There's a book out recently by a “financial strategist” whose background is in insurance that advocates trying to avoid paying any taxes in retirement. This is actually possible to do. You basically only have enough money in traditional IRAs/401(k)s that it can be withdrawn in the 0% tax bracket (up to around $20K a year this year for a married couple taking the standard deduction). With little other income, Social Security is tax-free. Withdrawals from Roth IRAs are, of course, tax free. If you're in the 15% bracket or lower, long term capital gains and dividends from taxable accounts are also tax-free. Muni bond yields are also tax-free. None of this is earned income, so you don't pay any payroll taxes on any of it.Those who push strategies like this also tend to sell cash value life insurance, so they like to point out that loans from the cash value of your life insurance policies are also tax-free (although they don't mention as often that the loans aren't interest free.) So the strategy is minimal tax-deferred money, very tax-efficient taxable accounts, cash value life insurance, and a lot of Roth money through contributions to Roth IRAs, Roth 401Ks, and Roth conversions. I think the strategy is ill-advised for several reasons.
Tax Fear Mongering
The first problem I have with people advocating for this is that they do a lot of fear mongering. They like to say things like “Tax rates have never been this low so they're sure to go up in the future.” Well, tax rates aren't actually the lowest they have ever been. You may have noticed the increase in tax rates the last 5 years or so under the Obama Administration, but if you haven't, check out this link. The chart demonstrates that our lowest tax bracket has been both lower and higher than it currently is, that our highest tax bracket has been both lower and higher than it currently is, and that our average effective tax rate has been both lower and higher than it currently is (and remarkably stable, to boot). In addition, capital gains/dividend tax rates have been both higher and lower than they are now. There is absolutely nothing that is particularly different about tax rates now vs what they have been in the past. Tax rates do change with the political winds, but if all you're looking at is the historical data, it would seem just as likely that tax rates are going to go down as up. That argument is pretty easy to refute.
The next argument advocates of this strategy generally pull out is that “since our US debt is out of control and the Fed is printing money like crazy then tax rates are sure to go up in the future.” Several articles/books I've seen suggest tax rates are likely to double. While I won't deny that it is quite possible that tax rates will go up in the future, I don't buy that our national debt is particularly out of control by historical standards. Take a look.
This chart from The Atlantic shows that while our debt as a percentage of GDP is high, it certainly isn't anything particularly different from what we've had in the past. It was a whole lot higher in the 1940s, and we saw plenty of prosperity in the 1950s and 1960s (and if you go back and look at the other graph, the effective tax rate didn't go up during those decades.) I suspect that most people making this argument are either uninformed about history, or selling something (like books, ads, or more likely, whole life insurance.)
Lack of Understanding of Filling the Low Brackets
There are a lot of people who don't get this. It turns out that maximum tax rates can go way up between when you contribute to a 401K and when you withdraw your money and you can still come out ahead. Not only do you get decades of tax-protected growth, but you are also likely to have far less taxable income in retirement than when you are working. For example, you might have enough income while working to be in the 6th bracket, but since you need/have far less income in retirement, you might only be in the 2nd or 3rd bracket. So even if each bracket went up 5% or 10%, you STILL have a lower marginal rate in retirement.
You also may get to withdraw a significant amount of that income at less than your marginal rate. A typical doctor might save money at 33% by contributing to his 401K, and then withdraw a good chunk of it at 0%, 10%, and 15%, such that his effective rate on withdrawing is 10-20%. Obviously, saving taxes at 33% and paying them at 15% is a winning strategy. Who benefits from talking you out of maximizing your 401K contributions? Those who are selling an “alternative retirement account” i.e. cash value life insurance. I don't know if insurance salesmen are ignorant or conniving, but either way you probably don't want their advice on this question.
Lack of Understanding of the Cost of Roth Contributions/Conversions
Regular readers know I am a huge fan of tax diversification in retirement. By having money in tax-deferred accounts, Roth accounts, and taxable accounts, you can minimize your tax bill in retirement, which, all things being equal, is a good thing. I contribute to Backdoor Roth IRAs each year and when I was in the lowest tax brackets (residency and military service) I preferentially put money into Roth accounts. I may also do some Roth conversions in low income years and early retirement years. Roth is great. However, when you're in your peak earnings years and you have to choose between tax-deferred and Roth contributions, the right choice for most is the tax-deferred account. There is a very real cost to going Roth. For example, if you have a $17,500 401K contribution and you're in the 33% bracket, going Roth is going to cost you $5,775 in taxes. If it were a SEP-IRA (which you could then convert to a Roth IRA) with a $52K contribution limit, that would cost you $17,160 in taxes. That is hardly insignificant. Yet, that is what these folks are advocating you do. “Pay your taxes now, while they're low.” Well, 33% isn't low compared to the rate at which most people are going to be withdrawing money. Conversions are the same deal. They cost money, and if you're in a high bracket, they cost a lot of money.
Mixing Insurance and Investing
Perhaps the biggest reason I dislike this idea of going for a zero percent tax bracket in retirement is it causes people to “invest” in cash value life insurance policies that they wouldn't otherwise buy. Remember that I said that all things being equal, a low tax rate in retirement is great. However, all things aren't equal if you're paying taxes at high marginal tax rates in your peak earnings when you don't have to and they certainly aren't equal if you're earning the low returns available in whole life insurance instead of the higher returns available with more traditional investments like stocks, bonds, and real estate. Remember you buy life insurance with after-tax dollars. So you can put $17,500 into your 401K, or you can pay a life insurance premium of $11,725. If the 401K investment grows at 8% and then is withdrawn at a 15% tax rate, and the life insurance cash value grows at 4% and then borrowed tax-free (but not interest free) 30 years later, the difference is $149,682 vs $38,029. Which would you rather have? I don't particularly think that cash value insurance compares favorably with a taxable account, but I can understand why some conservative, highly taxed investors might find it attractive. However, when you compare life insurance to a 401K or Roth IRA, the insurance nearly always comes out looking terrible.
Trying to get into the 0% tax bracket in retirement eliminates the benefits of spreading your income out over many years (and thus fully utilizing the low, non-zero brackets). It can also cause you to make mistakes in the Roth vs Tax-deferred decision and in the Investments vs Insurance (masquerading as an investment) decision. The goal isn't to pay as little in taxes as possible in retirement. The goal is to have as much after-tax, after-expense money to spend as possible in retirement, at least when adjusted for risk taken. Don't fall for the Zero Percent Bracket argument made by insurance agents when selling their wares. Tax diversification is good, but only at the right price. Going for the Zero Percent Bracket will probably cause you to pay too high a price.
What do you think? Do you plan to pay zero taxes in retirement? Why or why not? Have you heard this argument from insurance agents? Sound off below!
Many who have accumulated great wealth will be in the higher tax brackets on retiring
What is so bad about that
I will never touch my principal taking out 3-4% yearly
There is always a trade off and considering no one can predict the future I want to be as tax diversified as possible. The tax rules will change! No one knows how the rules will change so seems foolish to stick hard and fast to a strategy. This post is very similar to a recent post about how to prioritize your accounts(taxes) and I would refer everyone to review that post and skip any book selling snake oil(i.e. how to pay no tax, become a your own banker, etc).
You don’t need any fancy insurance products to achieve this.
You can do LTCG/Divs to 74k married tax free. Toss in some Munis and Roth and you can easily do over 100k/yr tax free.
If you can’t live on that, you have a lifestyle issue, not a tax issue.
Brian,
I couldn’t agree more with your comment.
The insurance angle is a complete non starter. A dollar lost to an insurance company for fees is no better than a dollar lost to the government in taxes.
And shrinking our drive to consume is one of the most powerful ways to accumulate wealth.
Ex
Actually its better to lose the dollar to the gov’t then to the insurance companies. That way you may get your SS or Medicare payments etch without further reductions.
Via email:
Good points. However comparison of our debt to GDP in the 40s,where indeed we did have a post war economic boom, is I think questionable.
First, we were the dominant economic power coming out of WWII. The wartime manufacturing base converted over to civilian, our GDP boomed, we were exporting manufactured goods to the world, and our debt/GDP then dropped.
Compare today. Our manufacturing base is contracting, we are a net importer. Our GDP is not growing enough in relation to our debt. Labor force participation, and the quality of jobs developing for the majority of Americans has dropped and gone to part time increasingly.
In short, the economic engine has shifted to China. That is the fundamental difference. There is no evidence that we will regain a level of GDP to support a lower debt to GDP ratio. We have a government which is promoting increasing dependency on government aid, and promoting envy of those who are successful.
I just don’t think the comparison with the WWII/post war situation works today. That said, I agree with your other points.
This is a very good point. However I have hope that as economic conditions and worker demands go up, companies will bring that work back to the US as it will no longer be feasible to do it overseas
So it’s been several years since this article has been published. Do you have any update on this for the year 2020, or a change of opinion? I was wondering if the financial site you mention here might be called “The Power of Zero”? The message does resonate but I’m not sure about some of the products suggested as some are insurance based. I can see doing some Roth conversions but just letting the sit in some type of stock index fund should suffice.
You’re wondering because I took references about it down after legal threats were made. Tread carefully. Caveat Emptor.
Wish you all the luck for all your blogging efforts.
My wife and I are both physicians and both will be collecting pensions in retirement. Our monthly income from the pensions alone will be approximately 16,000 per month.
I am 42 and my wife 40.
Her employer does not allow Roth 401k as an option but mine does, so I have opted to contribute to the post-tax option.
I did this with the thought that a tax-free income stream in retirement is a good thing given that our pension income in retirement is fixed and taxed. My wife’s 401K will eventually also be subject to tax when the required minimum distributions kick in.
Reading your post today, I am not sure if it is better to diversify in this way or not? Do we have a tax problem in retirement in this scenario?
T
No, I think you’re probably making the right decision given your circumstances. I think I would do the same.
Thanks for your reply, and thanks for this blog. It is a great resource and always an interesting read!
You probably read FWF so you likely know who I am.
I generally agree with your post, but a few minor quibbles.
1) Conversion analysis is math not feelings about “cost”. It’s an investment that generates a return in the form of avoided future taxation. Even if future brackets are unknown you’re making this bet one way or another even if you refuse to acknowledge it. The simpler (but not simple) way to do this is by bracket targeting on current tax rates well into retirement and then comparing rate to the present. This is still overly simplistic and most people wont come close to doing even this math right. They wont take into account rising contributions, inflation adjusted brackets, etc. and don’t know what withdrawal rate to assume on the pre-tax accounts (correct answer –typically 5.5% or higher which will probably leave people scratching heads).
2) Depending on circumstances it is conceivable to be a persons interests to convert substantial IRA balances well into 33% + state tax rates **even when their estimated highest marginal tax bracket when retirement starts is estimated to be lower**. I’m sure that comment is leaving even more people scratching heads. The explanation is very complex, but accurate.
3) To a different point, depending on circumstances it is conceivable for even a person with a decent amount of assets to want to spend several years of retirement just below the 25% threshold given some key cutoffs in the tax code such as 0% cap gains and a higher SSI exclusion can be worth it.
4) Tax diversification into taxable accounts when you have the ability to get those assets into qualified is not smart. Tax diversification within qualified space (IRA, Roth, HSA, etc.) is great, but don’t automatically assume that extends to taxable accounts. It doesn’t.
5) The fact that dumb insurance salesman are the primary people talking about a concept and the risk that they’ll use it snare more people into their product isn’t a good reason as to why a concept is a bad idea.
Roughly speaking: 0%/near 0% retirement rate targeting is probably dumb for 80%+ of your readers, 50% of retirees that will retire with above average retirement assets, and immaterial to those that will retire with less than average retirement assets.
I was going to email you, but I’m pretty sure the email you left was fake. At any rate, I think it would be fun to talk more about your points 1 and 2, perhaps under their own post, maybe even a guest post if you’re interested in writing it. I’m pretty sure I understand the math you’re referring to, which as I recall, depends on your having money outside the retirement accounts to pay the tax bill on the conversion and is really the effect of tax protecting money that was previously in taxable.
No I wasn’t referring to the excel spreadsheets floating around that show implicit contributions into qualified money via a side taxable account paying conversion costs.
Those estimate the value of implicit qualified contributions via conversion and I’m referring to estimating an individuals entire retirement tax profile via assets.
Maybe one day we’ll look at me guest posting or something like that. I’ll keep on the back burner as an idea. In the meantime I’ll give you some food for thought that may get you thinking in a better direction 😉
1) What key assumption underpins tax value equivalency between tIRA and Roth IRA in practically every retirement tax analysis done? In reality is that assumption separate from the size of tIRA and Roth assets or is that assumption a direct result of tIRA and Roth assets? If the latter how can someone use that theoretical tax equivalency in any individual persons case?
2) In your post you give examples of withdrawal scenarios in a persons retirement. Tell me what do you think *should* dictate withdrawal behavior more: relative size of assets in each tax status or an individuals desired tax efficiency for that year?
3) Let’s illustrate a point with some extremes once (may help you to see how #2 above could be possible). Let’s say I have $1,000,000 in an IRA. Lets say I need $20,000 a year out of that $1,000,000. Now hypothetically that $1,000,000 is growing in situation A) at an astonishingly high 50% real a year and in B) -10% real per year. Now I’m looking at theses from the perspective of conversion. How does the different growth assumptions affect the long term tax efficiency and how much does this withdrawal rate (I’ll give you a hint: it rhymes with “fear hero”)?
4) Given #3 what is then wrong with analysis that targets taxation off of needed income and doesn’t target taxation off of asset size?
If you want to talk more privately PM me on FWF.
I don’t know why your comments are being flagged for moderation, so sorry about that. I also don’t spend a great deal of time on FWF, having only posted there a few times. I suppose I could go there and try to figure out who you are, but I’m not sure what the point would be.
I’m having a hard time following your arguments. In fact, I’m not even sure what question you are arguing. I’m not sure if that is because I’m not smart enough or because you’re not explaining it well enough or both. It seems like you’re alluding to something that I’m supposed to guess. Let’s just dumb it way down for me, because if I’m not getting it, most of those following this thread aren’t getting it either, and it’s probably important to get. For example, how about you tell me what you think should dictate withdrawal behavior and why. Thanks!
You know, I had the same question. Somehow, I was waiting for him to suggest cash value whole life. I’m surprised no insurance salesmen dropped by and recommended it either haha.
Also struggling with Roth 401k option.
Current combined income for wife and I – 425k. Will likely not exceed 550k in any given year with bonuses. Both independent contractors with access to 401k with option to make Roth contributions (up to 51k traditional, or ~33k traditional/~17k Roth)
We max contribute currently to 100% traditional, HSA, FSA and backdoor Roth IRAs every year.
We live in California.
Anticipated retirement in 15-20 years.
Does allocating a % of 401k contributions to Roth make sense?
