TIAA CREF Universal Life policy as retirement vehicle.

[PaloAlto]

The other day, on the radio, I heard a discussion about TIAA CREF’s Universal Life Policy as a retirement vehicle for high earners (those who max out 401K and have sufficient emergency funds and saved for kids college)

The main advantage was a way to get payments tax free from the policy after retirement, or pass along tax free to heirs after death. The expert (from TIAA CREF) suggested 2 ways of saving in the policy. One was a lump sum - usually emergency funds because the policy has no surrender fee and you can withdraw your principal without taxes (appreciation will grow tax free but taxed if with drawn). The current rate is 3.8% with a floor of 3%. Its not FDIC insured but TIAA CREF has a good rating.

The other option is to put $s that might have gone into investments, into the policy. The advantage here is you get a death benefit that protects the family in the event of death/disablement and also sets up funds that appreciate tax free and can be withdrawn tax free.

This is what I understand at a high level and it seemed interesting as we have $300k sitting in short term municipal funds earning 1% (federal tax free) that I would love to see earn 3.8%. We also have about 50K or so excess funds after both 401k and 457b are funded (about 100k between DW and me). We could probably put some into a policy insuring DW as she has the steady income (i have a sole proprietor consulting business). We do have $1M term policies on each one of us that would pay off the mortgage and the kids’ education (and then some) leaving only living expenses and some retirement expenses for the surviving spouse to manage. We are also fairly close to our RE target (we have $5.5M in assets and I estimate current expenses without mortgage run around $130K. Mortgage still has another 7 years which is also roughly my RE timeline. Hopefully the $5.5M would have grown to $7-8M by then.

Does anyone have experience with this product? Bases on assets listed above I feel we can start being more conservative since almost $4.5M is in equities and only about $1M is in cash and a rental condo (rented out and covering expenses).

Thanks for the insights in advance!

[flintnational]

Part of the problem with Universal Life products is they are complicated. Generally, the complicated structure benefits the insurance company and not you. The 3% guaranteed rate of return is on the "potential cash value". As mentioned here. It is not on your full payment. A lot of the payment will go to fees, insurance premiums, rider costs etc.

Generally it is better to separate your investment decisions and life insurance needs. Investments provide the same tax free treatment for basis in the investment compared to the universal policy. In addition, if you purchase a term life policy, the death proceeds receive the same tax treatment as the universal policy death benefits. IMO, there is no magic here.

FN

[LOL!]

I don't think it makes sense unless you have $100,000,000 in assets.

Below $10,000,000 you should not have much problems passing on your assets tax-free to your heirs. And one is never taxed on principal anyways since return of capital is tax-free in a taxable account.

[pb4uski]

Quote:

Originally Posted by flintnational Part of the problem with Universal Life products is they are complicated. Generally, the complicated structure benefits the insurance company and not you. The 3% guaranteed rate of return is on the "potential cash value". As mentioned here. It is not on your full payment. A lot of the payment will go to fees, insurance premiums, rider costs etc. Generally it is better to separate your investment decisions and life insurance needs. Investments provide the same tax free treatment for basis in the investment compared to the universal policy. In addition, if you purchase a term life policy, the death proceeds receive the same tax treatment as the universal policy death benefits. IMO, there is no magic here. FN

I'm very familiar the UL product (not TIAA's, but UL generally). I think you might be confusing UL with VUL or some others... UL is NOT a complicated product at all... if is essentially a combination of an interest bearing account and term life insurance. Your account value earns interest at a rate declared on each policy anniversary by the company but not less than 3% in this case. Each month your account is reduced by a cost of insurance charge for mortality coverage. Typically, there might also be expense or administration fees as well but they are usually minimal (a few dollars a month in my experience). That's it... you can't get more simple.

If you never need that money and intend to pass it on to heirs then it is not a bad option... if you do need the money then your premiums can be witthdrawn tax free but any growth would be taxed at ordinary rates.

IMO its not a bad option... essentially 3% or more tax-deferred with no interest rate risk and negligible credit risk.... but not a good option either... from what you have described, with your assets you don't really need life insurance at all so the cost of insurance charges are arguably an unnecessary expense.... unless perhaps you view the life insurance coverage as helping pay for estate taxes.

[flintnational]

Quote:

Originally Posted by pb4uski I'm very familiar the UL product (not TIAA's, but UL generally). I think you might be confusing UL with VUL or some others... UL is NOT a complicated product at all... if is essentially a combination of an interest bearing account and term life insurance. Your account value earns interest at a rate declared on each policy anniversary by the company but not less than 3% in this case. Each month your account is reduced by a cost of insurance charge for mortality coverage. Typically, there might also be expense or administration fees as well but they are usually minimal (a few dollars a month in my experience). That's it... you can't get more simple. If you never need that money and intend to pass it on to heirs then it is not a bad option... if you do need the money then your premiums can be witthdrawn tax free but any growth would be taxed at ordinary rates. IMO its not a bad option... essentially 3% or more tax-deferred with no interest rate risk and negligible credit risk.... but not a good option either... from what you have described, with your assets you don't really need life insurance at all so the cost of insurance charges are arguably an unnecessary expense.... unless perhaps you view the life insurance coverage as helping pay for estate taxes.

