for whole life insurance, positive, but low. Yes, these policies guarantee that the cash value (not the money that goes to the costs of insurance, of course) will not lose money, but there is no guarantee it will keep up with inflation, much less grow at the rate you need it to grow at in order to provide for your retirement.
Indexed Universal Life Insurance ‘Benefits' Debunked
Universal Now, on to Mr. Koreis's 16 reasons:
#1 You Can Never Lose Money
An indexed universal life policy account value can never lose money due to a down market. Indexed universal life insurance guarantees your account value, locking in gains from each year, called an annual reset.
That's true, but only in nominal returns. Ask yourself what you need to pay in order to have a guarantee of no nominal losses. Would you expect that to be cheap? Of course not. In investing, you get paid to take risk. If you don't want to take much risk, don't expect high returns.
#2 Life Insurance Is Like an IRA or 401(k)
IUL account values grow tax-deferred like a qualified plan (IRA and 401(k)); mutual funds don’t — unless they are held within a qualified plan. Simply put, this means that your account value benefits from triple compounding: You earn interest on your principal, you earn interest on your interest and you earn interest on the money you would otherwise have paid in taxes on the interest.
Unless held in a qualified plan, mutual fund gains are annually reportable and taxable, thus denying an investor the benefits of such three-fold compounding. Although qualified plans are a better choice than non-qualified plans, they still have issues not present with an IUL. Investment choices are normally limited to mutual funds where your account value is subjected to wild volatility from exposure to market risk.
There is a big difference between a tax-deferred retirement account and an IUL, but Mr. Moreis doesn't mention it. You invest in one with pre-tax dollars, saving on this year's tax bill at your marginal tax rate (and will often be able to withdraw your money at a lower effective rate later) while you invest in the other with after-tax dollars and will be forced to pay interest to borrow your own money if you don't want to surrender the policy. He mixes the comparison a little bit when he starts throwing in mutual fund associated taxes, which of course you don't pay at all in an IRA. Then he throws in the classic IUL salesman scare tactic of “wild volatility.” If you hate volatility, there are better ways to decrease it than by buying an IUL, like diversification, bonds or low-beta stocks.
#3 No Contribution Limits
There are no limitations on the amount that may be contributed annually to an IUL.
Great, I can invest as much as I want into this terrible investment product. That's reassuring. Let's think about this for a second. Why would the government put limits on how much you can put into retirement accounts? Maybe, just maybe, it's because they're such a great deal that the government doesn't want you to save too much on taxes. Nah, that couldn't be it. Apparently that's not a concern with life insurance.
#4 No Age 59 1/2 Rule
Policy owners may access their money from an IUL without IRS penalty regardless of age. Qualified plan withdrawals prior to age 59 1/2 are subject to a 10 percent penalty in addition to being taxed as ordinary income for the year the withdrawal is take.
First of all, this is retirement money. How big of a deal is it, really, that you can't get to it before age 59 1/2? Second, there are so many ways around this rule that it might as well not exist at all.
#5 You Control the Taxes
You control your taxes, not the fund manager. IULs grows tax-deferred, and is never taxed if taken in the form of policy loans. This allows owners to control precisely if, when and how much money will be taxable, depending upon their needs and circumstances.
Mutual fund owners are subject to the fund manager’s annual capital gains distributions whether or not they redeem any shares for additional income. Many equity (stock) mutual funds have turnover rates averaging over 80 percent annually, meaning that management sells over 80 percent of their fund’s holdings every year, replacing them with other stocks (and sometimes even buying the same stocks back after Jan. 1), often in an attempt to beat their category averages.
This is a straw man argument, and one IUL folks love to make. Do they compare the IUL to something like the Vanguard Total Stock Market Fund Admiral Shares with no load, an expense ratio (ER) of 5 basis points, a turnover ratio of 4.3%, and an exceptional tax-efficient record of distributions? No, they compare it to some terrible actively managed fund with an 8% load, a 2% ER, an 80% turnover ratio, and a terrible record of short-term capital gain distributions. What they also fail to mention, of course, is that when you borrow money from your life insurance policy it might be tax-free, but it certainly isn't interest-free.
#6 Mutual Funds Make Distributions Even After Taking a Loss
Mutual funds often make annual taxable distributions to fund owners, even when the value of their fund has gone down in value. Mutual funds not only require income reporting (and the resulting annual taxation) when the mutual fund is going up in value, but can also impose income taxes in a year when the fund has gone down in value.
When the markets take an extended downturn after several years of sustained growth (as they did in 2000-2002 and again in 2008), fund managers will often resort to selling appreciated stocks purchased several years earlier in order to generate gains to offset those losses. This has the effect of minimizing the fund’s published loss-in-value at year end, allowing the fund to claim that it was “only” down, say, 9 percent on the year while its peer group was down an average of perhaps 17 percent.
This is mostly just a repeat of the last (straw man) argument, but it gets a little weird when it claims that a fund manager can somehow disguise a loss by selling his winners. Look, if the fund lost 17%, you can't somehow sell some of the stocks in the portfolio and magically turn that into a 9% loss. That's not how mutual funds work. You can tax-manage the fund, harvesting losses and gains in order to minimize taxable distributions to the investors, but that isn't somehow going to change the reported return of the fund. Only Bernie Madoff types can do that.
#7 Indexed Universal Life Insurance Avoids “Tax Traps”
IULs avoid myriad tax traps. The ownership of mutual funds may require the mutual fund owner to pay estimated taxes. Tax-deferred accumulation inside an IUL does not create the same tax problem. IULs are easy to position so that, at the owner’s death, the beneficiary is not subject to either income or estate taxes.
The same tax reduction techniques do not work nearly as well with mutual funds. There are numerous, often costly, tax traps associated with the timed buying and selling of mutual fund shares, traps that do not apply to indexed life Insurance. Additionally, mutual fund ownership can result in the loss of tax exemptions, tax deductions, and tax credits, and mutual funds (with the exception of those held in an IRA or 401(k)) are usually subject to state and local income taxes in those jurisdictions that have such taxes. These losses do not occur with IULs and, because they grow tax-deferred, IULs are not subject to state and local income taxes during their accumulation phase.
Finally, mutual fund ownership, specifically the annual distributions made by such mutual funds, can subject the fund owner to taxation under the alternative minimum tax. The AMT always results in increased income taxes. Indexed life insurance ownership cannot trigger the AMT in the same manner as mutual funds.
This is mostly scare tactic stuff. Yes, the life insurance death benefit passes to your heirs outside of probate. Yes, if you do not put your taxable mutual fund account inside a revocable trust, it will have to go through probate. Yes, some mutual fund (especially certain types of muni bonds) distributions can cause you AMT issues (just like your regular income does). Chances aren't very high that you're going to be subject to the AMT due to your mutual fund distributions if you aren't without them.
The rest of this one is half-truths at best. For instance, while it is true that there is no income tax due to your heirs when they inherit the proceeds of your IUL policy, it is also true that there is no income tax due to your heirs when they inherit a mutual fund in a taxable account from you. Even better if they inherit an IRA (especially a Roth IRA) as they can then stretch the distributions out over decades, prolonging the tax-protected growth of the account.
The federal estate tax exemption limit is over $10 Million for a couple, and growing each year with inflation. It's a non-issue for the vast majority of physicians, much less the rest of America. There are better ways to avoid estate tax issues than buying investments with low returns.
#8 Mutual Funds Cause SS Benefits to Be Taxed
Mutual funds may cause income taxation of Social Security benefits. The annually reported earnings from mutual funds can, in many cases, cause a retired couple’s income to exceed the thresholds above which up to 85 percent of their Social Security benefits are taxed in their income bracket. The growth within the IUL is tax-deferred and may be taken as tax free income via loans. The policy owner (vs. the mutual fund manager) is in control of his or her reportable income, thus enabling them to reduce or even eliminate the taxation of their Social Security benefits.
This one is great. He's pulling out all the stops now. I'm not even sure this one deserves the description of “half-truth.” It's just sales tactics. While increased income does increase how much of your Social Security is taxable, it maxes out at 85% taxable at just $34,000, including the Social Security benefits. If you don't have enough retirement income to have fully (85%) taxable Social Security benefits, you certainly have no need for the tax benefits of an IUL. Remember that $34K includes half of your SS benefits.
#9 Don't Buy the Distribution
Mutual funds create an income tax trap for individuals purchasing funds late in the year. Because mutual funds must distribute realized gains to fund owners each year, fund companies usually do so in November or December. An uninformed investor purchasing such a fund during the last quarter of the year may place himself at a disadvantage by taking on a partial tax liability for gains which took place earlier in the year which never accrued to his account. An IUL presents no such problem when late-year purchases are made.
Here's another minimal issue. It's true if you buy a mutual fund for say $10 per share just before the distribution date, and it distributes a $0.50 distribution, you are then going to owe taxes (probably 7-10 cents per share) despite the fact that you haven't yet had any gains. So don't do that; buy after the distribution in a taxable account. But in the end, it's really about the after-tax return, not how much you pay in taxes. You are going to pay more in taxes by using a taxable account than if you buy life insurance. But you're also probably going to have more money after paying those taxes.
#10 Mutual Funds Require Complex Record Keeping
The record-keeping requirements for owning mutual funds are significantly more complex. The keeping of excellent records (redemptions, purchases, dates, values, commissions, etc.) is often one’s only defense in the event of an IRS audit. With an IUL, one’s records are kept by the insurance company, copies of annual statements are mailed to the owner, and distributions (if any) are totaled and reported at year end.
This one is also kind of silly. Of course you should keep your tax records in case of an audit. Thankfully, the mutual fund and your mutual fund/brokerage account will do all this for you. All you have to do is shove the paper into your tax folder when it shows up in the mail. Hardly a reason to buy life insurance. It's like this guy has never invested in a taxable account or something.
