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Opinions on Wealth Protector Universal Life Insurance
Old 08-10-2013, 07:57 AM   #1
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Opinions on Wealth Protector Universal Life Insurance

Yesterday I asked for opinions on LTC and appreciated the responses. Today I'd like to ask for opinions on a type of insurance policy known as a universal life wealth protector. Before I describe this policy let me describe our situation:

DH/me: Ages 67/64. Retired/semi-retired. Pension/VA Disability/SS Income in retirement $137,000, fully cola'd. Total expenses $185,000, including $50,000 estimated annual taxes.
TA: 2,850,000. No debt. SWR less than 2 percent.

So we manage our own investments but have sought legal estate planning assistance and did visit a fee based financial planner once in 2008, to validate our plan. Upon legal advice in 2000, we purchased this Wealth protector universal life policy, face amount $500,000, referred to as a second to die policy. The premium is variable. The purpose of the policy, was to build an asset to cover estate taxes and/or build additional wealth for our heirs. For the past 14 years we have paid annual premiums of $5,460. The premiums are placed in a mix of investments. Premiums for the insurance are deducted from the investment portfolio. The idea is that after 15 years one can decide whether or not to stop paying the premiums and the investment portfio will pay the insurance premiums indefinitely. Upon the death of the second to die the policy pays out the five hundred thousand plus the value of the assets. We have elected a moderate aggressive investment portfolio. The portfolio is now worth $88,000. (not included in our TA). Depending on investment performance the total payout upon death could be several million dollars. If we continued to pay premiums beyond 15 years that number jumps substantially.

There have been fees assessed throughout the years , which have declined over time. At year 15 the fees drop to $60/yr.

I have never known and always wondered whether this has been a wise investment. Our financial planner in 2008 was not wild about it but stopped short of recommending that we cash out. After 15 years we could cash out with no penalties, but of course, no policy.

Do any forum readers maintain such a policy and what are your thoughts on this policy? Insurance company rip off or wise estate planning tool
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Old 08-10-2013, 09:01 AM   #2
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Maybe your future heirs would be happy to pay your premiums for you?
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Old 08-10-2013, 09:32 AM   #3
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Did you compute or estimate an XIRR? You could do this under several scenarios and this might help inform your decision.
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Old 08-10-2013, 09:39 AM   #4
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Step one is to confirm the reasons for carrying the insurance.

You say the original reason for purchase was protection against a projected estate tax liability.

Federal estate tax law permanently and significantly changed with the fiscal cliff deal on January 1st, 2013. There should be no more of the annual congressional drama on the exemption amount.

American Taxpayer Relief Act
Quote:
The American Taxpayer Relief Act (ATRA; P.L. 112-240) established permanent rules for the estate and gift tax for 2013 going forward. The estate tax is imposed on bequests at death as well as inter-vivos (during life) gifts. A certain amount of each estate, $5 million in 2011, indexed for inflation, is exempted from taxation by the federal government.

..The provisions of the new legislation apply to estates of decedents dying after December 31, 2012.
So, unless you live in one of the 19 states with their own estate tax (and in one of those with a lower threshold), it appears the estate tax reason for the policy is no longer applicable.

Assuming you are not providing ongoing support to one or more of the heirs, I would treat continuation of the policy as a straightforward investment decision.

Where Not To Die In 2013 Update - Forbes
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Old 08-10-2013, 09:48 AM   #5
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Originally Posted by Htown Harry View Post
Step one is to confirm the reasons for carrying the insurance.

You say the original reason for purchase was protection against a projected estate tax liability.

Federal estate tax law permanently and significantly changed with the fiscal cliff deal on January 1st, 2013. There should be no more of the annual congressional drama on the exemption amount.
Yep, this has changed significantly from 2000 when the OP purchased the policy.


Year -- Amount Exempted -- Tax Rate%

2000 ---------$675,000 ------ 55%

2013 ------ $5,250,000 ------ 40%

-ERD50
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Old 08-10-2013, 10:48 AM   #6
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Quote:
Originally Posted by Htown Harry View Post
Step one is to confirm the reasons for carrying the insurance.

You say the original reason for purchase was protection against a projected estate tax liability.

Federal estate tax law permanently and significantly changed with the fiscal cliff deal on January 1st, 2013. There should be no more of the annual congressional drama on the exemption amount.

American Taxpayer Relief Act
So, unless you live in one of the 19 states with their own estate tax (and in one of those with a lower threshold), it appears the estate tax reason for the policy is no longer applicable.

Assuming you are not providing ongoing support to one or more of the heirs, I would treat continuation of the policy as a straightforward investment decision.