Agreed. VUL is worse. I may be looking at the wrong policy (not sure which one the OP is considering). The UL product I linked indicates the insurance is "permanent" leading me to believe it is whole life. Additionally, they show 7 potential riders and endorsements available to complicate the program. While I think you are probably correct about the savings aspects, they state "potential cash value accumulation". I would think they would state it differently if it was 3% guarantee on the cash in the plan. But happy to defer to those more knowledgeable in this area.

FN

[PaloAlto]

Wow- thanks. Maybe it sounds like I misunderstood the product

[flintnational]

Quote:

Originally Posted by PaloAlto Wow- thanks. Maybe it sounds like I misunderstood the product

Or, I misunderstand the product. (Always a possibility) Investodpedia, here, raises issues with the cash value account in UL, VUL and whole life policies. Apparently, upon death, the remaining cash value reverts to the insurance company and only the death benefit is paid. If cash value has been removed from the policy, the death benefit is reduced by this amount. The article goes on to provide ways to minimize the impact of this issue.

"With cash-value policies, policyholders can use the cash value in a variety of ways, including as:

A tax-sheltered investment;
A means to pay policy premiums later in life; and
A benefit they can pass on to their heirs.

Whole life, variable life and universal life all have built-in cash value. Term life does not.

Don't Throw Away Your Cash Value

Far too many policyholders make the costly mistake of leaving behind a wad of cash value in their permanent life policies. When the policyholder dies, his or her beneficiaries receive the death benefit, and any remaining cash value goes back to the insurance company. In other words, they’re essentially throwing away that accumulated cash value."

FN

[OldShooter]

Quote:

Originally Posted by PaloAlto ... TIAA CREF’s Universal Life Policy ... The expert (from TIAA CREF) suggested ...

(bold emphasis mine) I have heard good things about low cost annuity and insurance products from both TIAA and Vanguard. This is in sharp contrast to the majority of these products, which are ripoffs.

That said, insurance policies that have an investment aspect are very complicated. I looked at one prospectus that was 218 pages! My rule is that I never buy any investment product that I do not understand, so this rules me out of the game for this type of product.

If you continue to be interested, though, I strongly suggest finding a CPA who is a tax and estate planning expert. Spend the $1K or more that will be necessary for him/her to completely understand your individual situation and to give you recommendations.

IMO for us amateurs to be making decisions like this alone is pretty much like thinking we could do our own heart surgery. This part of the investment and tax world is just too complicated to attempt without the services of a good and unbiased guide. SGOTI is not that guide.

[6miths]

These policies are complicated. Many (most?) of those selling them don't understand all of the nuances and their opacity is unlikely to benefit policy holders IMHO.

[pb4uski]

Quote:

Originally Posted by flintnational .... Apparently, upon death, the remaining cash value reverts to the insurance company and only the death benefit is paid. ....

That is true of almost all life insurance... if you die your beneficiaries receive a death benefit and if you cash out you receive the cash value... why would you think you should get both? For whole life, it is all built into the pricing... if one wanted a policy where upon death you received both the cash value and a contractual death benefit that is easy to design for but the premium will be more than a conventional whole life policy with a stated death benefit.

Most UL contracts allow the policyholder to select an option of upon death receiving just the death benefit, or the death benefit plus the cash value... however, the cost of insurance charges each month are based on the "net amount at risk" and as a result will be higher for a policy that receives both the seath benefit plus the cash value.

For example, say the death benefit is $1 million and the cash value is $200k... if upon death beneficiaries would receive just the death benefit of $1 million would be paid the cost of insurance would be based on the $800k net amount at risk... if upon death the beneficiaries would receive the death benefit and the cash value then the cost of insurance would be based on $1 million net amount at risk. The contractholder elects one mode or the other when they apply.

Since you seem to like Investopedia:

Quote:

A level death benefit is one of two death-benefit options available under many universal life insurance policies; the other is an increasing death benefit. A universal life policy has two components: a cash value component and a pure insurance component. When the policy holder chooses the level death benefit, the value of the pure insurance component decreases over time to keep the death benefit the same while the policy’s cash value increases. If the policy holder chooses the increasing death benefit option, the pure insurance component will remain the same over time; so as the policy’s cash value increases, the death benefit increases. Read more: Level Death Benefit Definition | Investopedia Level Death Benefit Definition | Investopedia Follow us: Investopedia on Facebook

[flintnational]

Quote:

Originally Posted by pb4uski That is true of almost all life insurance... if you die your beneficiaries receive a death benefit and if you cash out you receive the cash value... why would you think you should get both? For whole life, it is all built into the pricing... if one wanted a policy where upon death you received both the cash value and a contractual death benefit that is easy to design for but the premium will be more than a conventional whole life policy with a stated death benefit. Most UL contracts allow the policyholder to select an option of upon death receiving just the death benefit, or the death benefit plus the cash value... however, the cost of insurance charges each month are based on the "net amount at risk" and as a result will be higher for a policy that receives both the seath benefit plus the cash value. For example, say the death benefit is $1 million and the cash value is $200k... if upon death beneficiaries would receive just the death benefit of $1 million would be paid the cost of insurance would be based on the $800k net amount at risk... if upon death the beneficiaries would receive the death benefit and the cash value then the cost of insurance would be based on $1 million net amount at risk. The contractholder elects one mode or the other when they apply. Since you seem to like Investopedia:

I'll just stick with my opening statement, UL is complicated.

FN

[pb4uski]

Ok, agree to disagree... other than a SPIA or whole life policy it doesn't get much simpler. that plain-vanilla/fixed UL.