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: Mon Feb 21, 2011 04:57 pm Post Subject:
I used to get a lot of WFG "reps" in my insurance licensing classes, and when I would get through with the chapter on insurance products, many of them would come to me and say, "That's not what my WFG agent told me." Then we'd sit down and review their policy, and, sure enough, what the client thought they had and what they remembered being told were not often the same.
WRL is owned by Aegon and I believe they have manufactured a specific line of policies (UL, EIUL, and VUL) only available to WFG reps -- WFG is also owned by Aegon.
They even teach their reps to market the various UL products as superior to retirement plans -- on the basis that retirement plan contributions are limited, but life insurance is not (never mind the possibility of a MEC, the majority of people I've run across who have been abused by WFG reps were never fully funding their retirement plans, but many stopped funding them and put the same amount of money into the EIUL/VUL product . . . to their detriment!
Posted: Mon Feb 21, 2011 05:22 pm Post Subject:
Well that sounds like a recipe for some lawsuits...
Posted: Tue Apr 19, 2011 09:28 pm Post Subject: Clarification
Re: The original inquiry ... you are not getting informed feedback here.
1) If you are really going to follow the "keep insurance as insurance" advice, then get a 40 year term policy (possibly with Return of Premium - ROP) THEN invest the difference. Within this contract you will have the option of converting to a permanent policy at almost any time up to age 65 -75 without having to requalify (be underwritten again), depending on the company. But do NOT believe that this is without risk -- see most of the last 12 years in the stock market. And then you will have to pay income taxes on your gains along the way. Depending on how long you own the stocks/mutual funds, etc ... you'll have to pay income taxes from the capital gains tax rate (15% ... soon to be 20%) up to full-blown taxed-as-income -- if you are churning your gains in less than 12 months.
2) As long as your permanent life insurance program is constructed correctly, be it an IUL or Whole Life policy, then you CAN pull out money from the policy 'tax free'. Key is to make sure that it is funded as a policy that meets the 'guideline premium test'. And, as you over fund it, it can NEVER cross the line and become a modified endowment contract (MEC). There can be tremendous power in these contracts and at your young age, you can have access to all of them with a little education. The people above offerring advice to you are ignoring or unaware of the powering of aligning yourself with (protecting yourself with) an index. The absolutes proselytized above simply don't wash out and, as I said, are uninformed for the most part.
3) Finally, I cannot say about Penn Mutual, but some of the companies offerring IUL's now include a rider (at no cost) which provides a critical illness benefit and a chronic illness benefit. So, if you were to have a heart attack, stroke, or develop cancer -- a large portion of the death benefit would be accelerated to you (as you recover) with a large death benefit remaining. The chronic illness benefit would be akin to long term care insurance where you are accelerated the death benefit (within parameters) were you to become cognitively disabled or if you couldn't perform 2 of 6 activities of daily living: transferring, feeding, toileting, bathing, dressing and maintaining continence. For the IUL's that include the riders mentioned see: Life of the Southwest, Western Reserve Life or North American Company. Also, familiarize yourself with an IUL that you capitalize (pay premiums) for only 15-20 years while still accruing all of the benefits above and still growing your death benefit and cash value.
Permanent life insurance has much utility to it, not the least of which is the death benefit and ability to use your policy to supplement your retirement income (when you choose -- even before age 59.5 sometimes). Patrick Kelly is very good at laying out this case as well as the soon-to-be increasing income taxes and the many perils of 401K's. Please keep educating yourself on this and GOOD LUCK.
Posted: Wed Apr 20, 2011 02:41 am Post Subject:
1) If you are really going to follow the "keep insurance as insurance" advice, then get a 40 year term policy (possibly with Return of Premium - ROP) THEN invest the difference. Within this contract you will have the option of converting to a permanent policy at almost any time up to age 65 -75 without having to requalify (be underwritten again), depending on the company. But do NOT believe that this is without risk -- see most of the last 12 years in the stock market. And then you will have to pay income taxes on your gains along the way. Depending on how long you own the stocks/mutual funds, etc ... you'll have to pay income taxes from the capital gains tax rate (15% ... soon to be 20%) up to full-blown taxed-as-income -- if you are churning your gains in less than 12 months.
