Indexed Universal life

[COcheesehead]

I think where people get into trouble is substituting insurance for investment products. Insurance can be bought for insurance purposes, a tax shelter or hybrid situations like as a substitute for LTC coverage when specific riders are added.
If you are buying it as an investment, that is a mistake. If you are in a high tax bracket, sometimes it makes sense to overfund a whole life policy to have one more tax shelter when you have maxed out all your other tax deferred investments. In cases like that the funds in the policy should be viewed as part of your cash/bond allocation. Nothing more.

 

[djr59]

That is what the iul product he was trying to sell me. Over funded insurance so I can borrow back my own money tax free since loans in the policy are not taxable.

Yeah the 6% was a mistake. It's actually yielding less when I look at it but it's going up around 2% every year. It's worth more than I put in and when I compound it out it's not bad and I am comfortable with it. So not going to publish all the numbers to get it ripped apart. Bottom line I have put in about $35k over 23 years and it's worth cash value around $50k. Plus he amount of insurance has gone up. As long as the death yield stays over 5% why sell it. It's just gravy on a nice nest egg.

 

[nun]

Yeah the 6% was a mistake. It's actually yielding less when I look at it but it's going up around 2% every year. It's worth more than I put in and when I compound it out it's not bad and I am comfortable with it. So not going to publish all the numbers to get it ripped apart. Bottom line I have put in about $35k over 23 years and it's worth cash value around $50k. Plus he amount of insurance has gone up. As long as the death yield stays over 5% why sell it. It's just gravy on a nice nest egg.

So that's closer to 3%.

 

[COcheesehead]

That is what the iul product he was trying to sell me. Over funded insurance so I can borrow back my own money tax free since loans in the policy are not taxable.

Yeah the 6% was a mistake. It's actually yielding less when I look at it but it's going up around 2% every year. It's worth more than I put in and when I compound it out it's not bad and I am comfortable with it. So not going to publish all the numbers to get it ripped apart. Bottom line I have put in about $35k over 23 years and it's worth cash value around $50k. Plus he amount of insurance has gone up. As long as the death yield stays over 5% why sell it. It's just gravy on a nice nest egg.

This situation could have made sense if you were already maxing out a Roth,IRA, 401k,...most never find themselves in that situation, so the benefit of overfunding may apply to very few and only in the higher tax brackets.

 

[nun]

I think where people get into trouble is substituting insurance for investment products. Insurance can be bought for insurance purposes, a tax shelter or hybrid situations like as a substitute for LTC coverage when specific riders are added.
If you are buying it as an investment, that is a mistake. If you are in a high tax bracket, sometimes it makes sense to overfund a whole life policy to have one more tax shelter when you have maxed out all your other tax deferred investments. In cases like that the funds in the policy should be viewed as part of your cash/bond allocation. Nothing more.

+1. I've always kept investing and insurance well away from each other. There are some scenarios for high net worth people or those that want to stash lots away from the tax man where it can work, but frankly that needs specialist advice and I'm not prepared to hand my money over to anyone. So if I can't fully understand something and manage it myself I just put it to one side.

 

[djr59]

Yeah. I max out 401k for me. Wife is limited by job. I then max out backdoor Roth IRA for her. I do traditional non deductible for me. Then on top of that we pay max top tax bracket. So it made sense but I am thinking of retiring next year. So not sure that it still does. Plus he fact I don't really understand it.

 

[Souschef]

I agree with read the fine print! My wife just recently rolled over an annuity, and the salesman offered her one option where she would get a 9% bonus if she did. BUT, when I read the fine print, the annual fees were higher! I ran it through a spreadsheet, and found that after year 6, she would lose money!
I presented that to the salesman, and he said nobody have ever done that calculation. DW was grateful that I had done that, because she would have not found that in the small print

 

[RobbieB]

Insurance Co's are not all evil and they do pay very well. Pops had a few policies and they sent me a book of checks on an account created in my name. If I needed the dough, I just wrote a check. But since the account pays 2.5% I just left it there.

 

[meierlde]

One possiblity if the policy allows and you don't need the whole benefit any more, is to go to reduced paid up insurance. I have a paid up at 65 policy that just paid up. I paid about $8500 for the policy over 47 or so years, and it has a base cash value of 7450. However it was a participating policy (no longer available as the company de-mutualized in the interim) that means with the dividends the cash value is 38,500. Partly this is a demonstration that if you can find a participating policy, you can do well.

 

[djr59]

Mine does participate and it had a vanishing premium option. I stopped paying for a few years where dividends covered the premium. But then payments started again. I could stop they told me but then cash value will go down. Since it seems to go up about 2% I feel it's worth it to keep it going.

 

[Taxman59]

Get any "guarantee" in writing, signed by an officer of the issuing insurance company. Without the insurance company's officer guarantee, any promises by the agent are worthless. I went through this with a client, and we had the insurance agent and the issuing company signature on a letter. Saved us about $350k when the policy didn't perform as promised / guaranteed! Even if you get the letter, the only one to make out is the agent!

 

[gcgang]

Indexed Universal life? Sounds like a salesperson's dream.

 

[ziggy29]

Yeah the 6% was a mistake. It's actually yielding less when I look at it but it's going up around 2% every year. It's worth more than I put in and when I compound it out it's not bad and I am comfortable with it. So not going to publish all the numbers to get it ripped apart. Bottom line I have put in about $35k over 23 years and it's worth cash value around $50k. Plus he amount of insurance has gone up. As long as the death yield stays over 5% why sell it. It's just gravy on a nice nest egg.

Ah. That "6%" included contributions through premiums?

