Multi Index Universal Life Insurance

[nun]

I looked at some annual premiums for $1M GUL for a 30 year old male non-smoker. They ranged from $4k to $6k......so picking the middle of $5k here are some numbers.

Age at death % return
30 20000
65 8%
83 4%

 

[pb4uski]

How are you calculating return? DB in relation to premiums paid (IOW an Excel annual rate calc where the premiums are an outflow and the DB is a FV inflow)? If so, that is also an after-tax return.

 

[nun]

How are you calculating return? DB in relation to premiums paid (IOW an Excel annual rate calc where the premiums are an outflow and the DB is a FV inflow)? If so, that is also an after-tax return.

Just setting the rate for compound interest on the premiums over the period between 30 and the ages given that produces $1M.....so if the 30 year old male puts $5k into an investment every year and it grows by 4% annually by age 83 they will have $1M which is the value of the GUL death benefit.....I've rounded the numbers for simplicity.

The advantage over a ROTH is that you can continue adding money in retirement as you don't need earned income. So if you want to pass on wealth tax free to someone the GUL is a way to do it. It would be interesting for Wade Pfau to rerun his model using GUL rather than WL given that he completely ignores the CV of the WL in his paper.

 

[jzajzz]

So it's interesting that in Wade Pfau's paper commissioned by OneAmerica he uses Whole Life in the retirement income scenario, rather than GUL, but only for the death benefit. The idea is that with a guaranteed death benefit the 401k allocation can be very aggressive and that when retirement income is required a single lifetime annuity can be purchased rather than a joint to give higher income as the death benefit will provide for the other partner if the one with the annuity dies.

While the conclusions of the paper look good given the assumptions and parameters I think it's a good example of a smoke and mirrors sales pitch for Whole Life.

You do realize that both annuity and GUL are insurance product.s.. so I'm sure he has his biases like everyone else but he makes money off both products. it's more lucrative for an insurance agent to sell a GUL than an overfunded whole life w/ term + paid up additions.

 

[jimbee]

I'm still waiting for the explanation why these insurance policies are a good investment. The responses in this thread so far, it depends, or, it's complicated. Guess I'm too stupid to understand.

 

[jzajzz]

I think I understand...as I said you'd need both GUL and a DA to get both the death benefit and the retirement income that is bundled in WL. My question is if using GUL and DA is better for the wealthy people who might actually need a life insurance policy for estate planning purposes. If you can save tax deferred in a DA for a fee of 0.5% and then take money out when you retire without having to do a loan it looks like you have all the tax advantages of the CV WL with lower fees and no loan interest to pay. Then wew need to discuss the nature of the investment....what return can we expect form a WL CV account vs a DA invested in mutual funds etc.

There are lot of info missing here (how old is this rich person) for me to accurately assess this but from afar... you have no liquidity..

 

[jzajzz]

I'm still waiting for the explanation why these insurance policies are a good investment. The responses in this thread so far, it depends, or, it's complicated. Guess I'm too stupid to understand.

it depends that's the answer for any investment vehicle. Of course some are better for a larger number of people than others. In short, it's lower risk plan than putting your money in the market, but higher than a CD. liquidity during retirement years is great because you can conservatively get more than the 4% because you eliminate the "sequence of returns" risk

The returns are not attractive if you have less than 20 years .. it doesn't work if your health is substandard. You can't really "start small" by investing small amounts and increasing from there. Less liquidity than a CD or cash ... less potential than the market.

 

[nun]

You do realize that both annuity and GUL are insurance product.s.. so I'm sure he has his biases like everyone else but he makes money off both products. it's more lucrative for an insurance agent to sell a GUL than an overfunded whole life w/ term + paid up additions.

Yes I understand about annuities. Wade Pfau is suggesting retirement income from a combo of 401k, SPIAs and WL in this paper.

https://www.oneamerica.com/wps/wcm/...&CACHEID=23b21fa6-8e9c-49c9-a49e-1a0b0ef95d91

Wade Pfau is not an insurance salesman, but he is paid to do research and modeling by insurance companies and has produced some results that favor insurance products with a certain set of circumstances and assumptions that many people believe to be biased towards the insurance products.