Where Not To Die In 2013 Update - Forbes
+1 exactly what I was thinking and from what the OP wrote, there doesn't seem to be a need for $500k second to die life insurance. And I suspect it is dubious from an investment perspective. I would lean towards ditching it at the first opportunity.
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Old 08-10-2013, 03:41 PM   #7
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Photo guy; What is XIRR?
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Old 08-10-2013, 04:13 PM   #8
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Photo guy; What is XIRR?
it's the internal rate of return function in Excel.

here's a random tutorial:
Excel XIRR- How to Calculate Your Return | The White Coat Investor- Investing And Personal Finance Information For Physicians, Dentists, Residents, Students, And Other Highly-Educated Busy Professionals
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Old 08-10-2013, 04:35 PM   #9
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This is excellent info. Thanks Htown Harry, ERD50 and pb4uski. I was vaguely aware that estate taxes had changed starting this year but hadn't thought about the impact on our estate planning until we received our annual premium this week-due next month. Unfortunately we do live in one of the "states not to die in". The estate tax threshold did increase in our state this year from 1,000,000 to 2,000,000. The taxes above that are graduated. From 2MM to 5MM, the tax is 8 percent. So for an estate of 5MM the tax would be $240,000. Ouch!!!

The Forbes article "Four Ways To Beat State Estate Taxes" was helpful. I think we may already be set up with a bypass trust-not sure. Plus something in the back of my mind tells me that tIRA's and Roth's if set to go directly to beneficiaries, are not subject to estate taxes. Does anyone know? And a final point from that article seems to indicate that insurance policies and other assets owned by a trust as our second to die policy is, are not subject to estate taxes. So this policy of ours, if we continue to fund it at the current annual premium rate could grow over time to several million dollars depending on market conditions and would bypass all federal and state estate taxes. Do any of these thoughts makes sense?

Much to ponder before writing this check next month.

Thanks again for your valuable wisdom.
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Old 08-10-2013, 04:46 PM   #10
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Sounds like you complicated things for your heirs. One more thing to handle.

Not something you needed at all. Still might be a good deal, if you kick off early. Probably a bad investment if you have an average life span, since the company selling this makes money. You'll have to do the math, though if you list your payments so far and in the future and possible payouts you might be able to con someone into running a quick check.
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Old 08-10-2013, 04:54 PM   #11
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tIRA's are subject to taxes, though only as the beneficiaries make withdrawals. It adds to their income, just as it does yours right now.

Roth IRA's are tax free to beneficiaries since you already paid taxes. (Could be a bad thing if you paid more than they do though.)

A standard revocable trust for estate planning does not necessarily avoid taxes. The main tax benefit was to allow exemptions for both spouses instead of transferring everything to one spouse and losing the first spouse's estate tax exemption altogether. That benefit is no longer necessary since the exemption transfer is part of the new law. Your insurance payout will be as taxable as any insurance payout.
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Old 08-10-2013, 06:13 PM   #12
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Have you updated your estate plan in the last 5 years? What did your attorney say about whether this policy is necessary? If it isn't necessary according to a competent estate planning attorney, I would dump it.
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Old 08-11-2013, 06:54 AM   #13
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Thanks photo guy. I'm going to see if I can model using this tool.
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Old 08-11-2013, 06:56 AM   #14
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Have you updated your estate plan in the last 5 years? What did your attorney say about whether this policy is necessary? If it isn't necessary according to a competent estate planning attorney, I would dump it.
Brewer; We did review our estate plan again in 2008, but not since, so it is time. You're right. Off to our attorney we go.
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Old 08-11-2013, 09:36 AM   #15
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I get a return of 2.1% (the rate of return where 14 annual investments of $5,460 grows to $88,000). It is probably worse than that because I suspect the $88,000 is the account value rather than the surrender value, so if you don't need the insurance the investment aspects of the policy stink.
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Old 08-11-2013, 11:01 AM   #16
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I get a return of 2.1% (the rate of return where 14 annual investments of $5,460 grows to $88,000). It is probably worse than that because I suspect the $88,000 is the account value rather than the surrender value, so if you don't need the insurance the investment aspects of the policy stink.
Thanks pb4uski. I think the return is better than you have calculated. The current account value, of 84,290, before adding the current premium due in a couple of weeks (the 14th premium payment) has been depleted regularly by COI charges of $10,455 over the 14 years, as well as other fees of $3,838 and $3,900, which are the painful parts of puchasing insurance. Those later two categories of fees, which end this year, have gone into someone's pocket and not into investments. I should point out that these fees as well as the cost of insurance are well publicized in the literature. I've just researched the website of the insurer. The fund that we are invested in shows the following returns:

