Multi Index Universal Life Insurance

[nun]

Basically disability. I have it through work but I didn't check out the coverages and how it worked. Overall if I would be in trouble if I had a problem and had to rely on it, so I got some additional coverage (again riversource) to bring my disability income up to something approaching my current salary.

Right then, I think I'll have to take a more hands on approach here and the answer is no to the MIULI.

Sounds like you are over insured. Most policies will replace 60% of income (that is not taxable if you paid with after tax dollars) and very few people get more. There are worrying signs with your FA.

 

[Maxburn]

FYI - My company's LTD/STD policies offered are paid in full by employees, which means that all payments made under them are 100% tax free to the beneficiary. So, when collecting disability in that situation, it may only be 60% of your gross pay, but it's 60% of your gross pay and no taxes are taken out of it. No SS, no medicare, no state, no federal. (if the employer pays for it, then the tax situation changes)

For me, that 60% after tax would actually replace 82% of my gross income minus just taxes. If I wasn't working because of a disability, I also wouldn't be contributing to my 401k or HSA (since I would have no income to put into it), so that 60% replacement actually would result in more take home pay than I get when going to work currently.

Even if it didn't though, my budget doesn't utilize 82% of my gross income for necessities, and I expect you would find a similar thing is true for you. Just food for thought on that extra disability insurance.

Damn, that's an angle I didn't know about. I'll have to ask work about that.

 

[respond2u]

I hear _Where are the Customers' Yachts?_ is a good read...

 

[Maxburn]

I checked with HR regarding disability today. They pulled up the paperwork of someone that was on disability and it is all filed under taxable income. Additionally this policy doesn't pay the whole 60% either, it only makes the difference between what the government disability gives you and the 60% of what you would be making working. So doesn't look like my financial adviser was leading me wrong there.

 

[Chuckanut]

Many insurance companies won't go much over 60% because they don't want to create a situation where the insured has a big financial incentive to remain disabled. One thing to watch for is how they define disabled. Is it unable to perform the normal necessary duties of your existing job or is it any job? If it is any job, then they might be able to deny payments if you are still in good enough shape to sweep the floors and flip burgers for minimum wage. The best policies will bring guarantee you a minimum income, so if you are sweeping floors for minimum wage they will supplement that.

 

[exnavynuke]

I checked with HR regarding disability today. They pulled up the paperwork of someone that was on disability and it is all filed under taxable income. Additionally this policy doesn't pay the whole 60% either, it only makes the difference between what the government disability gives you and the 60% of what you would be making working. So doesn't look like my financial adviser was leading me wrong there.

IF you pay it out of your taxable income (not the company paying the premium), then if you collect it, it is tax free. If your employer isn't paying the premiums, the benefits aren't taxable. You'd get a W-2 from it with the disability income in block 12 with a code of "J" (nontaxable disability pay).

As for the "pays the difference" part, they're going to pay you up front, but if you get awarded SSDI by the government later, they'll require you to repay them what the government back-pays you for the time you were collecting from them (I say repay because in 95% of cases, SSDI isn't decided within a year of claiming it).

Just some additional information for you to consider. The odds are your HR person doesn't know much about this stuff unless they've actually had someone utilize it recently, and then they'll probably only be kinda familiar with it. I'm up to speed on it right now from helping a friend who was on STD and then LTD for the past year and just came back to work today.

 

[exnavynuke]

Many insurance companies won't go much over 60% because they don't want to create a situation where the insured has a big financial incentive to remain disabled. One thing to watch for is how they define disabled. Is it unable to perform the normal necessary duties of your existing job or is it any job? If it is any job, then they might be able to deny payments if you are still in good enough shape to sweep the floors and flip burgers for minimum wage. The best policies will bring guarantee you a minimum income, so if you are sweeping floors for minimum wage they will supplement that.

Our policy leaves it up to the doctor to state whether or not you can do your job. A "no" from them = eligible to receive disability". I hadn't heard of any that require you to change jobs if you can do something else until now.