Yes, it absolutely can. Even if you max out the Roth 401(k) options in both of your plans, you’re still putting in $72K each year into tax deferred (401(k) + HSA) and only $45K into Roth. No one can really predict which one is going to work out better for you with certainty as there are so many factors that come into play. How big will those tax-deferred accounts really get (how long will you contribute and what returns will you see)? Will you move away from California in retirement? What will tax rates do? Will the success tax come back? Etc etc etc.
Have you seen this link?
https://www.whitecoatinvestor.com/should-you-make-roth-or-traditional-401k-contributions/
WCI, how is he able to contribute to a backdoor Roth IRA if he is maxing his 401k? I believe his income puts him above the limits for contributions into a tIRA.
https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
IRA and 401(k) limits are totally separate and there is no upper income limit on a traditional IRA contribution.
Re 401k conversion to a Roth IRA, what’s better asset security or tax efficiency in case of a lawsuit and not enough umbrella insurance? Some states protect IRA’s, but the question arises if it remains protected if you have an accident outside the state and a victim sues you there?
401(k) protection is slightly better than IRA protection in some states. This is a pretty rare event we’re talking about, of course. They always say don’t let the tax tail wag the investment dog. I think it’s easy to say don’t let the asset protection tail wag the tax dog. If you want maximal asset protection, you’re most likely going to be poorer for it.
In regards to the tax fear mongering, when you have the head comptroller of the USA under both Clinton & Bush, David Walker, CPA, saying that we will be broke by 2023, then is it really fear mongering? Why, it’s not fear mongering is simple math. Social Security and Medicare are costing way too much. Also Ed Slott, CPA, the IRA guru, not only endorsing this book, but he wrote the forward for it.
http://www.bankrate.com/financing/retirement/no-more-social-security-at-62/?ec_id=m1078090
We have an aging population and someone is going to have to take care of them, and that will cost money. I guess people will just have to start dying sooner, and you’re an ER doctor. WOW!
If it is “tax fear mongering,” then what is the solution? Usually this is what makes me chuckle with people who say this kinds stuff. They’ll say it’s fear mongering, but offer no solutions even though all the evidence is clearly right in front of their face.
The solution is offered elsewhere on the site as well as in the above post. It’s called tax diversification.
Funny you mention the dying sooner. That’s actually a solution that many people are already using. They think they’ll live to 95, but don’t have a good plan and would have run out of money if they had lived to 95. Instead, they live to 65, 75, or 85 and end up not running out of money. That actually solves lots of financial dilemmas for people.
Last, with regards to fear mongering, we’re already broke and have been for decades, perhaps even centuries. I’m not sure what your definition of broke is. There’s a reason the national debt keeps getting bigger. It’s because we spend more than we earn, i.e., we’re broke. If it’s the SS trust fund you’re worried about, get over it. That’s our easiest problem to fix of all our nation’s financial issues. Raise the retirement age, cut benefits a little, increase the tax a little, increase the income cap, increase the taxation of SS a little and voila, solvent forever. They’ve made these changes before and they’ll make them again. But they won’t do it in advance. Buying cash value life insurance out of fear of some future tax law is likely to be a terrible mistake.
[Ad hominem attack deleted]
So I see in your solution you say to raise the retirement age, increase
taxes, and tax social security a little more. Hey, that’s no big deal, right? However, didn’t the Gov’t just do this? Where the highest tax bracket went from 35% to 39.6%? The Gov’t also added a 3.8% surtax on ANY investment income and raised the long term capital gains tax to 20%. If you think the Gov’t is going to stop there, you’re mistaken. All of these factors make the case for cash value, Max funded universal life insurance, stronger than ever.
[Ad hominem attack deleted.]
I’ve heard you say many times that contributing to a Roth IRA (as opposed to traditional) while in residency is the best strategy because of the low tax bracket and taking advantage of tax-free gains. Does the equation change if I’ve jumped into the 25% tax bracket ($95k/year) due to moonlighting. I’m sure the answer also depends on what tax bracket you find yourself in during retirement, and, as I’ve also heard you mention you can basically determine your tax rate with tax diversification in retirement, I’m wondering what you might suggest a reasonable bracket might be for a physician (15% bracket, perhaps?). I hope my question makes sense, and thanks in advance for the reply!
No, I think I’d still do it at 25%. As you move into 28-33%, perhaps not so much.
The rate at which you can get your money out in retirement depends on your other taxable income (pensions, rental properties, Social Security), the ratio of tax-free to tax-deferred accounts, and the overall size of accounts.
You may be right in some of your statements. However, consider this:
1. While taxes may or may not rise, do you really want to leave it up to chance? Would you leave your hard earned savings and retirement income in the hands of the government?
2. Market risk. Does the phrase “Past performance is no guarantee of future results” sound familiar? In other words, “give me your money even though I do not guarantee you anything.” When does that become a smart strategy?
3. Fees. Even if the qualified plan (including 401(k), IRAs, etc.) fees were identical to the insurance’s (which are not. Recent nerd wallet’s figures put the fees at 3% and 1.5%, respectively, but even if they were equal) have you ever asked the percentage of what? The bulk of the fees linked to these plans are in commissions. Advisers get a percentage of Assets Under Management (AUM). Consequently, the bigger your assets he manages for you, (your portfolio) the higher his commissions, annually. Life insurance agents, on the other hand, get a percentage, typically 1.5% of the monthly premium, not the total asset’s worth. Big difference. Huge.
4. Whole life policies are expensive, internally, because of the guarantees built into them. There are newer policies whose internal costs are minimal, thus allowing to redirect those amounts to the cash accumulation. They guarantee you a couple of things: a) You will never lose your investment plus any interest you have accumulated. b) In an up market, you can earn as much as 12%, on a down market, you will earn no less than 2%.
5.Growth. Compound interest only occurs on an up market. On a down market, you lose whatever compounding you had earned. Because on these insurance plans, you always earn interest, compound interest accumulates uninterrupted, tax deferred.
6. Limitations. On qualified plans you are limited on your annual contributions, based on income. Not on life insurance plans.
7. Penalties. Present on qualified plans, none on insurance plans, not even RMDs.
8. Withdrawals. On qualified plans, you only get out what you put in, plus interest, minus taxes and penalties, if any. On life insurance plans, when structured properly, you can get out what you put in, plus interest, plus the death benefit. No taxes, no penalties.
9. Lifetime income. On qualified plans, once you run out of money, you’re out of money. To avoid this, advisers recommend you only withdraw 4% of your accumulation. If you had saved $1million, 4% of that would be $40,000 a year, pre-tax. In a 28% tax bracket, that would leave you with $28,800. Could you live on that? On insurance plans, you are guaranteed income for life, tax free.
10. Long term care is not cheap and is not covered by Medicare. At an average of $9,000 a month, with an average stay f 18 months, it can quickly drain your savings. Most insurance plans carry a rider at no cost, which allows you to borrow a portion of your death benefit to cover medical expenses for such occasions.
11. Death benefit. In qualified plans, none; on insurance plans, yes, after all, it is an insurance plan.
There is nothing wrong with having a qualified plan. We have to remember, though, that they were never meant to be the primary source of retirement, only a supplement to one. Any consultant worth his salt will tell you that the foundation of any estate plan starts with life insurance. With the tax deferred accumulation and the benefits mentioned above, these newer life insurance policies are ideal for turning them your primary retirement plan, while maintaining your qualified plans as they were meant to be, a supplemental retirement plan.
Let’s start with noting that the website you link to in the profile is to an insurance agent site. No surprise, given the length of the comment and previous behavior by insurance agents on the site.
1) Yes. I’m fine leaving the unknowable future up to chance. Since I use dollars in daily life, my financial future is in the hands of the government maintaining a stable economic environment. The alternative is to horde guns and ammo and canned food. But as far as tax rates, I’m hedging my bets by investing in tax-free, tax-deferred, and taxable accounts.
2) When it outperforms the other strategies over and over and over again.
3) I agree fees matter. That’s why I avoid high-fee and high commission insurance products. It is also why I avoid high fee retirement accounts and mutual funds. I think 1.5% is outrageous, much less 3%.
4) Those aren’t whole life policies. They are IULs and have a myriad of downsides. Not enough time to delineate them all, but it has been addressed on the site in the past.
5) That’s one of the worst arguments for investing in life insurance that I’ve ever heard. You can put your money in a checking account paying 0.10% a year and get the same benefit you are espousing. Does that make it wise? No. And it isn’t wise to buy whole life insurance for that reason either.
6) Seriously? The reason there are limits is because the benefits are really good, unlike in an insurance policy. At any rate, investing in a taxable account using tax-efficient investments is also a good alternative, and certainly better than mixing insurance and investing.
7) Sure. There aren’t any penalties. Unless you decide you want to get your money back and then realize that your cash value is 40% of the premiums you’ve paid over the last few years. That seems kind of like a penalty to me. All income gets taxed once. With a life insurance policy, you buy the policy with post-tax dollars. A tax-deferred account has RMDs because it has never been taxed. The overall tax treatment of a tax-deferred account is MUCH better than that in an insurance policy. Tax break going in, tax-protected growth, tax arbitrage coming out. Pretty sweet deal. Alternatively, you buy an insurance policy. No tax break going in and the only way to get your money out tax-free is to borrow against the policy (tax-free but not interest-free) or die. Yea, those are appealing choices.
8) I’m starting to wonder if you even understand the product you sell. You get the cash value or the death benefit, not both. Anything you borrow out of the policy comes out of the death benefit before it is paid out. If you surrender it with a gain, you pay at ordinary income tax rates.
9) Seriously. You’re arguing that someone pulling $40K out of an IRA is going to be in the 28% tax bracket? Do you have any idea where the 28% bracket starts? It starts at $92K single and $153K married. If your only taxable income is $40K out of an IRA and you have two exemptions and the standard deduction you’re only going to pay a little over $2K in tax, or about 5%. Not 28%. What could be better than tax-free income? How about saving money at 28% and pulling it out at 5%. That could be better. Weird that life insurance agent school doesn’t teach stuff like that eh?
10) LTC insurance is a product best avoided if you can possibly self-insure the risk. Using a life insurance product to insure against it is an even worse idea. Just because something can be used for something doesn’t mean it should be. Insurance isn’t free. Money that goes to pay for those benefits is money that cannot be invested elsewhere.
11) Yup. If you want a permanent death benefit, buy a permanent life insurance policy. It might mean leaving less to your heirs than you otherwise are likely to leave, but at least it will be a guaranteed amount.
Nothing wrong with life insurance. Except not only was it never meant to be a primary source of retirement or a secondary source of retirement. It is simply a product designed to be sold, not bought. Anyone who knows anything about estate planning is aware that the vast majority of Americans, including physicians, has no need for life insurance as part of their estate plan.
Good luck with your insurance based retirement plan. Hope it works out for you. If you save enough, it probably will. But please stop trying to sell whole life insurance to doctors. You are not helping them. They will come here in a couple of years and post stories like these:
https://www.whitecoatinvestor.com/forums/topic/inappropriate-whole-life-policy-of-the-week/
It’s this kind of argument that has so many seniors still working well past their retirement age and creates more confusion. I simply gave you a condensed version so as to keep it brief, but if you insist:
1. You will end up paying more in taxes, even if the tax rates stay the same as they are now, for one simple reason: you will be taxed on the whole amount, your contribution, your employer’s contribution plus the growth, if any. I would much rather pay up front, on my earnings. The again, I suppose you still believe in free things.
2. While the market may out-perform any other vehicle, there is no guarantee, only theories, filled with lots of hope. Just ask those who were ready to retire in 2001 and 2008. I am reminded of Warren Buffet’s rule #1 of investment: “Never lose money.”
3. Fees is what keeps you in business, at the expense of your clients. AUMs are sweet, when you are compiling them year after year on the total amount, rather than just the premium paid. Even at 1%, on $1 million portfolio, you are collecting $10,000/yr, vs. 1.5% of a monthly premium of $800, or $144 annually. I suppose you would call those high fees? That may be the reason you do not offer these, as there is more money in qualified plans. I sleep better at night, knowing I have done right for my clients.
4. You are right, they are not whole life policies; they are not your grandfather’s policies. These are IULs. They do have a lot of moving parts, that is one reason not every insurance agent offers them, nor does every insurance company carries them. You have to be educated on them so yo can maximize your client’s premium. Admit it, you have not been educated on them, but are making a case against them without having all the facts. Be honest with yourself and your clients.
5. As I said, it is part of the learning. These policies can earn you up to 13% on an up market. There are some companies that GUARANTEE you, worse case scenario, 2% on you money, one offers you 3%. Try that at your bank. and, yes, that would make it uninterrupted compounding interest, tax deferred. What kind of guarantee do you get in the market? You keep arguing about whole life and you either overlooked my comment on it or chose to ignore it. I am not an advocate of whole life because of its internal expense. I would much rather redirect those funds to my client’s accumulation.
6. I am serious. Why should you be limited on the amount you want to save? Why should you be penalized for using your money if you need it before a certain age or for not using it if you do not need it past a certain age? Yes, I understand the premise behind it, the government side. I prefer to understand my client’s side.
7. When you understand how compounding works, it will make more sense to you. These are terrible products for the short term. They are not get rich quick schemes. They are designed for the long term. Depending on the company, beyond 10 or 15 years, is when you will begin to benefit from the compounding effect on your premiums. Prior to that, no, just as in the example you presented. Most planning, however, is done on a long term basis, isn’t it? This is tantamount to an investor pulling out of the market when it crashes (by the way, why is that considered a correction? Wasn’t it going in the right direction? LOL!). He stands to lose more than what he put in, naturally. Yes, premiums for insurance go in post-tax, grow protected tax deferred and you will never have to worry about paying the tax man again. The only exception to this is when you cancel the policy. At that point, Uncle Sam wants his part of the growth. Many companies forgive the interest when you hold the policy for more than, say 10 years. So no worries there. Consequently, you can get a loan interest free AND tax free.
8. This tells me you have not studied these policies, and that’s fine. But if you do not know, don’t talk as if you do. These plans have a way for you to get back exactly as I stated it, your money plus the growth plus the death benefit. If I told you that there is a way for these policies to even pay for themselves, you would not believe me, but there is a way. It can get to a point where the policies pay you back every dollar you put into them, still pay you lifetime income AND still have a death benefit. You should study them. Try that with any investment you offer.
9. A couple, filing jointly, according to 2016 tax brackets earning 40,000 each, will be in a 25% tax bracket. My bad. I suppose 3% will make a big difference. I suppose you can always find ways to avoid dealing with the tax consequence. I would much rather not. 10. Avoid LTC? Sure, who wouldn’t want to stay healthy till they die, but statistics are not in your favor. Self insure? Are you serious? Do you know how much that would take? The Motley Fool quotes a report by Genworth Financial in today’s financial article, that the average cost for a semi-private room is more than $82,000 a year, a private room is more than $92,000. With 69% of Americans average stay of three years, that amounts to more than $246,000 or more than $277,000. Is that what you would advise your clients to do? True, if you buy LTC insurance you will spend a lot of money and if you do not need it, you can not recoup that. Yet this is a rider attached to most of these policies, AT NO COST. It’s just a perk thrown in.
