By Dr. James M. Dahle, WCI Founder
Indexed universal life insurance (IUL) is an insurance product that seems to promise you can have your cake and eat it, too. Unfortunately, as with most things in life, there are no free lunches. The devil is in the details, and when you really examine them, it becomes clear that these are products designed to be sold, not bought.
What Is Indexed Universal Life Insurance?
Indexed universal life insurance is similar to the more familiar whole life insurance policy in that it is composed of two basic pieces: first, a permanent insurance policy that will pay a death benefit whether you die young or old; and, second, a cash value account from which you can borrow money tax-free (but not interest-free) in order to pay for expensive items, educational expenses, or your retirement. The difference lies in how the cash value account grows.
IUL vs Whole Life Insurance
In a whole life policy, the insurance company determines the dividend rate. Each year, this announced rate is multiplied by your cash value and the product is added to your cash value. The insurance company is the sole determinant of what that rate will be, but it is generally considered to come from a combination of the insurance company’s portfolio returns, surrender fees, and the extra money available when people live longer than actuaries project.
With IUL, the crediting rate for your cash value is determined by a formula, instead of being at the insurance company’s discretion. The specific formula is outlined in the policy documents, but, in general, is related to the performance of the stock market.
Unfortunately, if you don’t listen and read carefully, you’ll misunderstand how the policy works and assume you’re going to get stock market-like returns on your cash value or, worse, on your premiums, not all of which goes to the cash value account due to the costs of insurance. The basic premise is that when the stock market goes down, you’re guaranteed a crediting rate of zero to 3%. When it goes up, you get to “participate” in that increased return.
Why Indexed Universal Life Is a Bad Investment
Your insurance agent is sure to point out all of the benefits of purchasing one of these policies; this article will show you five reasons why buying IUL is generally a bad idea.
#1 You Don’t Need a Permanent Death Benefit
The vast majority of Americans, and especially high-income Americans like physicians, will, at some point, no longer depend on their earnings from work in order to live. This is called financial independence. Once you reach this point, you generally no longer have a need for life insurance.
IULs are, by definition, permanent life insurance policies. Term insurance is very inexpensive: less than $350 per year for a $1 million, 30-year level term policy bought on a healthy 30-year-old. The reason it is so inexpensive is that people are unlikely to die before 60. If everyone died before 60, those policies would be much more expensive.
Since everyone eventually dies, permanent life insurance must be priced so that there is enough money to pay a death benefit to everyone. As such, the insurance component is very expensive. The portion of your premium that pays for the insurance component cannot go into your cash value account. The more the insurance costs, the less you’ll have in the cash value account. You don’t need a permanent policy to insure against a temporary risk.
#2 Complexity Does Not Favor the Buyer
IULs have many moving parts. The more complex the policy, the less likely you are to really understand how it will work in the future. The less you understand, the more likely you are to be disappointed when you eventually compare the steak to the sizzle you were sold. Also, the more complex the product, the fewer competitors it will have, and competition drives prices down.
Like any insurance/investing hybrid product, you need to hold a IUL for the rest of your life to achieve even a low return, and you are far less likely to do this when it turns out you bought something that isn’t what you thought it was. Those who sell these commissioned products are highly trained, but not in finance. Their training is in sales, and they are generally very good at what they do.
You may have noticed that the best products in life generally sell themselves. If a highly-trained sales force is the only way to sell something, buyers should probably wonder why.
#3 IULs Don’t Count the Dividends
You have probably heard that “the stock market returns 10% in the long run”. While this figure is approximately true—at least on a nominal (non-inflation-adjusted) basis—it includes the stock dividends, not just the change in the index value. IULs, however, only pay you based on the change in the index.
“So what’s the big deal?” you ask.
The big deal is that if you go back to 1870, the average dividend yield of the stock market is over 4%. Even now, at historically low yields of around 2%, the dividend still accounts for one-fifth of the market return. So if an index mutual fund goes up 10% (including a 2% dividend), an IUL may only credit you 8%.
#4 IULs Have Cap Rates
To make matters worse, IULs usually have a cap rate. That means if the stock market has a really great year, such as the 30% index return in 2013, your return is “capped” at some lower figure, often in the 10% to 15% range.
How much does that matter? Well, imagine if your policy had a cap of 12%. Any time the S&P 500 index returned more than 12%, you just get 12%. How often does that happen? Since 1928, the S&P 500 has had an index return over 12% 44 times, or about 52% of the time. It happens more often than not.
Even if you only go back 15 years to 1999, during this supposedly terrible period for equities, it has happened seven times. If that cap wasn’t in place, an IUL purchaser in 1999 would have had 69% more money than he really ended up with.
#5 IULs Have Participation Rates
If that wasn’t bad enough, there is also something called a participation rate. If your participation rate is 80%, that means that if the stock market goes up 10% (not counting dividends) you get 8% credited to your cash value account. After 30 years, a nest egg growing at 8% instead of 10% ends up 42% smaller.
Adding It All Up – Are IULs a Good Investment?
So how can IULs offer “market returns” while still guaranteeing you won’t lose money, at least on a nominal basis? They don’t.
You simply don’t get anywhere near the market returns due to the costs of the insurance, the additional fees, the loss of the dividends, the cap rates, and the participation rates. These products don’t pass the common sense test.
How can an insurance company give you most of the upside of investing in stocks while eliminating the downside? They don’t have any magic investments; they have to invest like anybody else. In addition, they have to generate enough money for profits and to pay hefty commissions to their sales force.
These policies are likely to provide a return very similar to that of whole life insurance (with the possibility of much worse performance), which is easily seen to be in the 2% to 5% range long term for a policy bought today and held for life. While it may have the word “index” in its title, an IUL has much in common with whole life insurance and almost nothing in common with a high-quality index mutual fund.
While guarantees are always nice, you don’t want to overpay for them. With IUL, you are doing so in the form of much lower returns.
Do you own IUL? Are you happy with your purchase? Why or why not? Comment below!
Isn’t it funny how you have financial experts like Ed Slott, CPA saying that Index Universal Life insurance is the way to go……..? I’d rather take my advice from CPA then this nonsense.
The advice given here is from an individual that is without a financial license nor any kind of a financial degree. To set thing straight, IUL provides stock market like returns while locking in the gains, that your principal can never go backwards while growing tax free, unlike a fully taxable mutual fund account that has zero guarantees.
A tax-free money market fund does all that (minus stock-market like returns), AND has a positive return the first year, unlike IUL. How is that “stock-like?” It isn’t. The returns CANNOT be stock-like. They must, by definition, be less.
The guarantees on most permanent life insurance aren’t worth much. For example, a typical whole life policy will guarantee a return over 50 years that is less than inflation. Hard to get excited about that. Now, you want to guarantee me “stock-like” returns, then we’ll talk. But I have yet to see a permanent life insurance product that will do that.
In regard to “guarantees” you mention, show me a mutual fund that offers any of the sort. At least the IUL product does come with guarantees and the principal is always protected and the gains are locked in. If you’re dealing with a company that doesn’t offer at least a 100% participation rate then you’re not doing your homework.
Also as far as caps are concerned, that’s why you only deal with A rated carriers. With a 15% cap as you state in your blog, how many times in the last 30-years has the S&P 500 beat 15%? This data has been back tested by the insurance companies and they show indexed link returns over a 30-year period of over 8.5%.
As an MD with an MBA, I am completely happy with my IUL. My brother is a CFP/CPA and he sold me the policy. This stuff does make sense for people who cannot stand losing half their money in the market like I did in 2008.
I’ve had gains of over 14% since 2008, and they are 100% locked in and can never go backwards. If the indexes do tank like they did in 2008, to where I lost 60% of my principal in mutual funds, I can never lose with the IUL. There is also an annual reset feature with the indexes you fail to mention in your article. IUL is a more holistic big picture approach to investing that allows you piece of mind.
[Ad hominem attack removed.]
I wrote a lengthy comment in reply to you. But I decided to delete it as it was mostly ad hominem attack, kind of like the end of your comment. I’ll simply take your questions at face value and answer them and then make one comment.
As I suspect you know before asking, the only mutual funds I know of that offer guarantees seem to be some of the money market funds that aren’t breaking the buck despite low rates that cannot possibly be covering the expenses of the fund.
The S&P 500 has bested 15% in 16 of the last 30 years.
I agree that investing in life insurance is probably a good option for terrible investors who managed to lose 60% of their money in a year when the market only lost 37%. I am, however, very skeptical of your claimed 14% returns in the product. I’m confident you don’t mean that your cash value is such that it represents a 14% annualized return of your entire premiums paid. If so, please email a statement and I’ll be the first to expound upon your wisdom in purchasing this policy (and will recommend it to my readers). But with a policy with a crediting rate capped at 15% per year, with significant insurance and commission costs, there is no way your return after just 6 years is 14%.
I’m glad you like your policy. I truly hope it helps you reach your financial goals.
Also, keep in mind the S&P 500 had an average return of 12.67% (annualizes out to 11.14%). Even if an IUL had provided you with the 8.5% return you mention (and it couldn’t have, as there were no IULs available 30 years ago) you’ve got to ask yourself how much that 2.64% per year really matters. Let’s imagine you’re putting in $50K a year for 30 years. If you get 11.14%, you end up with $11.3M. With 8.5%, you end up with $6.7M. Over time, that lower return absolutely does matter. That’s 41% less money. Hardly insignificant.
Again, if your IUL can truly provide you a true 8.5% return going forward, you’ll probably be just fine. But I’m pretty skeptical.
I bought my IUL policy in 2009 after I lost my shirt investing in mutual funds. I never said I had it for 30-years, I said the data listed returns have been back tested to show an 8.5% return.
In looking at my statements, I had my money with Fidelity in what was supposed to be a diversified large cap-growth strategies fund, which lost 49.28% not 60% as I said before.
In my IUL, I’ve been using a monthly point-to-point strategy ever since. My annual reports are here my returns are as follows:
2010 S&p 500: 39.64%.
2011 S&P 500: 20.30%
2012 Nasdaq: 12%
2013 S&P 500: 11%
2014 S&P500: 18.19%
For a total of 20.23% over a 5 year period. The gains are forever locked in and can never go backwards, unlike a mutual fund. I am happy with this.
It’s also my understanding, these returns are linked to index call options and not the actual market. It says its a minimum non-modified endowment face amount contract policy, with an increasing (Option 2) death benefit.
I don’t have time to constantly watch what is going on and try and time the market with running my own practice, working as an attending on call 1 in every 4, and managing a family. I work 60+ hrs a week. If that makes me a “Terrible investor,” so be it.
This IUL product as I said before, is more of a holistic approach to investing. It may not be for everyone, but it gives me piece of mind.
might want to read this
http://insurancenewsnetmagazine.com/article/illustrated-promises-unmet-expectations-2533
chances of meeting even the illustration less than 1% and that article is written by people pro IUL.
Bottom line is that insurance companies take the investment portion and invest most of it primarily in their general accounts which is primarily bonds/treasuries and take a small portion and buy options. The gains over time will never be more than that minus the commissions and insurance costs.
The worst things about these products is they make people think they will get market like returns. They will get returns similar to other fixed (minus insurance costs) bc that is what the majority of the money is invested in. Maybe a little better or maybe a little worse depending on how things go. This is why they have long surrender periods and are allowed to change both the caps and participation rates at their discretion. There is no magic in this world.
To make matters even worse the illustrations are typically quoted without using the guaranteed costs for insurance meaning they are allowed to increase that as well if desired (gUL riders are available at times for more money).
These things could under perform even whole life over the long run. They might do better or they might do worse but they wont produce market returns especially since they dont credit the dividend.
This is from the article on IUL you suggested. Pay attention to what he says about only focusing on “Guarantees…”
Policy illustrations have evolved to help consumers better understand how the underlying policy would work under the extremes of an unrealistic “guarantees-only” result, and an equally unrealistic “current, non-guaranteed” calculation that is the simplistic result of projecting a user-selected crediting rate as a constant over the many years of expected policy benefits.
Neither extreme is a realistic representation of a likely future.
This is a far more relevant quote:
IUL was developed to protect against equity losses while providing some participation in equity gains. But while volatility occurs in a much narrower range than in VUL, volatility can still produce a very different result than the policy illustration, especially when the objective is a low, lifetime annual premium.
Instead of the idealized “perfect” graphic image of an illustration whose $5,417 planned premium is calculated based on IUL’s often-allowed 8 percent average crediting rate, Chart 7 depicts two random results with annual credits ranging between the guaranteed 0 percent minimum and a 10 percent “cap” with 100 percent participation (i.e. in a year in which the index return is 14 percent, the most that will be credited to the policy is the “cap” as determined by the formula 10 percent cap X 100 percent participation = 10 percent credit).
When all 1,000 randomized hypothetical IUL illustrations are run and the 0 percent minimum and 10 percent cap are imposed on outlying returns, we find that only 1 in 1,000 are able to sustain to age 100 with a premium of $5,417.
Basically, the moral of the story is you shouldn’t be running this illustrations with 8% rates (or even higher as in the one you sent me) but something 250 basis points lower, or 5.5% to more likely reflect reality. Of course, if you show people that, they’re not going to want to buy it.
I believe tt was an associate of mine as I never sent you anything.
What this guy is talking about is the solve feature that is on all life software programs. You put in the data (E.g., Age, Sex, premium pmt, health rating, etc.,) and then it solves for the death benefit based up you inputs and the interest rate. I said all along this is the problem with buying this type of plan (IUL) and this is how it turns into a bad investment. This is only the way an agent should sell term.
Instead of dropping the interest rate by 250bps, I take it a step further and run it as a minimum non-MEC face amount. Example: If the solve feature spit out a DB for $100k then some would say run the DB at $75k to make sure the policy preforms. I run it as a minimum Non-MEC which is even a lower face amount.
The 8.6% average return over the past 30-years, my associate sent you, has been fully back tested to support it’s representation.
This article is talking about running a solve only feature and selling as much face amount is possible. I always said all along, this is not the way IUL should ever be sold.
I am placing $25k per year in my IUL, and my cash value is $198,167. That means I’ve paid somewhere in the neighborhood of $6,800 for the cost of insurance and fees over a 5-year period. I also have a tax free death benefit of $908k.
Yep and since its a UL the cost of insurance rises and rises and rises (and isnt even at the guaranteed rate yet which would be a lot higher). Good luck. Glad you are happy. Might want to read the article so you can plan accordingly.
You’re saying that you’ve been contributing $25k per year into this policy over the last 5 years and your present value is $198k? That’s a great return! And you’re getting a death benefit to boot. Check the facts with your brother – they don’t add up.
Looking at my statement, the facts do absolutely do add up! I believe that you don’t realize the potential of IUL or don’t realize all the crediting options that are available. Again, this is a monthly point-to-point strategy with a 5% cap. Meaning I can make 5% per month for a maximum of 60% per year. That of course is, if the index selection or selections I’m in make at least 5% each month.
There is also an annual point-to-point with a 14.5% cap, and a daily averaging strategy with no cap and a 107.5% participation rate. If I selected the daily averaging strategy from March ’09-March ’10, I would have done even better.
That was my problem with this article in the very beginning. It is just so generic. The author tries to put all IUL products into one box without going into detail how the accounts work (E.g. Annual reset features, locked in gains, call options, and the various crediting methods available,) without presenting all the facts.
I’m still astounded by your claimed returns. Would you mind making a copy of your statement and initial illustration, blacking out any identifying information, scanning it and emailing it to me? Your claimed returns are something like 19% per year which is obviously very, very good for an insurance product. But the devil is in the details on these things.
Of course the article is generic. How much detail can you get into in 1000 words? Send me your stuff and I’ll do a post on your particular experience.
The facts are the following: There are costs to the insurance. The investment piece is made up of primarily bonds/treasuries with a small slice of options. Everything else is smoke and mirrors. This why the insurance company gets to change caps and participation rates at their discretion. The bonds/treasuries allow one to pretend there are no losses/ “lock in gains” when in reality if those investments went sour then you would lose everything and of course that is before taking into consideration insurance costs and inflation. I find it very interesting that you have a MBA, lost your shirt with stocks so they are bad, and came to the conclusion this is a good investment. It had nothing to do with your personal behavior or you “understanding” of the limits of the products. Good luck. If you like the investment piece so much then just invest that way without the insurance as well. That way you can lock in the gains again. The additional truth is that these products will perform similar to a regular UL over the long haul maybe a little better or maybe a little worse and that’s bc 95% of the investment piece is the exact same.
