By Dr. James M. Dahle, WCI Founder
Wise physicians will have a solid insurance plan and a solid investing plan. But they shouldn't mix the two. Remember the combination TV/VCRs? Seemed like a great idea initially. But then you ended up with the worst of both worlds, and when one of them broke, the other became useless. It's the same with investing. Instead of providing some kind of synergy by mixing the two, you end up with the worst of both worlds.
These “products” go by different names—cash value life insurance, whole life insurance, universal life insurance, variable life insurance, variable universal life insurance, variable annuities, equity-indexed annuities, deferred fixed annuities…the list goes on and on. A large percentage of doctors (including myself) have been suckered into one or more of these at one point or another. Why does that happen? I think there are a number of reasons:
10 Reasons Why Doctors Get Sold Insurance as “Investments”
#1 Lack of Financial Sophistication
As we've discussed previously, doctors aren't exactly in the same category as accountants when it comes to knowledge of the financial world. This knowledge gap handicaps them when they go to make financial decisions. They are too trusting, too naive, too worried about things that don't matter, and not worried enough about things that do.
Even simple financial cliches that most investors know (such as “Don't Mix Insurance and Investing” and “Buy Term and Invest the Difference“) can be profound revelations to a doctor who just spent a decade worth of 80 hour weeks inside the hospital walls.
These products are purposely made to be very complex. They are NOT simple to understand, and when an investor points out issues with it, the salesman will quickly move on to another feature of the product. The complexity always favors the issuer, not the buyer.
#2 Mistaking an Insurance Salesman for a Qualified Investment Advisor
Everyone markets themselves as a financial advisor or a financial planner these days, no matter what their qualifications. Insurance salesmen, stockbrokers, and mutual fund salesmen like to take advantage of the fact that they know just a little more than you.
Unfortunately, most of their training is in sales, which means they can make whatever product they happen to profit from look extremely attractive to you.
#3 Belief That Doctors Need to Invest Differently Than Everyone Else
We like to think we're special, and in some ways we are. Doctors have highly specialized skills allowing for relatively high salaries with correspondingly high tax burdens. We have high debt burdens and have a significant delay to the start of our earnings. We're big targets for litigation—both malpractice and non-malpractice.
#4 Belief That Insurance Products Provide Asset Protection Benefits Not Available in Other Ways
Salespeople are quick to point out that in some states the cash value of a life insurance policy or the value of an annuity may be protected from your creditors in the unlikely event of an above policy limits judgement from malpractice and other litigation. What they usually fail to point out is that so are your 401(k)s, IRAs, and sometimes a great deal of your home equity. Not to mention they are not going to tell you whether it is actually protected from creditors in your state. Life insurance cash value protection is limited in many states and annuity protection is limited in most states, but 401(k)s receive lots of protection in all states and IRAs receive protection in most states.
#5 Belief That Insurance Products Provide Estate Planning Benefits Not Available in Other Ways
The salesman also love to illustrate how life insurance proceeds are estate tax-free. Of course, hardly any Americans (including physicians) pay estate taxes at all. A typical married physician has to leave behind more than $23 Million at their death to pay ANY estate tax. Most doctors will never have that amount of assets.
Estate tax law can change at any time, of course. It wasn't that long ago that the exemption amount was only $1 Million. But through gifting and trusts, there are ways to eliminate or minimize that burden without paying for overly expensive insurance.
#6 Belief That Insurance Products Provide Tax Benefits Not Available in Other Ways
I am appalled at how many physicians don't max out retirement accounts such as 401(k)s and IRAs before “investing” in life insurance. The tax benefits of a 401(k) exceed those of cash value life insurance. Not only do you get the tax-free growth over the years, but you also get an upfront tax deduction.
The main problem with investing in insurance is you have to quit doing stuff that keeps you from getting insurance at a decent rate, like this.
Cash value life insurance doesn't offer that. Don't expect to learn that from someone who sells it though. Even fully taxable investment accounts provide some tax benefits not available in an insurance product, including lower qualified dividend and long term capital gains tax rates, tax loss harvesting, and the step-up in basis at death.
#7 Misunderstanding the Value of a Guarantee
Most of these products come with some kind of guarantee. It might be a certain amount of guaranteed value at some point down the road, some kind of guaranteed minimum growth rate, or a guaranteed amount payable at death, but I can assure you there will be some kind of guaranteed benefit.
Is there a value to that guarantee? Of course, and it seems especially valuable in times of high market volatility or political uncertainty. However, in nearly every case the buyer is overpaying for that guarantee. The complexity favors the seller, not the buyer.
#8 Misunderstanding of the Importance of Keeping Insurance Costs Down
As these products become more and more complex, they become less and less like commodities. Commodities are all the same and are sold based on price. If a company sells a variable annuity that is different from every other variable annuity on the market, it becomes very difficult, bordering on impossible, to compare competing products and the investor usually ends up with the one that pays the biggest commission to the salesman. Each of these products have some type of insurance component. The insurance company can charge whatever it wants for that. If you have no way of determining what the insurance cost should be, how will you know if you're being ripped off? You won't, and you are.
#9 Misunderstanding of the Importance of Keeping Investment Costs Down
To make matters worse, the investment component is also often overpriced. Variable life insurance and variable annuities, in particular, place your money into the equivalent of mutual funds, except they are managed by the insurance company. The company not only doesn't hire very good managers (why would it, no one buying the fund is looking very closely at them), but it also overcharges for them.
The expense ratios on these variable annuity “funds” are some of the highest I've seen. They can range from 1.5% to 3% or even higher. That's 10 or even 100 times what you'd pay for a mutual fund at Vanguard, even an actively-managed one.
#10 Misunderstanding of the Value of Liquidity
One of the biggest downsides of these insurance products is the lack of liquidity. Some investors recommend you never buy something that you can't look up the price of in the Wall Street Journal every day. Stocks, bonds, and mutual funds can generally be sold any day the market is open. You can “go to cash” any time you want. This allows you access to your money to invest it elsewhere, spend it, or give it away.
Insurance products always limit your liquidity. In fact, the only ways you can access your cash in most products is to “borrow” from your policy (which has its downsides, including paying interest and sometimes causing the policy to fail) or to surrender it, often for much less than what the “cash value” is supposed to be. Liquidity has a value, and far too often insurance product investors give it away for nothing.
The bottom line is that there is no synergy that comes from mixing investing and insurance. Don't get me wrong; I'm a big fan of insurance. I think you should insure very well against financial catastrophes. But any time agents start combining insurance policies with investments (or other insurance policies), you should step back and consider whether you would be better off buying your needed financial products a la carte.
What do you think? Why do you think physicians get sold so much insurance they don't need? Did you ever get talked into buying insurance that you didn't need? Sound off below!
Great post, I am really enjoying your blog
This is nonsense, if you want the straight truth on how index universal life is a fantastic retirement planning tool for cash value growth read, “THE POWER OF ZERO,” by David McKnight.
Ed Slott the IRA GURU wrote the forward of this book and explains that if any advisor steers you away from this awesome product, you should find another advisor ASAP!