One of my criticisms of Pfau's paper is that it only uses the death benefit of the WL policy and if he's ignoring the CV it would be cheaper to use GUL.

Also, I'm wondering if a wealthy person looking to pass on money through a death benefit and also save money for retirement over and above the usual retirement accounts would do better with a GUL and a deferred annuity rathe than WL.

 

[nun]

There are lot of info missing here (how old is this rich person) for me to accurately assess this but from afar... you have no liquidity..

Sure a personal deferred fixed or variable annuity isn't a bank account, but it's withdrawal rules are similar to qualified retirement accounts and if you are going to be using the money after 59.5 you can either take it out as a series of payments or convert it into a lifetime SPIA. There no tax on the principal, just the gains and critically no interest is charged as you aren't taking a loan, Vanguard fees are around 0.5% on funds.

So lets say a 30 year old man wants to pass $1M to his children at death and he also wants a CV in some account of $400k at age 59.5. What should he do?

A $1M GUL would cost $5k/year for life and if he puts $5500 into a ROTH with fees of 0.1% and a 5% return he'd have $400k at 59.5. If he dies at age 83 he would have contributed a total of $430k and conservative planning would have allowed him to withdraw a total of $550k tax free from his ROTH (SWR=4% and 3% inflation). So how much would a WL policy cost in lifetime premiums, loan interest, taxes on gains in the CV etc to guaranteed a death benefit of $1M and a retirement income of $550k....

 

[nun]

liquidity during retirement years is great because you can conservatively get more than the 4% because you eliminate the "sequence of returns" risk

Liquidity is better outside of an insurance policy as you don't have to pay interest or surrender fees to get at your money post 59.5. Liquidity is also cheaper in a DA if you buy one from someone like Vanguard if you really want extra tax deferred growth.

Sequence of returns risk can be easily mitigated with asset allocation.

 

[jzajzz]

Liquidity is better outside of an insurance policy as you don't have to pay interest or surrender fees to get at your money post 59.5. Liquidity is also cheaper in a DA if you buy one from someone like Vanguard if you really want extra tax deferred growth.

Sequence of returns risk can be easily mitigated with asset allocation.

there are no surrender charges on Whole life ..
you must be thinking UL or IUL.. regardless most UL have surrender charges for the 1st 10 or 15 years.
you can withdraw from a life policy without taking a loan.. but with interest .. many times the loan nets you the most income.. at the end .. If I net more money with the interest.. who cares that I had to pay interest, I net more income.

Sequence of returns risk can be minimize. but there is a tradeoff .. with returns. With WL , it's completely eliminated again which allow for a conservative 5-6% withdrawal ...

the income from the WL is also tax free which also makes it a more reliable source of income.. I've mentioned the downsides of WL but usually the best feature is in the distribution stage. The returns aren't astronomical especially with current dividend rates.. however the liquidity in retirement is where it shines.

 

[jzajzz]

Sure a personal deferred fixed or variable annuity isn't a bank account, but it's withdrawal rules are similar to qualified retirement accounts and if you are going to be using the money after 59.5 you can either take it out as a series of payments or convert it into a lifetime SPIA. There no tax on the principal, just the gains and critically no interest is charged as you aren't taking a loan, Vanguard fees are around 0.5% on funds.

So lets say a 30 year old man wants to pass $1M to his children at death and he also wants a CV in some account of $400k at age 59.5. What should he do?

A $1M GUL would cost $5k/year for life and if he puts $5500 into a ROTH with fees of 0.1% and a 5% return he'd have $400k at 59.5. If he dies at age 83 he would have contributed a total of $430k and conservative planning would have allowed him to withdraw a total of $550k tax free from his ROTH (SWR=4% and 3% inflation). So how much would a WL policy cost in lifetime premiums, loan interest, taxes on gains in the CV etc to guaranteed a death benefit of $1M and a retirement income of $550k....