11. I suppose you can also self insure your children’s/grandchildren’s education, the mortgage, all your debts, vacations, family dreams and retirement, along with LTC. Or you can leverage your money with a life insurance policy with all the benefits mentioned. Should you still have extra cash, sure gamble it away on Wall Street. Who knows? You may strike it rich? In which case, you would simply add to the base you have already established. For, if you lose it on Wall Street, you have your bases covered and will not be forced to remain working well past your retirement years.
There is no better foundation than life insurance, especially with these new policies. You get the best of both worlds, safety AND growth. That’s some peace of mind you can not buy at any price. You say doctors do not need these products? They need it more than anyone! Have you heard of malpractice suits? Sure there is malpractice insurance. Yet it’s so costly, many doctors can not afford to retire. They dare not retire without it, for fear of being taken to the cleaners by a lawsuit. They can not afford to retire and pay the high premiums, either. This is the best remedy for that, because if they get sued, the life insurance can pay for it; if they never get sued, they get to keep their money!! How can they go wrong??? Only if they do not know of this.
Hmmm…an 1125 word comment on a 1483 word post. Might want to take up blogging. I’m trying to decide if my time would be well spent reading those 1125 words or doing something that might actually help fulfill the mission of this site. Ahhh..what the heck.
1) I don’t care if I pay more taxes so long as the after-tax amount is higher. I would suggest you and anyone reading this do the same rather than fixating on trying to get to zero taxes, which was the whole point of this post. The fact that you make this point suggests you have not done the math. Surely the issue is not that you cannot do the math, since it is quite easy. But let me demonstrate it, just for fun:
You earn $30K pretax. Let’s say, just for simplicity sake, that you’re in 33% bracket. So you have two choices. You can either pay your taxes and invest $20K in a life insurance policy or you can invest it all in a tax-deferred account.
# 1 $20K into life insurance policy. You leave it invested for 50 years and it grows over that 50 years at 4%. That $20K grows to $142K in cash value you can borrow from the policy, paying interest but no taxes.
# 2 $30K into a nice 401(k) with low expenses and nice investments. You leave it invested for 50 years and it grows over that 50 years at 8%. That $20K grows to $1.4 Million.
Now, which would you rather have $1.4 Million in pre-tax dollars or $142K in money you can get to tax-free but not interest-free?
This is the issue with using life insurance as a retirement account. The returns are too low and the tax benefits pale in comparison to those available in a qualified account.
# 2 Scare tactic. It doesn’t work on those of us who have actually studied market history. It turns out if you look at it that those who retired in 2001 or 2008 with a reasonable portfolio and plan and reasonable discipline are doing just fine sans life insurance.
# 3 What are you talking about? Did you think I’m a financial advisor working for AUM fees? I’m a blogger and a physician. No AUM fees available in either of those fields. But I agree if you want to maximize the amount of money you have, you would do well to learn what an advisor does and skip that 1% fee. I’m amazed you can sleep at night knowing you have sold so many people a product that has done serious damage to their ability to accumulate wealth. Personally, I would be ashamed of what I did for a living if that was what I did. But like I said before, It is very difficult to convince a man…
# 4 Again. I don’t have clients. I have readers. I have patients. But not clients. If you wish to go argue with a financial advisor, knock yourself out. I certainly HAVE educated myself on IULs. I won’t be purchasing them, nor recommending them for my readers (or patients for that matter.) I agree they have moving parts, and in my experience, that complexity favors the issuer and the salesman, not the purchaser. But again, I don’t expect to convince someone who makes his living by selling them.
# 5 While a policy might be written such that it could give you 13% in a year, it is also designed such that your likely long-term returns are similar to those of a whole life policy. Go back to the policies you sold 10 years ago and calculate the return on them. Then compare them to a reasonable index fund portfolio. Do it again for the ones you sold 20 years ago. Eventually you’ll convince yourself that you’re hurting your customers.
# 6 Nobody is limiting you on how much you can save, only how much you can contribute to an account that qualifies for some serious tax savings. You can always save more in a taxable account or a life insurance policy or whatever you desire. You’re making a mountain out of a molehill with the age 59 1/2 rule. It’s really not hard to get around it for any reasonable use for the money. If you’re not familiar with the SEPP rule, I would suggest you become so before touting this “benefit” of investing in insurance again. https://www.whitecoatinvestor.com/how-to-get-to-your-money-before-age-59-12/
# 7 I understand compounding just fine. The most critical aspect of compounding is rate of return as demonstrated in the above example. Why don’t you explain why you think compounding at a dramatically lower annualized rate of return for decades is a good idea?
# 8 I don’t offer investments. Return of premium, which you allude to, doesn’t take into account time value of money or inflation. But thanks for playing. You really believe you’re helping people don’t you? Drunk on Kool-aid. Hook, Line, and Sinker. You are a true believer. I will give you that. Which explains again why I don’t expect to ever convince you. You will go to your grave thinking investing in insurance products is a good idea.
# 9 Oh, now we’ve changed it from $40K of income to $80K of income. I agree that doesn’t increase taxes. It does not, however, increase your effective tax rate to 25%, only your marginal tax rate. Your effective tax rate on $80K for a married couple is more like $20K *0% + $18K * 10% + $50K * 15% + $12K * 25% or about $12,300, or about 15%. Contributing to accounts at 33%-40% and withdrawing at 15% is a winning strategy unavailable with life insurance policies.
# 10 Yes, I’m fully aware of how much self-insuring for LTC would cost (it’s a pretty simple multiplication problem.) Luckily, I have saved and invested well enough that I can self-insure against that risk, partially because I was smart enough not to put substantial amounts into cash value life insurance policies. I suggest most high-income professionals do the same. I know that’s not what your insurance company taught you, but it’s a perfectly viable way to deal with that issue. I love that you think a rider somehow provides a valuable benefit for free. Either the benefit isn’t valuable, or it’s not free. Just because you can’t buy the policy without it doesn’t make the rider free. That’s just sales tactics.
# 11 It’s like you’ve never heard of using term insurance until you become financial independent, pay off the mortgage, save up for college etc. No need for an expensive permanent product. The main problem with investing substantial sums in life insurance policies is that your money doesn’t grow fast enough to meet your future needs. The “base” your describe simply isn’t big enough to do the job.
My malpractice policy is $16K. I think I saved $400K last year. I’m pretty sure my malpractice policy isn’t keeping me from retiring. Are you seriously advocating buying whole life insurance to pay a malpractice judgement? That’s truly a stupid idea. It’s like you have no idea about the statistics associated with malpractice (such as that the likelihood of being sued above your policy limits is something like 1/10,000, and that’s before the appeal which usually reduces the judgement to policy limits.
Thanks for stopping by. I think your arguments are very revealing of the mindset of an insurance agent and his tactics when trying to sell these policies to unwitting physicians.
Really? Are you most concerned with being right or do you really want to face the facts? Hey, it’s a free country and though we may disagree, I would die defending your right to speak your peace, even if I do not agree with what you say. I do not want to convince you differently; I merely want to uncover the facts:
1. If you do not care about the taxes you will pay when you retire, then there is no issue. Uncle Sam will love you to death. Don’t get me wrong, I am as American as you can get. I even served in the US Navy, and I am proud to have done it. I do believe in taxes; I simply do not want to pay more than I have to, especially once I retire and find myself on a fixed income. Zero tax is not a fixation, but a result of the plan involved. We are simply touting the benefit. No one knows how long this will last. Being that the economy is in dire straits, these benefits may end up being taxed, down the road, for new accounts. As for your example:
#1 If you are interested in doing the math right, rest assured, your numbers add up. The only thing is, you are using the wrong numbers. Again, let me remind you, we are not talking about your grandfather’s nor your father’s life insurance policy. These average more than 4% annually. For 50 years? In case you missed my comments regarding interest on loans, re-read my previous post.
#2 You can manipulate the numbers, but the facts do not bear that out. Low expenses? Nice investment? 8%? Not even your friend Dave Ramsey is using that percentage anymore. He’s starting to use 6%, in view of the real market results. And, yes, that’s pre tax. That’s also interrupted compounding. Why is that important? For this reason: Say you have $25,000 in a market plan, the kind you advocate, and the market drops 20%. Now you have $20,000. The following year, the market goes up 20%. Are you back to even? No, you now have $24,000 to start your third year, and who knows where the market will go from there? Conversely, you have the same $25,000 in an IUL. The market crashes, by the same 20%. What happens? The worst case, nothing your $25,000 is locked in; at best, you will earn 3%. Let’s suppose, it’s nothing. Year two, the market goes up, 20%. Now you start year three with $28,250, tax free, if I may add. Which would you rather have? That’s uninterrupted compounding of interest, at work.
a few episodes like this over a lifetime of savings will make a difference in your accumulation.
#2 No, that’s not a typo, that’s how you numbered it. There’s nothing scary about the facts, and there is no tactics here, just the facts. Historical results over the last 16 years these plans have been around, demonstrate these IULs have outperfomed the S&P 500, by nearly twice as much. Being that the difference is tax free is even more significant. You really should take a closer look at these plans. Sure, you may do better elsewhere, but you know the rule: the higher the return, the higher the risk.
#3 Whether you are a licensed advisor or not, the fees are the same. If they do not pay them to you, they will pay those fees to their advisor, the managing broker, the third party administrator, any and all with access to the accounts. If you are investing based on your own analysis, you are no better than the man who chooses to represent himself in court. And you know what they say about the man who does that, as having a fool for a client. Yeah, those who retired in 2001 and 2008 are doing just fine, working as greeters in Wal-Mart. There may be some who are doing well, but the vast majority are broke. Yet, those who had these plans those years, fared very well, based on the example I mentioned earlier. That allows me to sleep very well at night, thank you.
#4 Are you sure you have thoroughly studied these IULs? Your comments do not bear that out. You keep referring to the low 4% return of a whole life. In fact, you keep mentioning it by name! I keep telling you, these are not the same. The returns are higher, the fees are lower, it is more flexible, the interest on loans is much lower, at times, none. It’s a totally different animal. All of its moving parts are there for flexibility to meet each client’s needs. True, an untrained agent will not maximize them to the client’s benefits, thus negating the features of the plan. I have been trained and am fully certified to maximize those benefits for my clients.
#5 See what I mean? It is not a matter of writing the policy a certain way or another. It is the way the policy is structured and registered with the regulatory agencies. There could not be switch and bait; a contract is a contract. I have compared my clients’ returns. As I once held both licenses, I can compare those who retained their portfolios and those who switched. Needless to say, those who kept their portfolios lost a lot more. In fact, after 2008, it took them five years to get back to the pre-’08 levels. Sad.
#6 What?? Last I checked, what you contribute is what you can save, isn’t it? Are you confused or are you trying to confuse me? I read long ago that a man who knows what he is talking about can not be confused. I am not as concerned about the 59 1/2 rule as I am about the age 70 1/2 rule. I know, you gave me the government reasoning for that and I understand it. I just find it nearly treacherous to be forced to withdraw your own money, even though you do not need it. Why is the government in such a rush to get its tax part? They are certain to get it sooner or later. At a 50% penalty? Plus taxes? Give me a break!!
#7 The dramatic lower rate of return is only present in your figures. The real historicals on these plans bear out a much higher average rate of return. I’m telling you, you should really have an open mind and study these plans. It will do your savings a world of good.
#8 Time value of money is huge, especially during the market’s down years. If it takes you five years to get back to even, those are five valuable wasted money years. I’d rather NOT have negative returns on my money. Would you? As for inflation, it’s going to be there regardless of what you do with your money, isn’t it? Or do you claim to have control over that too? But since you brought it up, on down years, you are not even keeping up with inflation, so you are actually going backwards on your plans and the plans you advocate your readers get. With the plans I propose, on those down years, you are just a bit ahead. Wouldn’t it be better to be ahead?
#9 I guess you can finagle the numbers to get the desired results. Legitimate tax breaks will be there no matter what. You seem to still not understand the guarantees embedded in these plans. I can not believe we are having this discussion. Look, you get home insurance to protect you “IF the house catches on fire”. You get car insurance to cover you “IF you have an accident”. You have malpractice insurance for “IF you get sued”. Doesn’t it make sense to have life insurance, since there is no “IF you die?” I am sure you are smart enough to figure that out. Being that you should get insurance, why not get the best plan available? Term insurance is meant to TERMinate on you. Statistics show that in 97% of the cases, the term expires before you do. To consider yourself self insured at this point is foolish because you can leverage your money better. Cover your assets. Let’s say you paid $20,000 for a permanent life insurance and you collect, $130,000 tax free in retirement, then you die and still have a $100,000 death benefit. Would that be a good return on your money? That’s the kind of return I am talking about with these plans. Take the case of an infant, for example. A 2-year old gets a $27,275 policy. Premiums would be $25 a month. That remains fixed throughout his life, regardless of future medical conditions. At age 67, he retires. He can stop paying premiums and begin collecting tax free income of $24,732. If he was to die at age 72, here is the breakdown: Total premiums paid amount to $19,200. Total income received $150,000. Remaining death benefit $260,000. Not too bad, for a $300 annual premium, huh? There are countless examples as these. And no, this kind of example does not only work well with children; it works just as well for grown ups. You see, if you truly mastered these plans, you would know the way to leverage your reader’s money. The purpose on these plans, unlike the typical life insurance policies, is not to sell anyone as much insurance as they can afford. It’s just the opposite. You offer them the least amount of coverage so they can sock away as much as possible, to take advantage of the tax free growth. That’s how the real growth takes place. But you have to know how to the plans work to maximize your client’s growth. Not every insurance agent is qualified to do that. I and a few other agents across the country can.
#10 Look, I understand, you have every right to be skeptical. I am not here to convince you of anything you are not ready to hear. However, that does not make these plans the worse for it. Yes, the LTC rider is thrown in at no extra cost. If you do not see the value in that, then you may not see value in anything beyond your blinder’s range.
#11 $16,000 a year? WOW! What if you never get sued? Depending on your health and age you could get a $5 or $10 mil policy with that money and over time, can grow it to $15 or $30 mil. And if you never get sued, you can pocket the money.
You are right. I do agree with you on this. Whole life insurance is a stupid idea. I would never propose one, nor have I in all my years of practice. Yet, this is not whole life. This is life insurance, grown up. You really should look into them. You will find out there are no gimmicks, no sleight of hand. Just some clear peace of mind, tax free, with safety AND growth.
TLDR.
Well, already knowing that whole life policies are rarely if ever a good thing, at least I learned something; TLDR means “too long, didn’t read”
It’s l like many agents are trying to convince themselves. That would explain the 1000+ word posts.
I like to compare it The Brad Pitt Phenomenon” (Yes, i made this up) Q: What would Brad Pitt say if someone said was he wasn’t good looking? A: Probably nothing. He knows he’s good looking. He wouldn’t write a 1000 word essay talking about his low body fat and how nice his hair is.