 

[Maxburn]

IF you pay it out of your taxable income (not the company paying the premium)~

That seems to be the heart of the issue, this is company paid.

 

[nun]

That seems to be the heart of the issue, this is company paid.

I'd double check that and think about whether you really need that extra disability insurance....it should be ridiculously inexpensive so maybe it's not a big issue.

You have yet to describe you funds beyond the insurance policy. It would be interesting to see what your FA has don and the charges.

 

[jzajzz]

First post here, please be gentle!

I have a financial adviser that I pay to handle my retirement financials and I think we have done some great things for my future but now I'm searching for more options to retire early.

She brought up a Riversource multi index universal life insurance package. In general the thing is too complex for me to comprehend but I'm researching it and finding a lot of negativity. I like some of the long term care benefits it has and of course the ability to use it as an additional vehicle for retirement. What are your thoughts?

I have around $200/mo that I feel I should be doing something with to further my early retirement. Ideas welcome!


My situation
-I'm single and 42, earning around 70k/y in a low cost of living area.
-Mortgage is being overpayed currently, roughly on track to pay it off by 63.
-I have a substantial IRA from previous employment 401k that is basically just sitting and growing, no contributions.
-I have a separate Roth IRA that I am contributing the maximum to.
-I have medium term savings investments that I am contributing to that is being managed and has a decent amount of funds in it to take care of projects like new roof for the house, new vehicle etc.
-I keep a good amount of money in checking to take care of unexpected things, I could live for six months off of checking if I had to.
-I have health, vision, dental etc through work.
-Disability insurances through multiple places adding up to something like 90% current income.
-I started a new 401k from my employer but for overhead reasons (small company) they decided they can't do that any more and are ending it. I was putting in 5%. This is the recent change that has me searching for new options.
-Before the 401k caved in I was on track to retire around 63 with over 80% income.

Index UL could be a great retirment vehicle... however you'd need a reliable company... Riverside doesn't sound like one of the players to me.. unless of course you're not in the US..
As far as fees and expenses, from earlier posts, that is a function of the agents... it can be expensive if the agent/advisor designs it so they get a high commission but if they design it to be efficient .. it is definitely a lower risk savings vehicle. There is a podcast that talks about it in depth.

 

[respond2u]

If it's too complex to understand, you won't be able to decide if it's good for you...

 

[pb4uski]

Index UL could be a great retirment vehicle... however you'd need a reliable company... Riverside doesn't sound like one of the players to me.. unless of course you're not in the US..
As far as fees and expenses, from earlier posts, that is a function of the agents... it can be expensive if the agent/advisor designs it so they get a high commission but if they design it to be efficient .. it is definitely a lower [-]risk[/-] returnsavings vehicle. There is a podcast that talks about it in depth.

FIFY.

I disagree... index UL is a poor retirement vehicle... Riversource is Amerprise which is horrible. Agents don't "design" product, but they may be able to chose from different products or flavors within a product family with varying levels of commissions and fees/expenses.

 

[6miths]

Very much agree with the proceeding two posts. Permanent life insurance is a dog for all but a very, very select few (and for the agents and companies who can convince some sucker that it is a good investment).

 

[pb4uski]

The only real good application of permanent life insurance that I am aware of are situations where one needs permanent life insurance to pay estate taxes where one owns a valuable family business or family farm.

In most other instances permanent life insurance is more like a hammer in search of a nail.

 

[Big_Hitter]

will I get flamed if I post a good experience with regard to "permanent" LI?

my policy was "paid up" last year with a cv over $300K and a db of $1.2M - I bought the $1M policy in 2000 with $12K annual premiums

however, DW had (FI)RED and I needed to make sure she was taken care of in case I took a golf shot to the temple; if I were single i probably wouldn't have bought the LI

 

[pb4uski]

If you cash out today, what do you figure your pre and post-tax IRR would be (ignoring the value of mortality coverage)? Do you still "need" mortality coverage? In hindsight, do you think you would have been better off to buy term and invest the difference? For reference, Total Stock returned ~ 5.47% since 1/1/2000.