That's a great exercise... by the way when you say WL .. you mean strictly whole life correct? not UL? I ask because this thread was about UL at one point.. lol

 

[nun]

there are no surrender charges on Whole life ..

So if I just want the cash value...no loans and no death benefit etc...a WL policy will just deposit the CV in my bank account?

you can withdraw from a life policy without taking a loan.. but with interest .. many times the loan nets you the most income.. at the end .. If I net more money with the interest.. who cares that I had to pay interest, I net more income.

numbers and examples please.

Sequence of returns risk can be minimize. but there is a tradeoff .. with returns. With WL , it's completely eliminated again which allow for a conservative 5-6% withdrawal ...

Is that a flat rate ie no inflation adjustment. what is the actual income after fees and interest?
Yes you will give up some potential return by holding cash and short term bonds to ride out downturns....but let's call in insurance.

the income from the WL is also tax free which also makes it a more reliable source of income.. I've mentioned the downsides of WL but usually the best feature is in the distribution stage. The returns aren't astronomical especially with current dividend rates.. however the liquidity in retirement is where it shines.

All ROTH income is tax free....the gains in CV WL are not tax free.

Please design me a WL policy that matches the $1M GUL death benefit and also produces $550k retirement income and tell me the lifetime cost in premiums, riders, taxes and interest assuming starting at age 30, taking $16k, 3% annual inflation adjusted income starting at 59.5 and death at 83. I think the GUL and ROTH approach would cost $430k. The 5% ROTH return is not guaranteed, but it seems like a sensible number to use. The ROTH contributions compound to $400k at age 60 and a 4% withdrawal rate starts at $16k and if you inflate it a 3% per year the total withdrawals are $550k by age 83. There is a very strong probability that there would be money left in the ROTH at age 83.....it would still have $279k at 5% return

 

[jzajzz]

So if I just want the cash value...no loans and no death benefit etc...a WL policy will just deposit the CV in my bank account?



numbers and examples please.



Is that a flat rate ie no inflation adjustment. what is the actual income after fees and interest?
Yes you will give up some potential return by holding cash and short term bonds to ride out downturns....but let's call in insurance.



All ROTH income is tax free....the gains in CV WL are not tax free.

Please design me a WL policy that matches the $1M GUL death benefit and also produces $550k retirement income and tell me the lifetime cost in premiums, riders, taxes and interest assuming starting at age 30, taking $16k, 3% annual inflation adjusted income starting at 59.5 and death at 83. I think the GUL and ROTH approach would cost $430k. The 5% ROTH return is not guaranteed, but it seems like a sensible number to use. The ROTH contributions compound to $400k at age 60 and a 4% withdrawal rate starts at $16k and if you inflate it a 3% per year the total withdrawals are $550k by age 83. There is a very strong probability that there would be money left in the ROTH at age 83.....it would still have $279k at 5% return

if you want cash value .. you ask the insurance to withdraw.. withdraw to basis ..it's tax free. however you do a loan .. it's always tax free as long as the loan doesn't force your policy to lapse.. the way it works is that the insurance company uses you cash value to pay off the loan but if the dividend that you're getting exceeds the loan .. you're in the black. .. and you can do this for your lifetime .. now of course if the dividend rate goes down.. you would have to adjust. The good news when you're projecting with today's numbers is that dividend rates are really low.. mainly because interest rates are really low.. and your life insurance guarantees are backed by bonds..

Ill try to come up with an example by tonight.

I know alll roths are tax free... I was talking about the DA

 

[jzajzz]

Here are my numbers
10000/year premium going to a Whole life designed for cash value .. the DB is 914k .. You can use that extra 500 year for a 30 year term .. you'd get a lot more than 100k DB
for a 30yrold

Cash value at age 59 .. 661k ... and the DB is now 1.3million because of the paid up additions.. To be clear the assumptions are the current dividend rate by the company selected. .. now since this is a low risk savings plan.. it's worth mentioning that the guarantee is 418K at age 59

Withdraw 33000 a year. from 60 to 83.. that's 792000. The DB is back down to slightly above 1million. The Cash value left is 699k

Now to be clear this is assuming a 5% adjustable loan rate .. this company doesn't have a fixed loan rate. loan rate could go up(or down) and probably would in a higher interest rate environment... but the same could be said for dividend rates.