40 year term with ROP! LOL. Might as well just pay for a whole life policy. There won't be much difference in cost. As for convertibility of term life to cash value, without proof of insurability, almost all term policies provide that benefit. It's not restricted to 40-year ROP term. Get a grip!
As for your tax advice, or your analysis of investing in the stock market in the last 12 years, you must be thinking of individual stocks or mutual funds. Most people can't choose the correct mix of investments to even keep pace with the benchmark indexes, including fund managers. On the other hand, investors who have quietly been investing in Exchange-Traded Index Funds have, for the most part, done exceptionally well. Better than most of the low cost Index Mutual Funds. The equal-weighted ETFs have outperformed the cap-weighted ETFs (such as an S&P 500 Index funds). The most informed of these investors are Buy and Hold individuals. They don't "churn" their holdings -- they rebalance their portfolios periodically.
2) As long as your permanent life insurance program is constructed correctly, be it an IUL or Whole Life policy, then you CAN pull out money from the policy 'tax free'. Key is to make sure that it is funded as a policy that meets the 'guideline premium test'. And, as you over fund it, it can NEVER cross the line and become a modified endowment contract (MEC). There can be tremendous power in these contracts and at your young age, you can have access to all of them with a little education. The people above offerring advice to you are ignoring or unaware of the powering of aligning yourself with (protecting yourself with) an index. The absolutes proselytized above simply don't wash out and, as I said, are uninformed for the most part.
Indexed UL is a joke. It is improperly marketed as an investment, typically with the same BS "tax-free" crap you spill here. Try taking most of the money out of a UL, IUL, or VUL policy and letting it lapse. Then come tell me how you did with all those tax-free loans when you have no money to pay the income taxes that will be due. Has nothing to do with a MEC.
Now, please tell me how you OVERFUND a whole life policy. And while you're at it, how about your attempt to educate the public about the relationship between policy loans and NET AMOUNT AT RISK and Cost of Insurance at age 65, 70, 75, 80 in any form of UL policy, and the likelihood of lapsing a policy due to insufficient premium/cash value.
Posted: Thu Apr 21, 2011 04:23 pm Post Subject:
Posted: Thu Apr 21, 2011 04:40 pm Post Subject: More Info
Again, this guy (or lady) is somewhat uninformed or has an agenda.
The original question was specifically about the viability of an IUL for someone in his early thirties. The illustration that he was given probably shows a loan/income option once the policy matures and is adequately capitalized. This likely showed an annual (tax free) income beginning at age 60-65 hopefully -- to be somewhat conservative -- based on about a 7.5% S&P annual, point-to-point index rate with loans (variable) based on a 6-6.5% rate. This guy's comment about taking all the money out and lapsing the policy has nothing to do with the questioner's situation, nor how one should look at interacting with this contract. He could, however, take out the basis (at age 62 for example) obviously tax free. This WOULD affect the income illustrated ...
You CAN overfund Whole Life policies. Really best only with a mutual company.
A valid point above is that a 40 year ROP will be damn near impossible to find, but a 30 year ROP for $1M at Preferred Plus would be $130 monthly, depending on the carrier. The original comment was to "keep insurance as insurance". This would be a good option if you go that route. Or, simply get a conventional term policy for less than that. Yes, always convertible to the GUL if you like or circumstances deem necessary.
I don't really see it as an either/or scenario. Going with this guy's example, ETF's and an IUL may both be parts of a good strategy. One still has to pay income taxes (or capital gains) on the returns of an ETF. He didn't address that.
Sir, why don't you tell ME how an IUL capitalized for 25 years at $500 dollars per month and protected with a 3% guarantee (floor) and benefiting from a 14% cap (indexed annual point to point with the S&P) and underwritten at Preferred is going to blow up for this 32 year old at age 65, 70, 75 or 85 if all he does is trigger the income as illustrated? Almost all costs with a well constructed IUL are gone after year 10 of the contract, except the cost of insurance of course. NAC gives its policy holders 75 basis points extra for all years after year 10 that the index performs above the guarantee. We haven't even mentioned the living benefits included (riders at no cost).