This is great! what provider are you with?
I have an IUL too!
I’m having a very hard time understanding what you’re saying here. You said earlier (and correct me if I’m wrong) that you have an IUL with a cap on the crediting rate of 14%. How is it that you have returns of 18%, 20%, and 40% on your money with that cap? Also, the S&P 500 index went up about 15% in 2010. Again, where are you getting 39.64% from?
If your numbers are correct, I’m certainly interested in whatever you seem to be investing in and I can see why you’re happy with it. But I confess that I remain exceedingly skeptical because it doesn’t seem to be making sense.
What (possibly) makes you a terrible investor is the belief that you have to time the market to be successful and that you invest (invested?) in actively managed mutual funds and then sold them at market lows. Remember that retrospective studies in finance have the same limitations as retrospective studies in medicine.
One of the strategies is an annual point-to-point crediting method, which has a cap of 14%. Upon looking into my policy statements and speaking with my brother. I’m in a monthly point-to-point crediting method which has a cap of 5% per month. Meaning I can make 5% per month through the index call options.
So it’s a snapshot on the anniversary date of the policy every March. So in this case, from March 2009 to March 2010, look at the monthly returns of the S&P 500.
Rex: You don’t know that for 100%, and this isn’t smoke and mirrors. That why you keep the face amount as low as the IRS allows, and IUL does allow you to decrease the death benefit if need be. As my family my need it, I’m fine with paying a small portion for the cost of insurance. I would rather pay that then fees to a mutual fund and get nothing. These life policy are still on the LIFO method of accounting when the cash comes out of them.
Yes, I do have an MBA as well as a MD and I lost almost half my money with a fidelity mutual fund account.
So what is next with you?? Is it going to be just like when Suze Orman lost this debate to Patrick Kelly and further to Ed Slott, CPA, her response was, “It’s just to complicated!!”
There is nothing new about overfunding right up to MEC limit. That’s the same strategy with all permanent life insurance. I haven’t lost any debate. Ive also not mentioned any of those folks nor care about their knowledge on the subject. You bring it up like other straw man arguments that have no basis in reality. I realize that I don’t need to invest in managed mutual funds with fidelity (funny enough you seem to like managed bond funds which is what insurance is). I understand how this works which is why I am not interested in the underlying investment piece nor the insurance costs. By the way its been shown time and time again that companies will change things like the caps/part rates when the investment piece isn’t working out for them. This is why LTCi has had rate increases bc lapse rates and investments weren’t working out, that is why they have unilateral made changes to what investments are allowed in VA with guaranteed income riders and the list goes on. Each time before this happened agents would say pick a company that has a history of this not happening…. well until it happens and then they stop saying that. And of course this has already happened with the index linked products but I guess not with yours yet and you feel good about that?
Straw man argument, I have to chuckle at that…. Especially, when you say things like, “Slices of options, devil in the details, just like UL, just like WL etc .” Those sound like “Straw man arguments,” to me.
Isn’t this what this piece is all about in the first place? The author by his own admission states this as: A generic article on IUL. He nor you explain all the “details” of how said accounts work. Furthermore, it’s just even more evidence that takes from the creditability of any argument you suggest against any IUL product by trying to make a comparison to WL or the old UL policies. Inasmuch, it’s unethical to not disclose that the topic of conversation is lacking in factual data, absolutes, and information.
Most of what is said by the author and you are based up on your opinions and emotions. There is no factual back tested data to backup what you’re saying. As far as I can see, you’re trying to compare this to the old UL and WL policies which is an insult to anyone reading this. My guess you’ve had no personal experiences to relate to the subject matter either.
Michael-
Are you going to send the statement and illustration? I think it would make for an interesting post. Either it will be obvious that you’ve miscalculated your returns or readers will be very interested in your experience. I’d like to run your success story with two others posts on IULs I have coming up as well as one on indexed variable annuities (which make IUL look pretty good, by the way.)
Do you even understand what a monthly point-to-point crediting method is with a 100% crediting rate?
Do you understand what an annual reset feature is all about? Do you even understand how call options work?
Do you understand that since the inception of the S&P 500, there have been only 2 consecutive negative years?
If you do understand call options, then shame on you for not explaining them in full detail since the devil is somewhere in there.
However, please humor us and explain them since the article failed to do so.
Fred- You’ve been in the business for decades. You ought to know better than saying there have been only 2 consecutive negative years. There have been both 4 (1929-1932) and 3 (2000-2002.) We all have opinions, but there are also easily verified facts.
Last, I don’t think you meant to direct your comment/questions at Michael, the owner of an IUL.
I would like to get the same IUL. What company and what is the product from that company named?
Please reply to this comment as the previous one, i forgot to check the box that says “Notify me” of follow up comments
I’m not the person who originally wrote you but I do have an IUL with LSW . I love it!! I started investing (albeit a most humble of scrap amount – hey … public servant here) … in 2008 … the same year the market tanked. I lost nothing!
When I needed emergency dental surgery 8 months ago at $1500 (I called in and got part of my actual cash value (ACV) released …. and paid them back today in fact. LOL. The amount exceeded my available savings as I was also dealing with a flooded residence and a car repair – LIFE HAPPENS!!
Because I am interested in RETIREMENT… my policy is structured so that the maximum portion is INVESTED IN RETIREMENT … and MINIMUM towards the life insurance – I have no kids / etc. And I have catastrophic riders on it for health / medical / injury as well.
It is not the fastest way to get rich…. by no means… but it is steady.. and I’m sorry…. I love paying with after tax money … borrowing and paying it back on my terms (but DO PAY IT BACK!) … and I can set my premiums up as I see fit – LOVE IT! Would NEVER go to a 401k or any “guaranteed” benefit plan.
Google: 60 min. 401k if you want a real scare about 401k tanking!! It’s also on utube and look up “401k scam.” You’ll realize it is about marketing… the 401k was never designed for retirement… hence why you can LOSE IT ALL!!
Glad you like your policy. Would you mind sharing what your premiums have been since 2008 and what your current cash value is of the policy? That way readers can see what kind of return you have had on your “investment” since that time.
I’m also surprised that a public servant with presumably a relatively low salary would place such a large benefit on tax reduction. Many public servants are able to stay in the 15% bracket where long term capital gains and qualified dividends are not taxed at all. I’m all for reducing taxes, but I’m mostly interested in maximizing after-tax returns.
Your assertions that the 401(k) was “never designed for retirement”, or is a “scam,” is obviously nonsense, and yes, I’m well aware of the 60 minutes piece. Minimizing 401(k) fees and getting the best possible investments inside your 401(k) is obviously important. The idea of a 401(k) being a scam is primarily marketing by those who sell insurance with high commissions to take its place. No sensible comparison of the two would lead anyone to choose IUL over a solid 401(k). If “tax-free income” is so important to an investor, a Roth 401(k) or Roth IRA is a far better choice than an insurance policy. It is unlikely that a poorly paid public servant can save enough to max out a Roth IRA, a Roth 401(k), and still have a substantial amount to put into IUL, so it’s really an either/or question here, and there’s no doubt which is the better choice. If you can’t stand the volatility, learn about market history and throw some bonds into the mix.
HI xzavier haywood, IF YOU ARE IN USA, I AM AN AGENT OF TRANSMERICA AND NATION WIDE AND MORE FROM CRUMP, IF YOU WANT TO LEARN MORE ABOUT IUL, LET ME KNOW. [Phone number redacted-ed]
Why do you think that an IUL or EIUL is a better product? As you offered above, I do “WANT TO LEARN MORE ABOUT IUL” 🙂
my emailadd is wiqar01 and it is on GMail
“Avoid [indexed] universal life insurance at all costs!” – Clark Howard
No one looks at these as a short term, one year plan. The first year you invest in mutual funds you can ‘potentially’ lose half the value or more. Any investment and IUL or VUL should be compared with long term results, distribution, and taxation. My advice for readers is seek advice from a professional CPA or CFP who understand these products as well as alternatives such as managed money who can show you the pro’s and con’s of each apples to apples. From my personal research they are great for the young and healthy and reduce market and tax risk in your overall LONG TERM strategy. Research available proves we are facing a highly volatile market environment and high possibility of future tax rates being sky rocket. Every financial product out there fits a purpose and has demand for that purpose. Cash value averaging 8-12% is very realistic fyi. Btw I love term and mutual funds too, they have their place as well.
Amazing how many people get out of these in the first five years for a long-term plan, isn’t it? 80% of people dump cash value polices before death. Before buying one, you should ask yourself, “Self, am I one of the 20% or one of the 80%?” and if you’re one of the 80%, you should never buy it.
Research does not and cannot prove that we are facing a highly volatile market environment nor can it say anything about future tax rates. If you want to say research says we possibly could have high taxes and possibly could have a volatile market, then sure. But my 2 year old can say that too.
Cash value isn’t going to average 8-12%. It cannot do so. Thus, it isn’t realistic. I don’t know why you would love mutual funds if you thought you could get 10% out of a cash value life insurance policy. If I thought I could reliably get 10% risk-free out of a cash value life insurance policy I’d be buying them left and right. Don’t you think there’s a reason nobody is getting 10% out of a life insurance policy? It’s because you can’t. Someone has told you a lie and is about to sell you a lie. Please keep researching. Find someone who bought one of these and calculate the return. Is it 10%? Nope. It isn’t. In the history of IUL, nobody has ever earned a long-term return of 10% on their policy.
I found some pretty good whole life policies bought in the early 80s when interest rates were double digits. Their long-term return was 7%. If you couldn’t get 10% then in a cash value policy, you certainly can’t get it now and anyone telling you that you can is either misinformed or lying.
“Anon” do you sell IULs? If so, at which return rate do you illustrate them? Thanks.
“Anon” you claim: “…Cash value averaging 8-12% is very realistic…”
*LAUGH*
Oh really “Anon?”
Please tell us Anon: What investment in this universe do you know of that will reliably return 8% and above over the 40, 50, 60 years and more that the policy buyer expects to own his IUL?
Anon. Please give us a sign that you are not completely full of horse*hit. Any sign at all.
Thank you.
Hello Michael,
Can I know the company name? contact name to get similar IUL. sounds interesting.
[Ad hominem attack deleted]
Please do your homework more thoroughly if you have not seen products that have delivered “stock market like” returns. There are plenty of index options out there that show an 8+% return over a 20 year history of that strategy. Yes, you do have to pay for the life insurance as well. Hopefully you would purchase that for your family anyway. Another important piece you leave out is that a Universal Life is not comparable to a whole life at all! It is more comparable to a term policy with a cash value vehicle attached. With an IUL, you get to share in returns when the market is up, you lose no principal or previous gains when the market is down and you benefit from inexpensive term like rates on death benefit. Additionally, good products do allow for loans that do not cost and are on a tax free basis. This is done by crediting your loan balance with the same interest rate as is being charged. I agree, if you have no need for life insurance, there may be better options for your money. However, when you combine the benefit of Life Insurance with the accumulation options, I would put a great IUL up against a regular term policy and pretty much any other investment option out there.
Do you sell life insurance for a living, Allen? Combining your IP address location, name, and “insurance agent” into a Google search leads me to believe the answer is. Assuming that is the case, how is asking you if I should buy more life insurance any different than asking a barber if I need a haircut?
At any rate, I am unaware of a 20 year old IUL with a 20 year 8% annualized return. Please forward documentation to me. I suppose it’s not impossible, but I’m pretty skeptical.
Allen you claim “…There are plenty of index options out there that show an 8+% return over a 20 year history…”
You are WRONG. Allen, you will FAIL to find an actual extant IUL anywhere on Earth that’s delivered anything remotely close to an 8% CAGR over 20 years. Period. That IUL will have delivered only in the 2.5%–4% range. And that’s BEFORE the carrier extracts its kilo of green.
Hell Allen, try to find us a still-gasping IUL that’s even a *decade* old. You’ll be very hard pressed to find this bearded rainbow-striped dancing unicorn of cash-value policies.
Why are IUL returns that low, in line with those of Whole Life? Allen, it’s simple. The carrier will use 95% or more of your cash value to buy enough investment-grade bonds to meet the 0–1% index account crediting it guaranteed to you. With the remaining 5% or less of your cash value, the carrier buys index options.
These options may or may not pan out. They may make some money for your index account if they manage to hit their strike prices. They may lose a little money if the options expire before they hit their strike prices. Guess what Allen? The carrier DOESN’T HUGELY CARE what the options do. Whatever happens, it’s YOU, the IUL holder, left on the hook to make up any shortfall.
I’m constantly amazed the industry still gets away with selling these vastly overhyped dreadful toxic pigs in pokes. And that so many agents remain ignorant to, or turn a blind eye to, their xULs’ invariably fatal flaws just to score a fast few thousand bucks of commission.
Directed at Real IUL Math: I’m years late to the party here, but this is the first accurate description I’ve found on the internet on the behind the scenes financing that must occur to produce an IUL policy. I assume that as the carriers portfolio returns drop along with modern corporate bond rates, your “95%” could even turn into more like 97% in the future.
However, while your description is the only one I’ve seen that clarifies this, after having barely managed to come across this info after scouring the internet and doing my own guesswork, I’m pretty sure there’s no other way that IUL could operate, and I think your description is accurate.
The thing I don’t get about your comment though, is that since the 95% is projected to grow into a replacement for the initial balance by being invested in the general portfolio of the company (back to 100% of the beginning of year balance, thus creating the 0% floor), and since the other 5% is invested into an assortment of inherently highly leveraged products, i.e. options contracts, that on net could either fully evaporate or actually double or triple in value depending on the underlying index, doesn’t this method of providing the various indexing products actually deliver the results as advertised? Assuming insurance costs are minimized and the policy is funded to IRS limits, I don’t see how this apparent reality of the operations is necessarily going to limit gains to 2% to 4% rather than the 10% to 15% that could be possible in the higher risk index crediting options. Historical “projections” certainly work great, and options are leveraged enough to make good on those projections in theory, so why do you think that the actual returns must be lower than an average of 6%?
Like you said, the risk is on the consumer and the carrier doesn’t care how the indexing strategy performs, but that’s what draws the investment oriented person to the product in the first place, they’re willing to assume the risk and the insurance company in turn is willing to allocate those funds into highly leveraged products that it would never be willing to risk their own safe capital in, and this is one reason is why IUL is both dangerous yet possibly lucrative.
The real fatal flaw of IUL in my opinion is the chance of having too much death benefit in later years relative to cash value and over paying for the renewable term component, but even then it appears that a carefully managed policy can be deliberately made to have a death benefit within 5% of the cash value indefinitely after a certain funding period, which caps the term insurance cost to somewhere around 2.5% of the cash value, and that’s when you’re 90 or so. Years before that it’s extremely low cost. So, isn’t it possible that an IUL could achieve the results that certain informed risk taking clients are after even knowing how the index crediting works?
You know, index annuities were designed to compete with CDs, not stocks. They’re a fixed annuity so nobody should be surprised when the return that eventually comes out of them is similar to other fixed annuities (maybe slightly lower due to the higher commissions). These products are not a stock substitute. I think those same lessons can be applied to IUL. In the long run, I’d expect returns similar to other universal life policies. It doesn’t make sense that you could get equity like returns without taking on additional risk of loss.
I am in the process of discussing opening a WL policy for infinite banking purposes and an IUL for 401K replacement. Everything I have read on your sites go against this. Do you guys offer a service to review the policies and see if they are appropriate?
I certainly don’t think an IUL is a 401(k) replacement. Not even close. So I’d skip that. No, we don’t offer a service to review it.
IB isn’t the world’s worst idea though. More info on that here: https://www.whitecoatinvestor.com/infinite-banking-bank-on-yourself/
if anything, a UIL is way better than a 401k. no one is really educated on how they work and loose like 40% of it every time they switch companies and not roll them over.
plus, they are taxed more and theres huge penalties on taking out early or too late lol.
and the fees that companies charge to ‘manage them” ridiculous. Also, they are in avariable market lol. you can loose your retirement at ANY time. ◡̈
you be easy though
Ha ha ha. That’s good.
First, it’s IUL.
Second, I am educated on how they work. That’s why I know a 401(k) is a FAR better deal than an IUL policy.