As of 03-31-2013
YTD: 5.58%
One Year: 7.39%
Three Year: 7.58%
Five Year: 3.65%
Ten Year: 8.24%
Since Inception: 5.72%

and is invested in (top 10)

Transamerica Large Cap Value, 7.009% 7.37%
Transamerica Select Equity 7.14%
Transamerica WMC Diversified Growth VP 6.76%
Transamerica Jennison Growth VP 6.37%
Transamerica PIMCO Total Return VP 5.63%
Transamerica Core Bond 5.26%
Transamerica Short-Term Bond 5.04%
Transamerica JPMorgan Mid Cap Value VP 4.62%
Transamerica Dividend Focused, 7.174% 4.36%
Transamerica Emerging Markets Debt 3.32%


Averaging an 8.24% annual return over ten years is, I guess, the best indicator or how this investment has done. The "since inception return" of 5.72% is much lower of course, but we bought into this asset in 11-03, so the 8.24% pretty much represents our annualized return I think. One thing I did just notice is the insurer now has a fund of funds for moderate growth option that is all Vanguard funds, so at the very least we will switch into that investment to keep fund costs low.

This policy is owned by an Irrevocable Family Trust. I intend to ask our attorney if she feels that we should cash in next year when there is no surrender charge, if we should leave the money in the irrevocable trust and continue to throw money in annually, so that the value grows and will be left to our heirs tax free. The modeling done for us if we continued to pay annual premiums every year at a 9.35% annual earnings rate, shows the value growing to 4.6MM at age 100, with all but $500,000 of that being investments. If I'm not mistaken that may be around 1,650,000 in today's dollars at 3% (35 years).
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Old 08-11-2013, 11:19 AM   #17
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You are looking at the returns of the funds, which is before any COI or other charges at the policy level.

I'm just looking at cash flow. You have written 13 (rather than 14) checks annually for $5,460 (a total of $70,980). Assuming you could cash out for your account value of $84,290 (ie; no surrender charge) then the net rate of return (after fees and such) is 2.81%. With surrender charges your return would be lower.

This is the way these products are sold. The insurer advertises a nice return (let's face it - 8+% isn't very bad - but few people factor in the fees they are paying to see how it is eating up their returns.

It's very unlikely that you will achieve a 9.35% annual earnings rate over the next 30 years. The 5.72% return since inception is probably more indicative of returns, but this is before COIs and other fees and as you get older the COIs will increase and further eat into the returns.
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Old 08-11-2013, 11:24 AM   #18
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I get a return of 2.1% (the rate of return where 14 annual investments of $5,460 grows to $88,000). It is probably worse than that because I suspect the $88,000 is the account value rather than the surrender value, so if you don't need the insurance the investment aspects of the policy stink.
[cross-posted with the two above...]

pb4uski, this is a backwards look at return-to-date, correct?

Shouldn't the continuation decision be based on a forward-looking calculation, treating the premiums already paid as a sunk cost to be ignored? I would think surrender value is much more relevant.

One set of numbers to run would be healthy cases using surrender value today and surrender value in the future as the denominators. The IRR function would calculate the return on $5460 payments going forward for one year, 3 years, 5 years, etc.

Further, as I read the OP, this next payment is year 15, a milestone where stopping future payments does not necessarily trigger a surrender or requires continuing payments beyond that point.

To get the full picture, several other scenarios could be run, e.g. collect the insurance with or without paying premiums in the future, surrender the policy with or without making payments in the future.

Finally, if insurance to pay the state estate tax bill is the root objective, there would need to be a comparison of keeping the universal insurance in force vs. getting a term policy.

One reason universal policies are a favorite of the industry is these calculations take some work to think through, something many customers don't take the time to do.

I hope posters with more direct knowledge chime in with more details.

(FWIW, keeping insurance wouldn't be my personal choice given the tax rate data presented above. The heirs getting a very big inheritance vs. a very, very big inheritance would not be a concern of mine. YMMV.)
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Old 08-11-2013, 11:27 AM   #19
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Yup. Your right. If it had been suggested by my insurance agent I would have been skeptical, but I do trust our attorney, so we bought it. As I said in my original post, I've never known if this was a rip off or a good tool. I think it's probably the latter. Thanks for your perspective and the number crunching.
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Old 08-11-2013, 11:33 AM   #20
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This book may be out of date due to recent law changes, but it explains the whole life insurance to pay taxes strategy.

Amazon.com: The Retirement Savings Time Bomb . . . and How to Defuse It: A Five-Step Action Plan for Protecting Your IRAs, 401(k)s, and Other Retirement Plans from Near Annihilation by the Taxman (9780143120797): Ed Slott: Books
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