Please don’t spam your comment onto every insurance related page on the site. If you continue to do so, I’ll just delete them. My discussion of McKnight’s book can be found here:
https://www.whitecoatinvestor.com/is-a-zero-percent-tax-bracket-in-retirement-a-good-idea/
I think the real question is: “What’s the proper mix of insurance products and market based products in a retirement portfolio? There is a place for both. In fact, Wade Pfau, CFA,PhD conducted several in-depth studies to determine what is the most income, tax and inflation efficient portfolio design for retirement income…the results were eye opening…He discovered that an optimal portfolio for retirement should combine actuarial science (insurance based products) and investment science ( market risk based products). If you want, I can send it to you. You may want to checkout Dr. Moshe Milevsky’s studies on insurance based products as well. I know this is your blog, but try to dispense the advice without bias or too much opinion. People will have tendency to respect the analysis more and be less confrontational. McKnight’s book has it’s place and yes it bugs me to see insurance guys slinging anything to help make PLI (permanent life insurance) sell. However, PLI designed and structured properly can be a very powerful asset in the portfolio. Cool blog…
Pfau’s “study” has flaws, biases, and bad assumptions I’ve discussed elsewhere.
I’ve read Milevsky. I see little reason for the living riders he seems to favor, although I (and most others) agree on the use of SPIAs for many.
I’m very unimpressed with McKnight’s book.
Everything you can do with whole life can be done better with a different product as discussed in my Myths series, so I don’t see it as all that powerful. It’s not that I hate it or have some bias against it. It doesn’t affect me one way or the other if you buy it. Buying it is probably a better move financially than buying a wakeboat. But I hate the way it is often sold inappropriately to physicians.
Agreed with Ed Slott. This article smacks of jealousy and breaking the number one rule in sales. “Don’t knock the competition.” Unethical sales people are everywhere.
Funny thing about all this is that, unlike you, I’m not competing. I’m actually standing on the sidelines and calling it like I see it.
Thank you so much for your blog. It will help me a great deal!
Thanks for contbriuitng. It’s helped me understand the issues.
I currently have the following:
400K SGLI
100K FGLI on wife
400K – 20 year term through USAA (18 years left)
I leave the military in 4 months and need to decide what to do next:
I was thinking of doing 600K of 30 year and 100K of universal life on myself and 200k of 30 year on my wife (with 50K universal). Do you think I would be better served in foregoing universal life all together and just doing 1 million of 30 year on myself and 400K of 30 year on my wife?
Perhaps 50K universal on both of us and then large term?
This is a huge factor for me as I transition as my original plan (the first listed) is likely to cost me about $200-250 a month. I could get that to $100 a month if I just did term.
Beau-
You are underinsured. When you think of term life insurance at the beginning of your career it should be in terms of millions, not hundreds of thousands. If you die, your insurance would pay off your mortgage, and then provide an income of about $18K a year to your family. That’s not going to go very far.
Forget the universal life insurance and use the money you would have spent on it to buy more term. I’d be thinking in the ballpark of $2 Million for you and perhaps $500K-$1 Million on your spouse.
SGLI and VGLI aren’t that great of a deal. In fact, USAA isn’t even that good of a deal (I know, I have a policy with them). Check out this post for more tips on buying life insurance:
https://www.whitecoatinvestor.com/how-to-buy-life-insurance/
Thanks for the reply. It looks like I could get 1.5mil on myself and 750K on my wife for around $125-150 a month. The website you suggest it great. I am going to look into Banner and give USAA a call as well. I prefer to keep things in the USAA “house” if you will but lately I have been finding better deals elsewhere on most of their products.
I really appreciate the blog style of your site as I can see other peoples opinions as well.
Thank you very much for discussing these important issues.
This is incredible. Every single point on this post is literally incorrect or irrelevant. The title is also decieving. As a financial professional who contributes to my 401(k), contributes to my brokerage accounts structured in varying manners and also owns a considerable amount of both whole life and term life, I am very disappointed to see this on a site that so many Docs, who are genuinely looking for good information, frequent.
In general, there are no “bad” financial products. Cash value life insurance is no worse a product than term life, 401(k)s, stocks, bonds, mutual funds, traditional qualified plans, REITs, Options, ETFs… etc. All can be good. The key is to work with an intelligent and creative advisor whom can first identify what action needs to be taken to further your interests/success and subsequently train you on how to create an effective strategy utilizing some combination of the disposable options.
Just like in medicine, a Doc is always better if he has the entire array of tools, ideas and training at his finger tips. So too is the case with a good advisor. A good advisor would never discount the value of any product, including whole life insurance through a mutually owned company. It is no more complex than any other combination of products one might otherwise recommend. I would argue that discounting the use of permanent life insurance which has historically been a solidly performing product and has been leveraged by the wealthiest individuals, banking institutions and corporations throughout history, would be equally as unsophisticated as relying solely on one product, insurance based or otherwise.
I would highly recommend that anyone seriously considering this decision finds a licensed advisor who knows how to design a strategy that encompasses multiple asset classes and has the ability to pressure test a series of various outcomes that incorporate insurance as part of a financial strategy and a financial strategy without it. If this article seems unusually hostile toward permanent life insurance, you should take pause. Why so hostile? Why not more hostility toward traditional investments that could (and do) literally go from being worth something to being worth nothing? In hindsight, wouldn’t all that money have had been better placed almost anywhere else, including cash value insurance? Why not more hostility toward guaranteed future taxation at a potentially higher rate than your current effective tax when using a 401(k)? Ask yourself, are tax rates going up or down? Why not more hostility toward taking too much risk? Is more and more risk the solution? I am not saying that pure investment vehicles are bad, but I am saying that all products have advantages and disadvantages.
In a future environment where you need your money to be safe, flexible and pliable, it is best to have an array of products that respond to market forces, interests rates, tax rules and life in general differently. That way, you limit exposure in the event that one asset class is threatened. Negating an asset class alltogether, is simply unwise.
Several points in reply:
1) Every point is incorrect or irrelevant. Amazing isn’t it that someone could be so dumb?
2) I’m not surprised you’re disappointed to see this on a site frequented by doctors. Before this conversation goes further, how about you reveal the sources of your income as I have done. Specifically, what percentage of your income comes from the sales of life insurance, and specifically permanent life insurance products. In my experience, most who advocate for permanent life insurance are not surprisingly those who benefit directly from its sale. Why is that?
3) A good advisor absolutely would discount the value of a poorly designed product. A bad advisor is one who pushes you into it to increase his commissions.
4) You really don’t believe permanent life insurance is a more complex product than a total stock market index fund? Try explaining them to a 2nd grader.
5) “Solidly performing” is a rather generous description of a product that most people dispose of once they learn more about it.
6) Hostile? I sense defensiveness. It doesn’t affect me one bit if everyone else in the world decides to pour their life savings into permanent life insurance products. How would it affect you if no one bought another policy?
7) Can you seriously with a straight face use the word “guaranteed” in the same sentence as “potentially”? I guarantee that you’re potentially wrong.
8) It doesn’t matter if marginal tax rates go up so long as your effective tax rate drops in retirement. You’re still better off with a tax-deferred product.
9) If you really think your effective rates will be higher than your current marginal rates, the answer isn’t more life insurance, it’s roth conversions.
10) I’m not sure this post argues for “more and more risk.” I have no idea where you’re getting that from. There are plenty of traditional investments and simple life insurance products that can be used to reduce risk of all kinds without combining the two.
11) Life insurance is only considered an asset class by those who sell it. Even if you decided to consider it an asset class, there’s no reason one needs to invest in every available asset class. There are many that have been shown to provide poor long-term risk adjusted returns. Small growth stocks, for example.
Taken a while for me to respond, I don’t typically spend a lot of time on these blogs, but I did want to respond to this. Let’s look at your points.