#11 Mutual Funds Can Go Through Probate
Mutual funds are commonly part of a decedent’s probated estate. Estate funds may be available to any and all creditors of the estate. In addition, they are subject to the delays and expenses of probate. The proceeds of the IUL policy, on the other hand, is always a non-probate distribution that passes outside of probate directly to one’s named beneficiaries, and is therefore not subject to one’s posthumous creditors, unwanted public disclosure, or similar delays and costs. Your heirs receive their insurance proceeds within weeks, not months or years after your passing.
We covered this one under # 7, but just to recap, if you have a taxable mutual fund account, you must put it in a revocable trust (or even easier, use the Transfer on Death designation) in order to avoid probate.
#12 Harder to Get Medicaid to Pay for Your Nursing Home If You're Rich
Medicaid disqualification and lifetime income. An IUL can provide their owners with a stream of income for their entire lifetime, regardless of how long they live. Insurance is often classified so that it is not considered assets for Medicaid disqualification of nursing home costs. This is beneficial when organizing one’s affairs, and converting assets to income prior to a nursing home confinement. Mutual funds cannot be converted in a similar manner, and are almost always considered countable Medicaid assets.
This is another stupid one advocating that poor people (you know, the ones who need Medicaid, a government program for the poor, to pay for their nursing home) should use IUL instead of mutual funds. First of all, poor people don't need to use a taxable account, so all their mutual funds should be in Roth IRAs or 401(k)s. And life insurance looks terrible when compared fairly against a retirement account. Second, people who have money to buy IUL above and beyond their retirement accounts are going to have to be terrible at managing money in order to ever qualify for Medicaid to pay for their nursing home costs. These folks ought to either buy Long Term Care insurance, or preferably, self-insure against this risk.
#13 Terminal Illness Riders Are Valuable
Chronic and terminal illness rider. All policies will allow an owner’s easy access to cash from their policy, often waiving any surrender penalties when such individuals suffer a serious illness, need at-home care, or become confined to a nursing home. Mutual funds do not provide a similar waiver when contingent deferred sales charges still apply to a mutual fund account whose owner needs to sell some shares to fund the costs of such a stay.
Another straw man argument here that actually just reminds the investor about one reason why cash value life insurance sucks (just like the loaded mutual funds used as the straw man)– the surrender penalties (AKA deferred sales charges.) Guess what the surrender penalty is on a Vanguard mutual fund in the event you want to access your money due to a chronic or terminal illness? That's right, it's $0. Yet you get to pay more for that benefit (rider) with an insurance policy. What a great deal!
#14 There's a Death Benefit and You Can't Lose Money
Indexed universal life insurance provides death benefits to the beneficiaries of the IUL owners, and neither the owner nor the beneficiary can ever lose money due to a down market. Mutual funds provide no such guarantees or death benefits of any kind.
Yes, Virginia, when you buy life insurance, there is a death benefit. Now, ask yourself, do you actually need or want a death benefit? I certainly don't need one after I reach financial independence. Do I want one? I suppose if it were cheap enough. Of course, it isn't cheap. On average, a purchaser of life insurance pays for the true cost of the life insurance benefit, plus the costs of the policy, plus the profits of the insurance company. No free lunch. I'm not entirely sure why Mr. Morais threw in the whole “you can't lose money” again here as it was covered quite well in # 1. He just wanted to repeat the best selling point for these things I suppose. Again, you don't lose nominal dollars, but you can lose real dollars, as well as face serious opportunity cost due to low returns.
#15 You Can Do Tax-Free Exchanges
IULs allow the tax-free exchange of one policy for another. An indexed universal life insurance policy owner may exchange their policy for a completely different policy without triggering income taxes. A mutual fund owner cannot move funds from one mutual fund company to another without selling his shares at the former (thus triggering a taxable event), and repurchasing new shares at the latter, often subject to sales charges at both.
Here's another benefit that isn't a benefit. While it is true that you can exchange one insurance policy for another, the reason that people do this is that the first one is such a terrible policy that even after buying a new one and going through the early, negative return years, you'll still come out ahead. If they were sold the right policy the first time, they shouldn't have any desire to ever exchange it and go through the early, negative return years again. And of course, we see the loaded mutual fund straw man show up again. If this isn't crystal clear to you yet, DON'T BUY LOADED MUTUAL FUNDS.
#16 It Costs Money to Rebalance
Mutual funds do not provide cost-free asset rebalancing whereas indexed universal life insurance does. This option is usually available among the major index choices (the S&P 500, NASDAQ, DJIA, Russell 2000, etc.), as well as a fixed interest option, at policy anniversaries. Rebalancing one’s portfolio within a family of mutual funds always requires the sale and purchase of shares, often generating both taxes and commissions.
Here's another one that made me chuckle. So these policies allow you to switch indexes once a year. Instead of following the S&P 500, you can follow the Dow! What a benefit! Never mind that the correlation between these indexes is something upward of 98%. They also allow you to peg your returns to the tech-stock heavy Nasdaq, although it is beyond me why anyone even looks at that index. It's simply a relic of the 90s internet craze. If you're going to use a small-cap index like the Russell 2000, you might wish to pause and consider why a good index fund company, like Vanguard, doesn't have any funds that follow it. The reason is because it's a lousy index. Not to mention that changing your entire policy from one index to another is hardly what I would call “rebalancing.” Cash value life insurance isn't an attractive asset class. Allowing you to change from one lousy index to another doesn't change that.
I haven't even addressed the straw man here yet, and that is the fact that it is relatively rare that you actually have to pay either taxes or significant commissions to rebalance anyway. I never have. Most intelligent investors rebalance as much as possible in their tax-protected accounts. If that isn't quite enough, early accumulators can rebalance purely using new contributions. Middle and late accumulators can generally do it with new contributions and distributions combined with wise use of tax-loss harvesting and charitable contributions, or simply by selling high basis shares. Decumulators can do it by withdrawing from asset classes that have done well. And of course, nobody should be buying loaded mutual funds, ever.
Well, I hope posts like these help you to see through the sales tactics often used by “financial professionals.” It's really too bad that IULs don't work. It would be awesome if they did. But in the end, you're going to end up with returns pretty similar to those of whole life insurance. It shouldn't be a surprise to see that these two products are treated very similarly by regulators. You just can't have your cake and eat it too, and that's the whole idea behind indexed universal life insurance.
What do you think? Do you own a policy? Are you happy with it? Unhappy? What kind of returns have you seen from your policy? Do you think the trade-off of higher returns for the guarantees was worth it? Comment below!
Hello,
I hope you can help me to understand this question. I have had a rollover IRA account with Vanguard for the past 3-4 years, and my wife has an IRA account with Scottrade for approximately the same duration of time.
2 years ago I established an S-corp, where my wife and myself are also the employees. Last year we set up a profit sharing 401K plan with Fidelity. My new CPA told me that I can’t have both solo 401K and rollover or regular IRA accounts. Is that true? if so, what should I do with my regular and the rollover IRA accounts?
Thanks
Arman
You can have a solo 401k plan and rollover IRAs together. In fact, you can contribute to both, though in your case you might want to consider a backdoor Roth IRA contribution which you can do if you roll your rollover IRAs into your Solo 401k plan. I think that Fidelity allows you do that (which is what I would do to get into Fidelity low cost Spartan index funds, since they require a minimum investment of $10k). What does your CPA suggests that you do?
Sounds like you need a new CPA. That’s absolutely not true.
For a typical physician in the accumulation years, you should generally transfer your traditional IRAs (SEP-IRAs, SIMPLE IRAs, Traditional IRAs, Rollover IRAs) into a 401(k) or solo 401(k) in order to be able to do a backdoor Roth IRA.
[Editor’s Note: This comment is posted by an IUL salesman who has used sock puppets on this site, including masquerading as a physician on multiple occasions. It provides a good lesson in why you should be very skeptical of anything you’re told by commissioned salesmen as they are clearly ethically challenged and willing to lie in order to present their products in the best possible light.]
I checked on the backdoor Roth IRA and if I have an SEP-IRA then I cannot do it b/c I have an SEP-IRA setup. Are you opening multiple Roth accounts? Each year since you can only do one, is Vanguard allowing you to roll the backdoor conversions into one account or do you have multiple account with them or with multiple companies?
As I’m classified as a highly compensated employee and I own more than 5% of my practice, do the income limits apply to the backdoor before it gest phased out?
The limitation used in the definition of highly compensated employee under Section IRC 414(q)(1)(B) is at $115,000.
The AGI phase-out range for taxpayers making contributions to a Roth IRA is $181,000 to $191,000 for married couples filing jointly. For singles and heads of household, the income phase-out range is $114,000 to $129,000.
My AIG, with my spouse, is somewhere in the $725k range, so these suggestion you speak of, I don’t believe I qualify for them.
It’s been suggested I buy an IUL policy, but I also a non-qualified differed compensation plan and that’s where most of my saving is going.
No, I don’t open a new Roth IRA each year. I use the same traditional IRA and the same Roth IRA every year to do the backdoor Roth IRA.
There are no income limits on Roth conversions in 2014. I’m failing to see what being a HCE has to do with the backdoor Roth. You make too much to qualify for a direct Roth contribution, so you need to go through the backdoor for you and your spouse. You can roll your SEP IRA into a 401(k) or individual 401(k) so you can start.
With $725K of income, you’ll probably end up with a taxable account of some type. Why are you choosing to use a non-qualified plan instead? Are you getting some asset protection out of it?
If you are old enough, you might consider having a Cash Balance plan for your practice. If you don’t have any full-time employees, a Cash Balance plan might make sense earlier than with employees. Even with a Cash Balance plan maxed out, you’ll need to have an after-tax account – at your tax rate, individual municipal bonds start making a lot of sense.
Backdoor is a tiny amount given your salary, but I’d still recommend that you do it ($11k for you and your wife together).