My parents bought me a whole life policy in 1984 (so that I could be insured if I acquired an illness). It cost them about $83 per year. When I realized i had one in 2015, I cashed it out immediately (which was actually hard to do; it required many steps).
The cash value in 2015 was around $2400
Now $83 per year x 31 years in a savings account= $2573
$83 per year for 31 years in stock market, 6% return = $7543
$83 per year for 31 years in stock market, 8% return = $11,139
Bummer about your policy. Not only was it probably not very well designed, but the fact that it was so small caused the fees to be relatively large and eat up the cash value. I’ve seen some policies bought back when interest rates were very high in the 80s that no kidding have an IRR over the last 30+ years of about 7%, which is darn good for a whole life policy. Can’t buy a policy that will give you that today though.
I think it’s an amazing phenomenon how many agents have come on this site over the last 5 years and left multiple 1000+ word diatribes about whole life insurance. Do they really expect they’re going to convince me? Who else do they think is reading 20, 50, 100, 800 comments down into a comments section on a blog post published years ago? Most of these posts only have 5 or 10 people subscribed to them, and half of them are insurance agents.
That should tell you something. We are trying to warn you about the pitfalls of market risk. We have all been railroaded towards a vehicle that is inefficient and outdated. It is a money maker for those on the inside, the ones charging the fees. Even the father of the 401(k) himself, Ted Benna, admits, he created a monster. (Read the MarketWatch article by Jeremy Olshan.) There are other countless articles, like the one by David Dayen, in Fiscal Times, titled “How Wall Street Is Fighting to Rip Off Your Retirement Money” dated February 6, 2015. Or the article in a Bloomberg report by Noah Buhayar on 2-16-2017 called “Warren Buffett says money managers charge too much.” I think he knows a little about money and how it works. Or books, like “The Pirates Of Manhattan”, by Barry James Dyke, or, “The Flash Boys”, by Michael Lewis, among many others. These are not insurance agents, they are analysts. They have seen and felt the Wall Street dream castle collapse. In other words, read! Don’t just follow the crowd; don’t just do what everyone else is doing. They do not know why they do what they do either, so why follow them? Come on up to the 21st century.
I’m quite familiar with the pitfalls of market risk. I was an investor in 2008. Despite those risks, I find them less significant than the risk of not reaching my goals due to investing too conservatively in instruments like cash value life insurance.
I find it kind of funny to see you giving financial advice to a 41 year old multi-millionaire. But thanks for stopping by.
If you think life insurance is an awesome investment, buy as much as you like. But if I were you I wouldn’t bother spending my time trying to convince me to invest in life insurance.
You are right. Most insurance cash value life insurance policies are so conservative, their return is laughable. Many IULs nowadays assure you an increase of as much as 13%. The greatest benefit, however, is the guarantee that your investment is not at risk, when the market goes south. All your gains are locked in from one year to the next. No matter how much the market loses or how long the bear market lasts. Warren Buffett has been quoted as saying: “The first rule of investing is never lose money. The second rule is never forget rule number one.”
As a multi-millionaire you claim to be, you have more at risk. Uncle Sam can wipe out a large part of your estate, upon your passing, unless you take other measures that can end up costing you just as much. I have helped many avoid this trap, by setting up a life insurance policy from which the proceeds will offset the taxes the government will charge. This enables their families to receive the full inheritance they have left for their heirs. In many cases, the heirs actually end up with more, as the policy is often larger than the taxes owed.
The IUL. It is life insurance, grown up.
There is no IUL out there that assures you of an increase of 13%. “Up to 13%?” Sure. Because up to 13% can mean -25%. Interesting choice of words you use there, but not unusual for a life insurance salesman.
Funny how you think an IUL can’t lose money when I keep running into people who bought one a year or two ago who now want out and, amazingly, can’t even get 100% of their premiums out. As I’ve said many times, the guarantees cost too much for what they provide.
I love how you think Uncle Sam can wipe out a large part of my estate. Do you even have any idea how the estate tax works? It appears you do not. A millionaire, even a multi-millionaire, can have zero estate taxes. That’s pure insurance company salesman-speak. Like most docs, I’ve got a long way to go from having an estate tax problem, and even if I had one, there are many ways to pay that bill without any life insurance at all.
The IUL is just the insurance industry’s latest method of tricking people out of their money in exchange for unneeded insurance.
Once again, you are partly right. These are vehicles designed for the long term. I have had clients make the same claim, that they lost money. On a short term basis, these are lousy vehicles. You’d be better off risking that money in the market. There is no comparison in the long term, however. That is due to the true nature of compound interest. Most folks do not realize that compounding only occurs on an up market. The minute the market drops, you lose any compounding you had earned, and start again, as long as the market keeps up, to lose it on the next down turn. It’s a vicious cycle. In an IUL, because you never have a negative interest on your money, it compounds uninterrupted.
I do not know where you came up with the -25% figure, but it is nonexistent in an IUL policy. You may have reason to be suspicious of the claims represented here. And, believe me, I am not trying to convince you otherwise. I merely want to clear the air about the misconceptions regarding the IULs. What you do with that information is up to you. If you took the time to educate yourself on the matter, however, you will find it most revealing. There are countless books on the subject, and no, they were not all written by insurance agents. Most were written by common folks who discovered for themselves the value of the IUL and decided to spread the word. Former business owners, CPAs, you name it. There are a few books and/or authors I can recommend, if you were interested. The IUL is everything you always wanted a life insurance policy to be. It is life insurance, grown up.
Don’t peddle that BS here. There is no cash value life insurance product on the market whose cash value at one year is higher than the first year’s premiums. That’s a very real loss of money.
This argument of using Life Ins as an asset class or not to use has been going on for perhaps 50 or more years and there will never ever be a 100% agreement either way. That said, if this is a bad idea then why are there billions in this stuff owned by the largest banks/brokerages? Bank of America, JP, Wells and more have billions in this.
Further, there are advanced and extremely knowledgeable attorneys and law professors and more that like this approach too.
That said, it is a case by case basis. The more assets and higher income you have, the more this makes sense. Then, not to mention if worth over 20M or more–legacy/estate tax planning. Malcolm Forbes had over 100M of perm ins at his death.
If you make 20k a year and/or did not accumulate much in your life, then this might not be for you. That said, if you don’t have much, then what happens when you die first and what will your spouse live on? What if you need long term care. Oh, and if you don’t have much, why pay any adviser? Why pay 1% a year to manage your money and on a growing asset? If you are not worth much, and not much to manage then just buy an index fund and don’t hire anyone. No one at the wire houses or a life agent or someone who is a combo (comprehensive adviser). Best advise—run the numbers and see your own personal circumstances. Math/facts gets you away from “opinion based” financial advise.
I disagree that someone at a wire house who sells index funds is an advisor at all, much less a comprehensive one.
If the asset protection or estate planning benefits out weigh the low returns issue, then buy as much whole life as you want. But don’t buy it because a bank buys it. You’re not a bank. Don’t buy it because Malcolm Forbes bought it. You’re not Malcolm Forbes.
It’s funny how you get caught up in titles. Advisor or not, if the counsel makes sense, take it. Same with life insurance. It’s not what it’s called; it’s what it does that makes a difference. You do not need me to tell you that things change. Life insurance has evolved into this latest product, called Index Universal Life, (IUL). It is not whole life; it is not the universal life policy your grandfather or even your father knew. It has safeguards, it has guarantees, it has living benefits no other product has had, including guaranteed, tax free income for life. Guaranteed annual lock in on your gains, meaning you will NEVER lose any gain on your money, including your money. Your money can grow as much as 10, 11, or 12% in any given year. In other words, you can now have growth PLUS safety. Most of these include a no-cost rider akin to Long Term Care policies. It has many other benefits you should look into. This is life insurance, grown up. It’s not what it’s called; it’s what it does.
That sounds like it came out of a class on how to sell life insurance.
The alternative hypothesis is that in our information age, people were catching on to the fact the less complex options of whole life and universal life weren’t such great purchases, so the industry decided to make it even more complicated to analyze by throwing in indexes (to capitalize on the popularity of index fund investing), safeguards, guarantees, riders etc. Now even the guy selling it has no idea what it’s going to do.
But hey, you love life insurance? Buy and sell as much of it as you like. I see it as a product designed to be sold, not bought.
You sound like a true cynic, defined as “one who knows everything about everything and the value of nothing.”
The fact remains that investing in the market is nothing short of a gamble. Ask yourself, How much will I earn? (in the market) How much will I have to pay in taxes? How much will I be able to draw monthly? How long will it last?
All of these are uncertainties, answered with an IUL policy. It offers more guarantees than any other product available. One big consideration for most, is that there will not be any taxes involved–not even to your heirs, upon your death. It truly is the retirement vehicle for the 21st century. If we could only get our 20 century mentality out of the way.
You sound like a true life insurance salesman, who honestly believes that life insurance is a solution to all financial problems.
I disagree that investing in the market is a gamble. Just because uncertainty exists does not mean gambling occurs. There is uncertainty with an IUL policy, for instance. My opinion is that the guarantees in an IUL policy cost more than they are worth.
I vehemently disagree that IUL is the retirement vehicle for the 21st century. I don’t think it should be used as a retirement vehicle at all.
Anytime you enter into a contract that, right off the bat, explains that: “past performance is not a guarantee of future results”, I consider a gamble. As in a gamble, you do not know how much your money will grow, or even if it will grow, how much you will pay in fees, how much you will owe in taxes (except in a Roth), how long your money will last, what your rate of return is on your money, you know none of that!! How else would you describe a gamble?
Unlike an IUL, all those are known factors. The fees, by comparison, are far lower, usually 1%, as in most investments. The difference, however is 1% of what? In an IUL, it is 1% of the monthly premium; in an investment, it is 1% of the accumulated value. So, as your money grows, so do the fees, not by a percentage, but by amount.
Another factor that is often overlooked is the compounding of interest. Compounding only happens on an up market. Being that there will be years when the market goes south, at that point you lose whatever compounding you had earned and starts up again, when the market moves up. In other words, there is no actual compounding in an investment. There may be growth, but no compounding. The difference is huge on an investment. Einstein has been quoted as saying that “compounding is the eighth wonder of the world.”
The IUL has living benefits. One of them is a free rider akin to long term care (LTC) insurance. On top of that, it guarantees tax free income, for as long as you live. AND if structured properly, regardless of how much you have collected during your retirement years, a tax free death benefit.
For these and other reasons, I consider the IUL to be the best retirement vehicle for the 21 century. A word of caution, however. Not every insurance company offers an IUL. Consequently, not every insurance agent knows of it or how to set one up properly. In order to get the most profit from an IUL, you need to talk to an agent who has had the training required to maximize its features for your benefit. There is no additional fee for those services.
There are also countless books you can also read on the topic. Patrick Kelly has written a few, as well as a former CPA named Bryan S. Bloom. I can refer you to some, if interested, because the list of such books is long. I leave you with a quote from the former CPA mentioned above: “If what you thought to be true turned out not to be, when would you want to know?
Thanks for letting me know your own personal definition of a gamble. I really have little interest in debating the definitions of words on the internet.
I don’t expect to convince someone who sells IUL for a living that it is a bad idea. So I’m not going to try. The mission of this site isn’t to get you to stop selling it, but rather to get your clients to stop buying it. So I’ll focus on your potential clients, rather than you.
You’re doing your clients a huge dis-service. The world is changing. Things aren’t as they used to be. You keep suggesting your followers to put their money at risk on the market, at their expense. I ma not opposed to investing in the market, just like I am not opposed to people going to Vegas with their money; I simply do not believe it should be your primary or only retirement source. I am not even asking for your clients’ business. They can check with their own insurance agent. I simply want to clear the air about the options available. The market had been the only game in town for the longest. Though the fees and risk have not changed much, now there are alternatives that one should at least consider, rather than burying their heads in the sand, that “all is well”, without giving a serious look to other options. The IUL is everything you always wanted a life insurance policy to be. With it, you will find it easier to supplement whatever else you have, better than without one.
Why do you think I have clients?
An IUL is certainly NOT what I want from a life insurance policy. What I want from a policy can be found in a low cost term policy.
Javier, just curious, at which index account rate of return do you illustrate your IUL policies? Thanks.
Banks buy life insurance policies to fund employee benefits. It is an insignificant amount of their assets. You think they actually invest in them for some expected return?
Man! You sure are quick to make judgments, bad judgments. If I had not responded to your question is not because I had all the time in the world and was ignoring you. I do keep a busy practice and do not always have the time to answer all my emails. As to your question, I have no problems illustrating an IUL at 7%, for a couple of reasons. Under an ordinary investment, I would not illustrate it at such high percentage; it is not fitting, because you have to account for the market downturns. Negative returns create a big burden on your accumulation. For example, a 50% drop in the market (I’m not saying it happened, it’s just an example) can only be made up by a 100% rise in the market. That’s an impossibility. The ratio of loss to gain is significant. On an IUL, however, you will never experience, by contract, a “downturn” on your money (again, keep in mind we are talking long term, as explained in a prior post) You do not have to make up that negative. Your gains are locked in from year to year. The worse your money will do is zero for the year the market goes south. The second reason for the high percentage on the illustration is that there are companies out there who will give you not only an uncapped ceiling, but a 145% participation of the market’s growth. (As you may be aware, caps and participation rates are factors to consider in an IUL). So, to use round numbers, if the market grows by 10% on your anniversary, your account is credited 14.5% for that year; 20% will yield 29% in your account; 5% will total 7.23%, etc. Naturally, not all years will be above 5%, yet, since we do not have to make up for lost ground, AND you can get 145% of the market’s growth, 7% is a very reasonable number to illustrate. Again, with no other vehicle would I project 7%, although I hear Dave Ramsey uses a 8% return on his projections. The market will not support that. IULs can, for the reasons I just stated. I’m telling you, you are missing the boat i f you are not using the IUL for your retirement. Plus, you have life insurance. Tax free, penalties free, no age restrictions, no strings attached. IULs are the retirement vehicle for the 21st century. Come on up!!
Someone who doesn’t understand what your phrases mean might misinterpret them. For example, when you say “your account is credited” someone might mistakenly assume those percentages refer to the return on your money, which is not the case.
The other thing to consider is when someone like Mr. Alba swings by and says this insurance policy will give you 145% of the market return without any possibility of losing money, you’ve got to say to yourself, “Self, how is this insurance company going to stay in business paying out 145% of the market return, guaranteeing I cannot lose money, and providing a death benefit.” It doesn’t take much thinking to realize that it cannot possibly work that way. So there must be a devil in the details. And when you really dive into the details, you find the devils. And then you realize the IUL gives you more or less about what you get in a whole life policy, as it must.