2) Frankly, 50% of my income comes from the sale of insurance products, a large portion of that being whole life insurance. I earned $685k last year and I have made a nice career out of teaching my clients the value of all their options including insurance. I am licensed and credentialed however in a host of other areas and never push any product or strategy on anyone. It is important to note that you are committing a fallacy of logic. Simply because I get paid on the sale of a product, does not somehow ding my knowledge of that product, my credibility or my ability to be unbiased in evaluation. I would hope that my surgeon, who gets paid to perform my surgery, would also know if surgery is appropriate or not. But, I don’t go around saying that doctors recommend surgery in order to get paid. That is shallow and insulting and incredibly unprofessional.
3) I would agree with that statement in general, though whole life certainly does not fit that description. The last sentence is obvious and irrelevant.
4) Do you not understand whole life? Is that why it seems so complex?
5) Very few of my clients dispose of their insurance. Most rant and rave about how much they love it and many are actively looking for opportunities to buy more. I would never cite this in a client meeting but the truth is that the vast majority of my clients performed better in their insurance than they have in their other investments. The reason behind this has to do with the variability of interest rates, rates of return and the sequence of those returns. Because many people end up experiencing down years on the back half of their compounding interest horizons, it is safe to say that most people will never do better than the average in a fund or investment. Couple that issue with expense ratios, transaction costs, tax costs, cash drag, soft dollar costs and advisory fees, most people have a very different experience than the “10% average rate of return in good mutual fund,” as Dave Ramsey so eloquently puts it.
6) It would not affect my practice if no one bought another policy, for many it would, sure, but we would have to simply find new ways to obtain tax free, guaranteed growth, self-completing, no risk assets to leverage… though none exist that perform all of those functions, we would do the best we could do. Clients would be damaged greatly. But I assure you, over time, I make far more from advisory fees than I do from commissions (that was the other half of that almost 700k income). Of course, this would never happen. Banks would continue to buy cash value insurance by the truckloads than go out and sell low interest or high risk products. Note BOA balance sheet; close to 20 billion in insurance cash values.
7) It looks like you misunderstood that sentence.
8) Calculating an effective rate going down is unprofessional and irresponsible. You might only need 100k, but you might want more. I don’t know what you will want in 10, 20 or 30 years. Moreover, 30 years from now, even a modest inflation rate will erode 100k to the point where its purchasing power feels like 50k. So, upon a closer look, it’s obvious that we might need and want to pull more than we plan on… let’s not even get into the fact that retirees are golfing, vacationing and getting sick more frequently while also not bringing in an income. If you’re not earning, you’re probably spending.
9) So, what should someone invest in if they want guaranteed growth in their Roth between ages 55-65? Whole life has a guaranteed growth rate in those age ranges and projected rates based upon the current low interest environment of around 5.5% tax free. What would be the market equivalent of that where they could have a guarantee not to lose money and a guarantee not to lose death benefit and a guarantee to not have to pay premiums if they become disabled and have liquidity around those dollars?
10) Everything outside of whole life causes people to take more risk. Sometimes it is appropriate, often it is not. You cannot name one, let alone a handful of products and strategies that can do all of what I just described in the previous paragraph.
11) That is actually not true. Banks look at is the most preferably collateralized money on your balance. It is pure cash, guaranteed to grow and backed by insurance companies. It does things that no other asset can do.
Grady….it’s been 9 months. You’re just now responding to this? I’m glad you make hundreds of thousands of dollars a year off whole life insurance commissions and wish you the best of luck in your career. I think the casual reader can form their own opinion about how much making several hundred thousand in commissions a year in whole life insurance would bias your opinion on the product. Doctors are no different than anyone else in this regard. If someone comes to the ED with a laceration and asks “do I need this sewn up?” my bias is to sew it up. I know it’s good for the patient and it’s certainly good for my business. Could they get by without having it sewn up? Sure. The scar might be a little worse and it might take a little longer, but what’s my bias? To sew. Just like yours is to sell life insurance. It might not be conscious, but to pretend it isn’t there and doesn’t affect your decisions is silly.
I know you think whole life insurance isn’t complex. But most of the people I run in to who own it don’t understand it. That tells me it is reasonably complex.
I’m glad to hear you seem to have the few clients who actually are happy with their whole life insurance. Statistics show that the vast majority of policies are surrendered early. It doesn’t seem to me like it would take much of an advisor to find someone better returns in the stock and bond markets than they can get in a whole life insurance policy.
I’m not sure you understand the term “effective tax rate.” It’s a blended rate including the lowest brackets. The brackets are also indexed to inflation, making that portion of your comment irrelevant.
Whole life returns are not guaranteed (aside from the very low guaranteed rate which is far less than 5.5% on policies currently being sold). I’m surprised someone who sells these would be under that impression. If someone wants a guaranteed return in their Roth IRA between ages 55 and 65 I would suggest a CD or a treasury. More likely, the person seeking the guaranteed return would be better off with some education as to why he may not actually want a (low) guaranteed return and instead take a little more risk.
Thanks for your comment. See you in 9 more months?
My goodness, reading the insurance saleman’s #9 makes me think that he is not being honest at all and how someone could be so stupid to even say that with a straight face. WCI, I have to give you credit for being so patient with dealing with the many insurance saleman’s deliberate misinformed responses on your blog. I would’ve just deleted them and marked it with a comment “spreading misinformation”.
It lends credibility to leave the arguments up and then shred them. My readers are intelligent to see the truth once they have all the information.
Dear white coat,
Your last point is way off and makes me question the validity of this blog. You mention small cap stocks as poor performers. Do some homework and check your facts. If you look at any 20 year rolling periods in the market from 1930 until today, small cap stock as a whole beat large cap stocks about 98% of the time.
You also failed to mention the real returns investors are getting in their brokerage accounts and retirement plans. DALBAR has done research that shows the average investor has only made about 3.5% on their money the last 20 years. This isn’t even beating inflation when you factor in taxes.
Lastly, planning that everyone will be in a lower tax bracket in retirement is a dangerous assumption. To make this happen, rates and brackets can’t go up (may not work with our nations debt), and the investor will have a lower income than they live off of now.
WCI is not the only person who believes whole life insurance is rarely a good idea. Or, that life insurance should never be considered an investment.
Dave Ramsey: http://www.daveramsey.com/article/the-truth-about-life-insurance/
Motley Fool: http://www.fool.com/personal-finance/insurance/2006/05/08/whole-life-vs-term-life.aspx
http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2011/11/01/life-insurance-avoid-universal-and-variable-policies
Whole life insurance is not “BAD”, however for most younger people, especially people who have other investment options it is often a poor choice. I have 1.5 million of term on myself. I pay a rate that is 1/3 of what it would be to have cash value insurance policy on just myself for 500K.
So, taking an average 30ish year old male into account, which would you rather have:
30 years of protection at 1/3 cost for 1.5 million PLUS $120,000 in an investment account (using a very conservative 5% and assuming no other deposits) at the end of that 30 years (Total cost $30,000) or:
30 years of protection at $400,000 with an option to continue that coverage when I likely no longer need it but now have a fixed income in retirement, or cashing it in. If I cash it in I expect to get industry average (3-5% return BEFORE fees) on the small amount they invested which will likely be less but at best will be equal to my investment return above. Only I took the risk of being vastly under insured so I could have the benefit of paying 3x the amount for the same return.
I talked with numerous cash value specialists and an independent fee only financial adviser before making my decision. One thing I have noted is that their projections are universally very optimistic. They forget to tell you that 1) You are unlikely to see 8-9% returns because their fees are very high and outside of the late 80’s-early 90’s this has not been seen in the insurance market 2) They only invest a small portion of what you are paying in 3) They almost always show a projection that involves a large initial lump sum or additional deposits (over-funding) which is what is actually generating their returns.