Sounds like you already had your mind made up, which makes me wonder why you bothered to ask to begin with.

There are very few situations where someone isn't better off buying term life and investing the premium difference in a moderate allocation (say 50/50 or 60/40) investment account. What do you think the insurance companies are doing with your whole life premiums, also remembering they have to take their cut of the action?

 

[Independent]

The problem with whole life insurance is the initial marketing/sales/underwriting cost. The company recovers them over the early policy years.

In some cases, both of these statements can be true.
- Buying the policy was a poor decision, if you measure from the issue date.
- Keeping the policy one more year makes sense.

I've got a small policy from AAL/Thrivent that I bought before I understood anything about life insurance. I don't pay any premiums because the dividend is more than the premium. The total cash surrender value went from $8,377 to $8,746 in the last policy year. That's a 4.4% gain.

If I died tomorrow, the death benefit would be about $3,000 more than the cash value.

If I surrendered today, I'd owe FIT on all the gain in the policy. If I keep it until I die, my wife will get the entire face amount without FIT.

To me, the best decision at this point is to keep the policy.

(Later on, when I learned about life insurance, I bought term. That would be my advice to anybody starting out today.)

 

[djr59]

Yeah I tend to agree. Life insurance is insurance. I bought when younger when I needed to protect my family. The agent talked me into some whole and some term. The term has long lapsed but I kept the whole going because I saw a trend that at the time made sense and I think it still does. If I can continue to get a decent yoy yield greater than say 1% and the death benefit yield stays high and over say 5% then why not. I will just be giving a bonus to my wife when I pass or it can be used to cover funeral costs. Either way it still seems like a win to me though I am sure if I took the cash value today and invested it well it could exceed the death benefit by the time I die but that is a maybe since no one knows when they will die!

 

[pb4uski]

....I've got a small policy from AAL/Thrivent that I bought before I understood anything about life insurance. I don't pay any premiums because the dividend is more than the premium. The total cash surrender value went from $8,377 to $8,746 in the last policy year. That's a 4.4% gain.

If I died tomorrow, the death benefit would be about $3,000 more than the cash value.

If I surrendered today, I'd owe FIT on all the gain in the policy. If I keep it until I die, my wife will get the entire face amount without FIT.

To me, the best decision at this point is to keep the policy.

(Later on, when I learned about life insurance, I bought term. That would be my advice to anybody starting out today.)

4.4% is pretty good for no interest rate risk and negligible credit risk. Mine is "only" 4% and I'm pretty happy.

Any idea what your annual after-tax return would be if you cashed out and paid the tax at your marginal rate? Similarly, if you died? I was surprised how good those returns were, especially the latter.

 

[ziggy29]

The late financial huckster Charles J. Givens sold a lot of snake oil in his time, but there is one thing he advocated which I believe was very true 25 years ago, and is still very true today: Investing and insurance, both necessary components of a sound and secure long-term financial plan, have nothing to do with each other, and one should not be used to substitute for the other.

 

[pb4uski]

I would say that is true 99.9% of the time. Whole life is a good product in estate planning situations where life insurance is needed for a long time (for example, so the kids are not forced to sell the family farm or business to pay estate taxes and probably a small number of other uses) but those sort of uses would fit in the insurance category better than the investment category.

That said, even though I believe that it is generally better to buy term and invest the difference, my whole life policy has had pretty good returns over the long period that I have owned it so I don't think of it as big of a mistake as I did when I was in my 30s.

 

[nun]

4.4% is pretty good for no interest rate risk and negligible credit risk. Mine is "only" 4% and I'm pretty happy.

Any idea what your annual after-tax return would be if you cashed out and paid the tax at your marginal rate? Similarly, if you died? I was surprised how good those returns were, especially the latter.

This is why it's hard to beat and old TIAA-Traditional account. Mine is paying 4.85% right now and if interest rates go up that will increase.

 

[meierlde]

I think that djr may have captured the essence of why at a minimum to convert a old whole life policy to paid up the tax angle, that if you cash it in in particular if it is a participating policy, you would owe a bunch of taxes but if the pays off with death there is no tax due. Also if the polcy is over 20 years old the yearly increase in the cash value tends to be close to the premiums since the sales commission has already been paid,
A paid up policy in essence requires no more premiums for a reduced face amount (essentially you take the cash value and buy a single premium whole life policy with it)

 

[Independent]

4.4% is pretty good for no interest rate risk and negligible credit risk. Mine is "only" 4% and I'm pretty happy.

Any idea what your annual after-tax return would be if you cashed out and paid the tax at your marginal rate? Similarly, if you died? I was surprised how good those returns were, especially the latter.

I've never tried to do the math from the issue date. I know that I owned the policy throughout the high interest environment in the 1970's and 80's, so I'd have to devise some way of comparing returns on the WL to what was available on bonds.

 

[pb4uski]

I think that djr may have captured the essence of why at a minimum to convert a old whole life policy to paid up the tax angle, that if you cash it in in particular if it is a participating policy, you would owe a bunch of taxes but if the pays off with death there is no tax due. Also if the polcy is over 20 years old the yearly increase in the cash value tends to be close to the premiums since the sales commission has already been paid,
A paid up policy in essence requires no more premiums for a reduced face amount (essentially you take the cash value and buy a single premium whole life policy with it)

I'm not sure how big a bunch of taxes is. For mine, the CSV is about 3x the premiums that I have paid so the gain is 2x the premiums paid.

So if someone paid $10k in premiums over the years then the CSV is $30k... then the tax would be about $3k (at 15% of the $20k gain).

My increase in cash value last year was over 5x the premiums paid.