Have you heard the expression “analysis leads to paralysis”? It is this kind of thinking that cost the Swiss the world’s lead in watchmaking. When the new digital watches were introduced, they wrote them off as a passing fancy. History proved them wrong. As it will prove you, by having such skepticism. It is proper to be cautious, but not a blind skeptic. When you study this plan, you will discover, as in your last sentence, that it works pretty much like a whole life, without the fees and costs of it with larger growth than WL. Safety and growth. No other vehicle in the market can give you both. The IUL does. It is the retirement vehicle for the 21st century.
Repeating something many times does not make it true.
Hi Javier, thanks for your response. How do you justify illustrating IULs at 7% when their index accounts yield a Compound Annual Growth Rate (CAGR), over the *long-term,*– 40, 50, 60 and more years–of only 2.5–4%? Javier, at 7%, you set up your clients’ IULs to fail 10, 20 years down the line. Wouldn’t it be better to illustrate the IUL fairly to begin with at 2.5–4%? Look forward to your answer Javier. Thanks.
That’s exactly it. The illustrated rate IS NOT the return you get. The return is the IRR, which usually doesn’t find its way into an illustration.
You are right. In my personal account, the first year far outpaced the illustrated numbers. In my annual reviews, I find many of my clients have earned 8-10%, when we illustrated only7%.
Over how many years?
Year to year. Again, your gains are locked in and reset on your anniversary.
Javier, why don’t you take a snapshot of some of your clients’ actual real amazing returns so that we can see the numbers. Then you’ll probabaly have thousands of WCI readers signing up for your IUL. If privacy is an issue, then show us your own IUL (if it’s so amazing, I’m sure that you have an enormous policy) returns with the actual numbers.
To what end? I can show you statement after statement, yet I am not here to convince you of anything. I simply started this to rebuff the notion that the IUL is a lousy vehicle. As an intelligent investor, it is up to you to study the facts before you and not be swayed by hearsay and innuendo one way or the other. We live in a free world, thank goodness; you are free to think as you like, as am I. You are not required to believe me, but you are required to be diligent in your quest for the best uses of your money. Besides, based on our past conversations, I have a feeling that no matter what I or anyone does to demonstrate the usefulness of this product, you will find a way to discredit it. If you are serious about it, you will find book after book on this topic. As I mentioned before, they are not all written by insurance agents, either. I had offered you a list of books for you to follow up on your own. I have not seen that request. I love America. We have choices. You can choose what you want to believe and i will do the same. Best wishes in your finances.
Javier, G*d forbid you should actually have to show proof of your wild claims to coax someone to pour $100,000s of their hard-earned money into these money black holes. They should just believe whatever you say, correct? Do I understand it right? Thanks.
Javier, one year’s return is meaningless. Even if you tell us the truth. We can’t verify this from you.
The IUL prospect wants to know the very long-tern return. Return over 40, 50, 60 years and more. That’s how long he expects to hold an IUL.
If this vehicle was in the market, yes. Your numbers do add up. Yet this product is not in the market. The index is merely used as a reference point to credit your account. You should look into it. This is life insurance, grown up.
Javier, you said “…this product [the IUL] is not in the market…” I’m sorry to say Javier, you’re dead WRONG. The securities that the carriers use to generate the income to credit the IULs’ index accounts are *absoluteIy* in the market. The carrier uses predominately low- to mid-risk stocks and corporate bonds. To see this for yourself Javier, please search on “What Do U.S. Life Insurers Invest in? – Federal Reserve Bank of Chicago” to get that PDF. Thanks.
Do you believe all of that is in a IUL portfolio? 100%? Or do you think that, maybe, just maybe, some of that is diversified for different products? Or do you just want to believe what you want to believe?
Javier, again, there’s you, the IUL sales rep-licant slugging these poisonous pigs in pokes for fat commissions. Then there’s that Chicago Fed study with real and vetted numbers. The reader will know whom and what to believe. Thanks.
Javier, bottom line, the carrier can’t credit index accounts more that the carrier itself makes from its investments. That’s 3–4+% long-term CAGR. After they take their cut from the spread, that’s 2.5–4% long-term CAGR.
Javier, the math’s as simple as that. Thanks.
Have you heard of paradigms? New paradigms involve new rules. The old rules do not apply to the new paradigm. For example, there was once a belief that the earth was the center of the universe and all other planets, including the sun revolved around it. When the new evidence pointed otherwise, the old rules did no apply to the new paradigm. No matter how “sound” the rules were. Same with the flat world vs round, same with the digital world vs analog, etc. You are trying to apply the old rules, like the CAGR to this new paradigm. It will never work. This is a shift in paradigms. As in the past, most have a tough time accepting the shift. You do not have to. Yet history will prove it. Hope to see you on the winning side, ten or so years from now. Otherwise…
That’s a new one. Cash value life insurance is now the new paradigm. I’ve gotta give you this- you are a true believer. Let me know when you’re ready to post the actual returns on an actual IUL policy and we’ll post them up and dissect them on the forum. Until then, you’re just selling, selling, selling like most agents. The only way to get an agent to stop selling is to stand up and walk out of the room.
Close mindedness will get you nowhere. You can walk out of the room all you want, yet when you come back, the situation you walked out of did not change. In the case of digital, we were not talking watches, we were talking digital watches; in the case of life insurance, we are not talking cash value, we are talking about IULs. These are different from any other insurance product in the past. That difference accounts for improvements that add value. It may not be for everyone, but that in itself does not make it the worse vehicle in the market, as you have alluded many times. In fact, those changes make it the best product for those seeking safety AND growth.
Are you not aware that an IUL is a type of a cash value life insurance policy?
I agree IUL isn’t for everyone. In fact, it might not be for anyone.
Everyone wants safety AND growth. Duh. But you must give up a certain amount of growth to get safety, and a certain amount of safety to get growth. IMHO, an IUL policy demands you give up too much growth for the safety it offers.
“Paradigm.” Lol.
Javier. You are merely one of many salestrons who doggedly flogs a young product meanwhile giving us remarkably little verifiable math to support it. Meanwhile, that Chicago Fed study tells us in detail how the carriers generate the income they use to credit IUL index accounts.
To recap: You, a rep-licant with a large vested interest to flog these toxic pigs in pokes. The Fed Study, which gives us real and vetted numbers.
I’m sure the reader can decide whom to trust. 🙂
Thanks for playing Javier.
Here’s a direct quote from the article you refer to:
Some insurance
companies will have greater exposure
to riskier asset classes and others will
have less. Firms will also vary in the extent
to which their liability gains would
offset their losses on investments. Similarly,
equity cushions differ across firms. Do not confuse the average with the uncommon. There are companies out there who do perform way better than what you may be used to. As I said, you need to come up to the 21st century, or stay behind.
Javier, exactly! And how do you know if it’s greater or less? You don’t. The carrier won’t tell you this. Even if it did tell, the carrier reserves the right to change its investment mix at any time. For all you know Javier, the carrier may actually be *more* conservative in its GA and SA accounts. And thus deliver *less* than 2.5% return to the index accounts. In an IUL, the carrier reserves the right to do that if it chooses. The IUL policyholder has zero say in that matter.
Javier, here’s the IUL’s root problem: The carrier offloads virtually ALL the risk onto the policyholder. All the carrier has to do is meet the index floor of 0–1%. The carrier has no obligation to deliver any return above that.
Indeed Javier, the carrier has incentive to *underdeliver* IUL index account returns. Why? Unlike in Whole Life, the IUL’s premium is not guaranteed. It can go up. It can SOAR–and often does. The less return the carrier delivers, the more premium the policyholder has to pony up to make up the diff. The more the policyholder has to shell out, the more likely that, sooner or later, he’ll get priced out of his policy and LOSE EVERYTHING–his death benefit and the $100,000s, even millions, he poured into his IUL. Especially as he ages into his retirement years when the yearly-resetting Mortality (aka COI) charges blast into the stratosphere.
Javier, as far as today’s publicly-traded insurance carrier is concerned, huge IUL failure rates are just good business. It better serves the *shareholder.* The less death bennie the carrier has to pay out, the better for its bottom line. Thus the carrier is happy to pay you fat commissions to slug these poisonous pigs in pokes to trusting credulous folks. Thanks for reading.
Wow! You really sound irate! Slow down; take a deep breath. Are you sure you are an investor? Are you buying and actively selling stocks on a regular bases, or are you simply pushing WL? Buying and believing in WL does not make you an investor, you are simply a WL buyer. The word invest carries with it, inherently, the word risk. There is no risk in a WL policy. So, if you are indeed an investor, you know every product you deal with has a risk. In that regard, an IUL is a far better product than a Wall Street product because it mitigates risk. Of all the other investments products, the IUL has the least risk associated with it. It allows you to have growth AND safety. Isn’t that what most investors want?
Sure, Javier. How you feel, etc. You blather a lot of happy airy talk. But you haven’t shown us that the IUL is anything but a total slo-mo disaster for the client.
Meanwhile I’ve shown–by the contract language and the numbers–that the IUL is the flat-out riskiest life insurance product anyone can buy.
Javier, should anyone in his right mind ever “invest” in a product that guarantees only 0–1% return yet bags you hundreds, even thousands of dollars of fees per year? Fees which can skyrocket to $100,000s per year by the time you reach your 70s and 80s? That exactly describes the IUL.
I look forward to your answer Javier. Thanks for reading.
Correction; “… the *x*UL is the flat-out riskiest life insurance product anyone can buy…” These include the original ULs, VULS, and IULs. Thanks.
Javier, I don’t push Whole Life. I suggest WL only if the client really feels he needs a “nanny” policy. Something to force him to save his money. In such a case I point him to reputable mutuals to explore WLs.
I recommend he avoid publicly-traded carriers, e.g. Transamerica (Aegon), Voya, Allianz, MetLife, etc. Why? For one simple fact: Publicly-traded insurance firms will always favor their shareholders over their IUL policyholders. IUL policyholders agree to 10–15 year Surrender fees so lock themselves in and render themselves powerless. Meanwhile shareholders can instantly offload the company’s stock. Javier, whom do you think the carrier will favor, their stockholders or their insured? I’ll give you two guesses. First guess doesn’t count 🙂
Here’s a list of carriers to avoid. LCHB, a leading plaintiff’s law firm, is working up a class-action suit against these xUL purveyors:
www dot lieffcabraser dot com/consumer/universal-life-insurance/
Thanks for reading.
Javier, I don’t sell Whole Life or any other financial or insurance products. I suggest WL only if the client really feels he needs a “nanny” policy. Something to force him to save his money. In such a case I point him to reputable mutuals to explore WLs.
I recommend he avoid publicly-traded carriers, e.g. Transamerica (Aegon), Voya, Allianz, MetLife, etc. Why? For one simple fact: Publicly-traded insurance firms will always favor their shareholders over their IUL policyholders. IUL policyholders agree to 10–15 year Surrender fees so lock themselves in and render themselves captive and powerless. Meanwhile shareholders can instantly offload the company’s stock. Javier, whom do you think the carrier will favor, their stockholders or their insured? I’ll give you two guesses. First guess doesn’t count 🙂
You can see a list of carriers to avoid. Search on “Lieff Cabraser Universal Life.” LCHB, a leading plaintiff’s law firm, is working up a class-action suit against the xUL purveyors listed therein.
Thanks for reading.
Javier, when you look past the IUL’s razzle-dazzle of index floors and caps and subaccounts, you get only one real crediting guarantee: the 0–1% index floor. The carrier can easily exceed that for a long-term CAGR. Thus the carrier assumes almost no risk. The policyholder takes on nearly ALL the risk. Over the long term, these IULs will generate only 2.5–4% CAGR for the policyholder.
Javier, how do you think the carrier will conjure the extra 3–4+% CAGR to justify your 7% illustrations? I look forward to your answer. Thanks.
Calls, puts, options, combined with market growth and other choices available to investors on the open market.
Javier, I’m sorry to say. But you utterly FAIL to answer the question.
First you say “…Calls, puts, options…” Javier, calls and puts *are* options. Options are derivatives. Go to the Table 1 on page 2 of that Chicago Fed study (cflapril2013-309-pdf.pdf). I directed you to this study a few comments ago, and also when we chatted over at a Dan Thompson comments board, the long 45-minute version of his “Why Universal Life Insurance Policies Will Fail” YouTube vid.
Javier, notice that Chicago Fed table shows only 1.1% of the carriers’ accounts are derivatives? This means derivatives have nearly *zero* effect on the modest 2.5–4%–at *most*–long-term CAGR the carrier will credit to the IUL holder.
Next you say “…combined with market growth…” Javier, that’s WRONG. You are “double-dipping.” The 2.5–4% CAGR *already accounts* for the market growth.
Finally you say “…other choices available to investors on the open market…” Javier, these words mean nothing. *What* are these “other choices?”
Javier, I look forward to an illuminating answer from you. Nothing you’ve said to now even begins to justify why you illustrate an IUL at the fairyland level of 7%, when the IUL holder can expect a long-term return of–at best–2.5–4%. Thank you.
In reading your other posts, along with this one, I am flabbergasted at your line of “thinking”.
The guarantees in place are way better than any other vehicle in the market, for starters. Those guarantees imply that the market will nosedive, year to year, until you retire. While that is a remote possibility, it is so remote it becomes almost nonexistent. While not every year will see market growth, there will be some years when the market closes higher than others. By contract, the company is obligated to credit (thereby grow) your account, the return of the index, on your anniversary, from year to year, with the guarantee of no less than zero percent for THAT year. The following year may be different than a current one. At that point, your account gains are locked in and the account resets to its present level. This new level becomes your “ground floor”, for the following year. For this reason (since your account will never be credited less than zero), the average return is a better indicator of growth than a CAGR. Let’s compare, using the worse case scenario, the historical worse decade for the S&P, from 2000 to 2010. If you started with $12,000, in the market, you ended up with -$9,000. The CAGR for that period is -2.48 for the S&P; the investment average was -18%. Conversely, if you started with the same amount in an index account, in the same time frame, you ended up with $18,000. The CAGR then, was 4.14, the average 6.73%. That is worse case scenario, using historical data. Best case? A real hefty return.
These are not fabrications or manipulation of numbers, as you do in your response to Grant’s comment. You mentioned Jim Harbaugh’s contract. You contrast a $350 a month premium with a $4 million one, and the returns on each. No comparison!! Or comparing the COI of an 85 year old male. Really?? Why don’t you compare apples to apples, as I just showed you? A discerning mind should see right through all that and realize the smoke and mirrors you are using. As for VULs, Wow! I can’t believe you are making a case for them!! And you are speaking against IULs??!! In my career, it is the only vehicle I have seen people lose their prior “gains” due to a market decline, to keep up with COI. It only shows how inept you are at your judgments on investment vehicles. I’m telling you, come on up to the 21st century!! IULs are better than you thought.
Talk about lawsuits? Anyone can sue anyone for anything. You may recall, McDonald’s was sued for its hot coffee. Does that mean hot coffee is a bad purchase or that McDonald’s is a bad place? I suppose in your line of “thinking” it does mean any of those. You ought to know it is neither of those. It simply means we ought to be cautious, but not skeptical. Or get left behind in prior centuries.
