Universal Life Insurance Contracts

[Wingnut1]

I have recently enrolled in a Universal Life Insurance Contract. Basicly you pay the premiums with after tax money and upon retirement the proceeds are paid monthly, tax free, providing retirement income as well as providing a death benefit.

Is this a good retirement instrument?

Diversification is good and I'm thinking about increasing the amount but wonder if I should just put those funds in an IRA.

Thoughts? Pros/cons?

Todd

 

[aja8888]

I have recently enrolled in a Universal Life Insurance Contract. Basicly you pay the premiums with after tax money and upon retirement the proceeds are paid monthly, tax free, providing retirement income as well as providing a life insurance payout.

Is this a good retirement instrument?

Diversification is good and I'm thinking about increasing the amount but wonder if I should just put those funds in an IRA.

Thoughts? Pros/cons?

Todd

Hi Wingnut1: Welcome!

Before asking questions like this, why not tell us a little about yourself?

Hi, I am... - Early Retirement & Financial Independence Community

 

[38Chevy454]

You won't get a lot of supporters for your universal life plan here. You will get a lot of supporters on the life insurance agent's forum (sorta kidding, I am sure there is one out there).

Give some more info on your investments and you will get better help.

 

[LOL!]

In general, any life insurance that is not term insurance is a very terrible idea. That is, life insurance should almost never be used as an investment or retirement instrument unless perhaps one is a billionaire.

 

[pb4uski]

I have recently enrolled in a Universal Life Insurance Contract. Basicly you pay the premiums with after tax money and upon retirement the proceeds are paid monthly, tax free, providing retirement income as well as providing a death benefit.

Is this a good retirement instrument?

Diversification is good and I'm thinking about increasing the amount but wonder if I should just put those funds in an IRA.

Thoughts? Pros/cons?

Todd

You usually have 10 days or more to get out of the contract.... called a '10-day free look". I'm not a fan of any insurance product for retirement savings... most have significant surrender charges to get out to reimburse the insurer for commissions paid to the agent... most also have significant fees. If you act fast you can get out without any damage.

If you want to invest for retirement, buy no-load, low-cost mutual funds or ETFs and buy term life insurance to protect your family... also known as BTID.... "buy term and invest the difference".

From what you wrote it sounds like when you retire that the account value would be rolled into an annuity... if so, the retirement benefits woud not be tax-free. Alternatively, if the retirement benefits are policy loans they will only be tax free to the extent of premiums paid.

 

[Wingnut1]

Ok, I'm 50, have $450K in a 415c and contribute $60k (includes catchup) annually to it and another $6500 on a Roth.

I am looking for some kind of catchup and this Universal thing sounded like a nice supplement for long term income.

Any other recommendations for good places for supplemental investing?

Todd

 

[pb4uski]

It sounds like you are tax-sensitive and probably in a probably in a high tax bracket. If so, then munis in a taxable account (like a brokerage account) would be a possibility. Also, domesic and international equity mutual funds or ETFs in a taxable account would generally be taxed at only 15% (perhaps a bit higher if you are in a really high tax bracket).

The other great thing about these sources is that if you chose to retire earlier than 59 1/2 you can use these taxable accounts from ER until when you can access tax-deferred accounts without penalty.

 

[OldShooter]

Ok, I'm 50, have $450K in a 415c and contribute $60k (includes catchup) annually to it and another $6500 on a Roth.

I am looking for some kind of catchup and this Universal thing sounded like a nice supplement for long term income.

Any other recommendations for good places for supplemental investing?

Todd

Sorry to say, @LOL! is almost certainly correct. This type of product is usually a good tool for enriching insurance salespeople and insurance companies but that is about it. Get out if you can. (I have heard that there are exceptions from firms like TIAA/CREF and Vanguard, but if you bought from an insurance salesperson you do not have one of those.)

As @pb4uski says, BTID if you actually need life insurance for some reason. If not, just buy a low cost total world market fund like VTWSX, using a tax sheltered account if possible. Even in a taxable account, passive funds are quite tax efficient because they trade much less frequently than actively managed funds and, hence, realize fewer gains.

You might benefit from some of the educational videos here: https://famafrench.dimensional.com/videos.aspx

 

[LOL!]

Ok, I'm 50, have $450K in a 415c and contribute $60k (includes catchup) annually to it and another $6500 on a Roth.

I am looking for some kind of catchup and this Universal thing sounded like a nice supplement for long term income.

Any other recommendations for good places for supplemental investing?

Todd

Any investment account invested tax-efficiently is perfect for supplemental investing. We have a joint brokerage account which we buy tax-efficient investments in. There are many advantages to such a so-called taxable account:

1. No limits on contributions. No penalties for early withdrawal. No limits on withdrawals.

2. Return of capital is tax-free.

3. Long-term capital gains are taxed at a favorable low rate. For us, that rate is 0%. Yep, LTCG are not taxed for us.

4. One can sell losers and get a tax break from the IRS. Yep, losses are shared by other taxpayers. Yep, that means YOU and other taxpayers have reduced my taxes for me with no choice on your part.