 

[Big_Hitter]

Looks like it may be a wash, not counting taxes on the "invest the difference" piece so my IRR may be about 5% which is close to the policy interest rate

I did a quick calc so I may have messed something up

I used 12600 premium less 600 a year for term increasing at 10% a year

Anyway, I have no regrets looking back on the decision.

 

[pb4uski]

I have an old whole life policy that I bought just out of college when I was financially stupid and feel the same way you do... I would not recommend it but it has worked out ok... in fact, if I were to die then the after-tax return is really good compared to any other investment alternative that was available to me.

 

[jzajzz]

FIFY.

I disagree... index UL is a poor retirement vehicle... Riversource is Amerprise which is horrible. Agents don't "design" product, but they may be able to chose from different products or flavors within a product family with varying levels of commissions and fees/expenses.

definitely agree with staying away from Ameriprise.

and yes to properly fund a cash value life insurance. the agent needs to lower the death benefit as much as he can.. which in turns cuts his commission .. there are several ways to do it depending on the type of LI policy you're using.. Many agents don't do it because they don't get paid any more.

 

[meierlde]

I have an old whole life policy that I bought just out of college when I was financially stupid and feel the same way you do... I would not recommend it but it has worked out ok... in fact, if I were to die then the after-tax return is really good compared to any other investment alternative that was available to me.

Note that if the policy is a participating policy, if it pays off at death then the dividends received if used to purchase paid up additions are not taxed under current law, whereas if you withdraw the cash value before death, the difference between the cash value and the payment is taxable.

 

[pb4uski]

Just to be clear about meierlde's post, the entire death benefit is tax-free (irrespective of whether the mortality coverage was paid for by premiums or dividends) and if you cash in the policy the excess of the cash value over the premiums paid is taxable (ordinary) income.

 

[jzajzz]

Note that if the policy is a participating policy, if it pays off at death then the dividends received if used to purchase paid up additions are not taxed under current law, whereas if you withdraw the cash value before death, the difference between the cash value and the payment is taxable.

the way to maximize dividends is to take a "loan" instead of withdrawing .. because LI is FIFO .. you won't get taxed when you withdraw the "basis" however there comes a point that you will be withdrawing the gain .. and that will be taxed.

However if you take a policy loan ... you're golden. for example if your dividend payout will be 5% of your cash value, you can take out a loan for 5 % of your cash value .. that way you never touch your principal. if someone has an old participating LI policy at retirement .. it's a great way to get dependable retirement income without touching the principal..

Pros
- way better returns than CD"s and savings for dependable retirement income
- more liquid and less risky than qualified plans with investment in securities

Cons
- not as liquid as a savings account
- potential for double digit return is a lot less than securities.

I don't subscribe to this "this is always bad or this is always good " way of thinking. I do think somethings are overused and oversold .. while others are underused and undersold

 

[meierlde]

Note that certain actions such as converting a policy to a paid up policy can convert a policy to a modified endowment policy which tax the first dollars taken out.

 

[Big_Hitter]

I won't cash it out. I would "borrow" the $300K and use it to bridge expenses to 59.5. I just turned 53 so I can almost see the finish line.

That's the plan anyway. Between that and my muni bond portfolio I think that will work. I also have a db pension that I can draw starting at 55.

 

[jzajzz]

I won't cash it out. I would "borrow" the $300K and use it to bridge expenses to 59.5. I just turned 53 so I can almost see the finish line.

That's the plan anyway. Between that and my muni bond portfolio I think that will work. I also have a db pension that I can draw starting at 55.

great example of how it can diversify your portfolio.. especially for folks wanting to retire early... Qualified plans are great to accumulate wealth but painful to get the money out when you need it.. so your taxable accounts and in this case a LI policy is a great tool to take distribution out.. it's also a great tool in retirement because of of all its tax benefits because the income taken out on LI policy loan can't be reported as income.. so it won't affect your taxable income for Social security .. Munis would