Now this company happened to have a high DB from the get go. but the first company I tried had a lower DB around 300k. Now that's what I typically expect, and we just supplement with a higher 30 year term.

In your example .. the GUL is almost the same amount as his Roth contribution.. so WL would almost always win out in this scenario. the other downside is that he couldn't contribute any more to the Roth.

 

[nun]

Here are my numbers
10000/year premium going to a Whole life designed for cash value .. the DB is 914k .. You can use that extra 500 year for a 30 year term .. you'd get a lot more than 100k DB
for a 30yrold

Cash value at age 59 .. 661k ... and the DB is now 1.3million because of the paid up additions.. To be clear the assumptions are the current dividend rate by the company selected. .. now since this is a low risk savings plan.. it's worth mentioning that the guarantee is 418K at age 59

Withdraw 33000 a year. from 60 to 83.. that's 792000. The DB is back down to slightly above 1million. The Cash value left is 699k

Now to be clear this is assuming a 5% adjustable loan rate .. this company doesn't have a fixed loan rate. loan rate could go up(or down) and probably would in a higher interest rate environment... but the same could be said for dividend rates.

Now this company happened to have a high DB from the get go. but the first company I tried had a lower DB around 300k. Now that's what I typically expect, and we just supplement with a higher 30 year term.

In your example .. the GUL is almost the same amount as his Roth contribution.. so WL would almost always win out in this scenario. the other downside is that he couldn't contribute any more to the Roth.

Why would I need term insurance when I've just bought WL?....the extra 500 can go into savings. Or maybe just buy the term as you suggest and invest the $9.5k. The IRR for the WL guaranteed cash value is 1.5%. If I get 5% on my $9.5k /year I end up with $700k at age 59.5.

So how much is paid in premiums, paid up additions, interest etc over the lifetime, how much of the income is tax free, and exactly what is passed onto heirs at death? The GUL and ROTH will net $1M in death benefits and $550k completely tax free income (and probably leave something in the ROTH too) for a total outlay of $430k.

 

[jzajzz]

So how much is paid in premiums over the lifetime and exactly what is passed onto heirs at death?

premiums are paid for 30 years age 30 to 59 ... the DB is what's passed on to their heirs so that depends at what age they died.. if they died at 83 1,063,000. It goes up from there .. since they're no longer taking money our for income.

 

[nun]

premiums are paid for 30 years age 30 to 59 ... the DB is what's passed on to their heirs so that depends at what age they died.. if they died at 83 1,063,000. It goes up from there .. since they're no longer taking money our for income.

OK could you post the table with premiums, paid up additions and the yearly growth of DB, CV and the withdrawals.
Of course the buying term from 30 to 60 and investing $9.5k in a ROTH and 401k or after tax investments would produce a death benefit of $1M to age 60 and with a 6% return $33k could be taken from age 60 to 83 and there'd still be $1.7M left. I'm assuming a flat 6%, but what interest rate are assumed in the WL and what is the guaranteed rate?

Thanks

 

[jzajzz]

 

[jzajzz]

OK could you post the table with premiums, paid up additions and the yearly growth of DB, CV and the withdrawals.
Of course the buying term from 30 to 60 and investing $9.5k in a ROTH and 401k or after tax investments would produce a death benefit of $1M to age 60 and with a 6% return $33k could be taken from age 60 to 83 and there'd still be $1.7M left. I'm assuming a flat 6%, but what interest rate are assumed in the WL and what is the guaranteed rate?

Thanks

You could do term and Roth

YOu could do the GUL and Roth

You could do the Whole life only ...


I myself would do both the life insurance & the Roth. although I would do an IUL instead of WL.. Others would feel more comfortable with WL instead of IUL

The key is to know what each strategy brings and the potential pitfalls of each..