Third, it’s lose, not loose.
Fourth, why in the world would someone who knows how they work withdraw the money and pay taxes and penalty on it? That may be the dumbest argument for an IUL I’ve ever heard.
Fifth, 401(k) fees can be very low. In fact, they have been very low in every 401(k) I’ve ever had, including several I’ve designed myself.
Sixth, volatility does not equal loss. You know what does though? IUL surrender fees and IUL commissions.
Nice try. Do you sell these things or did someone sell one to you?
Your stating facts that are factually incorrect. I am a licensed financial professional and am also licensed to sell Iuls. I also have them myself and can show you my own statements that show your ignorance on this subject. My cost of insurance is $50 a month and it’s not permanent my cost of insurance drops off in 30 years the same it would be if I bought a term. It’s structured that way.
What you fail to understand is that the death benefit you may may not need but there are also living benefits and loaning benefits in these accounts that do not exist in mutual funds .
My Iuls have outperformed my other investments and I’ve also used them to grow my net worth loaning against my own accounts and buying real estate as opposed to loaning from the bank. This isn’t anything new many companies have started this way and Walt Disney famously did this to start his theme parks. I’ve also loaned against my Iuls to pay off student loans. Ironically for medical school and I switched careers into finance over 15 years ago.
Iuls performance also depends on the company or the strategy. I represent over a 100 companies and yes some of them can be expensive and do have additional cost but some don’t. Yes some agents are naive and dont know how to structure them properly. If costs are too high it’s probably not a good investment for you. For you to generalize that they are a bad investment for everyone, is ignorant, I can speak on facts not opinions, I’ve had my accounts for over 15 years and will gladly compare it to your mutual funds and money market investment, my ROR on just one of of my Iuls was over 12% and utilizes a JP Morgan index and out performed my other accounts which are still In the negative. Btw market volatility does matter, negative numbers can’t compound that’s not my opinion either that’s 8th grade math. Everything is not good for everyone I get that. However Had I taken your advice which has no merit since your not a licensed professional i would have greatly regretted it today. I think you should really get your facts in order and explain that this may be bad for those who’s costs come out too high but it isn’t bad for everyone. I’d love the opportunity to meet with you and show you these statements and break down the facts in math instead of arguing opinions,
Wow, your other investments must be terrible if your IULs have outperformed them long term. At any rate, send in your initial illustration and your current in-force illustration to editor(at) whitecoatinvestor.com and we’ll see how great it is.
I’m well aware of death benefits, living benefits, and the ability to borrow against the policy.
@Zeena :
I have been studying the IUL for past few months since they have been pitched to me. I agree with the author in terms of fees, high variability and complexity. However I can also see that a well structured IUL *if* it performs at 5-6% per annum, can provide good diversification + security for the portfolio.
I am interested in learning more about it, if you can provide me with some illustrations.
PS : I would never recommend it as a major chunk of investment in any portfolio, but only as diversification after maxing out 401K/roth/HSA/stocks if ther’e still some left over.
Hi, I’m also trying to decide about my IUL. It’s been frustrating that every time I called in to speak to an agent about my IUL, to get a better understanding of how it’s doing, I always get a different answer. It doesn’t seem that the person on the end actually understand the product. Just keep telling me what my statement says. I had an IUL since 2012. The first 2 years I made max contribution at $13k. When I signed up, I told I’m capped at 12%. My life insurance is $500K. In the second year, I called to ask if something happens to me, does my son gets $500k and the money that is in my annuity accounts. For example if I’m so lucky and my account grew to $1million.. they said no. My son will just be paid $500K no matter how my account is doing. I’m thinking to myself- that’ really stinks!! So who gets my hard earning money????? So I stop contributing max but only half for the following 2 years to prevent lapse in policy. I didn’t surrender because at the time after surrender fees, I would lose almost all my principals. As of a few days ago, my account grew to $40K. I contributed total of a bit over $36K. And I also realized that my next year is capped at 1%., I wasn’t told that the capped can go down on the company’s term. In reality, I guess I appreciate that however much my account earned, paid for the $500k life insurance for the last 11 years. Whatever is left after the fees and cost of life insurance, I made a bit over $3K after 11 years. That is a one expensive insurance plan I paid. I could have bought a term 900K for 10 years for $30-40/mon with Haven.. While my market account that I started in 2019 barely contribute over $3-4K per years has a whole lot more than my IUL. I want to like my IUL and I want to understand more to really decide if I should surrender, but I could never get clarity from any of the agents when I called. Currently, I don’t know how I feel about it.. not very happy but don’t understand enough to hate it. I guess I will figured it out after I get a new quote for a term. I just know that I could have made a lot more had I put my money in my retirement account instead.
You will need to read the policy documents and then Google what doesn’t make sense to you or get a professional to do it for you. Usually IUL are pathetic investments and insurance. It’s a product which is designed to be sold, nobody buys this crap on its own because its rarely makes any sense financially.
I’m sorry this happened to you. You’re not the first.
David, not sure if you’re still reading this, but I have a question for you. Where does Ed Slott say IUL is the way to go? I’ve never heard him say this. You might be right, but I’d like to see the proof. Thanks.
https://www.youtube.com/watch?v=tJqqZyAD96U
That YouTube video is not Ed Slott promoting IUL. That video is made by a guy who sells IUL (David Weisman). He took things Ed Slott said about permanent life insurance in general and has misrepresented the truth in the title in order to market himself. I’m not convinced Ed Slott has ever promoted IUL.
Hmmmm…I guess that’s what I get for never having met Ed.
Hi I am a broker who offers IULs as well as other investments. Ive seen IULs returns and gains from multiple clients including myself. They received way more than What was estimated and we even give free financial needs analysis that calculates an estimate of your return. I love seeing people taken care of in their finances. If you’d like a PFR or personal financial review feel free to contact me
[Inappropriate advertisement removed.]
I’d love to see a 10 year old illustration along with a current in force illustration for that policy that shows people “received ware more than what was estimated.” Please email to [email protected] and I’ll do a post about it.
But I kind of doubt you have the evidence you say you have because my experience has been just the opposite.
Athena, the IUL is an unmitigated DISASTER that no-one should ever, ever, ever waste a dollar on. They all collapse, leaving the policyholder with nothing after years of faithfully pumping thousands of dollars into them.
Please immediately stop flogging and selling these toxic pigs-in-pokes.
Transamerica marketed the world’s first IUL in 1997, 23 years ago. Good luck finding an IUL that’s even a decade old. I guarantee you will NOT be able find this mythical beast.
Thanks for reading.
http://www.thebishopcompanyllc.com/wp-content/uploads/pdf/indexed_universal_life.pdf
That video is by ed slot posted by david, see this where he says his name and you can check wikipedia too for his pictures :
https://m.youtube.com/watch?v=v0oYCPoKylI
Thank you! He also did not mention that an IUL has a floor and will not lose $ if and when the market drops below 0%.
This article sounds like it was written from a Term insurance salesman
Other than the dollars already lost to the commission and the dollars lost paying for the overpriced insurance.
The author of this article has no idea what he’s talking about. If the agent structures it premium heavy on death benefit, yes, bad idea. However, if you are a licensed and educated agent, you know how to build the plan and it’s a very good way to have a large tax free income in years to come.
Stop spewing your uneducated opinion about things for which you know nothing!! Keep watching Dave Ramsey for your financial advice and see where it gets you.
Did you lose a sale? Sounds like it. We’re working hard here to put folks like you out of business. Stop preying on my peers. You should be ashamed of yourself selling this junk as a high quality financial product.
That is absolutely not true. The insurance company can and does lower the cap rate continually and has no reason to increase it. Our cap rate has dropped from 13% to 8.5% over the last five years. Minus the fees and cost of insurance you will be in a deficit position very quickly. And if you bought the policy under the impression you can borrow against it to supplement your retirement you are completely screwed.
The above post does raise some interesting points…..
[Ad hominem, off-topic, or repetitive comments deleted.]
…the annual reset feature allows the principal to restart where the market linked index ended up on it’s anniversary date. So in order for the guarantee feature of 3% provided within policy to kick in year after year
[Ad hominem, off-topic, or repetitive comments deleted.]
then you must accept the market indexes will not at least do 3% for the duration of the policy. Ask yourself the probability of our market indexes never making at least 3% over the next 30-years.
Also, for guaranteed maximum charges to kick in people will have to start dying soon then they are now. The current mortality charges from a life insurance company are a reflection of life expectancy and are equal to 1.4-2%.
[Ad hominem, off-topic, or repetitive comments deleted. ]
There is an inflation risk to money market funds, and they are not 100% guaranteed. If you were securities licensed and were caught telling someone that, you’d be in big trouble.
There is an inflation risk to permanent life insurance and guarantees are only worth as much as the person guaranteeing them. If you’ve been telling your clients that life insurance companies have always pay as guaranteed you’ve been lying to them.
There is no surrender period with this policy and a 0% sales load on the premium coming in. I’m with an A+ rated privately owned carrier (ESOP) that’s been in business for over 100 years. I researched them fairly thoroughly and they took no TRAP/Bailout money.
I wouldn’t have went this route if it wasn’t for their ratings, stringent underwriting requirements, and track record. I probably would have just tried to use the dollar coast averaging method with the Fidelity mutual fund to where I lost my shirt.
What is the company name? It looks interesting.
Hello
Can I know the company name? sounds interesting.
Michael you keep saying you lost your shirt what do you mean by this. As unless you withdrew money loses were not realized and the market made almost a full correction within 2 years. Depending on your investment strategy maybe you didn’t make money those years but if you did dollar cost average or dumped a lump sum in the market you would have taken advantage of buy low getting up side swing. Interesting!
There is a reason why smart investors don’t use the same investment strategy of mostly bonds/treasuries with a small slice of options even without insurance costs. There is no magic in this world.
Guarantees come at a cost, and these costs are never explained by agents. Yes, you can get your money out anytime, but there is something called a surrender fee that is retained by the insurance company. The surrender fee is the salesman’s commission for peddling this policy. These policies are heavily promoted by the industry under the guise that IRAs and 401k accounts are not cutting it, and using high cost mutual funds in their comparison. Just go to Youtube and see for yourself all the training videos that salespeople are putting out. IULs are just as toxic as other whole life plans and you need to run if your agent tries to hawk one of these to you.
I completely disagree that this is a bad product. I’ve had excellent growth the past 5-years and now my principal is locked in, and can never go backwards. BTW, The IUL I have has 0% surrender charge so I can liquidate it at anytime if I’m unhappy with the way this is going.
I ran, when shopping, this against a New York Life WL policy and the cost is about 60% less than that of the Whole life policy for the same face amount. There was a guarantee death benefit rider, with the IUL, I could’ve placed on the policy. I agree the guarantees are just too expensive to justify the protection when you’re buying the lowest face amount as the IRS allows.
No, I don’t get dividends because the index participation is 100% linked to call options. The dividends are usually taxable anyways, so I’d rather save myself the 1099-DIV. For those of us that are in a 39.6% tax bracket, paying an extra 3.8% surtax on investment income, and 20% on capital gains is just plain ludicrous when you can have a product like IUL that grows tax free. Or, much worse a taxable account your using as a retirement vehicle.
I am of the belief that taxes will be much worse in the future. The placement of my IUL as a hedging vehicle against higher taxes comes after I’ve maxed out all my other qualified tax deferred accounts.
IULs grow tax deferred period. You may access the money tax free but if surrendered gains are taxed as income period. That would be like saying my BRK stock grows tax free. It doesn’t. Additionally you don’t actually know that your IUL will beat the whole life. Your illustration predicts it but that’s about it. Again the investments are very very similar and depending on how those small differences perform will primarily determine which one will perform better although one is a UL chassis and the other whole life.
Rex: I haven’t sent you anything. The IUL policy I have is 60% less expensive than the whole life policy from New York Life I compared it to. If I added the guaranteed death benefit to the policy, it jumped the costs about 20%. It’s nowhere near the same as you suggest. (That’s a straw man argument.)
Also, it is tax free not tax deferred, in regards to the death benefit and also the cash coming out of it due to the FIFO method of accounting. If a policy is structured with a face amount as low as the IRS allows then it’s almost impossible to ever lapse.
Mutual funds use the LIFO method, meaning they pay you the interest (gains first.) I didn’t say this is for everyone, but it is for those us who are in a high income tax bracket (39.6%, 3.8% surtax on investment income, and 20% on capital gains.) You can choose to invest in similar strategies, but then you’ve now taken on all the tax liability.
In my opinion, IUL is a fairly conservative way of saving. It’s for those of us who cannot stand losses and hate paying taxes. For those of you who have a much higher risk tolerance, don’t mind paying taxes, and are counting on tax rates staying the same, then by all means go the routes you’re suggesting. Just don’t try and say all IUL is bad and it’s not suitable for anyone. You can choose to invest in similar strategies, but then you’ve now taken on all the tax liability.
I think you’re unfairly and inappropriately using the terms FIFO and LIFO. First, they don’t really apply to mutual funds. Distributions aren’t included in those terms when applied to mutual funds or life insurance. They are classically used to apply to investment accounts like Roth IRAs, annuities, and life insurance policies. It generally refers to whether you pull out the taxable gains first (LIFO) or the non-taxable principle first (FIFO).
With a partial Roth withdrawal, you get FIFO treatment- meaning your first withdrawals are tax-free. With an annuity, you get LIFO treatment, meaning your tax-free contributions are withdrawn last and you’re paying your full tax-rate on your first partial withdrawal. If you’re borrowing from your cash value life insurance, these terms don’t apply. But if you’re withdrawing cash value from life insurance, my understanding is you get FIFO treatment like with a Roth IRA.
With a mutual fund in a taxable account, you can designate which shares you wish to sell. If you like, you could sell the first ones you got (which are likely the highest taxed ones.) While you would think this would be called FIFO, the tax-treatment is really more like LIFO. However, a wise investor would usually sell his highest basis shares, usually the ones he recently bought (although held for a year.) While this sounds like LIFO, it is really treated tax-wise like FIFO.
Let’s not confuse the terms in this discussion or it will leave later readers confused. The terms LIFO and FIFO shouldn’t be applied to mutual funds.
Regarding your phrase “fairly conservative” everyone has a different idea of what that means. Certainly an investment which has apparently been providing a return of 19% to you recently is not “fairly conservative.” Substantial risk must be taking place. You can argue that the insurance company is the one taking all the risk, but if that risk blows up on the insurance company, you will also reap the consequences along with the company. Their guarantees are only as good as their ability to stand behind them.
Again, send me your illustration and statements and let’s do a post on them. That’s really the only way to “win” this argument if that is your goal. If your goal is to educate doctors about a viable investment alternative you have found, that is also the best way to do that.
It’s easy to get caught up in semantics on this issue. If you only borrow from the policy, it’s like it’s tax-free but not interest free. If you surrender it, then all gains are tax-deferred. Technically, you could borrow with a mutual fund as collateral so that mutual fund withdrawals would then also be tax-free but not interest-free, and then pass to heirs at death with the step-up in basis, just like a tax-free life insurance death benefit.
The principal can and will go backwards. That’s just insurance agent double talk. Guess what happens when the market doesn’t behave and you get no credit but the cost of insurance goes up as with all ULs? The cash value goes down. There again is no magic here. It’s just mostly bonds/treasuries with a small slice of options all of which the insurance company can change at their leisure with the caps and participation rates and then you have all those additional insurance costs. You do realize that the same people who want to raise taxes also have looked at removing the tax free death benefit on insurance? Interesting that one would fear one without the other.
In 2005 Congressional tax reform panel also stated that IF that change was made, all Life policies would be grandfathered in. So if Congress decided to take away the tax benefits of a Roth IRA, then every one who had a Roth prior to the legislative change would now have a taxable account?? No way! Those who bought the product before the change would be allowed to keep it the way it was designed. In the end, the members of congress decided to leave well enough alone.
As far as an insurance company changing their caps or participation rate…. Well I guess that’s why you do your homework, deal with A+ rated carriers that have a strong reputation and have been in business 100+ years . Besides, if that ever happened that’s why I bought an IUL with a waiver of surrender option so I could get out of it.
My brother showed me the company commission schedule for this product. He as the agent bears the risk of me surrendering the policy within 5-years. He’s the one who would have to pay 100% of the commission he received back to the company, so if the agent is willing to take that risk when suggesting a product, I believe it works in my favor.