I fully believe cash value is a “safe” investment” its just not very financially wise for most people when compared to other options.
So I just recalculated… I would actually only get $200,000 of universal for the cost of my 1.5 million dollar term. Also using an estimator I found that my cash value on a $200,000 policy after 30 yeas would be about $95,000. $25K less than the term option by it cost my $60,000 more. So my return on the whole policy is about 1:1. My return on my term plan would be 4:1
Jim-
Thank you for your comment. I think you missed a word in that point. The word is growth. Small cap GROWTH stocks are the black hole of investing. Despite increased risk, there is no increased return in that “quadrant.” The long-term higher returns from small-cap stocks are primarily from small cap value stocks. Also, using rolling periods as separate data points is a statistically questionable tactic. You may think you have 82 separate data points, but in reality you only have 4 completely unrelated data points, and no one should feel at all confident about results obtained from a study of 4 points. Do I think small cap stocks will have better returns than large cap stocks going forward? Absolutely. How sure am I? Not nearly as sure as you.
You are correct that the average investor is falling far short of long-term asset class returns. This is primarily due to expenses and behavior, both of which a wise investor can control. Unfortunately, the average “investor” in whole life insurance has a NEGATIVE return because he doesn’t stick with the investment long enough to reach the low positive returns possible with these insurance-based assets.
It’s absolutely NOT a dangerous assumption. Remember that we’re not talking about tax BRACKETS (aka the marginal tax rate) in retirement. We’re comparing the marginal tax rate now with the EFFECTIVE tax rate in retirement. For example, consider a married doctor who was making $250K a year and saving in a 401K/IRA in a tax-deferred manner. He is saving money at his marginal tax rate- 33%. In retirement, let’s say they pull out $100K one year. Assuming they take the standard deduction, the first $19,500 comes out tax-free. The next $17,400 comes out at 10%. The next $53,300 comes out at 15%. Then the last $9800 comes out at 25%. Overall effective tax rate for that withdrawal is 12.2%. Saving at 33% and spending at 12.2% is a winning formula. Once they start taking Social Security, that rate will go up slightly since 85% of their SS income will be taxable, but it will still be far lower than 33%. They can get the rate even lower by spending Roth assets (0%) or liquidating taxable investments at the long-term capital gains rate.
Most retirees not only have a lower income than they have during retirement, but a far lower income. I calculate I can live just as well in retirement on 28% of what I’m making now. By cutting out taxes, work-related expenses, children-related expenses, and retirement savings, this is pretty standard. Assuming a typical doc will make MORE in retirement than during their career is the bizarre assumption being made in this discussion. Not only do they not need to, but most aren’t saving anywhere near enough to replace half their income, much less the whole thing.
You may question “the validity” of this blog all you like. No one is asking you to agree with any and every point made on it. (In fact you don’t even have to read it.) I’m confident you’ll probably never agree with me with regards to the fact that most doctors should never own a whole life policy. As Upton Sinclair said, “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” Based on your comments and the fact that you dodged the question about how you earn your income, I think the reader may safely assume a large percentage of it comes from cash value life insurance commissions.
Thank you for the excellent post. Thank you for saving honest workers money and for exposing complex insurance-investment schemes for what they are. Your notes are organized, succinct, and informative. In perusing the other responses I most enjoyed the (obvious) revelation that “Grady” is an insurance salesman. Informative and ever-so entertaining!
[Ad hominem attack removed.]
[The WCI] is not licensed to sell or advise on securities or insurance products. He is not an RIA and approaches this topic and several others with preconceived notions that are a) factually incorrect, b) logically absurd and c) dangerous to the consumer.
This is very bad and reckless advice provided by WCI. To make matters worse, “Buy term and invest the rest,” has now been deemed unethical advice. On any continuing education ethics course they teach you this. Most will buy term and then buy an SUV. I am fully licensed financial planner of 40-years, with a series 7 and 66 and can sell you any financial product under the sun. So please let a fully licensed financial profession educate you folks on what is being said here.
The Indexed Life Insurance products are the strongest in the financial industry. It’s really a super charged Roth IRA, that will allow a high income individual to put an unlimited amount of cash in the plan, and allow it to grow tax deferred. Cash coming out of these plans are still under the First-in-First-out (FIFO) method of accounting. (IRC 7702)
The problem is design, and if you have an unethical agent or financial advisor, they will sell you as much insurance as the premium will allow. One needs to ask for the plan to be designed as a minimum non-MEC contract(Modified Endowment Contract.) So what you do is over fund the index universal life plan to penny of the non-MEC classification.
To address commission LIMRA (Life Insurance Marketing Research Assn.) looks at properly structured universal life as costing 2-to-3% over the life of the contract. Every time you buy a mutual fund you have to pay a commission and sales fee to the advisor and mutual fund company, this comes with absolutely no guarantee of principal and any gains are fully taxable.
Mutual funds are fully taxable, you usually have upfront or back in loads of 4.5% and management fees and 12b-1 expenses of 1.5-2.5% per year. These costs come with no downside market protection. So if the market looses 40% like it did in 2008, you still have to pay all those fees in a mutual fund. Its insult to injury to pay all those fees when you lose 40% of your investment. With Index UL there is market downside protection, and with the fees come a 100% tax free death benefit (IRC 101(a).) My point, if your going to pay fees, at least get something in return for it.
I’m not opposed to the 401(k), but only contribute to what your employer matches. As we past the 2013 tax changes, we noticed the marginal tax rates increased with the highest 39.5%. A 3.8% surtax on investment income for families making over $250k, and capital gains tax raised to 20% for the highest wage earners. These facts within the tax code make the case for Index Universal life even stronger now than ever. Also, I’m not opposed to by term and invest the difference, but buy a $3-Million 20 year term, and then a max funded non-MEC IUL Policy and enjoy the tax (IRC 72(e.) BOTTOM LINE: IT NOT WHA YOU EARN, IT’S WHAT YOU KEEP!
This is how I invest my money because of the tax saving, my principal has market downside protection with a 15.5% potential market gain that can never go backwards. I also have a tax free retirement plan similar to a Roth IRA b/c of the FIFO method of accounting under IRC 7702. Lastly, The fees I pay provides a 100% tax free death benefit to my family and that’s something any mutual fund can never do.
These links put the matter to rest:
http://www.youtube.com/watch?v=cuCd2mY6iEs
(Max. funded Index Universal Life vs. Buy Term and Invest the difference)
http://www.bing.com/videos/search?q=ed+slott%27s+retirement+rescue+for+2013&FORM=HDRSC3#view=detail&mid=8A22EC0AC69056B545EE8A22EC0AC69056B545EE
By ED Slott, CPA “The IRA GURU.” (https://www.irahelp.com/front)
Thanks for stopping by. I disagree with nearly all of what you wrote.
First, a series 7 and 66 (originally 6 and 77-dyslexia kicking in) means nearly nothing as far as training goes. You sell financial products. I imagine you’re pretty good at it. That makes you salesperson, not a financial advisor. A financial advisor sells his advice. You sell “any financial product under the sun.” I think readers ought to take that into account when evaluating the rest of your “advice.” They should also be aware that your credentials, at least according to your website, do not include a CFP, CFA, MBA, or even the usual insurance designations of CLU or ChFC despite 40 years in the business. I don’t even see a finance-related bachelors.