Non-qualified DC plans do not afford asset protection from creditors, unfortunately. A lot of times, NQDC plans are sold as a product, and might have very high fees, poor investment quality, etc., and you really have to be sure that the administrator for the plan knows what they are doing.
[Editor’s Note: This comment is posted by an IUL salesman who has used sock puppets on this site, including masquerading as a physician on multiple occasions. It provides a good lesson in why you should be very skeptical of anything you’re told by commissioned salesmen as they are clearly ethically challenged and willing to lie in order to present their products in the best possible light.]
With a 401k or a cash balance plan, I would be responsible for the match and any profit-sharing contributions due to my employees, right?
Wouldn’t an attraction of IUL be to provide asset protection (Civil suits) and also keep me from having to partake in profit sharing with my employees?
Your state may or may not provide more asset protection to IUL than to a 401(k). It’s state dependent, but both usually enjoy pretty good asset protection.
Obviously you don’t have to give employees anything if you take your after-tax dollars and buy life insurance with it. But you also don’t get the tax breaks associated with the 401(k). The question is do you want to do a retirement plan through your business, or just do stuff on your own. Once you’ve decided on your own, then you can use things like a personal and spousal backdoor Roth IRA and HSA and then beyond then, you have to decide what to buy in a taxable account- index funds, rental properties, small businesses or life insurance contracts. Don’t make the mistake of thinking IUL or another life insurance contract is a retirement plan. It isn’t. Can it be used to provide funds you can spend in retirement? Sure. But so can lots of other things.
I have maxed out everything I can and after alot of research I do have an IUL that was built exactly how I wanted it. For 3 years it has done very well and I am pleased with the tax free income stream that was created for me.
I understand they arent for everything but my advisor has me in low cost etfs, a deferred comp plan and an IUL…
Get a written plan and find someone you trust….everything is not all gloom and doom
As usual, well done WTC!
Oh no another criticism on insurance as an investment. Good post, but I hope everyone brought their flame proof suits today! The mad insurance agents will appear in 3…2…1…
Of course they will, these posts are like insurance agent magnets. I’ve actually got one more (or hopefully two) coming up on IUL. The first one was very introductory. This second one is a lighthearted jab at the way these things are sold. The third one will be a more in-depth look at a relatively good policy sent to me by an agent. The fourth one is dependent on a reader who states he is a physician with a policy in which he has had a 19% annualized return over the first five years of the policy. I asked him to forward me his statements and the policy illustration with identifying information removed. Thus far he has refused to do so. You can read whatever you like into that fact. If he sends it, I’ll write it up like I did this doctor who was happy with the whole life policy he bought in the 1980s: https://www.whitecoatinvestor.com/a-whole-life-insurance-success-story-the-friday-qa-series/
Another argument for the IUL’s that I’ve personally encountered is their benefit as a college savings tool. A friend of my wife who happens to sell IULs suggested we consider one to save for our children’s education. The argument is that it doesn’t count toward need based financial aid requirements in the way that a 529 or taxable account would. I just countered that we were not really concerned with financial aid issues since our income and assets would already disqualify us from any need based aid anyway, regardless of where our college savings were held. But I find it concerning that IULs are being marketed for college savings, given that those who are wealthy enough to fund them to levels that could theoretically provide the illustrated returns are unlikely to qualify for need based aid, and those who would qualify for need based aid are unlikely to have the money to fund the policy to the proper levels. And when you consider a time horizon of 18 years or less, the chances of the policy performing as one would hope seem slim at best.
As discussed above, IULs are rarely the best product for the job. Planning is not done by selecting a tool and then trying to apply it to a financial situation. We should first consider what the need is and what outcome is desired, and try to select the best tool that fits the situation. If we need our principal relatively safe with a predictable return with minimal expenses even a 529 plan might be the best tool to fit the job (which will depend on the horizon, contribution amounts and tax deduction opportunities). I like the tools to be multipurpose, so for those in high tax brackets I always consider individual municipal bonds because they are tax free (federal and state) and because your principal is relatively safe, and the return is rather high (and predictable). No need for fancy products at all. Also, if interest rates rise, it is possible to design a portfolio in such a way as to take advantage of this. I also like the fact that such portfolios can be a source of income (if they are not used for higher education purposes). So between 529 plans and individual munis it is possible to address most higher education planning scenarios.
I agree that education funding is a pretty lame use for permanent life insurance for the reasons you mention along with others. I wrote about it somewhere in an article about whole life.
“Planning is not done by selecting a tool and then trying to apply it to a financial situation. consider what the need is and what outcome is desired, and try to select the best tool that fits the situation.”
I think this is a great quote that should be applied to anyone ever looking into a new investment/advisor/plan. Every new attending or resident should have this sent to them on a 2×3 magnet.
Thank you Nate, here’s another one. Although this might be counter-intuitive to some, one can save money by hiring the right adviser and paying them for their services rather than going with so-called advisers whose services are ‘free’ because free will always cost you, one way or another. This is the biggest problem for those to whom these products are sold – the products are often offered for ‘free’, and who can resist getting something of value for free?
Most of this
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my head
Thanks for taking the time to elucidate each of these points. I am so lost when the insurance salesmen start talking and handing out glossy brochures. Can you link to me your quick, cliff note version of what type of insurance is needed? From what I have gathered from reading here, it is always to say no to whole and now IUL?
This was already addressed by White Coat Investor:
https://www.whitecoatinvestor.com/7-financial-planning-issues-new-physicians-must-grapple-with/
Stay away from whole life, IUL, indexed annuities, insurance sold as investment, etc.
If it is life insurance, almost always say yes to term. If you have to say no, you should have an advanced knowledge of why. Or have a lottery ticket worth tens of millions and an estate planning lawyer
It’s impossible to say “always” or “never” with respect to these permanent life insurance products. They are certainly optional, and probably a bad idea for the vast majority, including physicians. When you mix insurance with investing, you general end up with less than ideal insurance and a less than ideal investment.
I would say the mandatory types of insurance are the following:
1) Disability
2) Health
3) Property
4) Personal liability (umbrella)
5) Malpractice liability (for most)
6) Term life until financially independent if someone besides you depends on your income for their lifestyle
Permanent insurance is completely optional, and often a bad idea. I ran into a doc this week who had been sold a whole life policy with annual premiums of $80K. That’s a talented salesman there. Now he’s trying to figure out how to get out of it without losing more than the $50K he’s already lost.
Oh my word. That is jaw-dropping.
I need to search for more info on “umbrella”… but I think I am covered.
Thanks for the clarification.
I would LOVE to hear from a doc that is pleased with their whole life/IUL plan. (per your above comment)
I guarantee you might just find someone. It does not matter whether a policy that has been out since 1980 performed reasonably well. When we start talking about whole life as an investment, the rules of the game change. Forget the insurance part – we are now discussing the investment performance (and upside/downside of using whole life as an investment). White Coat Investor has a great post on this by the way (just search for ‘whole life’).
In comparison (say to corporate or municipal bonds), while life is not a good investment over the long term. While I have read about policy design to maximize investment returns, given today’s low rates, I don’t think this will work well going forward. Both very high and very low interest rates will hurt any investment that locks up your money for decades. In order to anticipate the direction of the interest rates, your fixed income investments have to be very liquid. So for example, CDs can be redeemed painlessly, individual bond purchases can be timed when rates fluctuate, while the maturity can be kept on the short/intermediate side, and new bonds with higher interest rates can be purchased when/if the rates spike. If the rates remain the same, individual bonds again can be used to create a safe fixed income investment that is not taxable (using municipal bonds) and liquid at the same time.
So it does not matter whether someone likes their whole life. The question is, what is the goal for this investment? Is it safety of principal? Tax-free growth? Liquidity? You can get all of this with municipal bonds (not to mention higher interest and ability to receive income).
Here’s one who likes his whole life policy he bought in the 80s:
https://www.whitecoatinvestor.com/a-whole-life-insurance-success-story-the-friday-qa-series/
What’s interesting is that Treasuries were paying as much as 15%, so someone buying those in the early 1980s would have made (after taxes) at least 4-5% above inflation (on average over several decades). Intermediate municipal bonds got as much as 3% over inflation. And that would be for EVERYONE, not just for one or two people! I don’t see this happening for life insurance, since they tightened all the screws in their favor. The market conditions are really different going forward, so one has to avoid locking up money for long periods of time.
Where are taxes going my friends:
http://www.bankrate.com/financing/retirement/no-more-social-security-at-62/?ec_id=m1078090
ROTHs= YES
IUL- YES
Tax deferred= They’re deferred for a reason, meaning you’ll pay taxes on a later date, and Uncle SAM for the future of SSI is counting on it.
Taxable accounts= USE CAUTION! Only 6-9 month reserves!
Do the backdoor Roth, then get your cash into IULs. I’m not a fan on mutual funds but more of index ETFs.
You may call it tax fear mongering, but you’re doing the same with saying the insurance companies will change their Caps and participation rates. These insurance companies must stay competitive with the mutual fund companies and changing their caps and participation rates is something they will not do unless something happens unforeseen in the markets.
Seems Congress is just as likely to remove the tax benefits of life insurance as to raise tax rates.
I agree with you that the whole “where are taxes going my friends” line is fear mongering.
Let’s do this one more time since I’m pretty sure I already responded to this comment on the 3 or 4 other threads you put it on:
1) Roths are great, but not worth over paying for (i.e. funding during peak earnings years instead of a tax-deferred option
2) IULs are optional at best, and terrible at worst.
3) Tax-deferred, for most people who contributed to them at their marginal tax brackets in their peak earnings years, are a fantastic deal. Contributing at 33% and withdrawing at 0%, 10%, 15%, 25%, even 28% is a great deal.
