by Guest » Wed Feb 16, 2011 10:10 pm
I would like to get the opinions of some the insurance experts on this forum regarding a life insurance proposal. An insurance agent (who is a family friend) has proposed an Indexed Universal Life policy from Pen Mutual. The agent is selling it as a retirement investment. Some of its features are:
• Indexed to the S&P500
• Lower cap of 2% and an upper cap of 13%
• Loan rate of 6% with loan participating in returns
• Loan rate of 0% with loan not participating in returns
• Life insurance benefit of $2.8 million in the proposal
The agent is proposing investing heavily up front (the model he illustrated has $50k, $50k, and $35k the first three years and then $15k each year after that until age 65). Note, I would not put that much money into it, but I would front load it if I were to do it. He is then proposing to begin loaning from the policy in year three and reinvesting the money back into the policy; in the model it is $60k of loans each year. The idea is to leverage the money since you can loan at 6% and get an historic average return of about 8%. In good years you could make up to 7% on the loan value (13% cap - 6% interest); in bad years you would lose 4% (2% floor - 6% interest); and on average make 2% (8% historic average – 6% interest). The model shows a huge growth with the 8% average return that would allow tax free income (loans) at age 65 to 100 of around $690k per year.
He claims this is a low risk proposal. On paper it seems like a great way to save for retirement; my company recently cancelled the 401(k). I have done a lot of research on life insurance; particularly on if life insurance is a good investment for retirement. There are reputable sources/people with good arguments both for and against using life insurance as an investment. I cannot decide if it is or is not a smart choice. This particular proposal seems to be a more aggressive plan to use life insurance as an investment.
Is this proposal a good way to save for retirement? Is it very risky?
Thank you.
• Indexed to the S&P500
• Lower cap of 2% and an upper cap of 13%
• Loan rate of 6% with loan participating in returns
• Loan rate of 0% with loan not participating in returns
• Life insurance benefit of $2.8 million in the proposal
The agent is proposing investing heavily up front (the model he illustrated has $50k, $50k, and $35k the first three years and then $15k each year after that until age 65). Note, I would not put that much money into it, but I would front load it if I were to do it. He is then proposing to begin loaning from the policy in year three and reinvesting the money back into the policy; in the model it is $60k of loans each year. The idea is to leverage the money since you can loan at 6% and get an historic average return of about 8%. In good years you could make up to 7% on the loan value (13% cap - 6% interest); in bad years you would lose 4% (2% floor - 6% interest); and on average make 2% (8% historic average – 6% interest). The model shows a huge growth with the 8% average return that would allow tax free income (loans) at age 65 to 100 of around $690k per year.
He claims this is a low risk proposal. On paper it seems like a great way to save for retirement; my company recently cancelled the 401(k). I have done a lot of research on life insurance; particularly on if life insurance is a good investment for retirement. There are reputable sources/people with good arguments both for and against using life insurance as an investment. I cannot decide if it is or is not a smart choice. This particular proposal seems to be a more aggressive plan to use life insurance as an investment.
Is this proposal a good way to save for retirement? Is it very risky?
Thank you.
Posted: Thu Feb 17, 2011 12:50 am Post Subject: save for retirement
See my replies to the following post for some explanation:
http://www.ampminsure.org/life/about15683.html
Sounds like a great policy...for the agent. Said it before and will say it again: insurance is for insurance and investments are for investments. IMO, they should be kept separate. Here's a few things to think about:
1. What happens when you loan at 6% and you are only credited the minimum 2% guarantee? What if this happens for 5 or 6 years in a row, or more? You still have to pay cost of insurance charges and are building up interest owed on the loans. Cost of insurance charges as you get older can get very high and accelerate quickly once you start getting past age ~60-65.
2. What are the GUARANTEED values? You would be pretty unhappy if you put $100k+ into this policy and ended up with $0 cash value and $0 death benefit, which happens when the policy "crashes" because there is not enough cash in it and the policy isn't guaranteed for life.
3. Do you need $2.8 million of "permanent" death benefit? If not, why are you buying a $2.8 million policy? If you do need $2.8 million to cover what you want to have covered, do you need to pay $15k, $35k, and $50k a year for it? Of course not. You could likely buy a guaranteed UL policy at a much lower cost to cover your permanent death benefit and invest the rest elsewhere or put it into some type of annuity if you want something without market risk.
4. You never stated how old you are or what your health is like. There is a big difference paying $15k premiums for 5 years versus paying them for 30 years.
5. If the policy is underfunded or does not perform as projected (of which the chances are slim...ask anyone who bought a UL policy in the 1980's), your policy could crash. Loans only compound how fast they will crash. The projection he gave you is about the rosiest scenario that you could come up with.