With my personal strategy .. I would have a more conservative .. more predictable income stream for retirement with the LI policy .. while I would be more aggressive with the ROth since I have the LI policy to back me up.

Chances are the Roth invested in the market would probably yield you a higher return overtime.. but if 2008 happens the year I"m trying to retire ... I can't really do it over.. even though the odds were that 2008 wouldn't happen that exact same year. I rather be ready for that. there are a lot of people who are worried about another big recession right now .. It might be just panic.. but you know what .. I rather not panic.. especially if I can get a 5-6% IRR in a lower risk vehicle.

 

[samclem]

Chances are the Roth invested in the market would probably yield you a higher return overtime...I rather not panic.. especially if I can get a 5-6% IRR in a lower risk vehicle.

Based on historical performance of these insurance products and the US equities markets, it is more appropriate to call these insurance products "lower volatility" than "lower risk." Inflation is a risk, too. US equity markets have done a much better job, over time, of protecting and growing the purchasing power of investors than fixed-income life insurance policies have done.
Yes, I understand that "risk and "volatility" are frequently used as synonyms--but they ain't.

 

[MichaelB]

Based on historical performance of these insurance products and the US equities markets, it is more appropriate to call these insurance products "lower volatility" than "lower risk." Inflation is a risk, too. US equity markets have done a much better job, over time, of protecting and growing the purchasing power of investors than fixed-income life insurance policies have done.
Yes, I understand that "risk and "volatility" are frequently used as synonyms--but they ain't.

+1
Actually, the Roth option has no upside limitation, while the insurance option has no upside opportunity. Even with recessions, term + Roth is the better deal, especially for today's yutes. That's my advice to my offspring.

 

[jzajzz]

Based on historical performance of these insurance products and the US equities markets, it is more appropriate to call these insurance products "lower volatility" than "lower risk." Inflation is a risk, too. US equity markets have done a much better job, over time, of protecting and growing the purchasing power of investors than fixed-income life insurance policies have done.
Yes, I understand that "risk and "volatility" are frequently used as synonyms--but they ain't.

Which insurance products are you referring to... while there fixed whole life products .. the products I mention above are not fixed... With whole life .. you get a fixed interest rate + a dividend and the dividend rates were way higher when the economy was booming.. you were getting dividend rates over 10% in the 80's ..

With IUL .. you're indexing the market.. so it goes up and down with the market except it has a floor and a cap...Since 2000 an IUL wiht a cap rate 12% would fare better than the SandP ..but that's in a down market since you had 01 02 03 and 08 ... but in the 80s and 90s the market would fare better.. The potential is not as high as the market but it's not a stagnant return. Even if it were.. .the point is not it's an option.. no one is telling you to put all your money in there. That wouldn't be wise with any product. It's another way to diversify...

 

[samclem]

Which insurance products are you referring to... while there fixed whole life products .. the products I mention above are not fixed...

You've mentioned nearly every type of insurance product known. My point is the same--none of them, over time, have done as well at protecting and growing the value of the money invested as the US market. Yes, we can look at subsets of time when this product or that has shined, but the delta between what clients have been paid by insurers and the returns of the underlying products in which the insurance companies invested (and which the investor could have bought directly) are evident--they manifest themselves as large corporate offices of insurance companies, high-dollar advertising bought by insurance companies, dividends paid to insurance company investors, and commissions paid to insurance salespeople. That's not a dig at insurance companies, it's just math. Over the long term, the vig taken by the insurance companies is a big hit to the investor, and >must< reduce long-term returns significantly.

With IUL .. you're indexing the market.. so it goes up and down with the market except it has a floor and a cap

That floor and that cap are very significant issues. That's what buys the skyscrapers and all the people to go in them.

Insurance is good for one thing: spreading rare, individually catastrophic risk among many people so that the effects of the individual catastrophe are mitigated. Needing money when we are old is not rare. Insurance is insurance, and investing is investing.

 

[brewer12345]

Index insurance products are total smoke and mirrors, nothing close to what the equity market/a diversified portfolio offers. They also universally give the insurer many options to cut your participation rate, lower the caps, etc. No thanks.