Second, IUL, while a seemingly good idea at first glance, turns out to be a terrible product in the end. The devil is in the details- the cost of the insurance, the surrender fees, the caps, the participation rate, the fact that dividends aren’t counted etc etc etc. Hardly anyone who doesn’t sell these things recommends them. Sure, you can design some better than others, but in the end, it’s still IUL. Isn’t it funny that the best way to design it better is to minimize the commission and the best way to minimize any commissions is to just buy an index fund and term life insurance? The “guarantees” cost far too much for what they provide.
Third, your mutual fund argument is a straw man. There is nowhere on this site where I recommend investing in loaded, actively managed mutual funds with 2% ERs. Nice try. Although I’ll give it to you that if that’s what you’re investing in it’s quite possible you’ll do better in an insurance-based product. Probably not IUL, but hey, maybe. Why not just compare IUL to stuffing your money in the mattress if you just want to make it look good?
Fourth, a physician who passes up maxing out a retirement account, whether it’s a 401(k) or a Roth IRA, in favor of a cash balance life insurance policy is a fool and has a salesman for an advisor. This idiotic tactic, pushed in books like Missed Fortune, shows a terrible misunderstanding of how retirement accounts work. Bottom line, it’s not what you earn, but what you keep.
I had to laugh when I saw you posted a link to the Missed Fortune guys. Here’s my long series of posts on why that philosophy is terrible:
https://www.whitecoatinvestor.com/missed-fortune-a-critique/
I doubt I’ll convince you of any of this after 40 years in the business. As Upton Sinclair wrote, “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” “Advisors” like you are one of the main reasons The White Coat Investor exists.
That’s like saying they’re a big difference between an MD and a DO. Except I’ve always been told MD stands for “Missing Dissertation.”
For anyone considering Fred’s points, you might want to look at his history of tax evasion and breach of fiduciary duty since 2000.
https://brokercheck.finra.org/individual/summary/859446
“Allegations
FEBRUARY 1997 – ALLEGATIONS BREACH OF FIDUCIARY DUTY, MISREPRESENTATION AND NEGLIGENCE
Damage Amount Requested
$25,000.00
Settlement Amount
$69,000.00”
Wow. Seven disclosure events. That might be my record of all the brokerchecks I’ve looked up.
Getting my popcorn. 🙂
Incidentally I disagree with you and you shoddy math.
1) Mutual funds don’t have to have loads or anywhere near the fees you quote. If they do you are a poor invester. My funds average fees well under 1%
2) No life insurance in existence has EVER 15.5% gain over any stretch longer than 3 years and I suspect EVER over an stretch longer than a year. Most, including just about all currently payout well under 4% and will likely for the perceivable future.
The only argument you make that is good is the mutual funds have no guarantee for principle while life insurance does. Problem is your guaranteed principle is well less that what you put into the plan for the first 10-15 years (i.e. – NEGATIVE market value). For that you get insured at a much lower rate.
Lets do an example.
You find me 1 single example of the an insurance product you sell that wins using the following:
1). 1.5 million universal life policy on a 30 year old of your choice over the last 10 years
2). 1.5 million in term insurance for for a 30 year old over same past 10 years (estimated cost of about $75, given the same can be had for less than $83 now) PLUS investing the remaining difference in vanguard total market fund.
In a strong market a mutual fund will blow away an insurance product, its a fact. The last 10 years has been a pretty crappy market and I am quite positive if you run what I asked above the mutual fund will still blow away the universal product given the vast majority of the payment for universal life isn’t going to your portfolio but to paying the insurance premium.
Your turn to step up to the plate. I’ll be here eating my popcorn
First of all it’s a series 7 and 66 (IARs” (Investment Advisor Representatives). Also, I have independent CFP’s and CPA’s at my disposal. I posted the Ed Slott video just incase you decided to get hostile and attack me as a salesman and not a professional. Nice try! I give many seminars with CPAs and CFPs, and they all agree with the IUL strategies I suggested.
If you’re loading up a 401k, you’re just deferring taxes and praying that taxes stay the same. 39.5% on the highest wage earners, 3.8% surtax on investment income, and a 20% capital gain. Have fun paying taxes thru the nose, Mr. Obama is counting on individuals like yourself, that just love paying taxes. The advice you give is unethical moreover reckless, and you can find that on any financial continuing education exam.
Let’s look at what the Social Security Admin., is telling us:
http://www.bankrate.com/financing/retirement/no-more-social-security-at-62/?ec_id=m1078090
Do you really think they’re going to let SSI go broke? I absolutely do not think the gov’t will allow SSI to go broke the only alternative is to raise taxes. Maxing out the 401k beyond the employer match is absurd to what the SSI admin is telling us, b/c you are only deferring taxes. LOOK ON THE FRONT OF YOUR SSI STATEMENT, they are telling you the fund is facing exhaustion.
Just in simple terms: Would you rather pay taxes on the seed or the harvest? You pay it on the seed, because of the FIFO method of accounting. Again, Mr. Obama is counting on individuals such as yourself that just love paying taxes.
Let’s do some simple math:
401k of $100k with a 20% return= $120k after a 33% federal tax that’s $80,400 left over, then the state will ask for theirs; This has no principal downside protection, nor a tax free death benefit;
ROTH IRA of $100k with a 0% return =$100k with no principal downside protection nor death benefit;
IUL with a 3% guaranteed return, =$103k with principal protection, gains that can never go backwards, and a 100%tax free death benefit.
“It’s not what you earn, it’s what you keep!”
You’re just repeating most of the Missed Fortune book I have already debunked in the previously linked posts. I’m not going to retype the reasons your argument is wrong.
I do love paying taxes, by the way. I’d love to pay $10 Million a year in taxes. It really isn’t about how much you pay in taxes, of course, it’s about your total return after taxes.
The concept of saving on taxes at your high marginal tax rate now while paying them decades later at a much lower effective tax rate (by filling up the lower brackets) seems to elude you.
Nobody’s hostile here, but I’m not sure what you’re hoping to accomplish with your half dozen posts this morning. You’re certainly not going to convince me that using IUL is a good idea, and I find it highly unlikely given the quality of your arguments that you’re going to convince anyone else either.
You said it, you love paying taxes!
I know a great way to not pay any at all. If your goal is to pay as little in tax as possible, that’s quite easy to do without every buying IUL.
Any have 100% of your principal at risk, and pay taxes and fees.
My IUL does have gains of 12.54% IN THE PAST 3 YEARS and 8.6% the past 10-yrs; however there is a 15.5% cap all with a guarantee of principal. This is beside the point.
First of all, I would never structure a $1.5 million face amount, I would structure a non-MEC face amount with whatever is left over from their employer match.
Lets do this, a 30 year old with an income of $100k, and a 5% employer defined contribution match. $5k into the 401k with the $5k employer match= $10k annually. A $1.5 million term costing $600 per year, so that leaves $4400 left for the IUL.
That buys a $211k non-MEC face to start. In 20-yrs, a Cash Value of $215k and an increasing face amount of $425k, and it just keeps getting better. The principal is 100% protected, the gains are locked in, and the death benefit is there if needed.
What can any mutual fund guarantee? That’s right nothing! ZERO!!
What get’s me the most about mutual funds is if it loses 50% like some did in 2008 and then gains back 50% the next year, a mutual funs salesperson will say the average return is 0%. This is smoke and mirrors because the real return is -25% and that not accounting for any fees nor expenses to add further insult to the investor injury.
Using the S&P500 index compare what a mutual fund strategy and an index strategy has done. The Index strategy blows the mutual fund away.