Javier, again, we have to look at the long-term CAGR the carrier will deliver to the client’s IUL. It’s 2.5–4%. That’s it. That’s all it *can* deliver. That the same 2.5–4% the carrier funds Whole Life policies. Javier, the carrier funds its xULs and WLs out of the very same General and Separate Accounts.
Thus it stands to reason that, to properly fund the IUL based on 2.5–4%, the client must pay premiums at least comparable to those for WL.
In such a case, why not go for the WL with the stronger guarantees? Most of all, a true guaranteed level premium?
Javier. It’s really as simple as that.
Thanks for considering.
What?? Says who? How did you come up with those numbers? Is it industry wide or limited to a specific carrier? Or are you pulling those numbers out of the air? I just showed you a HISTORICAL, contrasting a market vehicle vs the index approach. I showed you both CAGR and average returns. And that was worse case scenario. If you don’t see that, you are either fooling yourself or misleading your readers, or both. We can discuss best case, if you’d like. It will out perform anything in the market. I know it is early in the 21st century, but it is not too late for you to come up to it. You’ll discover the IUL, when properly structured, is the best vehicle there is. Bar none, when you compare risk, growth AND fees. I repeat, WL is great, because of the guarantees. Yet, in my experiences and comparisons, those guarantees are costly. They rise the fees through the roof! The IULs are a little riskier, by comparison, but they are also more flexible, with some guarantees, lower fees, and higher return potential. Plus, the dual advantage of a death benefit. It is life insurance, grown up.
Javier, here are the actual facts and math to show the lousy max 2.5–4% long-term CAGR the carrier delivers to your IUL’s index account.
First please go to that Chicago Fed study I showed you earlier, filename cflapril2013-309-pdf.pdf. Carriers list their assets in two Accounts, General (GA) and Separate (SA).
On page 1 you get this: “…separate-account 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…”
Javier, that nails the IUL. Except for VUL, IUL and the original ULs are the riskiest life insurance product you can buy. For the IUL the carrier guarantees only a 0–1% CAGR. Separate Account (SA) assets give the bulk of the crediting for the IUL’s index account.
Javier, now please go to Table 1 on page 2, “Life insurance industry aggregate assets.” You see the SA’s top assets are equities (80.1% of total). Thus the main assets that credit the IUL are equities. So what long-term CAGR will we get with them? Javier, even if we could trust your, uh, “interesting” CAGR claims of the past few years, we have to toss them out. It’s dangerous and irresponsible to rely on a mere few years’ returns to project a very long-term CAGR over the next 50, 60, 70 years–the time a policyholder expects to hold on to his IUL.
Javier our best guideline to predict long-term IUL returns is the S&P CAGR history. We can easily see that at Moneychimp, a site recommended by Forbes, Harvard Business School, Barron’s and many other top-tier media and educational institutions.
Search on “Moneychimp S&P 500 CAGR” to take you to the calculator.
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? Make sure it’s checked for the moment. Now click the Calculate button. CAGR comes to an impressive 9.07%.
BUT…now please deselect that Dividends box. We have to do that because the carrier excludes index dividends before it credits your IUL account.
Now click Calculate. WOW. CAGR comes to a mere *4.36%.* Excluding dividends really tanks returns! Whoda thunk?
Wait, Javier, it gets worse. That 4.36% is the absolute *best* we can expect. For many years now, actively-managed funds underperform the passively-managed indexes. You can find many articles from the quality press that discuss this phenomenon. E.g. search “99% of actively managed US equity funds underperform” to read an FT piece on that. Despite the “index” name in the IUL, the carrier is free to invest in all kinds of equity funds passively and actively managed, and to change that mix at any time. Expect the CAGR to drop to 4% or lower.
Then we must account for the carrier’s spread on that CAGR, typically 0.5–1%. Split the diff and call it 0.75%. That drops the net CAGR to the IUL policyholder down to 3.25%.
There you have it Javier. 3.25%. Right in the middle of the 2.5–4% range.
Hopes this helps. Thanks for reading.
About the VUL – Variable Universal Life – this is the *only* life insurance policy type you will find in PPLIs. And in BOLIs. And in COLIs.
IOW Javier, the VUL is the *only* policy type the big boys use.
Thanks.
Big boys? Or uninformed big boys? You will not find Warren Buffett owing one of these, for example. His motto: “Rule number one for investing is NEVER LOSE MONEY. The second rule is never forget rule number one.” VULs put your gains, hopes and life insurance at risk, because the market is going to do what it’s going to do. No one has control over it. IULs give you the benefit of the up market with protection from the down turn. For that reason, the informed “big boys” like Warren Buffett are heavily invested in index accounts.
*Laugh*
Javier. Please think about it for a moment. The Big Boys–the PPLI, COLI, and BOLI crowd who have the financial clout to pick their own investments to fuel their cash-value policies–won’t use anything *but* VUL for that purpose. For the original ULs and the IULs, the carrier chooses the investment mix, remember? That’s why the carrier illustrates them for the client.
Javier, now let’s talk about your vague “index accounts” attribution to Warren Buffett. Buffett may be directly invested in index funds like low-load ETFs like Vanguard’s VOO. Indeed he lauds Index ETFs in his 2013 annual shareholder letters:
“…My money…is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will…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…the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.
Hm. Javier, do you see where Buffett mentions cash-value life insurance? Neither do I.
So Javier, where’s your proof Warren Buffett owns even one IUL? Thank you in advance for your proof.
Boy insurance salesmen love that quote, don’t they? Yet they ignore the fact that Warren buys companies, not life insurance contracts. And this is what he recommends investors invest in:
http://ftmdaily.com/daily-briefing/031114/
I see you have some real issues with the IULs. Again, being cautious is one thing, but to be totally skeptic about a product with a proven history of success is another. No doubt, there has been some failures along the way. Tell me there has been no one with a serious accident in any given car. Does that mean cars are unsafe, therefore are a bad purchase? Or tell me everyone who has invested in the market has hit it big? There is no perfect world; everything has its risks along with its opportunities. I do not know where you get your “facts” from, especially in regards to the “high fees” of the IUL you mention. I challenge you to compare them to the fees of the WL. There is no comparison. Again, those guarantees come at a very steep price. Yet, it is what it is. If you want that security, you have to pay for it. No one is saying WL is a bad vehicle, simply because of the fees involved. I am sorry you have had such a bad experience with the IUL. I can assure you, however, that it was not the IUL that was bad. Chances are, it was designed poorly. As I’m sure you know, and I have stated earlier in other posts, the IULs have a lot of moving parts. You have to know what you are doing in order to make it do what it was designed to do, properly. Selling one of these has become as a specialty in the industry. A general practitioner, as good as he may be in his medical practice will not do as good a job in performing brain surgery than a brain surgeon. Anything short of that increases the chances of failure. Just as a specialist makes the real difference in a medical situation, an IUL specialist will make all the difference in your retirement planning. In such a case, the IUL does indeed become the retirement vehicle of the 21st century. Come on up!!
I still don’t have solid grounds to really believe anyone discrediting a properly structured IUL in the case that it would make sense for someone to own one. A million in any investment account would have lost around 50% in the market crash. Leaving aside any retirement income stream needed from the account, it would need a 100% gain the following year to recover. Cash value in an IUL policy wouldn’t have lost anything and in certain policy’s actually slightly went up. How much did the product save a client in just one market adjustment? David Mcknight’s Power of Zero is something I suggest reading before taking any advice online. It’s recommended by many professionals who understand retirement planning and economic research such as Ed Slott (deemed by WSJ as the top IRA expert) and David Walker (previous comptroller general for the US government) both of which don’t sell life insurance. If we are focusing on 1 year returns or even 10-20 years an IUL is going to seem like horrible investment and i would fully agree, unless you consider the permanent life insurance that will eventually go to your family. Look at the long-term growth and tax free distribution perspective and I don’t see any reason someone wouldn’t want to utilize IUL or PPLI like products. Also consider most wealthy individuals (something like 80% or more of fortune 500 CEO’s) utilize investment vehicles like these as a piece of their retirement plan. The best argument i’ve heard is the rising cost of insurance in later years. The credited interest going into the cash value nets way more than the coi if funded properly. I disagree with anyone making this their sole strategy, but can you think of a reason why it shouldn’t be? Don’t give me a long drawn out answer i’ve already read 20+ times looking into the product. Send me your math in excel spreadsheets please & thank you.
I totally agree.
Bully for you 🙂
I have not heard that phrase since I was in high school!! And that was some time ago!
Hi Javier, yes. Not sure how old you are, but if your American Flag backdrop profile pic is a recent one of you, we seem to be a similar age, maybe late 40s–early 60s. When TR was a less distant memory.
Grant, you make a dead-wrong equivalency: “…I don’t see any reason someone wouldn’t want to utilize IUL or PPLI like products…” IULs vs PPLI-wrapped VULs are different as night and day.
All folks should avoid IULs like the plague. But if you can afford a PPLI-wrapped VUL and you find a hot-shot investment and VUL manager, please go for it! That PPLI product could be a superb investment.
Here are 4 reasons why:
1) FEES. Grant, in retail IULs–and they are ALL retail IULs–are saddled with huge fees that hoover up a third to over half of your premium. By contrast, the total PPLI-wrapped VUL incurs only 2–3% per year of the principal.
2) INVESTMENT MIX. Grant, in IULs, the carrier decides the investments–you are at its total mercy. If the carrier decides it wants to stay super-safe and stick only to low-risk stocks and bonds, it’s free to do just that. Ain’t nuthin’ you, the IUL policyholder, can do about it. All the carrier commits to is a 0–1% yearly credit to your index account. That’s it. Meanwhile, the PPLI manager can choose among a limitless range of investments, including hedge funds and other high-return exotica.
3) TAX SHELTER. Grant, the sad fact is, for middle-market retail IULs, the tax shelter does almost nothing for income. E.g. a client who buys a $500k IUL and pays $350/month premium, with $200/month going to fees. This means only $150/month goes into Cash Value, or $150 x 12 months = $1800/year. If the index accounts earn 5%–above the average CAGR–then the client earns $1800 x 0.05 = $90 for that year. Assuming his effective tax rate is 25%, that clients saves a whopping $22.50 for that year. Big whoop. Go to Denny’s and go wild 🙂
Now let’s look at a PPLI owner: U of Mich coach Jim Harbaugh. He makes $5 mil/yr salary, plus Michigan loaned him $4 mil last year will loan him $2 mil for the next five years to pay on his PPLI-wrapped VUL. If he gets a sharp PPLI manager, he may get 10% or more per year return. Harbaugh’s effective tax rate will be very close to the top-tier 39.6% rate. For ease of math, let’s say 40% and 3% on the yearly fees. Harbaugh’s CV for 2016 is $4mil – 3% fees = $3.88 mil. At 10% return, that CV earns $388,000. If Harbaugh had to pay 40% income tax on that, it comes to $155,200 of tax he didn’t have to pay.
Now we’re talking Grant! That’s not the measly $22.50 of taxes Pa Kettle saved in his $500k IUL. Harbaugh, in his PPLI-wrapped VUL, keeps nearly all that $155,200 to go on to earn more for him. In such a case the VUL makes an awesome tax-shelter.
4) MANAGEMENT. Grant, the goal of publicly-traded IUL carriers is to bust you out of your IUL policy a few decades hence and force you to LOSE EVERYTHING–the death bennie and the $100,000s you poured into this policy. The less death bennie the carrier pays, the more profit it delivers to its shareholders. The IUL is ideal for this purpose to royally screw the client. it offers only the an low 0–1% return guarantee, transferring nearly ALL the risk to the policyholder. If it chose, the carrier can generate that return using super-safe T Bills. Doesn’t matter to the carrier because, the more it falls short, the more the policyholder, has to make up the diff. Same idea with COI charges–the carrier doesn’t care if you end up paying more COI than you need to. The more COI you have to pay, the more likely that, sooner or later, you’ll be priced out of your policy and LOSE EVERYTHING. For these reasons Grant, the carrier can save money and hire merely so-so managers.
By contrast, your PPLI investment manager works for YOU, the policyholder. The larger your CV, the more he earns. Unlike the IUL manager, the PPLI serves as YOUR fiduciary. As such he will fight to keep your CV slammed up tight against the Cash Value Corridor wall, minimizing your COI, and maximizing the success and growth of the VUL.
Again Grant, the IUL and PPLI-wrapped VUL are polar opposites. The more your PPLI succeeds, the more your PPLI manager succeeds. By contrast, the sooner your IUL *fails,* the more your IUL manager succeeds.
Grant, hope this helps. Thanks for reading.
Not sure I’d call hedge funds a “high-return” investment. The data suggests that they certainly are not, at least on average.
True, and you can even lose big-time on hedge funds. The larger point I wanted to make is that the you the PPLI holder (OK, your investments manager who serves as your fiduciary) can choose from a virtually limitless range of investments and have the best chance to choose ones that are best for you, not the carrier. And in the PPLI, even if you stick with a very low-load passively-managed fund, like Vanguard’s S&P 500 ETF (VOO), the CAGR could be in the high single digits because you get to keep the dividends and feed them back into the CV.
Grant, I’ll save you some work. You don’t need spreadsheets to show you that the IUL is an absolutely awful product. All you need is your contract language that guarantees only the 0–1% tops yearly crediting, and the COI charges chart. You can see a COI chart for Transamerica’s FFIUL over at P*ssed Consumer for WFG (World Financial Group). Search on “Why the FFIUL–WFG’s Flagship Policy–is a *Disaster*” and your search engine will take you there. You can click on that chart icon to blow it up to read it. You’ll see that a healthy male, at age 85, pays almost $60,000 that year in COI charges alone. If you bought this IUL at age 35 and live to age 90, you’ll have paid over a million dollars in COI and other fees. IOW Grant, you pay *twice* as much in fees as the total death bennie you get! How can that possibly make sense for anyone?
It doesn’t take a rocket scientist to see that, at 2.5–4% max long-term CAGR, you have to “overfund” the utter crzp out of the IUL just to keep from losing it, and losing everything, your death bennie and the $100,000s you poured into this money black hole. If you just have to have a Perm policy, you may as well buy a Whole Life policy. At least with WL, you get a guaranteed level premium. Thanks.
I agree that if you focus on either short term returns like one year or long term returns like 20 years that IUL is a lousy investment. That’s exactly the reason someone wouldn’t want to utilize IUL like products.
You also make the mistake of comparing the same amount in an investment that could lose 50% of its value (like stocks) and in an IUL. What you should be comparing is say, $1 Million in stocks to $300K in the cash value life insurance product. Sure, the stocks could lose 50% of their value, but you’d still be ahead because of the superior long-term returns.