4) Only an insurance agent would “caution” against using a taxable account once tax-protected accounts are full. Index funds in taxable accounts get great tax treatment- basis isn’t taxed, LTCGs are taxed at lower rates (perhaps even 0%), tax-loss harvesting lowers the tax bill, qualified dividends also get lower rates, you can choose to sell high-basis shares first, and you get a step-up in basis at death.
5) The insurance company strategy in your purported “competition with mutual fund companies” seems to be hire more salesmen and offer them higher commissions.
6) The future of SSI doesn’t count on higher federal income taxes. Those funds are paid from payroll taxes. You don’t pay payroll taxes on investment earnings, nor on tax-free or tax-deferred retirement account withdrawals.
If you want to work the tax angle, at least be accurate about how taxes really work instead of just fear-mongering. Does permanent life insurance have some tax bennies? Sure. But they’re not very impressive.
What happened in 2005 as a posted pointed out to you by another physician? Congress would not do it! The IRC 7702 rule of life insurance would be grandfathered in, so you better buy it now.
Otherwise, why are you advocating a backdoor Roth if congress can retroactively change things? I think it’s one hell of an idea, so take advantage of both the backdoor Roth and IUL!
I believe we have constitutional safeguards against such things, but with things like the Medicaid spend down act you never know. You may want to address Medicaid spend down in a future blog.
Also why Mutaul funds and not ETFs?
Even closed end funds selling at: 8% discount paying a 9% dividend? Let me guess your a, “Do it yourselfer,” and you don’t want to pay a commission.
I’m not sure who you’re talking to. You’re replying to yourself.
You’re a financial professional and you need me to explain the difference between mutual funds and ETFs to you? Here you go:
https://www.whitecoatinvestor.com/vanguard-etfs-vs-mutual-funds-friday-qa-series/
No, I don’t need you to explain what they are to me. I was asking why you prefer one of the other.
As the linked post notes, I use both in different situations, usually making the choice based on overall expenses.
I really don’t think it’s tax fear mongering when we’ve seen a 3.8% surtax on investment income for people making over an annual amount of: $200k for single filers and $250k for joint filers this year. It’s only going to get worse and I don’t see how you cannot believe it’s not with all the evidence out there.
As of now most of social security is paid by payroll taxes; however, this 3.8% on investment income is helping fund social security and Obamacare. As suggested by a post on the: No more Social Security, “One way to make the Social Security better is to increase the amount of contributions to a much higher level or to the maximum of any ones annual income whether its $200,000 or $10,000,000 per year, and includes investment income. Those with that income can easily afford that.
Read more: http://www.bankrate.com/financing/retirement/no-more-social-security-at-62/#ixzz384Isu4Cw
As far as Congress taking the tax free benefits away from life insurance, then you must believe they’re going to do the same for a Roth IRA. Even if congress made that decision going forward, Congress will not take the tax free benefits from those who bought life insurance b/c they will fall under a grandfather clause and their policies will be protected.
This agreement was made in 2005 under the Bush admin tax reform act. As pointed out to you by another poster, “In 2005, Congress decided to leave ALL the benefits of life insurance well alone.”
Valid points, all of them, but with one exception. Insurance, no matter what form, is not an investment. It may appear to be one or have similarities but it is nothing more than buying money inexpensively to protect against a possible risk. Life insurance is designed to protect against the possibility that one might die prematurely. The type of life insurance chosen depends on whether you want it permanently or for periods of time. According to studies done by LIMRA, the Life Insurance Marketing Research Association, only 3% of term policies result in a claim. Insurance companies want you to buy term insurance policies, because the likelihood that they will have to pay is far less than using any other form of cash value type policy. Permanent coverage has flexibility that term does not. If you don’t need the insurance, surrender it for a return of premium. If you need cash, borrow on the policy. It is more expensive because it is designed to be in force when you actually need it. But never consider it an investment vehicle, it is insureance.
If you look at the same studies by LIMRA, society of actuaries, or other groups you will also notice permanent life insurance also rarely pays a death benefit. It gets lapsed or surrendered the great majority of the time. In general less than 20% of those expensive permanent polices are kept in force until death.
I have (My agency) personally delivered over $8-million of tax free death benefit from Wl and UL policies this year alone. If those same people bought 20, and some 30-year term, the insurance would have expired. When you buy term, you rent your insurance. If you want to leave a legacy and protect your estate, you buy WL or UL policies.
“If you want to leave a legacy”
The third insurance salesman I have heard use this one.
It is a plea to emotions, IMO.
My Goodness. This article is so spot on. Dump insurance and only buy term? IUL only has rates of return equal to CD’s.
Tell that to the millions of investors that lost their “investments” listening to anonymous snake oil salesman like the author of this article, who “cherry picks” his facts to keep banging that same ole…you need an advisor to actively manage you retirement so I can make my fees…uh… look out for your retirement.
With the lone exception of AIG…who lost their ass insuring garbage loans against default, probably by the same hucksters bashing insurance companies on her at this moment, I am unfamiliar with any insurance companies needing a govt bailout and who are privately still needing capital infusions and QE by the Fed.
The benefits of IUL on retirement, college savings, tax benefits are endless and with one KEY additional benefit. You aren’t getting fee’ed to death by the same parasites on here year in and year out whether your investments go up or down.
Funny how these same FA’s never tell you about the extreme downside risks of their products and how they collect from your hard earned money in any case.
Who is anonymous? You’ve certainly been busy this morning. 7 comments in a half hour on a post published a year ago.
I don’t think much rebuttal is needed for someone arguing that benefits are “endless.”
$8M? That’s probably enough to term life to cover maybe 2 dentists. The purpose of term life is to protect against premature death. An average dentist will have a net worth of at least $2M-$3M at 55, and will not need any insurance thereafter. They’ll probably retire with $4M-$5M. What they need is financial planning and investment advice, which includes advice on how to generate income in retirement, and how to invest after-tax money (and WL and other insurance is not going to cut it for that purpose).
These are people who bought WL in the 1970-80s and UL in the 90s to now. My point if they would have bought term, it would have expired. In my 40 years of business, I’ve never had a widow ever give a tax free death benefit check back to me.
Term is the very most profitable product sold by an insurance company. It’s true, it only pays out 2-3% of the time. A person may be self insured by the age of 55, but when you look at the internal rate of return (IRR) of even an expensive guaranteed UL policy, it’s still over a tax free 8% at age 100. Who can guarantee an 8% tax free return? A life insurance company can!
Really? No widow has ever given back a “tax free death benefit check?” They probably haven’t paid taxes on one either. Man, I should get me one of those. They probably never signed over to you the million dollar investment account they had instead of a $300K life insurance policy they would have had if they hadn’t bought term and invested the rest. That’s really a goofy “argument.”
I call BS on the universal life return. Send me the illustration for a universal life policy bought by a diabetic, hypertensive at age 60 that guarantees an annualized cash value IRR of 8% at age 100. Heck, do it for a healthy 30 year old.
[Editor’s Note: This comment is posted by an IUL salesman who has used sock puppets on this site, including masquerading as a physician on multiple occasions. It provides a good lesson in why you should be very skeptical of anything you’re told by commissioned salesmen as they are clearly ethically challenged and willing to lie in order to present their products in the best possible light.]
There ya go champ! Check your email!
[Editor’s Note: This comment is posted by an IUL salesman who has used sock puppets on this site, including masquerading as a physician on multiple occasions. It provides a good lesson in why you should be very skeptical of anything you’re told by commissioned salesmen as they are clearly ethically challenged and willing to lie in order to present their products in the best possible light.]
I’m talking about the DB not the CV.
Let me guess, you picked aim age of death that was premature to what the insurance company is actually expecting in order to come up with that return on the DB? I find that very intellectually dishonest. Of course if you picked a more realistic age of death, the return would be a lot lower and if you were talking about the cash value even lower yet.
[Editor’s Note: This comment is posted by an IUL salesman who has used sock puppets on this site, including masquerading as a physician on multiple occasions. It provides a good lesson in why you should be very skeptical of anything you’re told by commissioned salesmen as they are clearly ethically challenged and willing to lie in order to present their products in the best possible light.]
Rex: No it would not, and you don’t know what your talking about! At age 59 the Death benefit IRR is 8.54% and at age 81 its: 7.9%. The CV is about 50bsp lower.
I sent the illustration via email, and this is really the only carrier I use. This particular product is a guaranteed death benefit product and was designed to knock the socks off whole life.
It might knock the socks off whole life, but it isn’t guaranteed to beat whole life or guaranteed to provide a death benefit IRR of 8.54% or a cash value IRR of 8%. That’s a projected return. I’m not sure you understand the meaning of “guaranteed.” There is a guaranteed death benefit. But it isn’t an 8.54% return.
That doesn’t make any sense. You said purchased at age 60 with diabetes and hypertension and now you are also giving an IRR at age 59. WCI did a post on the guaranteed returns from whole life and IUL wont be much different bc of the underlying investments. Maybe a little better, maybe a little worse. The insurance company invests most of the money in their normal portfolio which is mostly bonds/treasuries and uses a small slice with options. Not going to knock anyone’s socks off except for the agent getting the commission.
[Editor’s Note: This comment is posted by an IUL salesman who has used sock puppets on this site, including masquerading as a physician on multiple occasions. It provides a good lesson in why you should be very skeptical of anything you’re told by commissioned salesmen as they are clearly ethically challenged and willing to lie in order to present their products in the best possible light.]
If you were paying attention, He said, “Better yet send me one on a health 30-yr old.” The illustration I sent is on a health 30-year old male. Again, you continue to show you have no idea what you’re talking about.
The other blog it was funny when you were debating with the physician who is happy with his IUL. First you said, it was impossible, then it was exaggerated, then it was cherry picked. What’s next for you? “It’s to complicated!!!”
Except in this case Rex is right. Your “guarantees” were both impossible and exaggerated. Either you are incompetent or lying. Which was it? Either way, it makes you look pretty bad. You cannot call projections “guarantees.” They’re not the same thing.