This is far from a low risk proposal. If you buy this policy, will you even remember what you purchased 5 or 10 years from now?
If you want to send me a copy of the proposal you were given (you can black out your information), I can give you an idea of what you might want to look for and ask questions about. Our website is in my signature below or you can e-mail me at david at terminsurancebrokers dot com.
Posted: Thu Feb 17, 2011 08:05 am Post Subject:
This article might be useful for you too - http://www.lifeandhealthinsurancenews.com/Exclusives/2011/1/Pages/Indexed-Universal-Life-Looking-Under-the-Hood-.aspx
Posted: Thu Feb 17, 2011 08:58 am Post Subject:
Dgoldenz has rightly pointed at 2 important factors - age and health condition. These 2 factors have a great influence over your insurance premium payments.
Posted: Thu Feb 17, 2011 06:13 pm Post Subject: how to save for retirement?
Thank you for the responses.
I am 32 and in good health (non-smoker). My wife is 30 and is also in good health (non-smoker). We do not need $2.8 million in "permanent" coverage. That coverage is so high in order to allow the investment portion to be so high. This proposal is being sold as more of an investment that happens to have insurance. We probably need about a million dollars each in coverage since we both have good jobs, a large mortgage, and a six month old baby. If we were to something like this proposal, we would likely split it in half; half the coverage would be for me and half for her. Though, even if I am convinced that this proposal is a good investment (and I am definitely not currently), we would do it at a lower dollar amount.
The guaranteed interest rate is 2%. With the guaranteed assumptions, the plan would lapse after 9 years (even with all that money put into it). The agent proposing this claims that the guaranteed assumptions would never occur. Also, that historically the stock market has never had more than three consecutive negative years. If the plan was going to lapse, there is a provision to convert the plan into some other kind of permanent plan (I cannot remember the details), so that the plan does not lapse and all the loans become a taxable event (that would be a disaster).
So people on this forum do not think that life insurance is a good investment? I read a book called
“Tax Free Retirement” by Patrick Kelly. He make a pretty compelling argument about the virtues of saving for retirement in an insurance plan: the tax-free growth, tax-free outlays (by taking loans against the policy), freedom to access the money (again through loans), and the tax-free death benefit. These are all huge advantages over the traditional 401(k) and IRA. Yes, a Roth IRA has the same tax benefits, but there are income limitations (we make too much to qualify) and even if you do qualify it is limited to $5000 a year. The IRS just raised the income limits on IRA to Roth IRA conversations, so I am taking advantage of that to convert some of my traditional IRA to a Roth (though, it hurts pay taxes on that money). My company no longer has a 401(k) and we are maxing out my wife’s 401(k). We are looking for another way to save for retirement and life insurance is an option. The big disadvantage to using life insurance as an investment seems to be the high cost of the insurance. I am also concerned that once you start putting money in one of these policies you are pretty much locked in for the long-term (yes you can cash it out, but you lose a lot of money) and if you took loans out on it you would be hit with a huge tax bill.
Posted: Thu Feb 17, 2011 08:34 pm Post Subject:
You don't make too much for a Roth. You can contribute to a traditional IRA and then convert to a Roth.
"An investment that just happens to have insurance" is an awful, terrible idea. Run from this guy. He's selling something as an investment and I bet that he isn't even licensed to sell investments. He doesn't have to be because this is not an investment.
You should buy insurance because you need insurance. A permanent death benefit has great value. This is not the way to do it..
Posted: Thu Feb 17, 2011 09:01 pm Post Subject:
Here's a better idea that keeps the insurance for insurance and the investments for investments:
32 year old male, perfect health, $1.4 million death benefit = $5,120 per year, GUARANTEED for life
30 year old female, perfect health, $1.4 million death benefit = $3,832 per year, GUARANTEED for life.
That puts you at $8,900/year for the life insurance. That leaves you $41k left over in year one and two, $26k left over in year three, and $6k left over every year after that. Add that up over 35 years and you have one monstrous difference. Just using your number of 8% that they're illustrating:
First year $41k leftover premium after 35 years at 8% = $667k
Second year $41k leftover premium after 34 years at 8% = $616k
Third year $26k leftover premium after 33 years at 8% = $361k
Years 4-35 extra $6k leftover premium after 32 years at 8% = $805k
$667k + $616k + $361k + $805k = $2,449,000
So using the number that your own agent has projected (not saying you would actually get 8%, just illustrating a point), you would have approximately $2.5 million in cash elsewhere at age 65 with the same contributions less the cost of buying a life insurance policy guaranteed forever. Those numbers assume you pay the life insurance premium forever - if you wanted the life insurance completely paid up at age 65 with no further premiums required, the cost would be about $10k per year combined instead of $8,900.