A companies rating has nothing to do with if they will change the caps/participation rates. It has everything to do with how the combination of 95% bonds/treasuries with 5% options performs. All permanent life insurance has the same issues with the agents getting charge backs if the policy is surrendered too soon. That hasn’t stopped agents yet and certainly to date isn’t in the favor of the over 80% of people who surrender permanent life insurance.
Nobody knows what changes congress would make. Frankly taxes are currently high from an effective tax rate. Considering the very few percent who keep permanent life insurance in force until death are typically the rich, I wouldn’t put much faith in grandfathering since if you want to tax the rich then that’s probably an easier way to do it especially if you put limits on the policy such as those over 200k or some number. Frankly I think its just a scare tactic to promote insurance so I don’t put any weight in it one way or the other but it is funny to see insurance promoters to push on it.
When the market doesn’t behave the way you want it to, then that’s why this product has an annual reset feature. If you don’t understand the way call options work. They would be surrendered in negative years, and rebought on the anniversary date so you would get the gains going forward.
Since the inception of the S&P 500 how many negative consecutive years have we had? I believe it’s only like 2 or 3.
I understand options and several of the IUL crediting methods. Notice nobody recommends this as an option for investing on your own (although of course they do sell index annuities).
Again, I’ll take the favorable tax route with the safety of the aforementioned attributes I have listed. The gains I’ve listed are for real. I also encourage you to look up a monthly call option strategy from March 2009 to present, and explain them to the rest of us.
If this doesn’t preform to my expectations, then I have a product that 100% liquid with no ZERO surrender charges. I’m sorry I’m just not into losing half my principal like I did buying mutual funds, and paying fees on top of all that. I’m also having to pay a 3.8% surtax and 20% on capital gains that I’m not too interested in doing either. Doing this is just hoping taxes stay right where they are for the next 30 years until I retire.
Good luck in mutual funds, and have fun paying all those taxes, but I have peace of mind with exactly what I’m doing all the while my principal is growing tax free. It will continue to grow tax free not tax deferred because of the way it’s structured.
Save the argument about fees with regard to mutual funds. Nobody following investing methods advocated on this site is paying any significant investment fees.
Look, you’re a relatively new convert to this method of investing (since 6 years ago you were using mutual funds.) Why not evangelize a little and actually send me your statements/illustration (with identifying info blacked out.) Your ability to show that you actually are having 19% returns will go a long way.
If you’re not willing to do that, the reader will be forced to assume you’re exaggerating your returns.
WCI, you’re not going to get any statements and illustrations. There are far too many shills masquerading as MDs (with MBAs). These claims are so preposterous that none of the many reasonable CFPs are going to back these claims. If it’s too good to be true, then…
We’ll see. I’ll give him the benefit of the doubt. If it never shows up, well, then I guess we know what happened.
It doesn’t matter if that person provides any illustration. I wouldn’t be surprised if somehow one was able to cherry pick a very small time period with a particular product which is cherry picked for that specific time period and show great results. They like to pretend its a case study and that case studies have any real validity. The bottom line is to understand how these things really work on the investment piece so you don’t fall for the hype of market like returns with no risk. If you aren’t interested in a UL with a slightly different credit rating (and normally you shouldn’t be), then no reason to go further.
My returns are real, I really don’t care if you believe me or not. You asked for my opinion and experience, and now you’re saying I’m exaggerating.
I never wrote the article to begin with, so I don’t feel it my responsibility to send my statement to someone I’ve never met. Since you wrote the article you should look up the monthly call option strategy from March of 2009 to present.
I have a feeling Rex has that why he’s made the remarked he did. You can choose to live in whatever world you wish, but do you own diligence and don’t insult your readers after you’re the one who asked them for their experiences. You’ve edited and deleted my responses and wrote what I consider to be an unethical article. I’m supposed to trust you?!?!??!? Are you kidding me?!?!?!?
As far as CPAs and CFPs recommending this product, have you ever heard of Ed Slott, CPA?
As far as my MD, you can feel free to ask me any medical question you wish.
Michael-
It would seem that you have confused me with Rex. I assure you we are two very separate people. Rex is a blog reader, like you.
I’m sorry to hear you won’t be sharing your experience with readers. I think they would find it really interesting. But I’m sure you understand why I can’t just take your word about your returns and do a big blog post about it.
I’ve been hearing a lot about Ed Slott from both you as well as a number of insurance agents recently. Readers should be aware that according to at least one site, Ed Slott, CPA, is on the payroll of numerous insurance companies. That doesn’t necessarily mean he’s wrong, but it certainly introduces a serious conflict of interest which doesn’t seem to be as fully disclosed in his presentations as I would like to see.
The main recommendations I have seen from Slott for permanent insurance involves people with estate tax problems, not something most docs will need to deal with.
Since you will not post a call option return strategy from March 2009 to present, here ya go. These numbers are directly from my statements:
S&P 500 March ’09-10
5.98, 9.39, 5.31, 0.02, 7.33, 3.43, 3.57, 0.85, 2.77, 2.81, -4.67, 2.85= 39.64%
S&P500 March ’10-’11
5.88, 3.19, -9.73, -5.39, 6.87, -4.74, 8.76, 3.69, -0.23, 6.55, 2.25, 3.20= 20.30%
NASQAQ March ’11-’12
-0.51, 3.03, -1.55, -2.00, 1.62, -5.15, -1.93, 7.39, -2.75, -0.44, 8.00, 6.29=12.00%
S&P500 March ’12-13
2.75, -0.38, -6.27, 1.43, 3.78, 1.46, 2.94, -1.98, 0.27, -0.95, 6.82, 1.11= 10.98%
S&P 500 March ’13-14
3.60, 1.81, 3.56,-2.91, 4.95, -2.82, 2.65, 4.46, 2.89. 1.87, -2.55, 3.35= 20.86%
Face amount started out at $855,700, with an increasing death benefit option 2. I’ve been placing $25k per year into this policy for the past 5-years. The cost of insurance is $308 per year, increasing by 24% per year, and an additional $903 for the option expenses and rider charges.
That should be enough information for you.
I’m not looking for cherry-picked information, nor is that “enough information” for me to do a post about your experience. I’m looking for the statements and the illustration so I can see the stuff you’re not telling us, whether purposely or not purposely. I hate to be the one to point this out, but it seems there is something you don’t want readers to see about what should be a very straightforward policy and experience.
By the way, I hope that cost of insurance doesn’t increase by 24% every year you own the policy. In 40 years the cost will be $1.7 Million per year. Seems like that would really take a chunk out of your retirement plans. Surely it levels off at some point, right? These are the details I’m interested in.
Also I have a 5% cap and a 100% participation rate that has remained unchanged since I bought the policy. Although, I do realize the insurance company reserves the right to change their rate at and time, this one has not.
Actually it was good Michael mentioned the fees for Mutual Funds. I have been paying 5.5 % loading fee every contribution for the last 4 years $3400 in total. I’m sick of it that’s why Im here now, reading to get more understanding on an alternative investment vehicle.
You may not need an alternative investment vehicle. You need to get good advice at a fair price. You’re getting bad advice at an unfair advice currently. Don’t let that turn you off from mutual funds. Are you aware you don’t have to pay 5.5% to buy mutual funds nor get advice from a commissioned salesman?
Hi,
The person who set me up with the A-Share Mutual fund also does my taxes. I am meeting with a Wells Fargo advisor ( who says the tax guy sold me the worse kind of mutual fund because a its expensive and b It is not managed. ( American Funds small cap – A to be specific) on Wednesday to talk about transferring the sep funds over somewhere else. I believe he ( the WF advisor) is commissioned as well though. Whom are you speaking of when you say get advice from a person who is not a commission based sales person.
This article should help:
https://www.whitecoatinvestor.com/my-two-least-favorite-ways-to-pay-for-advice/
Here are some recommended advisors. Even if you don’t hire them, at least you can see what reasonable fee structures look like:
https://www.whitecoatinvestor.com/financial-advisors/
Anyone on that list is going to be head and shoulders above either of the two “advisors” you’ve met so far.
I do know of one firm which recommends this- whole life + S&P 500 options. They wrote a book on it called “Comfort Investing.” Not saying it’s a good idea, and it is being pushed by an insurance agent(s) who benefits from selling the whole life policy.
The answer is 4- 1929-1932. There were 3 in 2000-2002.
Well then there ya go, it’s been less than a handful of times there’s been consecutive down years. Please explain what an annual reset feature means to your readers. Also, explain why only focusing on the guaranteed column is unrealistic in regards to the annual reset feature of the IUL.
As far as Ed Slott, CPA, I do believe he states he’s not an insurance agent nor is he compensated in any way by insurance companies. I believe I sent you a link to which he stated this. I can post it again if you wish.
I think my readers are quite familiar with the phrase “annual reset feature” and if they’re not I’m sure you’re quite qualified to explain what it means in a comment.
I prefer Jack Bogle’s advice to Ed Slott’s. I wonder how he feels about somehow becoming the “poster boy” for insurance agents?
Regarding his objectivity, it doesn’t take much Googling to bring it into question. Take this question posted in a forum by a guy who uses the handle “annuityseller”:
http://www.insurance-forums.net/forum/annuities-forum/ed-slott-elite-ira-advisors-t12271.html
ED SLOTT, THE IRU & RETIREMENT GURU
http://www.bing.com/videos/search?q=ed+slott%27s+retirement+rescue+for+2013&FORM=HDRSC3#view=detail&mid=8A22EC0AC69056B545EE8A22EC0AC69056B545EE
Just a week ago you were admitting that you, had respect for him, but have “Certainly lost respect for him that he thought IUL is a good idea.” Do you not remember saying this? Also, the book by David McKinght, “THE POWER of ZERO.” you made a blog on but you still didn’t recognize Ed Slotts’ forward. Please do that if you’re going to comment on the book.
This video is a marketing piece by insurance agent David Weisman, who famously wrote a book about the “retirement tax trap.” This concept of a retirement tax trap is used by insurance agents all over the country to sell more life insurance. The Missed Fortune guy in my local area loves to harp on it, as does David McKnight in his recent book on zero taxes in retirement. The problem is that it isn’t true when you really look at it for several different reasons that would probably be a pretty good post. It’s mostly fear-mongering to get people to buy life insurance instead of funding their 401(k), which is usually a better idea.
So how much is the IRS and vanguard paying you to suggest to people to put money in taxable or tax deferred accounts?
The IRS cuts me a check for $100K every month. I’m also on Vanguard’s payroll. In fact, 4 of the 5 basis points they’re charging for their Total Stock Market fund go right into my pocket.
Seriously though, I love how these insurance agents don’t even understand Vanguard’s structure (not to mention the structure of our tax system). Maybe try reading this before making comments about Vanguard that make you look ignorant.
https://www.whitecoatinvestor.com/why-vanguard/
If Vanguard is making profit off me, it’s my profit, since I own Vanguard.
Wall Street has put forth the biggest retirement scam ever known to mankind. They suggest 401ks/IRAs for retirement when they get most of the return in taxes when you withdraw from your plan. My IUL with Allianz uses the Barclays US Dynamic Balanced Index and has no cap. It has averaged 10.07% over the past 24 years and is very strong. I estimated 8% in my illustration just to be safe. There is no question that an IUL is one of the best things out there, kind of like your father’s pension plan from his company back in the day. This is what it mimics because in the past companies used insurance companies to provide pensions for their employees. When the 80s came to be Wall Street promoted IRAs and 401ks because they could make enormous fees on them. Politics are involved as well because politicians are funded by Wall Street to promote products that will pay the government a lot of money. The IUL is the best thing out there, by far, and I am an electrical engineer by profession.
Wall Street gets my taxes? That’s funny. I usually write “US Treasury” on the check.
You have had an IUL for 24 years? Call me skeptical, but I’ll take a look if you’ll send the original illustration. I suspect you meant to say that you have some backtested data showing the index your Allianz IUL uses has returns of 10.07% over 24 years. Given it is a balanced index, I suspect that’s an average return, not an annualized one. I truly hope the index gets the 8% you’re estimating and although that is different from what your return will be, I also hope you get whatever return you need to meet your financial goals.
There IS a great deal of question about whether IULs are a good investment. Very few of those who don’t sell them or haven’t been sold them actually believe it is a good investment. That’s why I write articles about it.
It isn’t a pension plan, but its a free country and you can call it whatever you like.
While some companies used insurance companies for their pension plans, far more of them used a firm that invested in good old stocks and bonds to fund those pensions.
I don’t disagree that Wall Street promoted IRAs and 401(k)s and charged enormous fees on them. It’s very similar to insurance companies promoting IULs and charging enormous fees on them. I don’t disagree that Wall Street gives politicians money, just like hospitals, the AMA, engineering trade groups, and my mother do, in hopes of influencing public policy. Isn’t America great!
I disagree that the IUL is the best thing out there but appreciate your enthusiasm and hope your decision to invest your retirement dollars in your IUL works out very well for you. Thank you for stopping by.
If you dont think IUL is the best product, what do you recommend to invest instead of IUL?
Are you new to the blog? I suggest beginning here: https://www.whitecoatinvestor.com/new-to-the-blog-start-here/
You might also consider buying the book: https://www.whitecoatinvestor.com/the-book/
But basically, I recommend that the lion’s share of the portfolio for most physicians is composed of a static asset allocation of an appropriately risky collection of a few low-cost, broadly diversified index mutual funds periodically rebalanced. If you want to play a little around the edges, that’s fine. Any reasonable asset allocation, when coupled with an adequate savings rate and good discipline, will do. This post gives lots of options:
https://www.whitecoatinvestor.com/150-portfolios-better-than-yours/
But if you want to invest in IUL with all or a portion of your portfolio, be my guest. It really doesn’t matter to me either way. If you save enough money it doesn’t matter so much if you buy investments with low expected returns. What I want is that doctors understand how it works BEFORE buying permanent life insurance. Far too many (in fact, in my experience, nearly all) catch on after buying it, and realize it was a mistake for them.
Hi there WCI,
I recently opened up an IUL a little over 3 years ago. I not very financially savvy, but I like to read online a lot. I opened an IUL because it made sense for me. I wasn’t really saving much, just maxing out my Roth IRA, instead of my 401k since my 401k didn’t have matching. Atleast that’s what the Internet told me to do,lol. Since I’m no expert, I was just putting my money in a low cost target retirement fund. I like to be hands free as much as I can. When I learned about the IUL, I decided to open one up and max fund it.
So far, I’m currently happy with it. I like that it is handsoff, I don’t have to know about investments and don’t have to reallocate each year like my target fund does for me. I understand that I can probably get better returns if I learn to do it myself. It’s like driving a stick, I can reduce wear and tear, and reduce gas usage, but I prefer automatic for the convenience.
I understood going in there was alot of fees, so I would be under for a while, but it’ll make itself up in the long run because I would still be able to earn higher interest during retirement, instead of having to move my money to lower interest, safer investments like what my target fund is doing as I get older. I heard the rule of thumb is age in bonds. My manager at work didn’t know that and was planning to retire in 2008, so when the market crashed in 2008, she told me she lost about half her retirement and had to keep working. So I learned alot from her mistake.
The cap for my IUL was at 11.75% when I first opened the policy. I looked at the illustration and it says they can lower my cap down to as low as 3%. But last year I got an email stating they were raising it up 13.25%. so I guess caps can go up or down. After 3 years, with the market doing pretty well, it currently has done better than the illustration, which was ran at 8.82%, based off of the 11.75% cap. Currently cash value is at $45.5k, and total premiums i’ve put in is 45.6k. I’m currently under by $100, but hope to make it up in the long run. Only time will tell. I’m currently earning about $200-$400/m, and cost is deducting a little over $100/m. Illustration shows $844k by the end of the 26th year with total contributions of $313k.
The mention of costs fluctuating alarmed me so I checked my last statement vs the illustration. The illustration estimated my charges to be $1653, but I actually got charged $1291.69. So I actually got charged less.
I personally think that it’s good that there’s a max that they can charge me. Technically the max any mutual fund can charge is 100% correct? But they don’t because it’s not good business practice. Which I would imagine is the same for life insurance companies, if they are greedy, they will have a bad reputation and wouldn’t get any referrals, and everyone would move their policies to a new company.