Well it looks like we figured out who the product is too complicated for…. You don’t even know the difference between guaranteed and illustrated? While I find this amusing, the real tragedy is that likely you go around telling clients you are an expert and guarantee them a 8% return on the death benefit. These poor folks probably are confused and take your word for it. Is it any wonder why the insurance industry has such a bad rap?
Fred –
Why do you bother with these dimwitted FA’s who think their products are the only way to save for retirement.
Just always remind your clients of who it was needing a bailout from the gov. Insurance companies or banks.
Then ask them how much money they lost in the past 10-15 years.
Finally, ask them to show you how much they have paid the same advisors in fees and commissions annually for their “advice”
When they say ” I don’t see it on my statement” just reply, “No one else does either but believe your paying it”.
I love the (Ed. Note) before any criticism of investment product advice or disproving their absurd IUL only pay CD rates od return arguments.
When you can’t win the argument, kill the messenger I guess.
Fred has been banned from the site for sock puppeting. I’m not sure who the “dimwitted FAs” you’re referring to are, but if you continue with the personal attacks you will suffer the same fate as Fred.
Okay, I have in my possession an illustration run on a healthy 30 year old. Premiums are $5500 per year from age 30 to age 80. Death benefit is $599,622. The guaranteed cash surrender value at age 81 is zero. That’s hardly an 8% return. In fact, that’s obviously a terrible return, a total loss of your money as an investment. The most optimistic projected scale shows a cash value of $3.1 Million at age 80, a return of 7.96% per year. If you calculate the return on the death benefit, the only reasonable way to do it, is to look at what it would be at your life expectancy. According to mortality tables, the life expectancy of a 30 year old male (not necessarily a healthy one, whose life expectancy is probably a little longer) is 48 years according to the SS mortality table: http://www.ssa.gov/oact/STATS/table4c6.html. The guaranteed death benefit on this policy is $599,622. So if you invest $5500 a year from age 30 to age 78, and you get $599,622, your return was 3.05%.
That’s pretty typical for permanent life insurance from what I’ve seen. No real surprise there. However, it is dramatically different from what you said you were going to send me. Let me quote from above:
You stated an insurance company can guarantee an 8% tax-free return. I called BS. Looks like I was right. They guaranteed a 0-3.05% return, a far cry from 8%.
[Editor’s Note: This comment is posted by an IUL salesman who has used sock puppets on this site, including masquerading as a physician on multiple occasions. It provides a good lesson in why you should be very skeptical of anything you’re told by commissioned salesmen as they are clearly ethically challenged and willing to lie in order to present their products in the best possible light.]
Well there you go again only focusing on the guaranteed column with the maximum charges. The article you posted yourself even says how unrealistic it is to take that scenario into consideration.
To make that your main focus then you’re saying people will have to start dying soon and life expectancy will reverse back to the pre-2009 CSO tables. Also you’re saying, the S&P 500 will not preform at the very least of 3% for the next 50 years even with an annual reset feature.
Since you posted the article and it says, “It’s Unrealistic,” to take that into consideration, how realistic to you think it is for either one of those things to ever happen?
As the article you posted suggests, with the current charges, I ran the middle column I ran at well below the 250bps. So tell us what that one has to say.
Of course I’m focusing on the guarantees. That was the point of the discussion. You told me an insurance company was guaranteeing an 8% return. I called you out on it and told you to send me an illustration showing a guaranteed 8% return. You sent me one that showed a 0-3% guaranteed return and an 8% projected return. That’s why we’re talking about guaranteed returns.
Do I think that’s what this policy would probably return for our hypothetical healthy 30 year old? No. Do I believe it will return 8%. No, I don’t believe that either. It will likely be somewhere in between. My best guess would be in the 3-6% range over 3+ decades. But the point of the exercise was to show readers that you were blowing smoke when you were talking about an insurance company being able to guarantee an 8% tax-free return. I think most readers would agree that has been done, so I’m going to move on to something else.
I’ve been researching myself to see if this is something to use for myself. So far it seems like it would suitable to start at a young age. I would always want to leave my beneficiaries money behind even into old age. I would also like part of my plan to include risk free growth to pull out tax free later in case of high taxes. From illustrations and historical crediting I’ve seen cash value being able to earn 8-12% on average. I understand part of my money is paying for the insurance, so the average is focused on what my cash value is earning. I’ve done the math in excel, compared what ill be paying in taxes and in fees, and IUL comes out ahead.
# 1 You can leave money behind without buying life insurance.
# 2 IUL does not provide risk free growth. If you want risk-free, best to buy a whole life policy. A better idea, however, for money you wish to leave behind is to take some risk with it. That way you’re likely to leave them FAR MORE money.
# 3 If you expect your money in an IUL to grow at an average of 8-12% you’re going to be severely disappointed. The crediting rate is not your rate of return. I would expect whole life like returns. So if you buy a policy well and hold it until death, your annualized return is likely to be in the 3-6% range. If that’s okay with you, then go for it. If not, better keep researching until you understand why I’m saying that. Yes, if you use numbers like 10% in Excel, it’s going to look really good. There’s a reason you shouldn’t do that though.
[Editor’s Note: This comment is posted by an IUL salesman who has used sock puppets on this site, including masquerading as a physician on multiple occasions. It provides a good lesson in why you should be very skeptical of anything you’re told by commissioned salesmen as they are clearly ethically challenged and willing to lie in order to present their products in the best possible light.]
Of course you are b/c you want to be unrealistic, and compare apples to oranges so it fits your agenda. You even posted an article stating just that. I’m talking about the guaranteed return on the death benefit, which does not lapse at age 80.
Again, I asking you a direct question, “How likely is it the guaranteed scenario would ever happen?”
I’m curious what my agenda is. I’m asking you a direct question. What is my agenda?
[Editor’s Note: This comment is posted by an IUL salesman who has used sock puppets on this site, including masquerading as a physician on multiple occasions. It provides a good lesson in why you should be very skeptical of anything you’re told by commissioned salesmen as they are clearly ethically challenged and willing to lie in order to present their products in the best possible light.]
[Repetitive badgering comment deleted.]
[Ad hominem attack deleted.]
Nobody knows exactly how likely the guarantee column will pan out but if you look at the Monte carlo studies on IUL, the chance of being near the illustrated is 1%. This unfortunately is only half the problem since that evaluation is based on the market performance evaluation. The additional problem is that given the low interest rate environment, insurance companies are having a hard time finding safe investments to meet their guarantees (as does everyone else). This is why dividends for WL and performance for standard ULs has gone down. For an IUL, 95+% of the investment piece is the same thing. In the short run, that isn’t a huge issue for a strong insurance company but if it continues then well you may wish to review the Japan experience with a long low interest rate environment (ie big insurance companies went under and couldn’t even meet the guarantees). See there is no magic in this world. You can’t get stock market like performance (and risk) without being in the stock market. All insurance products performance depend on the underlying investments (not including all the outrageous costs and typically later unnecessary years of insurance as well). For your sake, you might want to hope the interest rate environment goes up and stays up for a long time. If so then maybe your comments wont get you into trouble. If it doesn’t then hopefully none of your clients have evidence about what you say is guaranteed and how likely these products are to perform as you indicated. Funny how you now have to backtrack to age 80 and not 100. I wonder why? Actually I don’t.
[Editor’s Note: This comment is posted by an IUL salesman who has used sock puppets on this site, including masquerading as a physician on multiple occasions. It provides a good lesson in why you should be very skeptical of anything you’re told by commissioned salesmen as they are clearly ethically challenged and willing to lie in order to present their products in the best possible light.]
[Repetitive badgering comments and ad hominem attack deleted.]
Fred, wci has quoted your exact words. Everyone reading this blog knows what to think now of your guarantees.
[Ad hominem attack deleted.]
Bottom line with IUL is that it will perform a little better or a little worse than a standard UL. That’s it period. No socks off. How the S&P performs is a small slice of the picture with an IUL and sequence of events are even more important than in a taxable and to top it all off, the insurance company at their leisure can continue to change the caps/part rates (something they are already doing with index products). Good luck guaranteeing those death benefit returns you pretend are guaranteed at age 100 (which is what you said).
[Editor’s Note: This comment is posted by an IUL salesman who has used sock puppets on this site, including masquerading as a physician on multiple occasions. It provides a good lesson in why you should be very skeptical of anything you’re told by commissioned salesmen as they are clearly ethically challenged and willing to lie in order to present their products in the best possible light.]
The death benefit IS guaranteed to age 100 on this particular product, and I stand by that. If the S&P 500 does better than 3% just only one time in the next 70-yrs of that projection, then it just beat it’s guarantee on the CV side. I did originally say the CV would also, and that was a mistake. The IRR report does say non-guaranteed cash values; however, the tax free death benefit is guaranteed. As far as changing caps and participation rates, the carrier I exclusively deal with has not changed since their original issue on policies.
The caps may not be as great on policies are being issued now, as opposed to 5-yrs ago, but the ones issue 5-yrs ago have not changed. The participation has always been 100% and has remained unchanged. That’s just as much fear mongering as with the crowd who thinks taxes are going up.
I agree. It was a mistake, and a very important one. While two people can legitimately disagree on what they expect their cash value return to be on an IUL policy, what is guaranteed is pretty clear to see.
While the death benefit in the illustrated policy is guaranteed to exist at age 100, it is NOT guaranteed to provide an 8% return on your “investment.” In fact, that return at age 100 could be as low as 1.18%. But there is a monstrous range between the guaranteed death benefit of $600K and the illustrated maximum projected death benefit of $16 Million (which would be an 8.01% return). Which number will your result be closer to? Nobody knows. You roll the dice and you take your chances, both with the markets and with the insurance company.
“Who can guarantee an 8% tax free return? A life insurance company can!”