Either way, you can see where I'm going with this. The policy he is proposing has a chance of crashing at some point if everything doesn't work out perfectly like they're showing you. If it crashes, you have $0 cash value and $0 death benefit.
Keep this in mind too - if you pump all that money into the life insurance policy and then die in the early years, you have "lost" all of your cash value since only the death benefit is paid out. If you buy the guaranteed life insurance and die, you still have 100% of the life insurance proceeds plus whatever left over savings/investments you have elsewhere. Which would you rather have?
Posted: Fri Feb 18, 2011 06:08 am Post Subject:
The agent is selling it as a retirement investment.
The agent is violating the law in so many ways by saying this to you, it's not very funny.
Life insurance is life insurance, retirement plans are retirement plans. The two are not the same and should not be equated with one another.
You don't make too much for a Roth. You can contribute to a traditional IRA and then convert to a Roth.
This comment by an anonymous poster is hogwash. There is no difference between a traditional (deductible/nondeductible) IRA and a Roth IRA in terms of investment return. That is entirely dependent on where and how the account assets are saved or invested. The Roth IRA makes a better savings vehicle for most person due to the "income tax-free" withdrawal of gain after age 59-1/2 (under current tax law -- Congress can always change the law and make it taxable in the future, but is unlikely to do so).
The proposal to use INDEXED UNIVERSAL LIFE is possibly an acceptable plan, but taking money out of the cash value of any form of UNIVERSAL LIFE interferes with something else called "NET AMOUNT AT RISK" which is the portion of the policy that you will actually be paying for with premium dollars and/or accumulated cash value. Dumping a lot of money into the policy on the first day can help avoid those later issues because of gains added to cash value in the early years, but, as dgoldenz has said, that mostly benefits the agent.
I'll be in touch with you in response to your separate email to me.
Posted: Fri Feb 18, 2011 06:30 am Post Subject:
So people on this forum do not think that life insurance is a good investment? I read a book called
“Tax Free Retirement” by Patrick Kelly. He make a pretty compelling argument about the virtues of saving for retirement in an insurance plan: the tax-free growth, tax-free outlays (by taking loans against the policy), freedom to access the money (again through loans), and the tax-free death benefit.
Patrick Kelly is an IDIOT if he actually wrote that life insurance offers TAX-FREE GROWTH (I haven't read his book, so I don't know what he actually wrote). So is anyone else who uses the term TAX-FREE in conjunction with any life insurance or annuity product.
Life insurance offers TAX-DEFERRED growth, which is income tax-free when paid as a death benefit. Tax-deferred and tax-free are two VERY DIFFERENT concepts, and the IRS will be happy to let you know the difference if the occasion arises -- because you will owe the difference to them.
Money borrowed from life insurance is not taxed at the time it is borrowed, but that does not mean it will never be taxed. If the insured dies before the policy lapses, the borrowed money plus accumulated loan interest is deducted from the death benefit paid to the beneficiary, and is considered an advance payment of the life insurance proceeds.
If any gain is borrowed and the policy lapses before the death of the insured, the borrowed money creates an income tax liability to the extent it exceeds the cost basis (premiums paid + any initial cash deposits) in the contract. If Patrick Kelly writes anything different than that, he is a liar, and those who follow his advice could be making huge mistakes.
IRS rules require, for tax purposes, that GAIN is removed from a policy before principal. This is true of annuities AND it is also true of life insurance . . . so that if a taxable event occurs, the IRS is going to get its share, whether one likes it or not. The accounting method is called LIFO -- Last In First Out -- cost basis is first in, gain is last in. So gain comes out first, cost basis comes out last. Allow a policy to lapse with loans outstanding, and any part of the loan (including interest) that represents gain becomes immediately taxable.
Many people who owned the first generation of Universal Life insurance sold in the 1970s-1990s learned this the hard way when their policies lapsed and they had huge tax liabilities due to automatic premium loans coupled with "vanishing premiums". And the insurance industry paid multiple BILLIONS of dollars in policyholder restitution and regulatory penalties as a result of myriad lawsuits and other legal actions through the early 2000s. That's a fact that the insurance companies would like to forget, and its the reason they have created some of the "secondary guarantees" now sold with many "next generation" UL policies today.
Borrowing money from an insurance policy, especially any form of UNIVERSAL LIFE, can cause the policy to lapse in later years, even if "planned" premiums are being paid, if the premiums plus unborrowed cash value are insufficient to pay the cost of insurance when due. It says so right on the cover of most UL policies (and if not on the cover, it will say so somewhere else in the contract).