5. One can die and heirs get a stepped up basis and not pay taxes on one's gains.

6. One can give shares away to charity and not pay taxes. Those shares must have been held long-term.

7. Qualified dividends paid by such investments are also taxed at a favorable rate. For us that rate is 0%. Yep, for us qualified dividend income is not taxed.

8. And one more: Unrealized capital gains are not taxed either. One could go years and years without realizing capital gains and thus pay no taxes on those gains during that time.

All the above make such an account ideal for just about any investing. Of course, Roth IRAs and tax-deferred accounts have slightly better features, but a taxable account invested tax-efficiently comes pretty close. A taxable account invested tax inefficiently is terrible, so be sure to understand how to make your taxable account invested tax efficiently. A life insurance sales rep is not going to help you do that because it will cost them commissions and fees which they need to make a living.

 

[Koolau]

Just wondering if the new fiduciary rule will affect such insurance products. Hmmm. YMMV

 

[LOL!]

Just wondering if the new fiduciary rule will affect such insurance products. Hmmm. YMMV

I don't think so since they are not retirement accounts.

 

[Independent]

I have recently enrolled in a Universal Life Insurance Contract. Basicly you pay the premiums with after tax money and upon retirement the proceeds are paid monthly, tax free,

The cash value withdrawals are only tax free up to your basis (the sum of the premiums). After that, the withdrawals are taxed as ordinary income, they do not get the favorable capital gains rate.

If you don't plan to have any gain, it's not much of an "investment".

Generally, life insurance is a great product for people who need life insurance, and a lousy product for people who want investments. That's because the loads on life insurance tend to be higher than the loads on pure investments.

If you want to post some numbers here, people might be able to address your specific policy.

 

[haha]

I have recently enrolled in a Universal Life Insurance Contract.

When I see a post like this I wonder whether it might not have been better to ask first, then enroll or not after you have this additional information?

One of my sons used to say, I am thinking of buying a 911. What do you think? Then I'd look out in the drive and answered, looks like you already solved this one! I tend toward stupidity, but even I sometimes know when there is no sense choosing, this game has already been played.

Ha

 

[urn2bfree]

When I see a post like this, I wonder whether it might not be a fake - or rather is actually an attempted sales pitch by an insurance salesperson.

 

[brucethebroker]

Welcome.

How about some thoughts from someone who actually sold UL (for 15 years) and formerly owned a policy?

"Is this a good retirement instrument?". No. It is an insurance instrument. And a very good one IF you NEED life insurance. Basically, UL is term insurance (paid monthly) inside an annuity, but taxed as life insurance at death, or surrender of the policy. UL was invented to counter "buy term and invest the difference" arguments-many customers at that time (late 70's/early 80's) were investing the "difference" in annuities which paid 10% and higher then.

Yes, cash value over your basis (contributions) will be taxed if withdrawn (not borrowed, withdrawn). However, to my knowledge, there is no accounting of the "interest/ investment return" used to pay the monthly insurance deduction.

Say you paid $50k in premiums over 30 years, and your cash value is $80k. Yes, you would pay taxes on $30k if you surrendered the policy. But, if your insurance part (mortality charges) were $30k, during that time-where did that money come from? It must have come from your earnings, since you get full credit for your payments (basis).

It is a nifty way to pay term insurance with before tax income.

Now, I have been out of the insurance business for a long time, and the IRS may have tightened this up. But it did not look that way when I did a quick search on line.

 

[pb4uski]

I think you are right on the net impact of COI/mortality charges effectively coming from income/earnings... while paying for mortality coverage with part of the inside build-up is a minor benefit of UL, IMO it is totally eclipsed by mediocre interest crediting rates since the insurer invests in the same bonds we can but also needs 200 bps or more to cover expenses, overhead and return on required capital.

 

[growing_older]

Basicly you pay the premiums with after tax money and upon retirement the proceeds are paid monthly, tax free

This is not correct, and if the salesman told you this to get you to buy, then it is very likely that other things he told you are also not true. You can get back the premiums you paid tax-free, but that you could have had by putting the money under the mattress or in any kind of savings account.

The investment component of these plans is usually sub-par. The insurance component of these plans is usually sub-par. You almost always can do better with separate insurance (if needed) and separate investments.

 

[Scuba]

Any investment account invested tax-efficiently is perfect for supplemental investing. We have a joint brokerage account which we buy tax-efficient investments in. There are many advantages to such a so-called taxable account:

1. No limits on contributions. No penalties for early withdrawal. No limits on withdrawals.

2. Return of capital is tax-free.

3. Long-term capital gains are taxed at a favorable low rate. For us, that rate is 0%. Yep, LTCG are not taxed for us.

4. One can sell losers and get a tax break from the IRS. Yep, losses are shared by other taxpayers. Yep, that means YOU and other taxpayers have reduced my taxes for me with no choice on your part.