But a life insurance agent can not, apparently.
[Editor’s Note: This comment is posted by an IUL salesman who has used sock puppets on this site, including masquerading as a physician on multiple occasions. It provides a good lesson in why you should be very skeptical of anything you’re told by commissioned salesmen as they are clearly ethically challenged and willing to lie in order to present their products in the best possible light.]
That was a product focusing on the death benefit with the IRR, and I still stand by at life expectancy it will perform to the number or pretty darn close. It still guarantees the tax free (Supra) DB to age 100 not 80.
There is another product from the same company that will focuses more on cash values accumulation, but were talking about a guaranteed tax free death benefit product in this case.
Nate –
I have a question for you. How much investment principal and gain can be lost following your investment advice?
Follow-up. What is the maximum amount of money you make in fees annually from your investment advice that are charged year after year?
You’re replying to a comment left a year and seem to be mistaking the commenter for a financial advisor of some type. I wouldn’t expect a reply as that particular commenter is not subscribed to comments on this post. In fact, there are only 4 people subscribed to these comments, and after 97 comments on a post, it’s best to assume I’m probably the only one reading them.
Ahhh…the old buy your insurance instead of rent it argument. That’s # 19 on the Myths list: https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance-part-5/
You certainly don’t need a life insurance policy to leave a legacy or protect your estate. I covered that one in # 17: https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance-part-4/ and in # 8: https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance-part-2/
I believe you may be mistaken, but if I followed your logic, you are basically saying that any life insureance is impractical? It has been my experience that exactly because the cost of the insurance is greater it builds a cash value that allows the policies to continue, even when additional payments are not made. People should always get coverage to cover thier need, which for most people means term insureance to start with. Over time, however, term insureance becomes the more expensive of policies as they get older. Even if your 20% of permanent policies result in a claim statement were accurate that would be a superior outcome to the 3% result of term policies that result in a claim, wouldn’t it?
Obviously I never said that about term. Term is appropriate. Term insurance is not more expensive at an older age. The truth is the insurance component within permanent is almost always much more expensive then a cheap term policy and with a permanent policy you are using the investment component to pay that at a later date with the UL or level with WL but its still more expensive for the actual insurance. Insurance at an older age isn’t necessary and if it is then you would be like the over 80% that lapse surrender and that number is being generous to the insurance companies some sites list ranges as low as 6% and those are run by CLU folks. Funny how you don’t recognize that most polices that are sold wont be available when the person needs/wants the coverage.
The statement is accurate. Read the report from LIMRA. 33% of whole life policies are surrendered within 5 years. By 30 years, you’re in the 70-80% range. Not my data.
I agree people should get coverage that covers their need AND NO MORE. Since there is no need after retirement, why pay for insurance for after your retirement?
That’s a stupid argument. Life insurance companies don’t “want you to buy term and avoid their permanent policies” or they wouldn’t be selling the permanent policies (and paying high commissions to get them sold.) They charge much less for term because a payout is less likely, that much is true. That’s actually the reason to buy term. Since your need for life insurance isn’t permanent, it doesn’t make sense to buy a permanent policy.
I love how agents point out that “it’s not an investment, it’s insurance” when the poor returns and poor investment characteristics of these policies are pointed out, but that’s pretty much how they are sold to doctors across the country.
Flexibility is great, but don’t pay for flexibility you don’t need.
[Ad hominem attack removed]
Of course insurance companies would prefer to sell an insurance policy that they will not have to pay a claim on. It is called actuarial science and is exactly how rates are determined. The older you get the more it costs for life insurance. If the probability of having to pay a claim is reduced, then the cost of that contract will be less. If the probability of having to pay a clam increases, then the cost for that plan will also increase. The cost of each permanent policy is also determined actuarially dependent upon whether the cash value is guaranteed or put at risk in some other form or alternative.
The reason insurance companies charge less for term is because there is less cost involved because the likelihood that they are going to have to pay is less. But people still use their insurance after retirement to supplement their spouse’s financial position because they are living longer and using up more of their accumulated assets than projected. Smart people will have insurance in force when they die. As for your criticism on “insurance is not an investment”, it is not true because of good or poor investment performance, it is true because it is a contract that agrees to pay a stated value in the event of a claim. Investments do not do that. An insurance policy may have similarities to an investment if you take into account the death benefit which may be a significant return for the amount of money expended, but since you are dead, it doesn’t do you a lot of good. Flexibility is important especially, since as you point out, the probability is higher that a permanent policy will be in force over a term policy when a claim is made.
Funny that in other statements you list insurance that is mandatory and yet, none of those policies has an investment return either, unless it results in a claim. The likelihood that you will have a claim on any of the other plans i.e. disability, health, property, personal liability or malpractices are all less than the likelihood of mortality, which as I understand it is 100%. As I stated earlier, insurance is for the purpose of replacing funds in the event of a claim. If you make the mistake of comparing an insurance policy to an investment vehicle you will always be able to point out the disadvantages, but the same could be said for anyone who focused only on investments but had a claim before they reached financial independence, without insurance. They might lose everything. Some people will not need life insurance because they reach financial independence, but until then, it is insurance, not an investment, that will pay a claim, if in force, at the time of the claim.
It is expensive to insure against risks that you do not need to insure against. Insure against financial catastrophe. If there is no financial catastrophe in the event of an untoward event, there is no need for insurance. Death after retirement is not a financial catastrophe. Therefore death after retirement is not a risk that needs to be insured against. That’s why I don’t plan to own any. If you want to spend your money on insurance you don’t need, that’s your choice. I’ll use my money differently, either to consume it or to grow it in order to probably leave more to heirs and/or charities.
Thanks for stopping by.
WCI, i know its a bit off the main topic, but can you give me some more information on why you think the russell 2000 is a lousy index? it seems that vanguard does offer one
[Editor’s Note: This comment is posted by an IUL salesman who has used sock puppets on this site, including masquerading as a physician on multiple occasions. It provides a good lesson in why you should be very skeptical of anything you’re told by commissioned salesmen as they are clearly ethically challenged and willing to lie in order to present their products in the best possible light.]
It’s not a lousy index, and neither is the Nasdaq. The NASDAQ has returned almost 140% the past 10-years, and the Russell 2000 ETFs (IWM) 112%.
I’m not sure you’re getting this Jason. The reason the Nasdaq is silly is that it is an index of just the stocks that trade on the NASDAQ. That’s like just buying an index of stocks that just trade on the American Stock Exchange. There’s no rational reason to do that. That’s like investing in an index of stocks that start with the letters L-T.
When choosing an index fund, you want to know #1- What index, #2- How well does the fund track the index, and # 3 at what cost. Some indices are more useful than others, and choosing based mostly on past performance will not lead you to the right result.
I understand the ends and out of it very thoroughly, but to call it a lousy index is something I disagree with. Index investing is never lousy in my book, but that’s a different subject. I’ve owned both mutual index funds and ETFs in the Russell and Nasdaq, in the past 5-yrs, and I did pretty well in them. Anyone who has enough sense to get up and go to work everyday, knows that past performance is not an indicator of future results.
BTW, I sold all of those at the beginning of the year and now I have some pretty good European REITs.
Interesting investment strategy. A rising tide lifts all boats I suppose.
But Jason –
Don’t you understand how much better you would have done actively investing and risking your money form 2000 to 2015 in the “market”? Not to mention much safer.
Just ask those active investors who bought the same line of BS from former Lehman and Bear Stearns FA’s, probably many of whom are commenting on here right now telling everybody how “bad” IUL’s are.
Sarcasm intended. I know (Ed.) this comment will get deleted for not following the “insurance sucks” mantra of this website.
Comments don’t get deleted because they disagree with the post. They get deleted for various other reasons- profanity, badgering, personal attacks, sock puppeting etc. “Not following a mantra?” Nope. Don’t expect a response from Jason either, BTW. That’s actually Fred sockpuppeting.
So I understand that IULs and whole life, etc are bad investments in terms of returns compared to backdoor Roth IRA conversions.
However, would you consider an IUL to be better than whole life in terms of a vehicle that allows some marginal investment while providing shielding against creditors and lawsuits, even divorce? I think in today’s volatile society, protection against leeching is worth some reduced returns, but then I don’t know what is another good vehicle outside of Roth IRAs. I’m not stuffing cash under my mattress. 🙂
Your 401k plan and IRAs can provide creditor protection, though not in divorce. There is no protection against that 😉
There are certain types of entities that attorneys can create for doctors (FLPs for example), but these can be expensive and might not protect you from all types of risks. You might want to speak with an attorney who specializes in asset protection to see what tools might be available for after-tax money. I would think most of these can be expensive to implement unless your net worth is rather high.
That’s a great question. The appeal of IUL and VUL is the possibility of higher returns than WL. But keep in mind that higher return comes as a result of taking more risk (of a lower return.) Also, remember that the “cost of insurance” in a universal life policy generally goes up, unlike with whole life where that’s all baked in to the guarantees.
If you’re more worried about creditors (probably not including divorce) then returns, and your state provides significant protection against creditors for life insurance cash value, then yes, it can be better for you than a taxable account. I wouldn’t think IUL provides any better asset protection than whole life in any state.
I would be interested in you dissecting a policy as a post. What I find incredibly irritating is that insurance salesman will say an 8% return but its really only an 8% return on the invested portion which for a large majority of people is a smaller portion than the insurance piece. Its much easier to make an insurance product look better if you are funding it at much higher levels than most people do. I.e. you significantly overfund it.
I would love to see a comparison of two health male 33 year old men that choose opposite investments. One buys an IUL policy for 1.5 million and pays on it for 30 years. The other buys a 30 year term policy for 1.5 million at $1100 a year (what I pay, actual quote) and invest the remaining difference between the cost of the IUL and his term policy.
At 30 years the IUL guy will still have a 1.5 million dollar policy but he will have paid X and his estimated investment will be Y.