If that happens, to avoid the EXTREME tax consequences that might result, one could be forced to pay TENS OF THOUSANDS OF DOLLARS in new premiums just to prevent a taxable event. If anyone doesn't believe me, I can show you an IN-FORCE illustration for a 76-year-old man whose actual $100,000 UL policy had no more cash value remaining after paying more than 16 years' worth of premiums at the rate of nearly $200 per month (about $34,000 total), and would have required a $10,767 annual premium ($897+ per month) just to keep the $100,000 death benefit available to age 85 (guaranteed = $107,670 paid over 10 years) or to age 100 (nonguaranteed = $258,408 paid over 24 years). If still alive at age 100, the insured would have received a check for $1168 as the remaining cash value in his policy.
Fortunately, for this 76-year-old, WHO NEVER BORROWED A PENNY from his policy cash value, his cost basis was more than the gain used to pay cost of insurance along the way, so he had no taxable event when he let the policy lapse. But, at age 76, he had no cash value for all his $34,000+ in premium payments, either.
Some retirement plan, isn't it? What would Patrick Kelly have to say about how this plan worked out?
Kevin is asking about multimillion dollar policies. Anyone can multiply the numbers accordingly to have an idea of a worst-case scenario for Kevin.
Posted: Fri Feb 18, 2011 01:18 pm Post Subject:
Max, again, your reading comprehension is in the toilet. You didn’t explain why what I said is “hogwash”. Unless, are you attempting to say what I said can’t be done or is stupid? I can’t understand what you are trying to say because what I said is certainly accurate.
Under current law, one who makes too much for a Roth can still put $5000 into one simply by contributing to a traditional IRA and then converting it to a Roth. If he has no other IRAs, only the gains will be taxed (and if done right away, we’re talking pennies). In short, it will change something that is tax deferred (nondeductible IRA) into something that is tax free if left alone until 59 ½. The investment return is only the same if we ignore taxes. There are also other advantages to a Roth over a non-deductible IRA such as the ability to take out contributions before age 59 ½ tax and penalty free and no RMDs.
If a person has other IRAs that either have gains or are pre-tax, taxes will be due when he converts his non-deductible IRA contribution to the Roth.
Posted: Fri Feb 18, 2011 06:55 pm Post Subject:
A couple points and questions. Thank you all again for you responses.
You don't make too much for a Roth. You can contribute to a traditional IRA and then convert to a Roth.
Fjaru good point. There is currently a loop hole in the tax code. There are income limitations on who can contribute to a Roth IRA (AGI of less than $169,000), but they have now eliminated the limit on income to convert a traditional IRA to a Roth IRA (this just occurred in 2010). Before 2010, only those with AGI of $100,000 could convert. You can contribute up to $5000 per person, so my wife and I can contribute $10000 a year. There are more nuisances to Roth IRAs, but that is a simplified description.
32 year old male, perfect health, $1.4 million death benefit = $5,120 per year, GUARANTEED for life
30 year old female, perfect health, $1.4 million death benefit = $3,832 per year, GUARANTEED for life.
Dgoldenz what type of insurance are you referring to? Excuse my ignorance, but what do you mean by “GUARANTEED”?
So using the number that your own agent has projected (not saying you would actually get 8%, just illustrating a point), you would have approximately $2.5 million in cash elsewhere at age 65 with the same contributions less the cost of buying a life insurance policy guaranteed forever.
I have a few quibbles with this comparison.
1. This money would have to be a taxable account, so there would be annual taxes that the investments would generate. These could be minimized by investing in tax-managed funds or index funds, but the effective interest rate would be lower in taxable account versus a tax-deferred account (like a Universal Life policy).
2. The gains on the investments will be taxed when they are sold, so the money will be reduced by whatever the long-term capital gain tax rate is at that time. Who knows what that rate will be (15, 20, 30 40 percent)?
3. While $2.5 is a lot money in today’s dollars (at least it is to me), that would only produce yearly income in the low $100 thousands (it could be a lot lower if the capital gains tax goes higher) versus about $690,000 in the life insurance model that is being proposed (again, I am not saying that model would actually happen, but that is what is being shown).
If that happens, to avoid the EXTREME tax consequences that might result, one could be forced to pay TENS OF THOUSANDS OF DOLLARS in new premiums just to prevent a taxable event.
Herr, that is a great point and one that would make me really worried about taking loans out against a UL policy. The cost of the insurance policy goes up each year in these policies correct? If so, then the likelihood of the cash in the policy not covering the insurance cost goes up and the chance of lapsing or paying huge premiums goes up. I am correct in my understanding?
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