Back to the original poster (if you are still monitoring this). I wouldn't dismiss the IUL out of hand, especially not based on this guy (above). He is coming from the place that he has decided that IUL's are a joke. He has to try to support that statement even though the facts don't. Apparently he's very proud to be an instructor. I'm sure you have had instructors before who were pretty narrow minded; I know I have. Just keep that in mind as you explore this option. GOOD LUCK.
Posted: Thu Apr 21, 2011 05:20 pm Post Subject:
You failed to meet my demand. THere is no way to OVERFUND a whole life policy. Your simple statement: "It is possible . . ." is not proof of anything.
By design, a whole life policy matures at full face value at the endowment age of 120/121. There is no way to pay more than the scheduled premium. IT IS IMPOSSIBLE. A whole life policy, by design, can never MEC because it is impossible to pay excess premium into the contract. A participating Whole Life policy can endow at age 120/121 with far more than the original face amount of the base policy as the result of using dividends -- a refund of excess premium paid -- to purchase Paid Up Additions.
This is NOT overfunding the policy. Those dividends could just as easily have been received in cash. They cannot be left inside the policy, but the can be left "at interest" with the insurance company . . . a taxable event, because that interest is not earned inside the tax-deferred cash value.
As for your hypothetical . . . please! Be honest with everyone who reads your post . . . in the GUARANTEED COLUMN the policy will LAPSE. Even with the 3% minimum interest guarantee. And a 14% cap? Right.
The whole business of "living benefits" is marketing hype intended to confuse people and sell policies. Living benefits are nothing more than policy loans. Borrow too much from any UL policy at later ages, and the policy will implode. You don't have to believe me. You only have to talk to some of my clients whose UL policies (sold to them by others) have done just that. Many without ever borrowing a dime.
And don't even go down the path of the SGUL policies. Those are almost always designed to have no cash value, so any discussion of Living Benefits is mostly moot before the policy is issued.
There's nothing wrong with UL, EIUL, VUL, or any other type of life insurance . . . as long as the policyowner understands EXACTLY how it works and what his/her responsibility to the contract is.
This likely showed an annual (tax free) income beginning at age 60-65 hopefully
SEE, this is the single most frequently recited INACCURACY about life insurance policies. Life insurance is not, by its legal definition in the Internal Revenue Code, intended to provide money for anyone other than the beneficiary. The tax code permits loans from cash value with no current income tax due (unlike a withdrawal from an annuity) because it is technically an ADVANCE PAYMENT of the death benefit -- it is money the beneficiary will not receive. If the policy LAPSES or terminates for any reason other than the death of the insured, all gain that was withdrawn (including the unpaid accumulated interest thereon) is TAXABLE AS INCOME -- so tell me how that jives with the "tax-free income" you promise?
I did meet with the OP, looked at the illustration he was given, and can tell you that there is no way it would ever do what it proposed. No one can illustrate a STRAIGHT LINE rate of return and believe that things will follow that plan. And when a person STOPS paying premium into any form of UL policy, and then starts taking money out of cash value, the recipe for disaster is being mixed.
Today's UL policies will only come close to performing properly (those that are illustrated to accumulate oodles of cash value, not the estate-planning uses) if they are heavily funded in the early years -- as close to the 7-pay or Single Premium test as possible without violating it -- and not tinkering with the cash value after that. Few individuals can afford that premium. Any manipulation of the formula under which the policy is expected to perform will have a negative effect on performance. Even a single premium or fully-funded (7-pay test) policy will underperform if the policy only receives the minimum interest in some, many, or all years. It will require addition future funding to prevent a lapse.
Posted: Thu Apr 21, 2011 07:11 pm Post Subject:
Posted: Thu Apr 21, 2011 07:12 pm Post Subject:
Posted: Thu Apr 21, 2011 07:14 pm Post Subject:
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