I also checked what was mentioned about cost of insurance going up the older I got, and noticed something in my illustration. At the age of 96, my policy value equaled my DB. So it looks like there’s no charge for DB, but I’m stilled charged 0.7% of my account value and $120 yearly fee. I guess that’s not too bad if I can get avg 8% return in retirement without tax and without risk of the market tanking.
I checked my participation rate, and it says guaranteed 100%, which is good right?
One of the other things I like about it is the flexibility to take out the money before 60 years old, unlike the other retirement plans. So I can use it as an emergency fund. I have to pay $25 per withdrawal, but I can withdraw as much as I want of the principal. For the interest, I can do a loan with a net effective interest rate of 0%, therefore not having to pay taxes or interest.
I do see how an IUL would not be appropriate for alot of people out there. It does take discipline to save, its long term, and I’m locked in with the company for 10 years before I can move to a new company. Those who can only pay the minimum probably should look elsewhere. It seemed to make sense for me personally. I havent had any problems with it so far. Let’s hope it stays that way.
Because of your article, I took a closer look at my policy and learned alot. There were benefits I didn’t realize I had and there were hazards I learned about. Thanks!
Glad you’re happy with your purchase. One point about one of your comments is this idea that the life insurance is good because you don’t have to put money into bonds in retirement to reduce volatility. I see that as just a sales technique/myth. Let me show you what I mean:
Imagine a life insurance policy that earns 5% a year compared to using a stock index fund that returns 8% a year. Both “invest” for 30 years. After 30 years, the stock investor puts all his money into bonds earning 3% a year. Who comes out ahead? Well, let’s assume $50K a year invested either way for 30 years, then nothing invested. After 30 years, the stock investor has $6.1 Million. The insurance investor has just $3.5 Million. 3% of $6.1 Million is more than 5% of $3.5 Million. And besides, the wise stock investor probably only put half his money into bonds. So in reality, he’s making 5.5% and still way ahead of the insurance guy. This, of course, ignores the sequence of returns issue but it does point out that there is a serious cost to this oft-touted benefit of cash value life insurance-you pay for it with lower returns. For example, your policy has just about broke even after 3 years, a return of 0%. Whereas if you had invested that $15K a year into stocks, you would have gotten average returns of 18% per year for those three years. The difference is real money which would have been compounding for the rest of your life.
There’s no free lunch. If you want guarantees, benefits, and insurance, you will pay for it with lower returns. Your illustration showing your $15K per year compounding to $844K after 26 years represents an annualized return of 5.31%. I wouldn’t be surprised to see you get that. I certainly think you’d get 3% anyway and maybe if things go really well up to 6%. If you’re happy with that, then you’re likely to be happy with your policy. But realize the difference between compounding $15K per year at 5.31% and compounding $15K/year at say 8-10%. At 8%, it’s $1.3 Million. At 10% it’s $1.8 Million. It’s possible your decision to use this policy could literally cost you a million bucks in lost opportunity costs over the next 26 years. Nothing is guaranteed, of course, but I know which way I’m betting. Heck, even if stocks only return 5%, I won’t lose that bet, and that would be the worst performance stocks have ever seen for a 26 year period.
White Coat Investor, in your math you didn’t include that every year stock earning would be taxed. If you are in 33% bracket and include state tax you would need to give 30-40% of earnings every yr (i am paying in CA). So, practically you are saving 60-70% of earnings for compound growth. Also, average return of index fund matches with iUL because IUL stops the loss. Remember 25% loss need 33% profit to be nullified.
In 30yrs the taxable account would be almost 30% less than tax deffered if you use same returns. You can take those 30% out from iUL without tax.
PS:I have not invested in IUL but after putting numbers in excel sheet comparing apple to apple, it make sense.
You pay 30-40% of your earnings on stock investments each year? I think you need to trade a little less often. I figure the drag on a very tax-efficient stock index mutual fund each year is 0.3-0.46% of perhaps an 8% return. So that’s more like 4%, not 40%. When you sell, DECADES later, you may pay another 15% or so. I would suggest comparing investing in an IUL to a tax-efficient stock investment lest you deceive yourself on the tax benefits.
In addition, don’t forget that you can borrow against your stock investments tax-free just like you can borrow against your life insurance cash value tax-free, but if you actually sell both of them, the stock investment gets the better tax treatment.
YES YOU CHOOSED THE RIGHT PRODUCT, NO WORRIES OF DOWNSIDE PLUS PEACE OF MIND OF PROTECTION AND GROWTH. I DO HAVE IUL TOO.
Typing in all caps is considered “yelling” on the internet and is typically regarded as rude.
And if you can’t believe the guy who sells the product for a living, who can you believe?
It seems that I can’t reply to your post while on the mobile version of the site. Sorry for posting a new comment instead of replying. Thank you very much for your reply, it is very insightful.
Just a small correction, on average I’ll be putting in $12k a year for 26 years. The slight miscalculation is because I’ve had my policy for like 3 and a half years. Not sure how much that’ll change the numbers.
At the 26th year, I stop putting money in and the policy value is growing at a rate of 7% to 8% per year. That’s probably why in the beginning the return is negative but the longer it goes, the higher the rate of return. It hovers around 8% per year throughout retirement. I’m not sure how accurate the illustration will be in the long run but so far the returns have surpassed the illustration and the costs have been lower as well.
In comparison to the stock investor, is the stock investor putting 100% into stocks? or is it their age in bonds and the rest into the stock? And if we continue calculating the values another 30 years past the original 26, to account for retirement life. If I earn 8% per year for the next 30 years, would I catch up to the stock investor who now has 50% or more in bonds? Let’s say I have $800k and the stock investor earned 10% and has $1.5m. Isn’t 8% of $800k for 30 years not that bad compared to 5.5% of $1.5m?
Also, in my illustration, it shows 8% after all costs and fees. However it seems like the cost for term insurance, fund expense, taxes, etc wasn’t included in for the stock investor. If the stock investor had to pay dividend taxes, capital gains taxes, and had to slowly move his money over to bonds, wouldn’t that affect the stock investor quite a bit and narrow down the difference? if the difference is small, I wouldn’t mind losing some to get the protection from market risk, and higher returns in retirement.
Even though I own the policy, I’m trying to be as objective as I can. If we compare the two options as fair as possible, is the difference that significant?
If you really get 8% a year it will have been a fantastic investment. But if you’re getting 8% out of an IUL, stocks should outperform that figure significantly.
Regarding a stock investor’s costs- there are no dividend taxes or capital gains taxes in a tax protected account, which as I recall, you had available to you as you were no maxing out a 401(k). Expense ratios are practically zero (5-10 basis points for index funds at Vanguard). And I don’t plan to need a death benefit after 50. Prior to that, term life is also incredibly cheap.
But hey, so far your policy is outperforming the projections and you’re happy with the projections. It sounds great and hope everything works out great for you in the long term.
I’m just trying to learn about insurance products, currently IUL.
Since it seems that holders hope to use their cash value for retirement, what happens to the cash value when the policy holder dies? Does your “savings” aka cash value get added to your policy’s face value? If the insurance company only pays the face value, and get to keep the cash value, then who would want to save all that money when you can’t pass it on to your loved ones in case you die? Wouldn’t that make a term life insurance and a savings account “more advantageous” in the long term?
How do I make sure I don’t die before withdrawing my cash value? just kidding 😀
Jie…..There are two ways to structured the policy, one is level and the other is increasing.
Level is where the insurance company gets to keep your cash value and only pays out the face amount. This is obviously not the way to go since it gives the insurance company a break on how much they need to pay.
Increasing is where the amount of your cash value gets added to the face amount so your beneficiaries end up getting both amounts. This is the option I have with my policy but there is a catch, the cost of insurance.
With a level option the cost of insurance is lower than an increasing option. In the first 10 to 15 years of the policy this is not a big deal, the difference is minor. In the later years you can start to notice a good amount of difference. Hopefully by the time 20 to 25 years have gone by you have funded to policy enough to where this is not a concern.
Remember there is only one thing that makes money and that is money. The more you fund the policy the better it will perform though out the life time of the policy.
On a side note, has anyone ever really considered the real cost of owning a mutual fund?
Sales Load
Administrative Fees
Expense Ratios
Transactions Cost
Cash Drag
Soft Dollar Cost
Advisory Fees
Taxes
When you really stop and think about it and start doing some math you figure out that mutual funds are super expensive. Prospectus are always good at pointing out the Expense Ratio but there are a few other fees that they fail to mention.
Everything in life has a catch, and every product out there has fees!!
http://www.forbes.com/2011/04/04/real-cost-mutual-fund-taxes-fees-retirement-bernicke.html
Seriously? Was there somewhere on this site where I recommended buying high-ER, high turnover, loaded mutual funds?
I’ve done the math. My TSP funds have an expense ratio of 0.02%. My Vanguard funds are in the 0.05-0.3% range. Just because there are fees doesn’t mean they’re anywhere near comparable to those from the cash value life insurance industry.
need to know if IUL is the best policy when we compare cost of ins, other expenses to “Buy term & invest the Rest” mantra? I have an EIUL policy from Midland Life. I am a physician, closing his 50s, and like the benefits it provides including lawsuit protection but concerned about the increasing cost of ins, especially as I will be getting older into 60s and later, eating away any chance of growth in investments to be used as a supplemental income during retirement days.
Why did you buy the policy? Hard to say if it’s the best policy without understanding why you bought it in the first place and what you expect it to do going forward.
Bought it in 2013 to replace, wait for this……, a VUL which was sold to me in 2000 :))
I bought it to provide Life ins for family. Like the idea that I can grow the investment portion without the risk of Market losses, the reason why my VUL was ready to lapse if I don’t increase the monthly premium to >double. Also, ability to withdraw earlier/later than retirement age as loans, without increasing taxable income, sound great. Flexibility to start putting less now and a lot more (than IRA/401K allows) later, attracted too. As I mentioned above, creditors/malpractice protection gave me added comfort.
So are you buying it for insurance or for an investment. Why are you mixing the two? The problem with doing so is you generally get an inferior insurance policy and an inferior investment compared to what you could get if you purchased them separately. For example, an IUL (and a VUl and WL) are all permanent life insurance policies. Do you have a permanent life insurance need? If not, what many smart investors do is buy a term policy for the term in which they actually have an insurance need. Then they have a lot more cash flow they can use to invest in more traditional investments such as stocks, bonds, and real estate, often combining those investments with far more beneficial tax advantages in retirement accounts.
I think you would benefit from reading this series. It’s technically about whole life, but most of the lessons apply to all types of permanent life insurance:
https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/
In the end, if you decide you like this policy, knock yourself out. It’s really no skin off my nose. I have no dog in this fight. But I find a lot of doctors really feel like they’ve been taken advantage of once they learn how these policies really work.
Terrible timing on the VUL. I’m sorry to hear that.
Thank you for your prompt responses:
1- One argument I keep hearing is that the withdrawals (or “Loan” in this case), are Tax free. That is then and there upto 30% ROI, depending on the tax bracket at the time. What is your intake?
2- Also, I do max out on available qualified retirement plans before considering EIUL premium. On the other hand I do get malpractice immunity here vs. investing into market directly. Or did I get it wrong?
3- I may not need all the amount I got life ins for, for life, but I opt for a higher amount to be able to transfer all the money I had in VUL into this IUL without a penalty. I am considering minimizing the policy to the minimum death benefit, keep funding any extra income after retirement accounts to allowable max, and buy term for any extra insurance I need for now. Do you recommend it or would you consider another approach. To remind you this policy is only 2+ years old.
I hope you don’t find my points redundant. I am not as savvy as you are, and since my wife needed ins coverage I started looking for what is out there. Another thing which concerned me is that I am concerned about exponentially increasing cost of insurance as I age.
I appreciate any help you can provide here.
Thank you and have a Happy 4th of July!
1) Loans from your policy, like loans from your house or against your investments, are tax-free but not interest-free. What are the terms on the loans in your policy? You may find it is cheaper to borrow money elsewhere.
2) I think “malpractice immunity” is probably too strong of a word, although in many states life insurance cash value is fully or partially protected from creditors in bankruptcy. What state are you in? Did you check if it enjoyed any sort of asset protection in your state prior to purchasing?
3) What “penalty” were you facing if you just cancelled your VUL and took the money are run? Surrender penalties still after 15 years? Taxes on the gains? (didn’t sound like you had much.)
You’re right to be concerned about the costs of insurance “eating up” much of the cash value.
To decide what to do with an unwanted permanent life insurance policy, it is best to look at a current in-force illustration. What is the guaranteed and projected IRR on the policy over the next 5, 10, 30 years etc? How much is the asset protection worth to you? How about the tax benefits etc? I assume at this point you’re going to lose a big chunk of money on the cash value you poured into the IUL, but dumping it after securing adequate term for your needs may still be the right thing to do.
Good Morning Dr. Dahle,
1- The interest rates are basically a wash. Also, wouldn’t it be hard to get loans at all when I am retired?
I am looking at these loans as my investment growth over time, and at a negligible interest rate, I am basically using my own money but tax-free.
– I am more concerned though that if I am drawing a $100K loan for my expenses every year, in 10 years I have taken out a million. Does it mean my Million dollar policy is worth nothing if I die (as any loans will be deducted from the DB first)? Or the investments growth over time will cover that?
2- I am in FL and have been told by multiple sources that Life ins is protected.
3- I had close to $70K and there were potential taxable penalties but no surrender charges etc.
4- I do understand your suggestion of just dumping the policy but I will lose a lot of money in that case. Are you not in favor at all of: “I may not need all the amount I got life ins for, but I opt for a higher amount to be able to transfer all the money I had in VUL into this IUL without a penalty. I am considering minimizing the policy to the minimum death benefit, keep funding any extra income after retirement accounts to allowable max (after funding any Retirement Plans), and buy term for any extra insurance I need for now. Do you recommend it or would you consider another approach. To remind you this policy is only 2+ years old.”
Thank you again for your time and all the guidance you provide here!
1) They may or may not growth enough to cover the withdrawals plus additional growth. Be sure you understand exactly how the loans will work in retirement as a surprisingly high number of cash value life insurance purchasers are surprised.
2) My understanding of Florida law is that life insurance cash value is 100% protected there.
4) What do you mean “lose a lot of money?” The money is already lost. Always do your calculations looking forward. If the forward looking return is acceptable, then keep it. If not, dump it. All past premium payments are water under the bridge. You might consider discussing this strategy with an insurance expert, such as James Hunt, for a low flat fee.
I love how all of the insurance salesmen responding to this article use the COMPLETELY deceptive method of comparing IUL to 100% stocks and NO diversification into bonds. They’re comparing apples to oranges. They compare ultra conservative to highly risky. A conservative retiree should never put 100% of their money in stocks. And if all you need to do is earn low returns then you invest heavily on the bond side — Probably 67% bonds and only 33% stocks. You will EASILY beat any insurance product that only earns 2 – 5% over a lifetime.
Thank you so much for this comment, Paul. I have spent the last hour reading every single everlasting comment on this article. Reading people’s arguments and watching them go back and forth with no clear answer as what to do with my money. At this point my mind is going in circles, as Michael raises some very strong points. But then again so does Rex and WCI. Finally……… I get down to the very last comment (Which is yours). And it’s short, simple, to the point and easy to understand. So going forward I will use Term for my life insurance needs and a mixture of stocks and bonds for my investing needs. Never mix the two. Got it. 10-4
Oh my lord. lol What an awesome debate.
The best way to go is to use both. So all this back and forth is non-sense. 75% safe 25% percent risk and everyone is happy. Have some gains and some back up. (Piece Of Mind) More riskier investor and know when to fluctuate between aggressive and non-aggressive then create a portfolio %50 / 50 % or 75% risk 25% Safe depending on how you feel about the market and the specific amount of money you have to play with and/or invest.
Come on now. EVERYONE IS DIFFERENT. Read ALL of the comments in one go. YOU BOTH ARE RIGHT! There is no right or wrong, they each have their own place. its all personal to the matter, conservative or less conservative, this or that left or right. Its the type of person you are.
Age also comes into play. Are you younger or in your 30’s trying to invest more into riskier vehicles or are you retiring and cannot afford to go back to work.