Also, you said smoothing about physician contributing to a Roth IRA… Once they are over an income of $114-129k single and $181-191 joint, which many are they cannot contribute to a Roth. If converting a traditional IRA, then here we go paying taxes again!
IT NOT WHAT YOU EARN, IT’S WHAT YOU KEEP!
Fred, you’re making yourself look bad here. Google backdoor Roth IRA. Better yet, here’s a link:
https://www.whitecoatinvestor.com/retirement-accounts/backdoor-roth-ira/
Please don’t tell me this concept is new to you as a “financial advisor.”
Of course I know what you’re talking about there, and I don’t entirely disagree with it. However, if you have a high wage earner and they can contribute to a traditional IRA but they cannot deduct the contributions. If converting to a Roth, there will more than likely be tax implications.
No, there isn’t any tax due on a backdoor Roth IRA. You paid taxes when you earned the money. You don’t pay taxes when you contribute it to a traditional IRA. Upon conversion, since the basis equals the value, there is no tax due. Of course, you do need a solution for the pro-rata rule, but that’s usually doable with a rollover into a 401(k) or individual 401(k), or if the account is small, just converting the whole thing.
This thread is funny…and scary.
Question from a first-timer doing the back-door: What do I about the few extra dollars left in my traditional IRA because of increase in value? Will that make taxes any extra messy? Do I just contribute by that many less dollars next year in order to zero it out?
Just convert it all and pay a little extra tax.
Why would my 401K have anything to do with what you think I should invest in life insurance? You seem to really like to muddy the waters.
Most of us do understand mutual funds and index funds and guess what…we can invest in low fee index funds too! (Shocker I know)
I don’t believe your return rates at all. When I looked they were no where near what you claimed.
Finally, you failed to do the one thing I asked which was to match the same insurance protection. $211K is not 1.5 million. You buy life insurance to insure life, not to invest. Your example fails to meet the one need it is used for.
It’s not beside the point. The details matter Fred. An S&P 500 index fund has an annualized return of 18.36% per year over the last 5 years. There’s a big difference between 12.5% and 18.4%. Investing $100K now and getting $18.4% over 20 years vs 12.5% gives three times as much money after 20 years ($2.9M vs $1.0M.) That might be chump change to you but it isn’t to me.
Life insurance offers guarantees, but they aren’t guaranteeing much and they’re charging way too much for it.
Now, let’s look at your example. First, if you’re paying $600 a year for a $1.5M 20 year level term policy you’ve got a terrible insurance advisor. Second, you’re also assuming this particular investor actually has a need for a death benefit, which may or may not be true. Now, you’re saying your policy that costs $4400 a year will grow to $215K after 20 years. That’s a 9% return. I’m pretty sure you’re not going to guarantee that return, now are you? If it’s like most of these, the guaranteed return is 0-3%. That means after 20 years your guarantee is $88,000-118,000, which is of course in today’s dollars, so it may be a loss after-inflation.
I agree that mutual fund salespeople, like insurance salespeople, like to distort the truth by using things like arithmetic returns instead of geometric returns.
That is an 8.6% return and that’s is based off what this carrier has actually paid not an average. The need for insurance is from the 20-year level term for $600 a year. We are talking about a 30-yr old physician, so he/ she will probably have or does have a young family. The will be exceeding the limits for contributing to a Roth IRA in the near future.
I’m not entirely opposed to the 401k, just only contribute to the employer match. The non-MEC is what I suggested. I did not suggest loading the individual up with a $1.5 IUL that will not allow the Cash Value to perform properly. One of the first things I said is how properly structured IUL is a very powerful product.
In response to the actual gains I posted, I’ve use a S&P monthly point to point strategy since 2008, so I have made those gains. The carrier I use has 12-Index selections and you can reallocate them on an annual basis.
If you want to talk about a specific policy, please email the illustration so we’re all talking about the same thing.
but 8.6% while the S&P 500 has given 18.4% isn’t very attractive. You’re just giving up too much return for the guarantees.
8.6% return is what the carrier has actually would have paid over a 20 year period using an annual point to point index strategy. Over the past 3-years the product has paid 12.54%. The gains are now locked in, and the principal is persevered.
These are the company ratings:
A+ (Superior) from A.M. Best1,2
A+ (Strong) Rating from Standard & Poor’s2,3 Standard & Poor’s Corporation is an independent, third-party rating firm that rates on the basis of financial strength. 5 out of 22 categories.
2013 Ward’s Top Performing Life & Health insurer.
Since 2000 what has the S&P 500 done in actual rate of return? The 14 year span? If an investor put $100k in an S&P 500 mutual fund lets say The Fidelity Spartan fund and someone put $100k into an index fund with a 15.5% cap, what would be the difference?
If you don’t know how to look up S&P 500 returns, what business do you have being a financial advisor? Do you really think the cap doesn’t make a difference? Let’s look at how many years the cap would matter. Since 1999, the Vanguard 500 Index fund has had four years when the index return has been higher than 15.5%, nearly 30% of the time. If you actually count the dividends (which IULs don’t), it’s 5 out of 15. The IUL guy would have lost over 4% in 1999, 11.5% in 2003, 8% in 2009, and over 14% in 2013. All together, that means the IUL guy now has 43% less money than he would have without the cap. Does that matter? Heck yes it does.
I wanted you to actually look at how many times the s&p 500 made more than the 15.5% cap over the 10-year span. How many times the IUL held it value when then s&p 500 tanked by -18% in 2001, -27% in 2002, -40% in 2008, and -2% in 2010.
If both put in $100k the S&P mutual fund guy didn’t even break even with $99,250 and the IUL guy because of it’s annual reset point came away with $189,250 at the end of 2010.
It’s easy to look in hindsight and go back and handpick mutual funds that would out perform the IULs, but again hindsight is 20/20. With the IUL, an individual did have to worry about it because of the guarantees.
^ DID NOT have to worry b/c of the guarantees.
If you would like to cherry pick a time period, why not use 1996-2013 instead of 2000-2009? Oh, I see.
Then go from 2000 to 2014, the IUL still out perform the mutual fund.
Send me a current illustration if you want to talk about a specific policy. It shouldn’t be that hard to do.
Since when were we talking about a whole life product? I thought this whole time we were speaking about index universal life. Now you’re doing what you were accusing other of is muddy the waters and quickly moving to another product. I think you need to educate yourself on what a Modified Endowment Contract is and how to max fund an Index Universal life policy properly. Also read about IRC 7702
For further reading:
16 reasons why accountants prefer indexed universal life to mutual funds:
[link no longer available]
As posted on “producersweb.com”? Seriously? When other articles on the site are about how to sell life insurance to prospects? Here’s a sampling:
“We’ve all been there. It’s Friday afternoon and I’m on the last appointment of the week with way too few sales. This appointment is our last chance to earn enough money for groceries. I’m stressed to the max, and I’m trying not to let it show.
It doesn’t matter how hard you try to keep those emotions bottled up, the people sitting across the table from you will pick up on it faster than a dog can smell a steak cooking on the grill. They sense that you’re trying hard to sell them, which only serves to push them away. You’re branded as a “high pressure salesperson,” and they will cross the road every time they see you coming. ”
The 16 reasons are the usual half-truths pushed by life insurance salesmen. Thanks for the link though, as writing a counterpoint for each of these would make for a good post.
So then address the reasons. I’ve rarely seen any REAL reasons from you, just childish attacks and name calling. I posted what Ed Slott the vaunted IRA guru has to say about the subject.
Yes, you’ve certainly lowered my opinion of Ed Slott if he thinks IULs are a good idea.