Grant, you assert a ridiculous thing: “…A million in any investment account would have lost around 50% in the market crash…” You can’t possibly know this. What if that investment account had a mix of low- to-mid-risk stocks and corporate bonds? You know Grant, *just like the carrier itself invests in? * The carrier has no special access to a lofty set of Rainbows’n’Unicorns investments perched out of our reach. No Grant. You and I are free to invest in the VERY SAME SECURITIES the carrier invests in.
Point is Grant, to meet the “index floor” the carrier plays it safe. It can play it safe because, at the end of the day, the carrier guarantees to the policyholder only a 0–1% index account crediting. When it issues a Universal Life policy, the carrier offloads virtually ALL of the risk on to the policyholder.
With the above-mentioned investment mix, the carrier earns a long-term internal CAGR of 3–4+%. After it takes its spread, the carrier gives the policyholder 2.5–4% CAGR.
Grant, please let me make very clear: **The IUL buyer can expect a long-term CAGR of–AT BEST–2.5%–4% return in his index account.** If you illustrate the IUL above 4%, you do your client a disservice. If you illustrate an IUL for a client at 6%, 7% and higher and you fail to make CRYSTAL CLEAR to him that he’s dangerously underfunding his IUL which will cause it to blow up on him 10, 20 years hence causing him to LOSE EVERYTHING–his death bennie and the $100,000 and even millions he poured into it–then Grant, you commit an extremely unethical act that borders on criminal.
Grant, this begs the Q: Why should the client pay whopping IUL fees–a third or more of his entire premium–when he can just directly invest in the *very same instruments* as the carrier does? Why should he suffer such huge opportunity cost, to pay burdensome fees that soar WAY beyond what middle-market folks lose through paying income on unsheltered accounts?
Well Grant? Why?
I look forward to your answer. Thanks for reading.
As I said before, you are right. Not because your thinking is accurate, but because you refuse to hear or consider another point of view but your own. How can you be wrong that way? Bottom line is, since you have discovered something in your white coat investor mentality, you have a duty. As you know, every insurance product is reviewed, inspected, analyzed, scrutinized, evaluated and tested by the insurance commissioner of every state in which the product will be marketed, before it is approved. This is a process that takes months, even years to get approved. If you, in your white coat investor mentality, have discovered something that has escaped the legal departments’ findings of not one, but 50 insurance commissioners’ departments, you have the responsibility to alert them of your findings. What you claim the insurance companies do regarding the strategies they use in their IULs, would be nothing short of criminal. And the public needs to know. Put your money where your mouth is and do the right thing. Do us all a favor, because, as you know, even if I was to believe what you say (which I don’t) and I stop selling these IULs (which I wouldn’t, in light of what I have seen and know), there will be many other agents offering them. This, according to your wisdom, puts Americans at risk. So take your complaint to those who are in a position to correct the situation. It is the duty of insurance commissioners in each state to protect their residents. They can actually show you historicals and have the time to compare your findings, fact for fact, item by item. Their results should carry more weight than anything I or any other agent can produce. I have shared these thoughts with you based on what I know, yet I do not wish to sell a faulty product. I honestly wish to improve the quality of people’s lives, especially in the financial arena. The results I have witnessed, from my personal experiences with my own account and the annual statements of my clients over the years, have proved to me the validity of this product vs the uncertainty of any other, or the high fees of others. Yet I am not one to bury my head in the sand and presume I know everything. If you have found something that has escaped everyone else’s findings, don’t you believe you owe it to your readers and the public in general to correct it? You will not do it by convincing me or another agent. Take it to the source, the insurance commissioners of each and every state where these “faulty” products are offered. One of us will be proved right. Until you are able to compare, side by side, each and every point in question, you are merely stating your beliefs, your deductions; you will use numbers and “facts” that support your theory. Until then, we can argue back and forth, endlessly, to no avail. At this point, you realize you will not convince me otherwise nor will I you. Take it up higher, with someone who can actually remedy this. Doing so will elevate your prestige with your readers, with me and the American public. Otherwise, you become another Dave Ramsey or Suze Orman, or others such as them, who are merely spewing out distortions, causing, in essence, more harm to their followers. So, step up to the plate. If you are so convinced of the accuracy of your “facts”. Until then, I wish you all the best.
Not sure who you’re talking to, but if it’s me, I’ve found it easier to go to your potential clients than to your regulators and give them the truth about what you’re selling. Very few of those who understand how cash value life insurance actually works want to keep the policies they already have, much less buy a new one.
I agree I’m not going to convince you to stop selling them. I assume the fact that you wish “us all” the best means that you’re not going to post another 5000 words about the product you sell over the next few days, right?
You’re right, I’ll try keeping it under that number. As for me, I am not trying to convince you of anything; I am merely pointing out the erroneous statements you make regarding the IULs. Is it the perfect vehicle for everyone? That is debatable. Have there been any failures? Absolutely. Yet, everything, from cars to the space shuttle and everything in between, has had their share of failures. Being that not every company offers an IUL product, not every life insurance agent knows sufficiently well how to put one together to the client’s benefit. Greed, profit, or ignorance can greatly influence its outcome. For that reason, it has become a specialty within the industry. As in the example I mentioned earlier regarding a medical practice, not every doctor can perform the same procedure as another who specializes in that field, with the same results. There are doctors, and then there are specialists. So in our industry; there are agents, then there are specialists. For best results, you always want to see a specialist. Otherwise, you take your chances. I can just about assure you that most of those bad experiences with IULs you refer to have more to do with that, than with the structure of the product itself. Your suspicions of the insurance companies plotting to rip off the consumer are, from my own personal experience, unfounded. You make it sound like a conspiracy theory—a semblance of truth, mixed with a large amount of innuendo. The fact is, there is no perfect product for everyone. If we were all the same, maybe. Yet we are each different. We have different goals, different time horizons, different awareness of products, different needs, different backgrounds, different, period. To push one product as THE product for everyone while highly discrediting others, is most unethical. You should know better than that.
Javier, please forget the State commishes. The meaningful first-line action will come from courts and the media to rectify the profound and pervasive injury that xULs to date have wrought on consumers. Your suggestion to appeal to the State commishes is a nice sentiment, but hugely flawed and maybe even disingenuous on your part. They are a striking example of the conflict of interest problems with dual-mandate agencies, designed to serve the industry as well as the consumer, plus many are staffed by former industry people whose personal ties and fealties to those industries don’t magically evaporate once they join these reg bodies. As such Javier, the state commishes are super trailing edge, and will adopt reforms only when forced into it, e.g. threats from an exasperated Fed Govt to take insurance reg from the states to DC. And they will make reforms as weak and convoluted as possible e.g. AG 49 which only suggests that carriers rein in the wildest excesses of IUL illustrations but still gives the blessing for them to be far too high at 6.5% and above. And of course the NAIC, the national body that ties them together in an advisory capacity, doesn’t have the authority to issue new regs, merely guidelines to the companies to “pretty please” try not to screw the consumer too badly and blatantly. At the moment Javier you can expect even less protection from our current Fed Govt, an admin and Congress that favors Big Biz at the expense of regular citizens like we’ve never seen before.
Again Javier, class-action suits and, most of all, an informed public are the best paths to correct this dreadful 30+ year xUL problem. Getting IUL salesagents to give up their fat commissions on such a floggable product is like trying to snatch away a crackhead’s pipe. Only the strongest man will admit the truth to himself and succeed on his own to give it up. The agents’ excuses and often histrionic defense of retail xULs are endless, legion, and staggering to the point of being Orwellian.
Thanks for reading Javier. Good luck for your future.
That is so absurd and exemplifies your twisted thinking process. Here’s why I say that. Your response implies you personally have met or know each and every member of each commissioner’s board, including their attorneys, actuaries, accountants and consultants across each and every state in the country and have given you their answers. You paint them all with a broad stroke. That is such a generalization, it borders on discrimination. You know, all Mexicans are the same, or all white folks, all blacks, Chinese, etc., they are all the same. You and I know, or should know, that is simply not the case. Until you deal with and get to know them personally, you will never know differently. Again, an astute reader of your column should see right through your absurdities. This may explain why your readership is not as big as it could be.
Why don’t you give it a go and contact the state commissioners? Pony up. If, in fact you come up with your expected roadblocks, you will have more ammunition for further legal action. Your hesitation means one of two things: 1. Either you are not convinced of the “facts” regarding IUL, as you see them, to the point that it paralyses you from further inquiry from someone in the know. The fear of being wrong can also be paralyzing. Because you are not fully convinced, you can not commit to take further steps. Or 2. You are too much of a coward to face those in the know and hide behind your newsletter, falsely attacking and mocking those you think are in the wrong. Which is it? Either way, your readers AND the American public suffer. In an age of whistle blower protections, if you have discovered something as damaging to the American public as you so affirm, it your responsibility to address the matter with those who are in a position to make the changes, to correct the “wrongs” you have learned about. I am certainty convinced you are afraid to be proven wrong, for then you will have to retract all the statements you have made regarding IULs. Yet, that is a sign of a great man, to admit he has been wrong. A man like you, however, will never bring himself to that. That makes you a legend in your own mind.
The fact remains, there is a place in the market for every product available; there is a place for term, for WL for IULs, for ULs, for CDs, for Wall Street, for bonds, etc. Not one of any of them is the perfect vehicle for everyone. We are each unique with our own individual goals and ambitions. There is not a “one size fits all” product. To discredit one over another for everyone can prove very damaging to the one who can benefit from such. As I mentioned before, in my personal experience, not only with my own policy, but with that of my clients, over the years, the IULs have fared way better than any other product. It may not be for you, and that is fine. But do not paint them all with the same broad stroke. A properly structured IUL can make a huge difference in a person’s financial picture. It is a get rich plan, not a get rich quick plan. It is life insurance, grown up.
Is there a place for lottery tickets? How about payday loans? Because I put them all in the same place as IUL- products made to be sold, not bought.
Sure Javier. Please read into my comment all kinds of wild motivations, meanwhile flinging out all kinds of bigotry cards. You know. If all that hoo-rah makes you feel any better at this moment.
Javier, it seems you don’t even know to whom you talk. You address the doctor who owns this blog. But it’s me–“Real IUL Math”–who wrote the comment that warns about relying overmuch on the State Commishes.
Javier, all throughout our exchange on this comments board, I’ve given you solid evidence to back up what I say. Especially on the disastrous IUL math and contract language, which render these fatally flawed policies unsuitable for any client at all.
Javier, you, by contrast, make only generalizations. You have stoutly refused to address any of the specific evidence I presented here. *Not even ONCE.*
Javier, I am a fee-only financial advisor who sells no financial products except my knowledge. My only compensation comes from the client. As such I serve as a full fiduciary for my client.
Javier, you, by contrast, are a salesperson who makes a fat commission–well into the thousands of dollars–on each and every IUL policy you sell. As such, you serve as a fiduciary foremost for you, your B/D, and your carrier. NOT your client.
IUL sales make a spectacular example of “Caveat Emptor – Let The Buyer Beware.”
Bottom line Javier: The reader will know whom to trust. With every comment you spew, you dig for yourself a bigger hole, using a bigger shovel. With each comment, you only more deeply confirm whom you really are–a shockingly craven sales rep-licant who’s willing to sell his soul to flog a horribly broken product for fat commissions. Javier, sadly, you’re not even that creative. I’ve lost count of the number of times you’ve trotted out the threadbare “life insurance grown up” cliche.
Thanks very much for reading this Javier. I wish you the best of luck for your future. And that, having been presented in this comments board with a wealth of reliably-sourced evidence, you will redeem yourself and make the right career decisions going forward.
Au contraire. I have responded to most, if not all of your “evidence”. That you have chosen to ignore them is a different story. Go back over our posts and you will see that. I am not impressed with you being an RIA. While there is a place in the market for stocks and bonds, faced with market fluctuations and risky market strategies, on top of the high fees involved for doing so (remember the AUMs are not based on the monthly contribution but on the aggregate), they should not be used as the primary source of retirement, as is the case with most 401(k)s. A retiree needs a product that is reliable, not at risk of markets; something he/she can count on to be there when he/she needs it the most. Such investments can be good as a secondary source of income. The most reliable product to own is an insurance product, through a carrier that has withstood the test of time, one hundred years or more of solid growth and stability. One that has never stopped paying its members through the thick and thin of economic conditions. A WL policy is such a vehicle, though it has, as I mentioned before, the highest fees associated with it than any other insurance product. The IUL is a better alternative. I do not know where you determined that fees on the IUL can add up to as much a a third of the premium, as you alluded in one of your prior posts. Your mistrust of the product does not make it a bad product. Your unfounded fear of the insurance companies plotting to short change you of your growth is a total fabrication of your imagination. Simply think about it. Would that make good business sense? While it may make for instant profit, in the long run, that practice would come back and bite them in the behind. It would erode whatever trust the public would place on them. No company would risk that. Especially when you use indexes that can be verified. The company commits to giving you a certain amount of the growth of the index, year to year, on your anniversary, with a guarantee of no less than zero interest, ON THE DOWN YEARS, and the down years only. So, rather than losing 10, 20, 30% or more on your growth, which would require a greater growth amount than that, just to get back to even, you lose nothing. For example, to make up for a 30% loss would require about a 45% gain in the market. By contrast, in an IUL, if the year following such loss, the market posts a gain, no matter how small, you are back on the plus side, even if that is but a 1% growth. Your IUL account would be credited accordingly.
As for the fiduciary rule, an honest agent has been practicing that for years, without government intervention. It is a shame how some agents put profit before service. Yet, I suppose there are some who do, thus the need for the government to step in and make such ruling. Where you get your numbers from, you have never said. Especially the commissions to agents. There is no comparison! An RIA, gets compensated based on the AUMs, YEAR TO YEAR. Consequently, the bigger your accumulation, the bigger the commissions paid out, year after year. Meanwhile, the insurance agent gets commissions on the first year’s premium. If you sold life insurance, you would know. So, don’t even go there.
One item you have very conveniently failed to address is the skill level of the insurance agent designing the IUL policy. As I have also mentioned before, this product calls for additional training that most agents have not had. If I was a gambling man, I would bet most of the “failures” you say you have witnessed, are the result of poorly designed policies (or expecting high results in a short time). Would you expect anything less from a general practitioner? For the best results, see a specialist. When structured properly, an IUL becomes the retirement plan for the 21st century.
Then again, if you are so full of evidence to the contrary, put your fiduciary duty to work; place your findings before a board that can stop this “horrendous” practice. Until then, you are just blowing hot air.
Hi Javier. Let’s go over your claims. Most of which you simply regurgitate from your previous comments on this board.
Of course, you still fail to offer any proof or reliable support for any of your claims.
Javier, I answer your points over several comments. Let’s get started.