In any portfolio it should be diverse, however things ALWAYS change
From 1970 to 2010 the lowest risk allocation was 28% stocks and 72% bonds. And you can’t replace bonds with an annuity because you can’t “rebalance” an annuity. Rebalancing is a basic and critical strategy that adds up to .35% per year in increased returns. After 20 year that’s a 5% difference in the entire value of your portfolio. It could be even more — think 2008, which was the opportunity of a lifetime to rebalance.
Bought an iul but after studying a bit I decided to just keep it going w the the premiums. I have two and both are increasing, I’ve had them reviewed by multiple sources and since 2010, it’s about 6.8 % return but I asked for a 7% illustration. A+ rated w pretty history and my part is 50/50 w sp500 and gold. I invested in a general fund option w my brother in 2005 and since the market did great I made a face value return of 22% and recently sold them all, but it was timing and luck. I also bought gold bars many years ago at $800 /oz and they exploded to $1950, sold $9000 worth daily for weeks and it helped put a 30% down on my home, also luck.
The IULS are peaceful and I don’t worry about them, that’s worth money to me. I’m confident it will outperform banks and inflation after 30 plus years . I also sold my house and left Cali/US bc I can’t stand OBAMA CARE and i feel an earthquake will take my home someday. IULS have been under a lot of attack, agents from TransAmerica, WFG, etc have been known as brainwashed salesman rather then educated financial agents. They sell feelings rather then solid information but imo most wouldn’t understand the info anyways and they would just do nothing. IUL is something, it’s better then the bank and most are scared of vehicles that can tank to 0. For the majority, it’s still a worthy vehicle. Buy from a friend or purchase your own online w some help. Check out the co, ratings, consumer reviews, co history and you should be fine.
I’d love to see the original illustration and a current in force illustration. While 6.8% isn’t anywhere near what stocks have done since 2010, 6.8% is higher than I would have expected the return on a 9 year old IUL to be.
You sure this isn’t a variable universal life policy?
Welp “Brian Lee”–if that’s even your real name–there’s 3,000+ of you on LinkedIn alone, so you are anonymous to us. Please feel free to spin any fantasy you wish about your purported IUL and your purported investing savvy–oh I’m sorry it’s mainly “luck” amirite? And nice effort there “Brian Lee,” painting your rainbows’n’unicorns with pastel colors to somehow try to lend your fiction more authenticity.
Bottom line “Brian Lee:” We can’t verify or trust a single syllable you tell us. And you certainly won’t ever show us any proof for anything you claim.
But what if your IUL were somehow delivering what you claim–which far exceeds the experts’ assessment of 2.5%–4%? (See link below.) Please bear in mind we’ve enjoyed one of the longest bull markets in US history. Do you count on the market not turning down into an extended bear market? There’s nothing to stop your carrier from starting to credit your IUL with 0–1% minima for many years in row if it so chooses. That dumps the burden on YOU, the policyholder, to pay higher premiums to make up the shortfall–or let the skyrocketing COIs gobble up your cash value and bankrupt your IUL. Then you LOSE your death bennie and all the thousands you poured into your slo-mo time bomb of a policy.
But thanks for playing “Brian Lee”–or “John Smith” or “Jane Doe” or whoever you really are. Folks with vested interests in flogging IULs for their fat commissions, especially hi-belief lo-info no-ethics WFG agents that recruiting-machine uplines lure off the streets, can weave the most amusing and creative tales 😊
http://thebishopcompanyllc.com/wp-content/uploads/pdf/indexed_universal_life.pdf
If by using both you are including the use of a complex insurance product that dramatically favors the companies and agents that sell it in “the deal” then I disagree that “both are right.”
[The comments section is for contributing to the discussion, not advertising your business. -ed]
Let me start by saying I sell IULs, I own an IUL and some of my clients own IULs. I love the “max funded IUL” strategy for covering one’s life insurance needs and providing a tax free retirement income. I am independent and can use/recommend almost any company (some companies only allow their agents to sell their products). I consider the expert in IULs to be Brett Anderson, author of “Last Chance Retirement.” He also publishes a nearly monthly newsletter that shows the changes in the IUL world and list the best companies for the “max funded IUL strategy” that I use in my practice. Another expert is Roccy Defrancesco.
There are many arguments contained in this blog, but I’ll try to summarize and comment on a few.
1. Most will agree the stock market (let’s say the S&P 500 index is the most common representative) provides returns around 10% +/- 2% per year averaged over many decades depending on when you started the calculation.
2.The S&P 500 beats about 75-80% of mutual funds over the long term and it is hard to find a mutual fund that can consistently beat the S&P 500 index even if you find a low expense ratio fund.
3. Very few people will invest 100% of their money into a stock fund for the rest of their lives. Most will diversify into bonds and less volatile investments as they get older. Therefore, they will achieve a lower rate of return than the S&P 500 index.
4. When the market goes down in a bear market, investors lose money and sometimes a lot of money. Some bear markets take a couple of years to bottom out. It normally takes a few years longer for the investment to dig out of the loss and get back to break even.
5. Most people have the majority of their retirement savings in tax-qualified accounts like 401ks, 403bs, IRAs or deferred savings plans. All of these accounts will be fully taxed as income when you withdraw funds at retirement.
6. As people get closer to retirement they tend to get more impatient with losses in the market which leads them to poor market timing and drives them to more conservative investments.
7. An IUL is a life insurance product and there is a cost for the insurance.
7. IULs are not invested directly in the S&P 500, but the interest they receive is determined by how well the S&P 500 index performs up to a cap. If the index goes up, the IUL credits a matching interest to your cash value, but since your money is not directed exposed to the market you do participate in any of the market losses when it goes down. Example, if the market goes up 20% and your cap is 14%, then you would earn 14% interest. If the market went up 8%, you would get all 8%. If the market goes down 20%, then you would not earn any interest, but you also will not lose any money. Good IULs have market caps in the 13%+ range.
8. Money in IULs grow tax deferred. Money removed from IULs is tax-free if taken out by policy loans which is what most clients will do since that is one of the best features of the IUL. Loans can either be zero cost loans, where the insurance company loans you their money and charges you an interest rate while setting aside an equal portion of your cash value for collateral or you could use a variable loan rate where the insurance company will still charge you interest for your loan, but now all of your money is still in your index account hoping to earn an interest rate higher than the rate charged, so that you can earn money on your money. The best IULs will have a lifetime cap on the interest the insurance company can charge you generally in the 5-6% range.
9. Most IULs will offer many different interest crediting strategies, but the most popular one is the S&P 500 point to point. The interest credited to your account is determined by taking a snapshot of the S&P 500 when you money goes into your policy and then another snapshot of the S&P 500 index is taken one year later; a percentage change in value is calculated and gains up to your cap is added to your cash value, while losses generated no interest for that year. This process is repeated for as long as you own your policy or change to a different crediting strategy.
10. IULs started in 1997.
11. Midland National Life and North American Life are my current favorite IULs companies.
12. I wish I could have invested my money into a IUL instead of an IRA or 401k when I started investing in 1986.
There are a lot of naysayers regarding IULs, but most are either defending a decision they made about investing, are lacking years of experiencing market ups and downs, don’t work with real clients, can’t sell IULs, don’t like life insurance, are not looking at the best IUL companies or are missing facts about costs and returns. At the end of the day, in order for any of us to have a happy retirement we need the markets to go up.
I agree that there are a lot of naysayers regarding IULs and none of them sell IULs. What I find amazing is what a large percentage of those who aren’t naysayers sell it. If it was awesome, you would think there would be entire internet forums full of excited owners of the product. But there aren’t. That tells you something. That something is that even those who own them aren’t very excited about them. Why is that? Because they’ve realized they’re nothing special. They don’t give you “almost the market return with no downside” which is the strategy used to sell them. They’re universal life policies with some window dressing.
Hi Dr Dahle. I posted a similar comment to your same article at at Physicians’ Money Digest.
I’ll say up front: typical off-the-shelf “xULs”–i.e. ULs, VULs, and IULs–are deeply often fatally flawed products. Very few people if anyone at all should ever consider them.
James, much of what you wrote makes great sense and is very important for people to read and know if they plan to buy an xUL they will, over their lifetimes, feed hundreds of thousands, even millions, of dollars into. If anything, your piece fails to cover the true extent and depth of the problems of these byzantine fee-laden policies. I address your points below.
Of IULs, I’m most familiar with Transamerica’s FFIUL, as sold through the MLM broker/dealer called World Financial Group (WFG). I’ve seen many others, including those pre-packaged xULs from Nationwide, Pacific Life, Voya, etc. They vary in the details, but these consumer-level xULs are similar in key ways–the very many ways that favor the issuer and the B/D at the expense of the client. Knowing what I know now, I would simply avoid ALL these pre-packaged xULs.
I often hear the question, “If xULs are so bad, then why do all the A-rated companies offer them?” I feel this is due to at least two reasons:
a) Huge demand. We see enormous interest in a “Permanent” life insurance policy in which the policyholder is “guaranteed” a substantial payout. In our insecure and fast-changing world, real and imagined global and existential threats magnified by mass media, the idea of Permanent Life policy makes a powerful psychological impact.
b) The US insurance industry is regulated mainly at the state level. The insurance companies work hard to keep it that way. Aegon and other insurance companies make such fat profits on their products, they can afford to pay lobbyists to keep the Feds at bay, to leave regulation to the states. This is a divide-and-conquer approach that limits plaintiff pools and thus limits potential contingency payouts for class-action suits, and makes it harder for smaller and less funded state reg bodies to keep up with the rapid changes in the industry, This makes it easier for unethical providers to stay a step ahead of the regulators. As soon as the reg bodies catch up with one exploitative product–e.g. the Variable Universal Life (VUL) policy, the industry’s already created and selling a new deeply flawed product, e.g. the Indexed Universal Life (IUL) policy, like Transamerica’s FFIUL. For more on regulation, please go here: www dot researchgate dot net/publication/228341618_An_Overview_of_the_Insurance_Industry_and_Its_Regulation
OK James, on to your points:
#1. “You don’t need a permanent death benefit.” In this you say:
“…permanent life insurance must be priced so that there is enough money to pay a death benefit to everyone…”
I’d say in its place:
“…permanent life insurance must be *packaged and promoted* so that there is enough money to pay a death benefit to *those relative few policyholders* who actually managed to hang on to their xUL until they died…”
If the carriers actually came clean with the astronomical prices they’d need to charge, few people would ever buy them.
Instead xUL issuers devise their policies to:
a) offload virtually ALL the risk onto the policyholder and agent, meanwhile spinning these faults as virtues wherever they can;
b) squeeze every bit of premium out of the policyholder, and;
c) structure and sell the xUL it ensure its failure. To compel the policyholder is forced to give it up, often in his later life when skyrocketing COI charges gobbled up his cash value, forcing him to pay enormous premiums or lapse the policy.
About offloading risk, the carriers give ridiculously low GUARANTEED Investment Index returns of 0–1%, very high caps on Cost of Insurance (COI) charges that reset every year, and a Policy Monthly Expense Charge that recoups the commission charge 3 times over. The xUL is less a “permanent” policy and more a 1-year Term policy that auto-renews every year–so long as you can afford the soaring COI charges.
About maxing the premium, agents railroad you into paying the most premium, by coaxing you into the Increased Death Benefit option (variously called Option 2 or Option B) so that you’re paying the most premium for the longest time possible. Mind you that Cash Value portion of the policy is YOUR money. The money left over to go in your Accounts *after* the carrier extracts its outrageous policy fees. Why should Transamerica or any other carrier keep YOUR money? In my experience, those people who chose the Level Death Benefit option (variously called Option 1 or Option A) are shocked to learn the carrier keeps all their cash value when they die.
About ensuring policy failure, there’s a tacit understand in the industry that agents must minimize, often *dangerously for the client* the entry costs into one of these policies. E.g. I analyzed an FFIUL for a late-30s NS woman who bought a $500k FFIUL with the default Increasing Death Benefit. Of course her agent illustrated it at a fantasy-land 7.9% which set her premium WAY too low at $324/mo. I did the math–I used a spreadsheet plugging in all the Policy Data I obtained from her SIGNED contract–which can vary *considerably * from her agent’s Illustration software, a program that contains a lot of policy data the agent hides from the client. I learned that, using the FFIUL’s own Non-Guaranteed MidPoint assumption of 4.33%, she needed to start paying at least $535 per month so her COI charges wouldn’t run away from her in her later life. That’s over $200 a month more than she originally paid. If she knew that high price at the beginning, she never would have bought this policy. I’ve seen this scenario play out time and again.
#2. “Complexity does not favor the buyer.” Quite right. This is confirmed by none other than Alex Wynaendts, CEO of Aegon, the huge Dutch holding company that owns Transamerica. Wynaendts actually *admits* providers can lard on the fees for complex products like xULs. In a 2012 Financial Times interview, he said “…life assurers had boosted profit margins by selling complex products…” You can search on “Financial Times Alex Wynaendts Insurance products too complex” to read his remarkably honest interview.
#3. “IULs don’t count the dividends.” James, that just scratches the surface of the problem and the deception the players use when they generate and sell xULs. The reality is that most of these IULs DON’T invest your policy solely in those indexes, and could be they invest in them only marginally, even tangentially. E.g. In the FFIUL you get this language: “An account option…will be based IN PART on changes in the values of published indexes…we may discontinue existing Index Accounts or make other Index Accounts available in the future…” What does “in part mean? 80%? 50%? Five percent? 0.1%? You can see the notion that these policies must follow any of the market indexes is pure fiction. As @Rex often pointed out here in these comments, it’s a safe bet much of Transamerica’s investment come from safe high-quality bonds, not index funds, so the carrier minimizes its risk. The point is, what Transamerica truly invests in is a *black box* to you the policyholder.
#4. “IULs have cap rates.” and;
#5. “IULs have participation rates.”
Again James, these just scratch the surface of the problem. Many issuers reserve the right to lower that cap rate at any time during your policy life, often down to the Basic Index Account rate, usu 2–3%, or Index Floor rate, typically 0–1%. Here’s that exact language in the FFIUL: “The cap may be changed for each segment but may never be less than the basic interest account current interest rate…”
James, due to these drawbacks and more, I’d simply avoid off-the-shelf xULs. As you’ve noted xULs are still young. The post §7702 “consumer” ULs date only from the end of the 80s, less than 30 years ago. We’re already seeing very troubling signs as the first of these policies begin to mature and fail. Indeed, we’re now seeing class-action lawsuits against issuers and broker/dealers of xUL products, like the original ULs and variable ULs (VULs). Google “Feller vs Transamerica” and “Lieff Cabraser Universal Life” for two of those exploratory and planned actions. IULs suffer the same inherent problems as its xUL predecessors, just with added smoke and mirrors.
People with sufficient funds looking for a tax shelter should explore a Private Placement Life Insurance (PPLI) plan, defining it with the GPT/CVC test. This is a tailored cash-value insurance package with an xUL at its base. Search on “Keeping What You Make Edward Renn” to read about a PPLI at the fa-mag site. Mind you I am *not* endorsing this particular PPLI producer. This article, which also appears in Forbes, simply gives a decent primer on what the PPLI does.
Two key differences between a PPLI and a conventional xUL like the FFIUL is that:
a) A PPLI will let you pass down to your heirs your cash value along with your death benefit and,
b) the investment portion in the PPLI is totally transparent, even self-directed. E.g. if you want you can actually get an S&P 500 ETF like VOO and every cent you earn you get to keep–including the dividends. Or you can invest in a hedge fund. Or in whatever. By contrast, the FFIUL investment portion is a total black box to the policyholder. But it’s a safe bet most of it comes from safe high-quality bonds, not index funds, so that Transamerica minimizes its risk. This is why strong anecdotal evidence suggests the index account portion of the FFIUL gives an average annual rate of return of a tame 3–5%–far FAR below WFG’s typical non-guaranteed fantasy pie-in-the-sky illustrated rates of 7.5–9.0%. Whatever the *actual* Index returns on the FFIUL we too often get only anecdotal evidence of it–e.g. the figures that xUL proponents eagerly claim on the internet. We do not see published audited numbers unlike those for the indexes and other publicly traded securities.
Thanks for sharing that lengthy and detailed comment illustrating issues with this industry and these products.