I’m not sure what you’re calling childish attacks. You’re the one who has walked into my living room and announced that I’m giving “very bad and reckless advice.” It might seem this is some kind of a public discussion, but it’s really just you and me and the six people subscribed to this post’s comments. Since this post is 3 years old, and only gets a read a few times a day, almost none of whom will get through 50 comments, that’s as large as your audience is. You might as well be sending me emails.
I’ve finished the post. You can wait a month to read it like everyone else. Or you can post 20 comments a day on this thread until then if you like. I don’t really care.
Ed Slott know what’s up!
It is bad and reckless advice. It is what it is man! It’s also been deemed unethical! Take any financial continuing education course. They tell you to give the advice of, “Buy term and invest the rest,” is unethical.
No, you’re talking about IUL. This post is about cash value life insurance and other insurance-based investing solutions in general. I’m well aware of what a MEC is and how to fund IUL properly. 7702 is the internal revenue code section about cash value life insurance.
Then why did you bring up whole life in the first place? That be like me talking about margin investing with mutual funds….. It’s not the same animal. I’m talking about max funding IUL to the MEC limits because of its tax favored and not tax deferred.
Look on the front of your SSI statement and what it says about SSI. It’s going broke and their will be no choice to raise taxes. Those who have their money in tax favored areas are going to be well ahead of those who are simply deferring taxes.
Increased marginal tax rates do not mean an individual investor will actually pay taxes at a higher rate in retirement. If I’m in the 33% bracket now, and in the 15% bracket in retirement, then it really doesn’t matter if the 33% bracket becomes the 35% bracket and the 15% bracket becomes the 17% bracket.
Are you going for the record for comments in a single day on this blog?
That’s if your banking on taxes staying the same. With the amount of gov’t spending, SSI telling you on the front of their statement the fund is facing exhaustion, and how much are tax payers on the hook? $70 Trillion? You REALLY think taxes are going to stay the same for a 40-year old by the time he/she reaches SSI at 70? This is also not considering they will not have tax write offs such as student loans, home mortgages, and dependents.
Get your money into tax favored plans not tax deferred plans, b/c one day they will be fully taxable and you’ll be subject to whatever the tax rate is then. Most physicians’ income exceeds the ROTH limits, so max funded IUL is the only way to go. Plus you get a 100% tax free death benefit, instead of paying mgt fees and mutual fund expenses, just in case.
No, I guarantee tax rates won’t stay the same. The IUL is not the only way to go. But I guess if all you have is a hammer, everything looks like a nail. If someone is very worried his personal tax rates will be higher in retirement he can do Roth contributions and conversions. You’ve already demonstrated you have no idea how a Roth conversion works. That’s not unusual among Missed Fortune proponents.
As mentioned before, mutual fund expenses can be so low as to be negligible.
Know exactly what the backdoor Roth is; however, there are some real caveats to that come with it. If an individual has more than one IRA already in existence, this strategy is going to cause some problem.
The caveat is you can’t have an IRA. That’s pretty much it. Most docs can still use it.
OK I see where you’re saying 5-years S&P 18.36%, and this particular IUL has paid 14.93%.
So the difference is the options pricing and the guarantees. However, the IULs guarantees are now locked in and can never lose value. The mutual fund can lose value. The IULs is the saying of, “A bird in the hand, is a good as two in the bush.”
The guarantees generally cost more than they’re worth. If you want to talk about a particular policy, it’s only fair to email me an illustration. Otherwise you can pretty much say what you want. “This particular policy had a 65% return the last 15 years running!” etc.
I find that no one cares about guarantees until you have a year like 2008. After all they lost 40% to 50% of there saving in their 401k, and still had to pay mgt fees and fund expenses. How long did it take them to get back to the pre 2008 values? Investors were screaming for guarantees and now are happy they have them. The very worse call I can give them is, I never lost a dime of their hard earned money.
I lost 33% and it took less than a year to get it back. That’s why you don’t invest money in equities that you need any time soon. It’s long-term money. I’ve got another “investing strategy” that doesn’t lose any money in 2008- it’s called put it all under the mattress. That’s hardly the most important criteria for long-term money.
See you go to saying a “65% return” which is a straw man argument.
Also, what is going to happen if the 401k or 403b plan doesn’t allow for individual to withdraw money at age 59.5 and will only allow withdraws once the employee has fully terminated employment? Let’s say someone enjoys working and wants to work part time until 70. They’re screwed because they cannot access their cash. The IUL is completely liquid and you do not have to wait until age 59.5 to access the cash.
The age 59 1/2 rule is not particularly hard to get around as I blogged about here:
https://www.whitecoatinvestor.com/how-to-get-to-your-money-before-age-59-12/
It’s not a 59.5 rule as a qualifying even, it’s what their 401k administrator say how their contract is structured. Many physicians have a plans that absolutely will not allow them to access any cash from their qualified plans until they’ve fully retired. The IUL is 100% liquid at this point and many are happy with the guarantees and the fact they can get to their money if they want it.
This is an interesting scenario. So you’ve got a guy who apparently is working part-time, and thus can’t get his 401(k) money, but cannot live on his earnings, any SS he may be taking, his taxable account, any old 401(k)s, 457s, defined benefit plans, pensions, and his IRAs. Seems like a pretty rare scenario to me.
Check out what TIAA-CRFF (403b with a 401a) does to physicians that are not fully retired. Also Vanguard does this to railroad workers, b/c its coded as a 401k with a profit sharing plan. I agree, it’s not fair but it’s more common than you think.
Didn’t say he could live on his earnings, but they will usually have a hardship classification that has to be met. Maybe he just wants $50k to buy a car he’s always wanted. They won’t allow it until he’s fully terminated service.
You’re talking about using a 72t distribution, that they have to take for equal payments for 5 years. So first the 4-1k plan admin would have to allow them to roll the funds into an IRA and then elect the 72t distribution. Again, I’m talking about the 401k and if the plan administrator will even allow access to cash if they’re still employed.
Also, long term capital gains are now taxed up to 20% not 15% as you have on your page. There is also a 3.8% surtax on investment income for individuals making over $200k and $250k for married couples. With max funded non-MEC IUL, they don’t have to worry about any of this. They can take any amount at any time, whenever they like.
People just need to ask themselves, “Which investment am I most comfortable with and is the most logical to me?” An investment, with a mutual fund, that makes 10-12% where it’s taxed now or later(some case both) and the principal is never guaranteed. Or an investment, with an insurance company, that will make 7-8% and will not be taxed now, nor at retirement, and the principal is 100% guaranteed.
I will take the guarantees everyday b/c taxes will go up in the near future!
You have no idea which direction taxes are going to go and saying you do doesn’t change that. Even your argument about why they’re going up is nonsense. You don’t pay SS taxes on investment related income.
Now, let’s talk about your understanding of taxes. When you earn money it is taxed. You can then put it into a mutual fund in a taxable account or into an insurance policy. The money then grows. A small portion of the earnings of the mutual fund in the taxable account are spit out as distributions. That money is taxed at a low rate (perhaps 0% if you have really low income, but 15-20% for most.) The money in the insurance policy grows in a tax-protected manner. When you die, the money in the mutual fund goes to your heirs, tax-free and the money in the insurance policy goes to your heirs, tax-free. If you decide you want to spend some of that money prior to death, you may have to pay capital gains taxes on the mutual fund (again, perhaps 0%, but more likely 15-20% for those reading this site.) You don’t have to pay taxes on the insurance cash value, but you do have to pay interest on it.