You say: “…I have responded to most, if not all of your ‘evidence’…” Yes, Javier. And I’ve debunked each and every one of your feeble and even outright risible responses, giving you plenty of rigorous evidence. I’m still chuckling over your “new paradigm” toss-off. That’s a gift that keeps on giving 🙂
You say: “…While there is a place in the market for stocks and bonds…they should not be used as the primary source of retirement…” Javier, to remind you, income from *the very same stocks and bonds* credit your IUL too. Whatever performance your carrier gets from them, you’ll get too minus the huge fees. Even without the IUL’s huge fees, you’d probably do better because the carrier is very risk-averse and stick mainly to low- to mid-risk stock and bonds. The carrier’s free to stay safe because it never ever commits to credit your IUL *beyond a measly 0–1% per year.*
You say: “…The most reliable product to own is an insurance product…A [Whole Life] policy is such a vehicle…The IUL is a better alternative…” Javier, you’re dead WRONG: the IUL is an absolutely *atrocious* option. Actually it’s no option at all, because, 20–30 years hence you’ll LOSE your IUL, and LOSE EVERYTHING, your death bennie and the $100,000s you poured into this toxic black hole, for reasons I explained on this board in previous well-sourced comments.
To recap Javier: There’s no way an IUL, earning 2.5%–4% at most per year over the long-term–the 40, 50, 60 years that IUL buyers expect to hold their policies–can even *begin* to keep up with skyrocketing late-life COI charges. Especially since nearly all buyers chronically underfund their IULs, because their hi-belief lo-info no-ethics IUL salestrons illustrated their IULs at fantasyland 6%, 7%, 8% and higher rates of returns, thus drastically underestimating their “level” premiums. The IUL premium is *never* guaranteed to stay the same. The IUL premium can–and usually does–shoot way WAY higher.
Javier, you say: “…fees on the IUL can add up to as much a third of the premium…”
Actually Javier, IUL fees can be over half the premium to *nearly ALL* the premium. Especially if you wildly overillustrate the IUL at 6%, 7%, 8% and higher, as nearly all IUL salefolks do.
For example, I had a client, a 37yo healthy non-smoker woman who bought a $500k Transamerica FFIUL. Her agent illustrated her FFIUL at 7.9%, generating a monthly premium of $324. From the get-go, her half-dozen separate monthly fees totalled $227.06. Javier, please do that math. $227.06 exp/$324 total premium means she pays, from the start, *over 70% of her premium in fees.* From the get-go, less than $100 went to her cash value. As she aged and her COIs start to skyrocket, virtually *ALL* her premium would have gone to fees, none to cash value.
Fortunately I got her out of that horrible pig in a poke. She cut her losses and switched to a Whole Life policy from a well-known mutual.
Javier you say: “…insurance companies plotting to short change you of your growth…Would that make good business sense? While it may make for instant profit, in the long run, that practice would come back and bite them in the behind…”
Javier, what a terrific question–thank you for asking it!
Point is Javier, the insurance companies *are* collectively and royally screwing their IUL customers, for four reasons:
1) the publicly-traded carriers favor their shareholders at the expense of their IUL holders,
2) most carriers are in on this very long-term confidence game,
3) the carriers’ short- and medium-term IUL profits will far exceed the judgments and out-of-court settlements the courts will assess decades from now for carrier/BD abuse to IUL holders, and finally,
4) because they *can.*
To explain:
1) CARRIERS FAVOR SHAREHOLDERS. Before the 1990s, many insurance companies were mutuals. In a mutual company, the insured also holds shares in his policy’s carrier. This means the carrier has a dual duty to its insured–to honor their insurance contracts AND a fiduciary duty to its shareholders, who are same folks! That’s the way it should be.
Then in the 1990s, with globalization and stock-market growth mania, a lot of insurance firms demutualized and become publicly traded firms. Now, their shareholders are often different folks from those who buy their policies. Shareholders are very demanding, looking for every bit of profit they can. They ask the carrier: “What have you done for me this quarter?” They can be very demanding because they can sell the carriers’ shares at a moment’s notice.
Meanwhile, what about IUL buyers? These insured are very captive customers. If they’re not happy with IUL returns, too bad! They can do *zip, zilch, nada* about it because the carrier locks the IUL buyer into onerous Surrender Fees that last 10 to 15 years.
Javier given the above conditions, shareholder vs IUL owner, whom do you think the carrier will favor? Will the publicly-traded carrier give that extra credit to its already-captive client, to the IUL holder’s index account? Or will it choose instead pump up its shareholders’ dividends? I’ll give you two guesses Javier, and the first one doesn’t count 🙂 Remember, the carrier set the IUL crediting bar super low for itself. The carrier never obligates itself to credit your index account more than the 0–1% index floor–regardless how any index anywhere in the world is performing.
2) MOST CARRIERS ARE IN ON THE SCAM. Javier, it’d be one thing if only a few carriers sold IULs. Critics would quickly zoom on those relatively few exceptional miscreants. Both because nearly ALL publicly-traded carriers sell IULs, this greatly dilutes the reputation “hit” each carrier will take. It’s much easier to blame “a few bad apples” than an entire industry. The insurance-buying public can’t wrap their minds around the idea that an entire industry actually has the audacity to massively fleece them. In fact, that’s exactly what’s happening!
3) SHORT/MEDIUM-TERM PROFITS TRUMP ALL. Javier, no-one knows risk management like insurance carriers. There’s little doubt their armies of lawyers, actuaries, and accountants have assessed their legal exposure and spreadsheeted out relative profit and losses for a) doing the right things by their customers, versus b) squeezing out all the xULs profits now and face lawsuits decades later. Javier, it’s purely a matter of math, not morality. E.g. Monsanto did this when it learned that its massive PCB dumping in Anniston Alabama, San Diego Bay and other places, which was poisoning people and the environment. This company failed to own up to this for decades until forced into court and into settlements for its wrongdoing. Javier if you think we can exempt the financial realm from such ethics-free math, please remember what happened only last decade when terrible behavior from “Too Big to Fail” companies and poor govt oversight plunged our planet into its second worst financial crisis in history. Did portfolio-lender Washington Mutual fail to make liar loans? Even though that bit them so hard in the butt they disappeared? Did Goldman-Sachs fail to totally screw their clients for many billions of dollars even though that resulted in a record $5 billion fine against them? Did Arthur Andersen fail to totally fudge the books on Enron, even though that led to the ultimate butt-bite–this premier accounting firm disappearing?
4) THEY CAN. Javier, large publicly-trader insurance carriers don’t do this biz out of the kindness of their hearts. Again, they don’t act out of any sense of morality or civic duty. They sell IULs purely to pump up the *bottom line.* IULs represent almost pure profit for the carrier. Sure, they’ll collectively take the reputation hit.
But they’ll make it through it just fine because:
a) Insurance companies are relatively immune from competition because govts impose such huge solvency requirements on them, thus limiting the players, and,
b) they also sell insurance products with real guarantees that people demand: Term Life and Whole Life. Per LIMRA, Term and WL represent over 80% of the premium dollars.
The biggest hit the industry may take: Federalized regulation. If we ever again get an at-least marginally ethical Congress, it may finally get fed up with this massive pervasive institutionalized fraud that the insurance industry has perpetrated for the last near 40 years with xULs. An exasperated Congress may well finally take regulation out of the states’ hands and federalize it. But Javier, we can count on the carriers have very flush Congressional lobbyist budgets. They’ll cross that bridge when they come to it.
Javier, you say “…The company commits to giving you a certain amount of the growth of the index, year to year, on your anniversary, with a guarantee of no less than zero interest…”
To be clear Javier and I repeat: The carriers commits to nothing more than a measly 0–1% index account crediting per year, REGARDLESS of the performance of any index anywhere in the world. IUL policies contracts tell you in many places they do NOT directly participate in any index anywhere nor do they ever commit to reflect, in whole, any given index or indexes. The ONLY IUL “index” crediting guarantee the carrier ever gives you is the measly 0–1% floor, *regardless* of what any indexes anywhere in the world are doing.
Next you say: “…As for the fiduciary rule, an honest agent has been practicing that for years…”. Javier naturally we’re grateful when an agent *chooses* to be honest. But you underscore my point: The law doesn’t require the agent to actually serve as his client’s fiduciary duty. Please read here for plenty of legal citations on the matter:
http://insurancethoughtleadership.com/do-brokers-agents-owe-fiduciary-duty/
Javier here you say: “…Where you get your numbers from, you have never said. Especially the commissions to agents…” Javier, you fail to specify what “numbers” you’re looking for except those for IUL sales commissions, which are typically 60–125% of the first year’s premium. Anyone can easily find this info on the web from the carriers and B/Ds. E.g.:
105% of first year’s premium: http://www.financialadvisorsinternational.com/downloads/EIUL%20payouts%20commissions.pdf
80%–120% of first year’s premium: http://www.bankrate.com/finance/insurance/life-insurance-agent-make-1.aspx
125% of first year’s premium: https://www.wfg-online.com/nonssl/buscenter/fieldmanual/wizard/New_Compensation_Plan/CalAdv.htm
Javier you say: “…An RIA, gets compensated based on the AUMs, YEAR TO YEAR. Consequently, the bigger your accumulation, the bigger the commissions paid out, year after year. Meanwhile, the insurance agent gets commissions on the first year’s premium. … don’t even go there…”
Javier I’ll absolutely go there! 🙂 Again you underscore my point. An RIA works hard to grow your money because the more *you the client* makes then the more the RIA makes. Simple as that! Javier, how do you think the big boys do Universal Life, i.e. with VULs tucked inside PPLI wrappers? You guessed it–the insured pay his manager a percent of assets!
By contrast, once the salesguy sells you an IUL and convinces you to hang on to it past the commission clawback period, then the agent’s attitude is far too often: “I got mine, see ya later.”
One other thing, Javier. For the umpteenth time, I am NOT an RIA. In your hopelessly entrenched salestron worldview–a place where everyone sells stuff from companies–you keep assuming I sell financial instruments. Javier. Please listen carefully this time OK? I am a fee-ONLY financial advisor. That’s it. I sell NO financial instruments. I sell only my expertise.
Javier. Why do you fail, time after time, to get this through your skull? Just wondering.
Javier you say: “… One item you have very conveniently failed to address is the skill level of the insurance agent designing the IUL policy…”
Javier, no agent can fix these deeply and fundamentally broken policies. IULs, with their enormous fees, modest 2.5–4% annual long-term crediting, and annually resetting Cost of Insurance (COI) charges that skyrocket in your retirement years, are virtually guaranteed to fail 20 to 30 years hence, leaving you with NOTHING: no death bennie nor any cash value after you’ve dumped $100,000s into it. Especially because agents nearly always wildly overillustrate IULs, guaranteeing the insured will chronically and dangerously underfund their IULs. Indeed, Javier, for the reasons I gave earlier, carriers actually *design* their IULs to fail.
No person on Earth should ever buy an IUL. It is an absolute and tragic waste of hard-earned money.
The best defense against IULs is an educated public. You can’t foist IULs onto folks once the word gets out and they know better.
Javier, I hope I addressed all your points. Presented with the abundance of reliably-sourced evidence on this board and elsewhere, I hope you’ll redeem yourself and stop selling these diabolical pigs in pokes. Thank you for reading.
Reading through all the posts, shows me that Real Iul math and wihite coat does not understand how money in an Iul is really invested. It sounds like the other agents do not either. So, this blog of experts is doing the public an injustice and proliferating misconceptions. The cost of insurance is mitigated by the net amount at risk in later years. So, public beware of both sides. Do your own homework. Talking heads do not give sage advice.
How do you make your living Buktop?
Excuse me Buktop. You clearly did *not* read “…through all the posts…”
Over the years, the IUL holder’s net risk keeps *growing* not shrinking. His net risk and COIs blast into outer space in his retirement years.
Buktop, just my contributions alone on this board, I explain in 11 places the reasons why massive overillustrations lead to chronic underfunding which will cause Cost of Insurance (COI) charges to run away from the policyholder, causing his IUL to implode, forcing him to LOSE EVERYTHING–his death benefit and the $100,000s even millions he poured into these toxic pigs in pokes.
Buktop. You do nothing substantive to refute those arguments. Please give us your specific rebuttals–with the solid MATH. As is, your words and $2.50 still won’t buy anyone a latte.
Thank you for reading.
Totally agree.
Thanks for detailing the risks and dynamics of the IUL. I now know for sure I will never want one and will stick with my two fund lazy portfolio. I have bread to bake!
Here ya go folks. Compelling evidence your IUL will give you only 2.5–4% growth per year, way WAY below any agent’s estimates. This comes straight from Valmark Securities, a broker/dealer of long standing which deals in life insurance and other financial products:
“…[IUL] contracts are unlikely to produce long-term returns in excess of bonds…”
Folks, 10y Treasuries now yield a “whopping” 2.2% and investment-grade corporates generally don’t yield far north of that. Through most of the years we’ve tracked bond yields since the beginning of the last century, bond yields have been below 4%, and even as low as under 2%.
Bottom line, we’re looking at–ta-daaa!–an IUL long-term annual yield of 2.5–4%. Way WAY below the 6+% that NAIC’s AG49 guideline recommends. And which legions of shyster and/or clueless IUL rep-licants and B/Ds have ignored anyway, blithely illustrating their IULs at fantasy wild-*ss rates of 7%, 8%, and higher.
These stupidly high illustrations virtually guarantee you will chronically underfund your IUL causing you to LOSE it 20–30 years hence. Buy this dreadful pig in a poke and, in a few decades, you LOSE EVERYTHING: your death bennie and the $100,000s you faithfully fed into it.
It’s as simple as that. DON’T BUY THE IUL. Unless you’re willing to fund it with hugely higher premiums, premiums generated by an illustrated rate of 2.5–4%. In which case, if you just have to have a Perm Life policy in your life, go for a Whole Life policy that actually guarantees a truly level premium. With WL you could even end up paying LESS of a premium for a given death bennie. Especially if you get the WL from a reputable mutual.
Thanks for reading.
http://thebishopcompanyllc.com/wp-content/uploads/pdf/indexed_universal_life.pdf
http://www.cnbc.com/quotes/?symbol=US10Y
Excellent series of post and very informative. I will relay this information to everyone I meet who may consider such garbage products.
Taxes seem to be the way the government gets paid right? Government = 20 trillion in debt. Retirement accounts = 25+ trillion. The government also set rules on when the best time to take your money (59 1/2 – 70 1/2). So save all your life, try not to need any of it before 59 1/2 turn 65 and retire, try not to take too much to avoid high tax brackets pray taxes don’t go up and the market doesn’t crash. So my partner (Government) isn’t doing too well and to me this looks like the perfect storm and a well thought out income strategy for the government, not for me. Screw it, just do what the man says and follow the heard… the heard has done just fine lately right? Put all your money in the market, draw during down years for retirement and don’t invest in a buffer or anywhere else to get money during those down market years… dumb strategy. I say do both and use actuarial science, that way you can play the market volatility game and tax game.
“Mad Max.” Why don’t you give us a concrete example of what you’re trying to tell us?
Please suggest to us your ideal portfolio. Which Includes the type of cash-value Life Ins policy(ies), e.g. WL, VUL, IUL, etc. If you are indeed including Perm Life policies in your discussion. Thanks.