You’re welcome. After 1988 when the gov’t enacted §7702, xULs stopped being viable for all but very wealthy clients. Unfortunately, weak regulation and enforcement allowed the insurance industry to create exploitative “consumer” xULs they promote with false promises and that financially abuse clients. They morph the xUL “skins” as necessary (i.e. UL → VUL → IUL) to stay ahead of the regulators and courts. As usual the gov’t prefers to leave enforcement to the legal system. We are now seeing that. We’re well past the worst of the Great Recession when law firms had their hands full with titans such as Goldman Sachs, Enron, and Arthur Andersen. Lieff Cabraser, Zamamsky and others are now turning their attention to smaller beer like the Life Insurance companies.
Folks, if you entertain fantastical notions that your xUL will return, over the long term, an average annual return of anything remotely approaching the commonly illustrated rates of 7–8%, then please read this. It should help you see that your xUL will average 4-ish percent–AT BEST–over the long term.
Bottom line: Your life insurance company invests mainly in plain old stocks’n’bonds. It offers no “special sauce” to reliably juice up your long-term average returns.
First please go to this site to see the Chicago Fed’s recent study, “What do U.S. life insurers invest in?”
https://www.chicagofed.org/~/media/publications/chicago-fed-letter/2013/cflapril2013-309-pdf.pdf
On that 4-page PDF, if you look at Figure 1, titled “Life insurance industry aggregate assets,” you see the two accounts, the General (GA) and Separate (SA). In the GA, fixed-income instruments like bonds make up the vast majority of the assets. In the SA, straight-up equities–you know, those things that make up the S&P 500–these make up the vast majority of assets. Turbo-charging exotica such as options make up only a *negligible* part of these accounts.
The following explains which account assets earn for each kind of insurance product:
“… life insurers segregate their assets … into … the general account (GA) and the separate account (SA). General-account (GA) assets support liabilities that feature guaranteed returns to customers from the insurer. In contrast, separate-account (SA) assets support “pass-through” products, in which investment gains and losses are passed on to the customer and no more than a minimum return may be guaranteed. Typical general-account products include term life insurance, whole life insurance, fixed annuities, and disability insurance. Products whose payouts fluctuate based on the investment environment include variable annuities and variable life insurance. The assets that back these products are recorded on the separate account.
The IUL belong mostly but not entirely in the latter group. It is mostly a “pass-through” product since the IUL policyholder shoulders most of the risk. However, due to the IUL’s index floor, we do have a guaranteed return however minimal—at least a guaranteed non-loss—in the Index Accounts. Thus we can estimate that IUL crediting comes two-thirds from the SA and one-third from the GA. Thus the income comes two-thirds primarily from equities and one third primarily from fixed-income assets like bonds. It matters little the exact mix since all asset sources yield similar returns. As shown above, actively managed funds lag the index funds. So if the insurer diversifies its equities in the SA beyond ETFs, e.g. mutual funds, then we can expect something lower than that the S&P 500’s historical return of 5.75%. We can safely go with 5%. For the bonds in the GA, over half are a mix of corporate and foreign. Foreign bonds are yield around 5%:
The Lowdown on Adding Foreign Bonds to Your Portfolio
http://www.wsj.com/articles/the-lowdown-on-adding-foreign-bonds-to-your-portfolio-1464946202
while corporate bonds historically yield 2–5% above treasuries, thus nowadays yielding 4–5%:
Are Corporate Bonds Worth a Look?
http://www.ncpa.org/pub/ba782
For corroboration, you find a lot of these same or similar numbers at Bogleheads:
Historical and expected returns
https://www.bogleheads.org/wiki/Historical_and_expected_returns
All this taken together, you can expect your IUL to return, on AVERAGE over the LONG TERM, **between 4% and 5%**. AT MOST.
Interestingly, that’s precisely where Transamerica puts in Non-Guaranteed Midpoint assumption for its FFIUL–a policy I recently reviewed–at 4.33%.
As shown above, IULs are not substantially different from preceding xULs. We see the life insurance industry repeat the same mistake with IULs that it did with the original xULs in the 80s. Agents routinely illustrate IULs, meant to stay in force for 50, 60, 70 and more years, based loosely on data that goes back only 20 years. They extrapolate overly rosy long-term trends from short-term and highly aberrant data.
Folks if you *truly* believe your life insurance company, investing mainly in regular stocks and bonds and hardly at all in derivatives or other return-revving exotica, will, on AVERAGE, over the VERY LONG TERM average, beat the S&P 500 and even more soundly beat the actively-managed funds, well…I wish you the very best of luck with that rosy notion.
By law insurance companies must invest at least 70% in bonds. According to William Reichenstein insurance companies invest 94.33% in bonds. According to Chris Wang (fee-only advisor), with all index annuities your can expect returns of only 1% to 3%.
James, here’s more on your Reason #3: IULs don’t count the dividends. More to indict the pernicious, abusive–even outright fraudulent–xUL. A product that people should avoid like the PLAGUE if they are at all interested in preserving wealth. A product that will in time join its prev-gen xULs as subjects of massive class-action lawsuits from massively cheated policyholders.
We already know that the IUL’s index smoke’n’mirroring thing is a total fiction. We know mainstream insurance companies can credit to the IUL holder ONLY the returns based predominately on plain ol’ stocks’n’bonds. I.e. *only 3–5%* over the LONG-TERM. Over the 30, 50, 70 years and more you’ll own this policy.
BUT just in case anyone can’t let go his nice little fantasy his IUL’ll somehow return, over the LONG TERM anything remotely matching his policy’s absurdly high 7.5–8+% illustration rate–then please check this out:
http://www.moneychimp.com/features/market_cagr.htm
Please look down to the section titled “CAGR of the Stock Market.” There you find a calculator that gives Average Returns and CAGRs on the S&P 500 started from that index’s inception in 1871.
See that little ” Include Dividends” checkbox? It should be checked by default. Make sure it’s checked for the moment.
Now click the Calculate button. “Average” return comes to an impressive 10.71%. CAGR comes to an almost impressive 9.05%.
WOW! Awesome right? “Hey haters, my IUL’s gonna kick major butt, right?!”
WHOA, hot-shot. Now deselect that Dividends box. That matches the reality what the carrier does to your xUL–i.e. your carrier fails to include index dividends when it credits your IUL account. Now click Calculate. You get this sobering news:
“Average” return comes to 5.94%
CAGR comes to a mere *4.32%*
Only 4.32%?! Even by your carrier’s own index-mirroring fiction, your IUL will return something approach *half* your stupidly high illustrated rate of 7.5–8+%.
Does your xUL still sound like a sound investment to you?
James, I just saw you covered this main point in Reason #3–that long-term dividend-less S&P returns fall to a very modest 4+% CAGR. Please excuse my repetition.
At least people now have the calculator to check it for themselves. To play with index date ranges to their hearts’ content. Or their hearts’ dismay.
The strawman argument used by insurance salesmen is to look at 100% stocks during bear markets. If we’re looking at an alternative to a mediocre returning insurance product that’s gonna return between 2% and 5% that why not look at a COMPARATIVELY low-risk bond/stock index fund portfolio that is percentage or at least calendar rebalanced. From 1970 to 2010 the lowest risk bond / stock allocation was only 28% stocks / 72% bonds. Even during the 2000’s you got about a 5.6% return, all during the WORST of times. What does that say about insurance products like IUL, WL and annuities? They are garbage!
Jocko, people should ask: Why on Earth should you buy a Universal Life policy that fails to give a guaranteed level premium, that bags you $100,000s in fees, and returns you only 3–5% over the long term? When you can buy a 30-year Term policy that gives you a guaranteed level premium, costs only dozens of thousands of dollars over its term, and lets you feed your massive savings into a Roth-sheltered low-load S&P 500 ETF that give you near 6% return over the same long term.
Your Roth-sheltered S&P index fund will grow to *close to your IUL’s Death Benefit* by the time your 30-year Term coverage ends. Then your index fund keeps growing from there.
Meanwhile monstrous late-life COI charges threaten to inhale your IUL–at least if you unwittingly paid too-low premiums for decades based on your agent’s absurdly high 7–9% illustration at contract time. As is nearly ALWAYS the case.
It’s about as straightforward as that.
I’m amazed that pernicious self-destructive xULs have had as long as run as they had. Almost 30 years. And victimized so many very smart professionals. Along with the low- to mid-income often lower-info folks.
All one has to do is actually read the IUL contracts and pour their Policy Data into spreadsheets. It’s not hard to do. The IUL sports only two credits (premium and index account credit) and 4–5 expenses.
Sheeting out IULs very clearly reveal their consistent terrible news.
Am I the first person to do this?
There’s no doubt that any permanent life insurance pales in comparison to investing in a Roth IRA. The only way to even start having the conversation is to assume the investments are in a taxable account. No reason to even consider permanent life insurance until available retirement accounts are maxed out (and probably not even then.)
I disagree that “it’s not hard to do.” I think it’s far more complex to make the legitimate comparisons, especially when you have to make assumptions for time periods that may be a half century away.
Hi James. It took me maybe 5 hours to work up the IUL spreadsheet. A lot of the work was keying the 120 years of COI multipliers into the sheet. COIs that skyrocket in your late life. As you know, 1-year autoresetting COIs are the dreary norm across xULs.
The reason it was easy. As I created the sheet, it became glaringly obvious how awful the returns were when you apply the shockingly high max insurance cost factors (COIs and admin fees) and the dismally low min crediting guarantees. It quickly stopped being a matter of how good or less good the Roth IRA investments are. It quickly became all about how horrible is the retail cash-value policy–i.e the Perm policies sold by mainstream carriers like Nationwide and Transamerica. Those especially from the for-profit carriers.
For Ma and Pa Kettle and their somewhat better-off professional kin, it’s a total no-brainer: AVOID all retail Perm Life. Buy Term and invest the rest.
James, this leads to a grimly fascinating point:
*Individual Retail Perm Life may be one of the biggest financial scams perpetrated on the American people.*
Retail cash-value life insurance sales may well be in an elevated class all its own for institutionalized scammery. In 2014-15, total disposable personal income in America (average, annualized) was 11.5 trillion dollars:
http://www.bea.gov/iTable/iTable.cfm?reqid=9&step=1&acrdn=2#reqid=9&step=3&isuri=1&903=58
of which Americans spent $207.4 billion on individual cash-value life insurance policies (see links below). That fraud soaks up *almost 2%* of all of Americans’ disposable income. Much of it simply thrown away when you consider that the vast majority of Perm Life policies will FAIL.
James you said that over 80% of Whole Life buyers let lapse their policies. It’s worse for Perm polices as a group–FAR worse. Go to PDF pp 16 and 49 at this Society of Actuaries pdf:
https://www.soa.org/files/research/exp-study/research-2007-2009-us-ind-life-pers-report.pdf
Doing the math on the SOA’s persistency rates, you see that Whole Life ownership at only 13% in the 60th policy year. You can expect that to be far better than with xUL, with premiums that can spike dramatically in your later years as your COIs start to race away from you. At least with WL, you have a fixed premium that due to inflation, becomes easier to pay as the years roll by. The SOA’s own numbers don’t refute that reasoning. SOA puts xUL at only 6% in the in the 60th policy year–less than half that of WL.
Back to the premium math on that $207.4 billion. In 2010, over 68 million Americans, over 1 in 5 people, owned at least one individual Perm policy. That’s if you believe LIMRA’s numbers and do the math on them. See here on pp 3–5:
http://www.limra.com/Research/Abstracts_Public/2014/130917-01.aspx?research_id=10737432296
In 2014, if we apply LIMRA’s 2010 Term/Perm policy ownership ratios, total Individual Perm owners paid $207.4 billion.
http://www.naic.org/state_report_cards/report_card_us.pdf
If we make a straight-line adjustment from 2010 data assuming the same Term/Perm policy ownership ratios for 2014, and based on 6/30/2014 US pop:
http://www.census.gov/popclock/?intcmp=home_pop
that tells us that, in 2014, 70.3 million people in the US who own Individual Perm policies. Divide $207.4 billion of premiums by 70.3 million people and you get an average annual premium of $2,950 per cash-value policyholder. That’s comes to an average monthly premium payment of $246.
But can that be right? Starting a decade ago, the very rich started (again) to glom on to cash-value life, at least the xULs. This WSJ piece:
http://www.wsj.com/articles/SB10001424052748703435104575421411449555240
says that even in 2007, almost a decade ago, the very rich were diving into Universal Life (mainly VUL) mainly through customized policies called Private Placement Life Insurance policies (PPLIs). Even then, nine years ago, the very rich were buying *nearly 40% of the Face Amount* of all cash value insurance:
“…$2 million and up policies, which carry *premiums of over $20,000* per year, are nearly 40% of the Face Amount of Permanent Life insurance sold in 2007. These account for just 10% a decade earlier, and 1% two decades ago…”
That staggering $20,000+ premium is seven and more times higher than the average of $2,950. Seven years later in 2014 on which I focus this data, we can expect the very rich to be even more heavily invested in cash-value life–50%, 60% and more of Face Amount. The Face Amount/premium figures are so heavily skewed to the richest 0.1% of Americans, one wonders if the retail xUL policies have any persistency at all. Or if LIMRA simply wildly inflated its policyholder numbers. Or both.
Indeed cash-value life makes great sense for the very rich who can piece together its plan a la carte to make a large tax shelter. E.g for very high net worth folks who can quickly plunk down five million or more in premiums, staying barely within §7702 limits within the tailored PPLI structure. There the cost structures are radically different and hugely cheaper than what you get in retail Perm Life. One site listed average annual PPLI fees at under 3% total: 1% for the COIs, 1% for the insurance admin fees, and well under 1% for manager fees which he takes out yearly instead of whacking you over 10 years for multiples of the commission paid. When you consider that these very rich folks’ effective income tax rates bump up near 39.6%, you can see how they massively preserve compounded earnings in a properly structured and -priced xUL.
Small wonder then that this unofficial Life Insurance industry organ:
http://www.lifehealthpro.com/2013/06/05/the-future-of-life-insurance-taxation
raises the alarm on this phenomenon: the very rich scooping up cash-value policies mainly for tax-shelter purposes. That piece expressing one of the industry’s main fears that Congress will degrade the tax advantages of cash-value policies.
Retail Perm life is definitely not for regular “widows and orphans.” It’s yet another sad example of a gift to uberrich while mainstream providers screw the bottom 99.9% with way overpriced and/or under-guaranteed retail Perm Life policies that are very likely–even virtually *guaranteed*–to fail.
BTW, James I apologize for making a several assumptions across year periods. I kept the year frames as tight as possible to minimize error from straight-line extrapolation. I had no choice. The insurance research arms (LIMRA, SOA, NAIC, III, etc.) are woefully inconsistent and deficient in their market study frequencies, methodologies, and source citations. This is no doubt due in part to low funding. And no doubt due in part to them actively obfuscating to keep from daylighting the massive retail Perm Life fraud. To let them slap as much lipstick as possible on their time-bomb pork-filled Perm Life policies.
I appreciate all the Great Comments above:
In my particular situation, since I am a director of my company, can anyone advise me how it will effect the pros & cons. Specifically, my corp can put money in (as a “Key-man ins” etc) and thus it will be going in tax free. When taken out as a loan it is again tax-free.
That is an added advantage but is it still worth it over “Buy term” and investing rest into Retirement accounts (IRA/401K) vs investing in the market? Why and why not?
Thank you so much for all the great information!
If you can legally take a deduction for the contributions, that obviously improves the return calculations. If you really need key man insurance, so much the better. I probably wouldn’t use IUL for that, but do what you like.
Vic, ~30 years ago, Congress started to catch on to key-man policy abuses and started to impose limits on its use. Check out this piece “How Life Insurance Morphed Into a Corporate Finance Tool:”
http://www.wsj.com/articles/SB1041197687392508913
Not saying key-man won’t serve your needs. But check it out carefully.
WOW great discussion, read it all in one sitting (couple of hours.) Always interesting to see different ideas & opinions and this site does give one just that.
There are so many variables that go into a decision to add a permanent life policy to your life. This is not a one-size-fits-all decision. Everybody is so totally different.
And times are different too. When life agents (and I am not one) or financial planners (nope not one of those either) reco or don’t reco any product, it always behooves one to go home and read read read, learn .. even doctors .. who do have better things to do.
Life insurance ain’t an investment altho it certainly can mimic one. It is an asset but not an investment. So when folks compare all these numbers and growth rates and index returns, etc, it looks like you are comparing apples to apples but you aren’t. People are supposed to buy life insurance for the insurance benefit but when agents realized that people, especially wealthy people and .. doctors .. were flocking to life insurance, they adjusted their pitches. They are in business to make oodles of money .. like many doctors have done .. so of course they adjusted their sales techniques.
