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 06:08 am Post Subject:
I did asked a similar question. The agent stated that if the caps (or the terms of the contract in general) were negatively changed that the product would not be competitive in the market place, so the company would not do that.
Your agent either doesn't know what he's talking about or is pulling the wool over your eyes and distorting the truth. If the policy is no longer available for new sales, will the company care if it's not competitive? This happens all the time. Ask anyone who bought a UL policy in the 1980's what happens when the interest rates don't perform as illustrated and the cost of insurance charges are increased. Do you trust the insurance company to "do what's right" or to maximize their profits? That's why I like guarantees, not "trust me" scenarios. Your agent is asking you to trust the insurance company.
Also, he said I could always transfer my policy to a new policy with another company that had better terms. Could anyone explain to me how this transfer would work? Is this something easy to do?
No, you can't just transfer your policy to a new company. There are surrender charges in UL policies that would cost you a huge amount of your money to cash out the policy in the early years. Example: John dumps $100k into a universal life insurance policy in year one. John decides in year two that he wants to cash out and buy something else. John pays a surrender charge as stated in his policy. This example policy has a 20% surrender charge in year one. John will lose $20k if he wants to change his policy to a new company.
The transfer he is talking about is a 1035 exchange which allows the cash value to be transferred to a new contract without being taxable. This also assumes that you are even insurable in the future. What happens when you find out you have cancer, have a heart attack, etc, and your policy starts crashing? Then you can't get any new insurance and are stuck with the policy you bought.
If you start taking policy loans at 6% and hoping for pie-in-the-sky S&P returns to get a higher crediting rate than you took the loan for, you are setting yourself up for disaster. Even one bad year could have a huge effect on future policy performance.
Sounds like you're trying to convince yourself why this WILL work and ignoring the sound advice as to why it WON'T work. IMO, your agent is not giving you all of the necessary information to make a decision and using a lot of "trust me" in his presentation. Your agent might be a family friend, but you are talking about a huge amount of money. If I were you, I'd find another agent, but that's just me...
Posted: Mon Feb 21, 2011 12:01 pm Post Subject:
Listen to dgoldenz. You have an agent who cares more about making the sale than giving you complete information so that you can make the intelligent decision.
Posted: Mon Feb 21, 2011 03:28 pm Post Subject:
the point is that if one contract has a better guarantee, it is a strong chance that something else is inferior.
If you want "inferior", simply buy a UL policy with the so-called "secondary guarantees" and miss one premium payment somewhere along the way. The disappearing guarantee is the "inferior" in UL.
Minimum funded SGUL runs the distinct risk of lapsing at the worst possible moment simply because a premium payment was missed.
Sure, wealthy persons use it successfully to fund ESTATE PLANNING uses of life insurance, and they have the money to make sure a premium is never missed. Those policies are not marketed with any discussion of cash value, loans, or using the money in retirement.
But the average life insurance consumer is not in such a position and, sold a policy on the basis of cash accumulation, loan values, retirement income, and minimum premiums, will probably wind up with no insurance and no money to show for it.
UL is a perfectly good product -- if understood, and if properly funded. To make UL work as it is intended -- to leave a death benefit for those who need the funds -- the policy must be fully funded -- such as 100% of the Guideline 7-pay Premium in the first seven years, or the Guideline Annual Premium in all years. But, again, for most persons, those numbers are so large, they might faint when discussing them.
The no-lapse guarantees are recognition that the policies are designed to lapse . . . otherwise they would not be necessary.
No whole life or term policy comes with a no-lapse guarantee. One simply pays the established premium to enforce the contract: You Pay, You Die, We Pay. Simple. But not always less expensive than SGUL, which is the reason many agents market SGUL. And I'd be willing to bet that few, if any, ever actually read any of the contracts they placed in the hands of their clients.
Posted: Mon Feb 21, 2011 03:36 pm Post Subject:
Max....if you have a term policy and miss a premium payment and go past the grace period, they will cancel the policy too. What's the difference?
No-lapse UL is not sold on a basis of cash accumulation, retirement income, and loans. Have you ever sold a no-lapse UL policy?
Posted: Mon Feb 21, 2011 04:01 pm Post Subject:
No-lapse UL is not sold on a basis of cash accumulation, retirement income, and loans.
That's exactly my point. It is NOT SUPPOSED to be sold that way, but I've run across plenty of folks in the past 2-3 years who have SGUL, are paying only minimum premiums, and relying on an illustration that shows an entirely different scenario depicting huge cash accumulation. You can have one or the other, but not both.
And, of course, any policy that is unpaid at the end of the grace period will lapse. That's not the same discussion as SGUL. SGUL promises to continue the policy as long as premiums are paid even when there is no cash value, which is not how a "standard" cash value policy would ever perform -- it would perform in exactly the same manner as the term policy at the end of the grace period.
You and I are on the same page.
The folks who have SGUL with the misunderstanding that it will supply huge cash value in exchange for their minimum premiums have been misrepresented. I simply try to right the wrong and make sure they get what they need, according to what their real objective is.
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Posted: Mon Feb 21, 2011 04:06 pm Post Subject:
I don't think I've ever seen a no-lapse UL projection showing "huge" cash value accumulation. Some companies are better than others, but nothing I'd describe as "huge"....what company/companies are you talking about that have these illustrations?
Posted: Mon Feb 21, 2011 04:12 pm Post Subject:
Mostly what I've seen are illustrations for SGUL policies with premiums that are higher than what the client is actually paying. They were shown one illustration, and then chose to pay a minimum premium as must have been illustrated differently.
It's all in an agent's manipulation of the illustration software, and beyond the control of the company, in come cases. It's not the company illustrating their product incorrectly -- I don't think I've ever seen that. I've seen agents use the software to create what is represented to be an IN FORCE illustration, when most of us know that only the insurance company can properly create one of those.
Obviously, there is no room in our industry for charlatans such as that, but they do exist.
Posted: Mon Feb 21, 2011 04:17 pm Post Subject:
All UL cases require a signed illustration for the actual premium paid though, so I'm not sure what you're being shown. You can't show someone an illustration with a premium of $10k per year when they decide to only pay the $5k per year guaranteed premium. They would have to sign the illustration specifically showing the values based on the $5k. This is a requirement of every company we write with, so again, just asking, but what company/companies have you seen this with?
Posted: Mon Feb 21, 2011 04:23 pm Post Subject:
This is a requirement of every company we write with, so again, just asking, but what company/companies have you seen this with?
It's also a requirement of state insurance laws.
The offender company is World Financial Group, and the policies come from Western Reserve Life. I'm sure the agent gets the proper illustration signed by the client, but leaves something different. I have no other explanation.
Never happens with the policies I illustrate from West Coast Life, Pacific Life, or others I might be able to represent.
Posted: Mon Feb 21, 2011 04:32 pm Post Subject:
WFG seems to keep popping up around here. I don't know what the deal is with them or the back story, but I keep seeing the name brought up. We're licensed with WRL and they don't even have a no-lapse UL that I've seen or heard of....unless it's something that independent agents can't write or no longer exists. How many of these could you have possibly seen though? I've never even met or talked to someone with a WRL UL policy, let alone many of them.
I don't know how an agent would go about having the person sign one illustration but leaving a copy of something else. Doesn't take a genius to see that there are two different premiums listed in that scenario. There will always be unscrupulous agents out there that hurt the whole industry, but to imply that this is the way no-lapse ULs are often sold is misleading.
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