At 30 years the Term guy will have no policy but will have investments estimated at Z.
What are X, Y, and Z.
It’s a garbage in, garbage out process, but I think the upcoming post will answer your question. You might be surprised to see the IUL really doesn’t come out looking too bad.
Looking forward to it.
My impression has always been that IUL is not a “bad” product as long as you keep paying it, and keep it for a long time. Especially when they reach retirement age.
When you get right down to it, there is very little out there that is “bad.” There’s plenty that is inappropriate for most people’s needs, and I’d throw IUL into that camp. If you hold it for life, you’re likely to end up with a return on it somewhere between 3 and 8%. Where in that range you fall (and it’s a huge range) depends both on market performance and on insurance company performance. I wouldn’t necessarily call one type of permanent insurance bad and another good, since they’re all awfully similar, with the same upsides and downsides. The big reason UL, and it’s more recently used versions, VUL and IUL, came into being is because insurance companies/agents recognized that the low returns of whole life were keeping people from buying it. So they want to at least give you the hope of a better return. And you have that possibility with both of them. Of course, you also have the possibility of doing worse…
I don’t have a problem with people buying these things if they understand what they are buying and will hold it their entire life. What I dislike is hearing stories like the one from last week of a doctor who was sold a permanent life policy last year with an annual premium of $80K and now realizes he’s been sold a pig in a poke. He wants out (now that he understands what he bought), but the surrender value is only $30K so he’s considering all of his options. Meanwhile, his “advisor” is laughing all the way to the bank. If he can do that a handful of times a year he’ll have an income similar to that of a physician.
While you are dissecting… include these factors if you would.
The amount paid in fees to actively manage the investment
The percentage of principal at risk for those 30 years hoping that your advice is correct.
Maximum percentage of principal loss in a down year on an actively managed fund vs IUL.
For the uninitiated, An IUL cannot lose principal nor previous earned gains due to market downside. But then you have the “annual reset” feature of an IUL.
But go on fellas. Tell us about the potential downside if your “advice” is wrong to their investment?
The answer to their downside risk potential is 100%.
But…can’t wait to see your report.
If you love IUL, buy as much of it as you can and sell as much of it to your client as they’ll buy, no skin off my nose.
P.S. I’m not a big fan of Wall Street fees, actively managed funds etc either.
also this:
http://www.forbes.com/sites/investor/2012/09/13/retirement-disaster-looms-for-universal-life-policyholders/
Yes, I’ve seen that. It’s important that UL policy owners understand the cost of their insurance goes up as life goes on, so less and less of the premium goes toward cash value and its even possible to need to “feed the pig” later in life, especially if the investments have underperformed or you’ve borrowed a bunch of cash value out of the policy.
Beau –
Measure for measure rebuttal to the FIA are no good arguments you also push from Forbes…
http://www.forbes.com/pictures/mjd45hged/eight-reasons-retirees-dont-buy-annuities-2/
Again, I love how you cherry pick the “advice” you provide.
You know Beau is an FP, not a financial advisor, right?
Many Indexed Annuities use what I might call a “slight of hand” on the guarantee, such that you have to make a choice at the beginning of each annual term as to whether you want your money in the guaranteed fixed income or the indexed annuity side. As you might expect this makes the guarantee almost worthless, unless you are good at fortune telling.
I am wondering if the IUL policies do something similar?
There are some policies that let you choose what index you want to track at the beginning of each year. Seems silly to me to pick something that tracks the Dow or the Nasdaq though, and I wish they offered a better small cap index than the Russell 2000. Heck, I’d like to see them use a total market index instead of the S&P 500.
I’m not a big fan of IUL, but I really dislike indexed annuities.
I was speaking more to whether you could be invested in the index and still have a 3% guarantee in an IUL. Most of the indexed contracts I have looked at, it is one or the other not both.
[Editor’s Note: This comment is posted by an IUL salesman who has used sock puppets on this site, including masquerading as a physician on multiple occasions. It provides a good lesson in why you should be very skeptical of anything you’re told by commissioned salesmen as they are clearly ethically challenged and willing to lie in order to present their products in the best possible light.]
The IUL illustration I sent has a 3% no matter which allocations you choose. That is different from indexed annuities that usually offer only 1%. On IUL, there is a fixed account rate currently paying 4%, but picking that seems to defeat the purpose of IUL when you have an annual reset feature with the indexes.
I agree the fixed option defeats the purpose. You can usually do better than 4% with whole life, so no point in choosing IUL and then just taking the 3-4% (remember this is a crediting rate, not the return) unless you think you’re a market timing genius. The point of IUL over whole life is to take a little more risk in hope of a little more return.
Soooooo many pros to IULs and yet people still try to find negatives. Guess you cant please everyone. Argue and fault find as much as you want but At the end of the day, nothing guarantees your money against stock market loss EXCEPT IULs. Maybe include the positives too instead of trying to give one sided opinionated arguments which fall short of the facts when you do your research. Lets keep this fair.
The truth is that the negatives outweigh all those pros. The benefits simply cost too much.
The truth is no one should be actively investing in the market with retirement principal unless they can afford to lose it.
IUL and FIA’s are both excellent ways to protect yourself against the Wall Street fee junkies that populate this website trying to tell you how bad they are.
The products are only bad for one person, the fee based advisor.
I’m curious who the wall street “fee junkies” are. Can you be specific?
I disagree that IULs and FIAs are excellent products. The protections they provide are offered at too high a cost.
so, I purchased a UIL from Thrivent.
The premium is 100k a year. After 4 premiums (4 years, 4 payments of 100k) it is fully paid and I never have to add more money.
The rate of return is 4.5%.
I can withdrawal the money in 7 years and get my money back, if I withdrawal anytime prior I will pay a surrender charge that phases out around year 7.
Anyhow the cash gains start to really add up after year 10.
It gains around 10-15k a year…at year 20 it will have a cash value of about 800k.
I will then start to withdrawal it annually.
I don’t see why this is bad? I basically wanted a 20 year CD and this is a great CD rate compared to what banks give you and it gives my life insurance coverage that I don’t have to spend on term each year that evaporates.
This is just a portion of my retirement outside of index funds and stocks. I consider this like a bond with bond like results.
What am I missing?
As long as you are happy with bond like returns of 4.5% it’s a win and you get a lot of insurance for death benefit.
Please reply! I know this post is rather old but I hope someone stumbles on it.
Thanks WCI.
WCI only wants to point out the negatives b/c he has an ax to grind with these insurance companies. He has to pay extra premium b/c of his hobbies. For someone whom isn’t rated IUL is a an excellent product. Granted it has to be designed properly, but the guarantees still will protect against market and that’s something no mutual fund can do. The argument that the “Evil” insurance company can lower their caps at anytime…. Well, that’s why you research the companies history of their caps and participation rates. Most of the A+ rated companies I know of have not changed by 1% in the past 10-years and have always offered a 100% participation rate. Even in 2008, it really never changed and now it’s back up to pre 2008 levels.
Yea, huge ax. It’s a lousy deal for anyone, but even worse if you like SCUBA diving or rock climbing.
If you love IUL, buy as much as you like, nobody is stopping you. Certainly agents will sell you as much as you’re willing to buy. But before you do so, I would suggest talking to a few dozen millionaires, seeing what they invest their money in, and then talking to previous purchasers of IUL products and calculating out their actual returns. Like most cash value life insurance products, these are designed to be sold, not bought. They’re sold on the premise that you get “almost” the entire market return of the stock market with none of the losses. The reality is that you get a small percentage of what stocks return, but due to the complexity of the policy, it is difficult for an unsophisticated investor to see that from the beginning, until they’re already roped into the policy and the agent has his commission.
A 15% cap with no risk and a 100% participation rate with 0 risk to principal. Again, what can you mutual fund guarantee? The insurance company is really sticking to their clients. Gimme a break, you’re a hater b/c of your lifestyle.
As for your comment about most millionaires, they can afford a market loss and it will not cause them loss of any sleep. However, for most high middle income folks, they cannot afford a 40% drop like what happened in 2008, or stagnate growth like we had last year. IUL protects them from market loss, while giving them a competitive cap and 100% market participation rate.
High middle income folks become millionaires by saving a good chunk of their income and buying real investments with it. They can’t afford not to take market risk as discussed in this post.
https://www.whitecoatinvestor.com/the-reason-you-take-market-risk/
Life insurance might protect them from market loss, but it also “protects” them from the market gains they need to adequately grow their nest egg. The guarantees cost too much.
But I don’t expect you or anybody else who makes their living selling these products to agree with me. You’re not my target audience anyway, your clients and potential clients are.
Oh Lord; now I got Ed Slott mr. tax advisor been use by agents to sell IUL. What a mental drag.
Fortune 500 companies invest billions on life instance. I guess their advisors and decision makers are all idiots….
6000 banks and security companies went belly up in the Great Depression. But not a single life insurance company did, and they all paid out claims. Nice try.
You desire the fund mgt fees as money advisors but have the gall to say that all insurance agents desire the same when I. Fact they are lower after any 7 year period.
Shill
I think you need to read your history better. Your arguments have been thoroughly debunked elsewhere on this site, most notably here.
https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance-part-3/ See Myth # 13
https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance-part-5/ See Myths # 20 and #22
They’re hardly new and they’re hardly strong. Try to obtain your financial education from somewhere besides your insurance company employer.
I also think it is odd you think I am a money advisor desiring fund management fees. You must be new here so I’ll forgive you. Please stop selling doctors insurance products they don’t understand, don’t need, and once they understand how they work, don’t even want.
[Ad hominem attack deleted.]
I started reading this, However, the very first paragraph on how an IUL works shows who ever wrote this does not know what he/she is talking about. This is very common for people who write such articles.
Weird, someone that sells IULs has a different opinion from mine. That’s so unusual.