When professionals (and non professionals too) say to ‘buy term and invest the difference’ .. the world is full of studies that show that almost everybody that starts out doing that .. fails to ‘invest the difference.’
When others say that high earning doctors should make enough money in their life to self insure .. well that is not always the case especially in recent times. You doctors especially you younger doctors know that those days of excessive high earnings are about done. You gotta keep that in mind. Thirty years ago a good internist or surgeon could count on earning $300,000 – $500,000 yearly. How many today have that capacity? Today if you earn $200,000 (did somebody say Kaiser?) and if you have no student loans to pay off .. you are doing good.
And as the decimation of the health care / insurance industry continues to ravage the population, this is going to get very interesting.
I am always leery when pros quote the 100-yr averages of the S&P. Because .. things can change. Just because it has a 100-yr 8% or so average .. does not guarantee in any respect that it will continue. The world from post WW2 to about the end of the tech wreck .. while it had some ups & downs and a stagnant decade .. was a very different time from the world today. That was a period of HUGE growth and expansion and of America being the leader of the world in so many respects. Now, history is flipping around. We are not a creditor nation anymore, we are the exact opposite, corporate earnings are not a given anymore, exploding world populations wtihout exploding discretionary income or just about any income after cost of living .. and there are other places in the world that have more stability than us.
So it is possible that the next 50 years might bring that 8%+ average .. downward.
The S&P 500 is a manipulated index. When a company does poorly, S&P can, at its discretion, dump it .. and it sure has dumped many companies especially in the last decade. The DOW cracks me up. There is only one original company left in it. All the rest were absorbed, bought out or went under. The powers-that-be will always manipulate the indexes but I have to wonder .. at what point will there be little wiggle room left to do just that. I am pretty sure that point is coming, I just don’t know when. But you better believe that the insurance industry is watching this. I was reading an article last week on some major insurer, Mass Mutual I think .. getting out of bonds with severely low yields, and this year they bought Babson, Barings, Oppenheimer and the retail division of Met Life so their plan is to make their money by owning AUM’s and fees from investments and Financial Planner services. That is quite a stretch from bonds bonds bonds.
The world is full of people that will need some kind of life insurance in place on the day they die. If we all knew our expiration dates, we would make better purchases, wouldn’t we. But we don’t, and therefore exists the life insurance industry. I am always amazed that the majority of people out there, any industry or profession, assume that things will go smoothly, well, when their retirements roll about. Things can happen. You can hit a bad year when you need to take money out and it is the year that markets are down 20 or 25% (or more) .. you know, one of those years people don’t like to think about. You can outlive your money – even a wealthy doctor. It just takes one bad investment and you can get wiped. How about that apartment building you owned in Oregon for the last 38 years, when the law protecting the Spotted Owl was passed? I had a friend, that went from 100% occupancy to less than 20% in months as they all lost their jobs and they lost the building. Things can .. and do .. happen.
The best chances for success would be combined portfolio of assets and investments. I can’t tell you what will work for you, that is your work. But I would never rule out life insurance. When those 30-year terms are up and you can’t get insured anymore or the cost is prohibitive .. and then your spouse dies .. you will most likely cry your eyes out not just cuz you lost your honey but you lost the money too. And that is what life insurance is for.
People forget that when somebody hits their 80’s or even earlier .. agents selling everything under the sun come out of the woodwork to ‘steal’ your money. So I always suggest when asked that people plan for every contingency under their roof. A part of your money to permanent products that have reasonable guarantees is not unwise to consider. How you do it, that is your choice. This thread was about reasons to not buy IUL products and ended up being a discussion of returns on IULs and WL products vs just buy the indexes through a mutual fund, etc. The returns with permanent products are not supposed to be fabulous. They are supposed to be ‘there’ when you need them. That’s why the portion of your money that you need to count on to be there .. needs to be there.
Now cash does the job too .. it’s there .. but the public has been brainwashed by the financial industry that there is no return on cash so you gotta put it somewhere. Well .. um .. sometimes return OF your money is more important than the return ON your money. There will always be a place for products that guarantee that.
So does the IUL guarantee that? OH NO it does not. Those fancy illustrations .. they are NOT guaranteed and they do say that all over every piece of paper. So while others are debating IUL vs WL vs mutual funds .. only an inforce WL policy will have a contractual guarantee with any value. Because at 1% or so on the UIL guarantee and a cost of insurance that will eat you up alive should you be fortunate enough to live long & prosper .. is a worthless guarantee. And you know what? Most people that sell IUL’s know this. IUL’s are really good for people that die young ( with rare exception. Apparently the man way up this thread that has averaged 19% for the last 5 years will fight me on this. But that is not the norm.)
And I will both argue & add to the discussion .. that mutual funds .. at some point .. just might not live up to those 8%+ 100-year averages. If there is one thing in life that we do know .. and especially medical professionals know .. things can go for years or even decades (and even 100) years and then one day .. something changes.
A smart person plans for those changes with X% of their assets.
If one truly believes they will live long and they equally believe the S&P 500 is Made in Heaven, then put all your money into the index and don’t look back. Let it be and when you die it will pass those zillions to your heirs with a step-up in cost basis. That is what the indexes (and stocks) are for — growth and keeping up with inflation. When you have those horrendous down years, don’t lose a night’s sleep cuz it always comes back ..right? Just like the Tech Wreck years. They got all their money back, didn’t they .. like .. NOT. And don’t forget, you also have to have an iron stomach and be willing to ride out the downdrafts cuz after all, history, which never changes, right? well history says just sit tight and it will all come back.
It always does .. till the day it doesn’t.
And in the meantime, if you die and you have a life insurance policy, you beneficiary will get the money.
Now some might think I am biased but my brother died three weeks after buying a $1M life insurance policy. Some drunk came out of nowhere. Best $2000 investment he ever made but too bad he wasn’t here to enjoy the benefit. However the rest of the family sure thanked him for it and they didn’t care whether it was term or some variation of permanent. That is what life insurance is for. And if you do it right and buy a good permanent policy, of which there is nothing wrong with that idea too .. and die at any point along the way, your spouse or kids will be very happy you did that for them. And if you live, there will be money there to use if you choose to do it. Debating whether it will be $2M or $4M is not the right question because this is not the product for that debate. This is not an investment. It just mimics it.
So we all have wiggle room here to consider this product (asset) to be a part of the We Can Count On This part of our futures.
(I am not a financial professional but I am a professional and this is just my own contribution to this most interesting thread.)
Jamie, you say you’re neither a life agent nor a financial planner. But reading your lo-ong booster for Perm Life–in places using dubious logic and making claims none of which you support with any evidence–I wonder: What *is* your vested interest in people buying Perm Life? Maybe you are a major shareholder for one of the publicly traded carriers like Aegon/Transamerica or Nationwide?
That said, I’m glad you seem to take a dim of Indexed Universal Life (IUL) policies. No-one should ever buy an IUL policy.
I address your missive point by point.
First you say: “…There are so many variables that go into a decision to add a permanent life policy to your life. This is not a one-size-fits-all decision. Everybody is so totally different…”
Jamie, I have to agree. But it’s nearly exclusively the uberrich–the ones who can afford to plunk down $5 million and more in insurance premiums–who can very handsomely profit from in a Perm Life policy. Typically using a VUL tucked in a Private Placement Life Insurance (PPLI) wrapper which now you know about (if you didn’t before) since you read all the comments here. As for the 99.9% stuck with retail-only options for Perm Life, only those folks who need a “nanny” policy to force them to regularly put away money should consider Whole Life (WL), and they be willing to pay a very hefty premium for it. In such a case, they should buy a WL policy from a reputable highly-rated provider, especially from a Mutual which often offers more for your money than those from publicly-traded companies like Transamerica, Nationwide, Voya, etc. None of the 99.9% should *ever* buy a retail Universal Life (xUL) policy. WL offers guaranteed fixed premiums, but xUL policies do NOT guarantee this, and these premiums often suddenly skyrocket in the insured’s later life, as you correctly noted. xUL insurance, in its usual retail form–i.e not purchased separately to put in a Private Placement Life Insurance (PPLI) structure–is a frankly terrible deal that’s unsuitable for any client.
Jamie then you say: “…Life insurance ain’t an investment…So when folks compare all these numbers and growth rates and index returns, etc, it looks like you are comparing apples to apples but you aren’t…”
Sorry Jamie, but that’s wrong. Check out Merriam Webster’s def for “investment:”
http://www.merriam-webster.com/dictionary/investment
“…the outlay of money usually for income or profit…”
Per this def, a cash-value policy such as WL and UL is most definitely an investment. In fact, the pitch on UL is that the growth of earnings on your accumulating cash value will grow to keep pace with your skyrocketing COI charges. Alas, this xUL premise and promise has FAILED disastrously to now, as older xUL holder by the thousands are forced to lapse their xULs and LOSE EVERYTHING, spurring class-action suits against carriers. As such the shopper *absolutely* needs to focus on the investment part of his policy and that, with discipline, he will almost certainly come out way ahead when he buys Term Life and invests the rest. And you can guess where we see the greatest growth of Perm Life policies: The uberrich flocking to finely-tuned cash-value policies, e.g. VULs within PPLIs:
Shift to Wealthier Clientele Puts Life Insurers in a Bind http://www.wsj.com/articles/SB10001424052748703435104575421411449555240
“…$2m and up policies, which carry annual premiums of $20k+, are nearly 40% of the FA of Perm sold in 2007. These account for just 10% a decade earlier, and 1% two decades ago…”
Jamie, this is all about the tax shelter which is all about keeping what you earn which is–ta daaa–investing!
Which leads us to what you say here: “When professionals …say to ‘buy term and invest the difference’ .. the world is full of studies that show that almost everybody that starts out doing that .. fails to ‘invest the difference.’…”
Really Jamie? Where are these studies? Do you care to share a few links with us about them? Thanks in advance.
Jamie, you then go on to discuss increasing downward pressure on doctors’ salaries. If your grim scenario will pan out, shouldn’t the young doctor be more focused than ever on getting the most bang for his squeezed buck? If he or she is disciplined–then the clear choice is Term Life and invest the rest.
Then you say this: “…I am always leery when pros quote the 100-yr averages of the S&P. Because .. things can change…”
Jamie, the fact that “…things can change…” is exactly WHY we MUST look at the longer term average. Instead, most agents do us a disservice when they tout market averages for only the last 20 years or even less. This is only a third or less of the time of the 50, 60, 70 years a young person will be expected to hold a Perm Life policy. We saw how badly that worked out when agents in the ’80s flogged the original ULs illustrated at 12% interest rates, boasting “these rates will stay this high till Kingdom Come.” Now these are crashing like crazy, devastating wealth for thousands of policyholders.
Then you say “…The S&P 500 is a manipulated index…” Jamie, so what? When you get term and invest the rest, you can get a low-load S&P 500 ETF in a Roth IRA. Whatever its curators do to the S&P 500 is immaterial. Its ETFs mirror that index, to the tune of 5.75%–6.75% CAGR over the last 140 years:
http://www.businessinsider.com/the-charts-wall-street-doesnt-want-you-to-see-2011-10
http://www.moneychimp.com/features/market_cagr.htm
Even one of the great insurance company owners in the world, Warren Buffett, recommends the S&P 500 ETFs :
http://www.berkshirehathaway.com/letters/2013ltr.pdf
According to the Oracle of Omaha: “… My money, I should add, is where my mouth is…My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund…”
Then you say this: “…some major insurer, Mass Mutual I think .. getting out of bonds with severely low yields…their plan is to make their money by owning AUM’s and fees from investments and Financial Planner services. That is quite a stretch from bonds bonds bonds…”
Jamie, you essentially make the case–which I agree with–that we should be MORE WARY of insurance companies than ever before. Today’s carriers are much less safe than they were in the 1930s. During that time, most US insurance companies were mutuals and the 1905 Armstrong Commission decisions led to the govt to mandate that carriers invest ONLY in bonds. This restriction saved the carriers’ bacon during the 1929 Crash and the Great Depression that followed. Alas, the government lifted that restriction by the 1990s so nowadays many insurance companies–including Transamerica, Nationwide and Voya–are publicly traded and shareholder-driven and *will* suffer along with the rest of the market when it crashes. The stock portions in their General and Separate Accounts will also tank. Regardless of their AM Best or other ratings, we may discover the insurance companies are much less solid than commonly touted and believed. Look what happened to Lehman Brothers, Bear Stearns, Enron, Arthur Andersen and some other former titans of the financial industry.
The you say “…The world is full of people that will need some kind of life insurance in place on the day they die…”
Jamie, sorry but that’s WRONG. You or no-one else has ever shown any proof of your totally unsupported claim. The point is we should work *to ensure the best legacy for our families* on that day we die. In the best forms that legacy takes. Which may or may not include Perm Life.
You list various doomsday scenarios including one dire-sounding case spurred on by Spotted Owls–these merely argue for one to DIVERSIFY. You say “…When those 30-year terms are up and you can’t get insured anymore…” is why folks should consider to layer in Term Life policies to last into their ’70s which gives their DIVERSIFIED investments plenty of time to grow and surpass the modest Death Benefit that was all you could afford when you bought your Perm policy as a young adult starting out. Again, we should work to ensure the best legacy for our families on that day that we die. For the vast majority of the 99.9%–that means Term and invest the rest.
Then you say “…People forget that when somebody hits their 80’s or even earlier .. agents selling everything under the sun come out of the woodwork to ‘steal’ your money…”
Jamie you’re correct–and sleazy agents love to target seniors’ cash-value policies too. E.g. selling a cash-value policy for an inferior and even fraudulently low Life Settlement, which you can read more about here:
https://www.thestreet.com/story/10005391/1/cash-out-that-life-insurance-at-your-own-risk.html
Then you say “…when you die it will pass those zillions [in your S&P 500 ETF] to your heirs with a step-up in cost basis…” Jamie, Roth IRA holders should check with their accountants, but for most the 99.9%, this higher cost basis matters little or not at all. You can leave a Roth IRA to a beneficiary tax-free, as long as you have owned the account for more than five years. Even if estate taxes apply, the limits are high in nearly all cases. In 2016, the Federal Estate tax exemption $5.45 million per individual, and $10.9 million for a married couple. Only 14 states impose their own estate taxes, and only New Jersey taxes estates below $1 million.
http://taxfoundation.org/blog/does-your-state-have-estate-or-inheritance-tax-0
http://www.rothira.com/blog/how-to-use-a-roth-ira-to-avoid-paying-estate-taxes
http://www.rothira.com/roth-ira-beneficiary-rules
You then return to doomsday scenarios about the stock market, hinting at near End-Times like disaster. Again Jamie, we’re no longer in the 1930s when carriers owned ONLY bonds. Today’s insurance carriers are so deeply tied to the equities markets that if the dismal events you warn of actually come to pass, the carriers are going down too. We’ll have NO safe havens to flee to.
Finally Jamie, about your brother. I’m sure I speak for all of us when I say how sorry we are for your loss. It’s terrible to have a loved one taken away so suddenly and tragically, and I speak from personal experience. I’ll gently suggest that your brother’s untimely death–something that could happen to any of us at any time–does not change the fact that Term Life and invest the rest is a superior strategy for the vast majority of the 99.9%. What if the drunk had swerved the other way and your brother lived, but later lost his job and his Perm Life policy because he couldn’t keep up with his $1,000+/mo premiums? Had he bought the same coverage from a highly rated carrier for $80/mo, his heirs still would have benefited from the same amount. Yet had he lived, the vastly lower cost of the $1m term policy means he’d have been much more likely to hang on to his policy–or dipped WAY less into his savings–until he got back on his feet. Jamie, again, Whole Life’s good for folks who absolutely need the discipline to save the money–and if they’re willing and can afford to take a big haircut on their life insurance. But for vast majority of the 99.9%–it’s Term Life and invest the rest. Hands-down.
I agree, term life is the way to go.
I am taking about my personal experience here.
Most of the insurance agents have no clue and insurance companies don’t care. They only care about the sales.
Most of the agents are selling iul policies which extremely expensive and useless.
Most IUL’s policies are bad deals some are good only for rich people who can pay big bucks.