Now, let’s talk about your projected returns. You suggest a 7-8% return on this cash value life insurance policy. Since you refuse to send me an illustration of said policy, we’re stuck taking your word on it. However, I think it is highly unlikely that you will have a 7% return on an IUL. You’ll be lucky to break even in 5-10 years. A crediting rate of 7-8% IS NOT a return of 7-8%. You’re only credited on the money that goes into the cash value account, and that’s after the insurance, fees, and commissions are paid. That’s why it takes so long to break even. Whereas in a good mutual fund, there is no insurance, fees, or commissions, just an expense ratio that is awfully similar to 0%.
The principal might be guaranteed, but the principal IS NOT the same as what you pay into the policy.
[I disagree (profanity removed.)] In retirement once an individual takes SSI and their income is over $44,000 their SSI gets taxed at 85%. BTW, most physicians will be in this tax bracket.
Although I’m not a fortune teller, I can tell you that taxes will go up and everything out there points that they will. Again, look at the front of your SSI statement and tell me what it says. When are they projecting fund will be exhausted. We also have an aging population and someone is going to have to pay to take care of them.
Saying its luck to break even with an IUL in 5 to 10 years is completely absurd. How long did it take mutual fund investors to break even after 2008? IUL clients never lost a dime, in fact they are way ahead of my mutual fund clients because of the annual reset point. For you to even say this, just shows me your lack of understanding properly structured IUL, or even how the products credit.
What can a mutual fund guarantee? NOTHING, ZERO and you will usually have to pay some kind of sales load (Commission to the Rep and B/D). In a good mutual fund as you say, the fees are hidden in the 12b-1 expenses (No Load funds.) Are you kidding me?
If the mutual funds are held in a joint account, deciding what happens to them upon the death of one of the owners is more complicated. Without any other provisions in the ownership, the disposition of the mutual fund might be decided based on who funded the account.
If one of the joint owners funded the account completely, the deceased owner’s estate may take possession of the account as part of that person’s estate, particularly if the joint owners were not married to each other. This means it has to go thru probate. Mutual funds also produce a 1099-DIV for the dividends even if you roll them back for more shares. If the fund turns over its holdings it creates more taxes, and if you sell them before 1-year the short term capital gains are taxes as regular income. If held for more than 1-year then a long term capital gain of 15-to-20% will apply.
As you said before, you love paying taxes and that is exactly what physicians or anyone else will do by listing to any of your advice.
Things are fine now with the equity markets, but there will be another market correction and another year like 2008. At that time, I will be back to your site posting on how my IUL client didn’t lose a red cent and my equity and mutual fund clients didn’t do so well.
Once someone receives SSI and makes over $44k the IRS classifies them as a wealthy retiree, do they not? A mutual funds’ 1099 will create a double tax causing 85% of their SSI benefits to be taxed. So if they are in a 28% tax bracket because of any income and now their SSI benefits are taxed at 85%, what will be their margin tax rate.
I’m asking you, b/c I know the answer to this question.
No, you apparently don’t know the answer to this question. The IRS does not have a classification known as a “wealthy retiree.” Nor will a mutual fund distribution, documented on a 1099, cause SS benefits to be taxed any more for someone who already has $44K in outside income. Someone in the 28% bracket has long since maxed out the taxes due on their SS Benefits.
What do you mean, exactly, when you say taxes will go up? You need to define what you mean before any one can know how that will affect them. Don’t forget to consider all the deductions and their phaseouts. You don’t need to repeat your arguments ad nauseum. You are apparently certain taxes will go up. I am agnostic as my crystal ball is cloudy. Taxes as a percentage of GDP have varied from 14-20% since WWII. We’re currently at 16.7%, right in the middle of that range. Could go up, could go down, but I suspect that overall, that number will stay about where it has been for the last 70 years.
As I mentioned, it took me, as a mutual fund investor, less than a year to break even after 2008. I suspect your mutual fund clients are doing terribly because you’re choosing actively managed loaded, high ER funds for them. No wonder IUL looks so good to you.
You tell me what my guaranteed cash value is at 5 years with your favorite IUL (whose illustration you are apparently very hesitant to send me) as a percentage of the total premiums paid. Come on, look it up. You’ll discover it’s something like 90-100%. Whereas if you had just invested that money in the 500 Index Fund for those 5 years that percentage would be 230%.
You DON’T “usually have to pay some kind of sales load” (and no you don’t need to define load for me). I don’t pay loads on any of my mutual funds. That’s a straw man argument. Only fools are still paying loads and 12B-1 fees.
It isn’t complicated to figure out what happens to mutual funds in a joint account. Nor are the investment related taxes from low turnover index funds a big deal. If the dividend yield is 2% and it’s taxed at 15% we’re only talking about 0.3% reduction in returns per year.
I’m looking forward to you returning to my site in a few years rather than continuing to post 30+ comments in a single day. I think we’ve already established what I think of your mutual fund clients who are apparently buying loaded mutual funds with 12B-1 fees from you. You’d better hope none of your clients, whether they are invested in IUL or loaded mutual funds, find my site. If you’re like most advisors who come along, you’re here because one of your clients already did.
You tell me what you guaranteed cash value will be in 5-years in your top performing mutual fund.
The 500 index in the past 5 years has done 105%. As you say a “Straw man argument and me picking and choosing times, that’s exactly what you’re doing here. You’re saying, “Hey I got in in 2008 just after the cash, and I’ve made all the great gains.”
The IUL has capped out at 15.5% and when they start in year 11 of the policy they get an extra .75% bonus added to their credits. They’re gains are now locked in, and their principal is guaranteed. Come’on man!
You must be a democrat because of your obsession of paying taxes. In 1944 the highest marginal tax rate was 94%. As desperate times call for desperate measure, and if you have any doubt taxes are not going up please consult your nearest psychiatrist. You’re totally banking all this on taxes staying exactly where they are, and its no more than just plain denial and poor planning.
Please explain the taxes as a percentage of GDP to your colleagues that maybe will listen to you. After they’re into an area where they’re already in a 39.5% tax bracket, they’re also paying an extra 3.8% surtax for Obamacare on their investment income, and their long term capital gains are now 20%.
In 2009, we saw $787 Billion spent on a stimulus plan, and another $700 million was spent to bail out banks. Congress also added another $12 million to start Obamacare. The Congressional budget office projects interest as $800 million annually. Again, look at you SSI statement for me and tell me what it says. Better yet here:http://www.bankrate.com/financing/retirement/no-more-social-security-at-62/?ec_id=m1078090
Most of my clients are risk adverse because of losing half their life savings in 2008 by taking advice from someone who loved mutual funds.
Now they are Max funding a NON-MEC IUL for the specific purpose of accumulating wealth at 65 most will start accessing cash and have a tax free retirement. Their principal is protected, their cash is liquid, they don’t have to wait unit age 59 1/2 to access their cash. They also have a tax free benefit just incase their family needs it. Their policy are also protected from divorce and malpractice suits.
But I guess you can always put some money into mutual funds, to where you can lose everything and increase you tax liabilities along the way.
If you’re planning on living past the year 2023, you’d better get your money into tax free areas (Such as the Roth and max Funded Universal Life). BTW, that’s the year most economist project this country will be broke!
Stop with the scare tactics already.
That ONLY IF the 401k administrator allows it, and then will allow the individual to access the money if they’re not fully retired, so age 59.5 is not an absolute qualifying event to withdraw from a 401k/ 403b.
Check out what TIAA-CREF does to physicians even though they’ve reached 59.5 and have not fully retired.