Sounds like a thread started by a CPA, who justifies their value proposition by helpning clinets get into a microscopally lower marginal tax bracket or makes a big deal about spending money needlessly to establish a tax write-off, the most universally misunderstood tax avoidance concept on the planet. The first and most basic question one must ask oneself before investing your hard earned retirement nest egg is “Do you expect marginal tax rates to be higher than our present historically low income tax rates or not? Especially given the entitlement debacle that will very shortly hiy the wall.” Simply put, if you believe rates will increase, where is the logic in avoiding paying the piper today, at an historically low tax rate, versus paying a higher tax rate when you need the money the most? Suggested reading for all, especially money managers, CPA’s and the author of this opinionette: The Retirement Miracle and Tax Free Retirement by Patrick Kelly and The Power of Zero by David McKnight.
“There is little in this world more abominable than willful ignorance.”
Quite familiar with The Power of Zero and reviewed it. Needless to say, didn’t think much of it.
https://www.whitecoatinvestor.com/is-a-zero-percent-tax-bracket-in-retirement-a-good-idea/
Those who said “tax rates will surely increase” last year are looking pretty dumb right now.
Yesssss. Keep investmenting in all this stupid financial instruments. I would hate any competition in real estate. Thanks lazy fools.
WCI,
Though I’m not part of your target audience (engineer, instead of doctor), I wanted to express my appreciation for your effort to educate investors on a variety of topics. I’ve learned a lot by browsing your posts, especially with regard to insurance products, but also in regard of other investing/retirement topics.
BTW, I discovered your website a couple of years ago through positive comments by posters to the Bogleheads forum.
Glad it has been helpful.
I find it so interesting that brokers talk about the weak returns that we insurance agents can offer and that there is no real significance in a minimum guarantee. One thing you never hear a broker talk about when comparing an IUL to their investment options is that when there is just a minimum or low amount that the insurance policy is paying, those are probably years where their Investments are tanking and people have lost their shirts. They never talk about this but this is a stark, harsh reality of The Brokerage world! They also love to chide our commissions when they get paid EVERY time their clients do a transaction with them. One other thing if IULs are such bad Investments, why do banks use them and almost every major corporation for their tax planning? If you want to see something else pretty interesting, look at the retirement plan set up for Jim Harbaugh the football coach at Michigan. According to Forbes Magazine this makes him the highest paid coach in college football. He will have tax-free income from guess what an IUL. You don’t have to look very far to find people who lost everything in the market in the last 15 to 20 years and have never come back. It’s easy to talk about a paper loss if you’re not 60, 70 or 80 years old and don’t have time to watch the market rebound. I watched a dear friend of mine lose everything who was told his money was safeR. I told him we use SAFE and his wonderful broker killed him with the R. By the way, some IUL participation rates are awesome! Time alone will tell.
This little rivalry between insurance agents and stock brokers is interesting to me, so much so that when I write anything bad about investing in insurance agents assume I’m a broker.
The truth is you shouldn’t buy an investment from either an insurance agent or a broker. As far as the silly arguments about corporations and famous rich people (# 13) buying cash value life insurance ( as well as “tax-free income” # 26), those have been addressed in the “Myths” series focused on whole life but applicable to IUL.
https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance-part-3/
So far, time has shown IUL returns to be rather disappointing, but not unexpectedly so if you understand how they work.
Life insurance is just what it says it is…insurance and as when buying any product the “value” of the purchase needs to be evaluated as just that…the value of the product, does it provide value for you and your family as exactly what it is, insurance? Will it provide financial security for a family in the event of the untimely demise of a family member? At an affordable and reasonable cost. Is it term insurance, likened to renting your residence; or is it permanent insurance with a cash accumulation component, similar to purchasing your home, having fixed payments, that will not annually increase, like rent does, and that works like an investment in that you participate in the appreciation of the land. After the great money grab of 2008, homes will no longer be viewed as the secure investment that they once were but they are still an investment, although that is no longert a valid primary reason for buying. You can do much better.
As for IUL insurance it is an incredible life insurance product, especially my favorite which offers an early payout of up to 95% of the face value in the event of diagnosis of terminal illness in non taxable cash to spend in any way you choose and a cash accumulation component indexed against but not invested in (think hedge) the S&P 500 featuring a zero percent floor and a 12% cap. Based on the actual performance of the S&P 500 for the last 20 years this strategy returned nearly 3 times what an investment in the S&P 500 did, subject to taxation , in tax free returns. This feature at no substantial premium increase over puny whole life accumulation returns, coupled with the health related accelerated death benefit make this IUL a no brainer when compared to other life insurance products. Oh an I forgot to mention it has a guaranteed life-time income provision that guarantees payout no matter how long you live.
For the average middle class American this offers an incredibly affordable way to achieve financial security for their family. For those that have sufficient funds securely invested to sustain their families, you don’t need to waste money on insurance. Go play in the market and good luck! But if you are looking for an incredible tax sheltering vehicle, we should talk, IUL can provide it.
Please email me the in force illustration of the IUL policy that outperformed the S&P 500 for the last 20 years. I’m confident it did not outperform an investment in the stocks in the S&P 500 and probably didn’t even outperform the index itself. In fact, I suspect the policy doesn’t even exist and you’re simply referring to an illustration of back-tested data. Here’s the standard:
http://www.moneychimp.com/features/market_cagr.htm
From Jan 1 1998 to Dec 31 2017, the S&P 500 grew $1 to $5.34. That’s an average return of 9.99% and an annualized return of 8.31%. I know of no insurance policy that had a higher return over that time period but would love to see one.
I’ve already done the math. Your turn to do your own if you doubt the results, but please don’t allude to the average return myth or use a BS mickey mouse calculator that supports that myth. There is no such thing. If I were to invest $100 today and it gained 10% over a given period of time I would have $110 correct? And if over a following equal time period it were to lose 10% the average return over the 2 year period would be zero correct? No loss no gain if you use the the hypothetical “average” return myth. But in reality you would only have $99. Hence the deceptive faulty reasoning related to the “average return myth”.
Utilizing annual point to point return methodology run two scenarios based on the actual annual loss or gain of the S&P 500. But do everyone a big favor. Actually do the math, year by year by year with a simple calculator, not the BS myth supporting moneychimp calculator you refer to. Good old fashioned mathematics, remember it? We have gotten so lazy and trusting of other’s claims.
Scenario #1-$1000 invested how much would you have at the end of 20 one year periods. Unfortunately there is still a major error. The annual capital gains tax on each annual gain. In reality that will have a significant effect on compounding, but for the sake of simplicity, let’s forget that for now.
Scenario #2-$1000 invested using the same true annual gains and losses but limiting the gain to only 12% in any year where it performs better and in years where there was a loss show no gain/no loss. If you really want to get fancy and real, in scenario #1 deduct the capital gains taxes on an annual basis prior to calculating the next year’s gain or loss. In scenario #2 (the IUL ) forget taxes either during the accumulation period or upon withdrawal since there will be none nor will there be any management fees.
I wish I could show you an InForce ilustration but the product only hit the market 5 years ago. It is a proprietary product offered by the largest brokerage selling forthe second oldest life insurance company in America.
That was my point. This fancy product of yours that would have beat the S&P 500 didn’t actually exist over the time period you claimed victory for it. But an S&P 500 index fund did. The return you seem to think comes from a “BS calculator” is literally what the actual, historical data shows for a product that could be purchased.
https://investor.vanguard.com/mutual-funds/profile/overview/vfinx
I’d wish you good luck with your business, but honestly, I hope you go out of the business of misleading people into investing their money into misleading life insurance products designed to separate them from their hard earned dollars. You know why you get paid those big commissions? Because it takes a lot of work to get people to buy these things. I prefer not to buy investments designed to be sold, not bought and I recommend the same to my readers.
There is no magic investing product. There is no tooth fairy. There is no getting all the upside of the stock market without the downside. Running it through an insurance company simply increases costs. In the end, the price of not being willing to take equity risk is a significantly lower return on your money. You can’t insure away this risk and keep the return, no matter what your insurance company told you in their sales training presentation.
Go ahead, send me the inforce illustration for even this 5 year old product and let’s take a look at it and talk about its returns. My email is easy to find.
PFFT!! It’s only 3rd grade math. Get a grip. You remind me of my pet peeve with people who gripe, whine and complain. I have adopted a policy of having whiners only listening to their complaints if they have a solution to propose. Do the math, your the one whining here. I have shared the light. If you want to try to draw the curtains again, good luck with that.
So I’m guessing you’re just going to leave ad hominem attack comments rather than actually send any data to analyze. Not surprised, that’s the usual thing that happens.
About time someone woke up the argument again.
So, let’s see guys if we can keep it civil and let’s try to use some 3rd. grade math with out confusing us.
I guess client expectations and objectives don’t mean anything after all.
Thanks
Not sure which side your sideways comment was aimed but no matter which side of the argument you are on we all know that client expectations and objectives are everything. If you want to keep it civil, I suggest that you hold the needlesst sideways comments.
And I suggest that if you can’t take the heat, stop crying.
He comes from a different side of your typical clients. So, of course, he is upset.
Insurance agents drink the Kool-Aid just like so-called market investors do also.
Whole life has a very narrow use and the stock market is the lazy ass way of investing.
When either of you can show me where to make 25% on my money every other month, I’ll listen all day long.
Till then I’ll be counting the cash; thank you.
Congratulations on your success. You should be very wealthy, very quickly if you continue to make returns >150% per year. If I were you, I wouldn’t even mention how you were doing that lest somebody else get in on it and take the opportunity away.
No need to hide. That’s the wrong mentality.
‘Private lending’ is been around forever.
Just got to learn how to cover your ass.
Thanks
Who’s borrowing money from you at 150%? Most of the hard money loans I’m seeing are in the 8-14% range.