5. One can die and heirs get a stepped up basis and not pay taxes on one's gains.

6. One can give shares away to charity and not pay taxes. Those shares must have been held long-term.

7. Qualified dividends paid by such investments are also taxed at a favorable rate. For us that rate is 0%. Yep, for us qualified dividend income is not taxed.

8. And one more: Unrealized capital gains are not taxed either. One could go years and years without realizing capital gains and thus pay no taxes on those gains during that time.

All the above make such an account ideal for just about any investing. Of course, Roth IRAs and tax-deferred accounts have slightly better features, but a taxable account invested tax-efficiently comes pretty close. A taxable account invested tax inefficiently is terrible, so be sure to understand how to make your taxable account invested tax efficiently. A life insurance sales rep is not going to help you do that because it will cost them commissions and fees which they need to make a living.

+1
I purchased a similar policy and watched its value stay pretty constant despite the underlying investments growing at a healthy rate. My market gains were getting almost totally eaten up by fees. I cancelled the policy and paid surrender charges to get out so I could start investing the funds productively.

Get out while you can and invest in a taxable portfolio instead.

 

[Scuba]

I think you are right on the net impact of COI/mortality charges effectively coming from income/earnings... while paying for mortality coverage with part of the inside build-up is a minor benefit of UL, IMO it is totally eclipsed by mediocre interest crediting rates since the insurer invests in the same bonds we can but also needs 200 bps or more to cover expenses, overhead and return on required capital.

+1
Exactly my experience

 

[OldShooter]

... How about some thoughts from someone who actually sold UL (for 15 years) and formerly owned a policy? ...

The thoughts are very welcome. I'd like to ask a few questions.

First, I'll say that my impression (never bought one) of Universal Life is that the bold print giveth and the fine print taketh away. IOW, the concept (which you describe well) is attractive but the commissions and fees on the majority of these policies are at ripoff levels. I saw one where the insurance company kept all dividends (which creates an agency problem) and also kept all gains above an annual investment growth ceiling.

So:

1) What were your average commissions as a % of the customers' first year premiums?

2) What fees, caps, and other takeways (like keeping all dividends) were typically in the fine print?

3) Had you been a fiduciary, could you have sold the customers these policies without violating your fiduciary duties? (https://www.law.cornell.edu/wex/fiduciary_duty)

 

[pb4uski]

The thoughts are very welcome. I'd like to ask a few questions.

First, I'll say that my impression (never bought one) of Universal Life is that the bold print giveth and the fine print taketh away. IOW, the concept (which you describe well) is attractive but the commissions and fees on the majority of these policies are at ripoff levels. I saw one where the insurance company kept all dividends (which creates an agency problem) and also kept all gains above an annual investment growth ceiling....

That doesn't sound like a traditional UL product... traditional UL is like a combination of an interest bearing account and term life insurance..... they are typically backed by bonds so there are no dividends to keep or gains to be kept.

It sounds like you may be thinking of some of the more complex equity indexed products that issue credits based on changes in the underlying index (which by design excludes dividends) and have annual caps.

 

[OldShooter]

... It sounds like you may be thinking of some of the more complex equity indexed products that issue credits based on changes in the underlying index (which by design excludes dividends) and have annual caps.

Probably. It was a pitch for what I thought was called a universal life policy but the investment was in the S&P or something like that. It was clearly a scam so I listened more out of curiosity than out of any serious interest.

 

[pb4uski]

Sounds like equity-indexed UL.... since the OP was not specific as to what specific kind of UL he had bought it is hard to know.... but I agree with you that I would not touch an equity-indexed UL policy with a 10-foot pole.

 

[mathjak107]

traditional universal life is really not a great product.

it is like i have one i bought decades ago . the policy is running off it's own cash value for 20 years now without me adding anymore money .

BUT --- unlike whole life , the internal cost of insurance goes up and not only does it go up , but at certain ages it jumps big time .

eventually it is designed to self extinguish without dumping more money in to it .
by the time you reach the age where odds are high it will pay out it likely will no longer be able to support itself . so you end up paying forever for it .

if you want permanent insurance -go whole life .

 

[pb4uski]

As you observe, UL mortality protection has the same warts as term life insurance... insurance costs increase as you get older..... since in substance traditional UL is nothing more than an interest bearing account combined with term life insurance

And I agree, if you need permanent insurance (say for business continuity purposes or estate taxes) then whole life is preferable... but in essence all whole life does is take those premiums that increase as you age is level them out.... you pay more when you are young and the difference effectively funds the higher mortality costs later in life.