IUL

[exoduskamman]

My friend asked about this indexed life insurance policy that he is being pitched. I’m very against the policy because he can do so much better investing in VOO and buying term in the mean time. He has about $5m in assets and owns a business producing $400k in profit per year. (All inherited but stil appreciates the value) His proposed policy offers a 9.5% cap on returns and a $1.3m death benefit initially. He will be paying $50k a year for ten years. I advised him that the plan is a rip off. There is inflation risk due to government deficit spending and the 1.1% management fee is egregious. I’m writing this post to see what is the counter argument? Why would anyone buy this? The policy decreases volatility. I see no other benefit. I’m sincerely asking, I don’t care to argue, what is the benefit of IUL? I see guaranteed, median projection and optimal projections denoting certain gains that I find underwhelming. Asking for a friend.

 

[joshdolern]

@exoduskamman If we’re looking at it as an investment then we’re looking at the wrong thing. Life policies are meant to remove financial stress / a legacy behind for your family. Permanent insurance also provides value to people who are making TONS of money.

There’s a reason 80% of Fortune 500 CEO’s own a permanent life policy. For various reasons, but one is NOT having to pay taxes on the growth of their money and their incomes being high.

at the end of the day, it is a life policy, the money growing and accumulating whether it’s touched or not is an extra.

Term is also good, just won’t last your whole life and if it’s converted the premiums can be EXTREMELY higher at that point cause the client will be older

 

[exoduskamman]

@joshdolern I can see how it makes sense for high net worth people. My friend is likely on the edge of that. My perspective is that the goal is to pass down X million dollars to surviving family members. I’ll guess that number is $10 million. He can buy term for 40 years for $5m for $500 a month. He can do the same payment scheme as the IUL, assuming a 10% return which include dividends, and still end up much better. My theoretical math says plan offers $2.7m and VOO has $12.7m assuming such returns. (Not unlikely with how the government interest payment will be forced to I flare the currency and national debt away). Even if you held inflation consistently low, taking a 1.1% annual fee out would be much greater than, hypothetical future tax scheme and on how democrats hate capital gains despite the majority being attributed to inflation, it just doesn’t seem like the tax savings will be greater than fees minus the opportunity costs. If the fees were .1% or lower than I’d be for the policy.

 

[joshdolern]

@exoduskamman Correct, but I mean it’s just like I had mentioned, if we’re looking at it like an investment, we’re looking at this wrong. If he’s wanting to maximize what he leaves behind and wants something that’ll last his whole life, wether it’s 20 years or 60, AND has the option for growth (cash value) while doing so, then it’s not a bad idea. Not to mention the 0% floor IULs offer, you can have investments outside of a life policy but some people don’t have the discipline or the time to look out for investments or want to risk big losses.

Removing the thought of looking at it like investment and looking at as a life policy makes the whole process easier

 

[exoduskamman]

@joshdolern Thank you; I really appreciate your input and I agree that this plan is tailored for a particular client

 

[javelinda]

@exoduskamman I agree with you IULs are not great savings vehicles but there is a very niche role for them non the less IF you know exactly what you're doing and it's structured properly. The goal of an IUL is not to beat the market. It's to provide tax free income in retirement. If you overfund the policy which has tons of opportunity costs and you should only do this if Evey other tax advantaged account available to you is already funded but the money you accumulate in an IUL is tax free to you once you start taking distributions in retirement. You can also use it for executive compensation plans or split dollar plans for that very same reason. But in general for most people it's a bad Idea

 

[exoduskamman]

@javelinda Thanks. I emphasized to take advantage of every tax advantages account (401k, 529, HSA, Back Door Roth). At 400k, he probably can’t fill every account and maintain a relatively high standard of living. Thanks for the feedback.

 

[ltcajh]

@exoduskamman What?

He should easily be able to save $100k+ per year and maintain a VERY high standard of living.

 

[exoduskamman]

@ltcajh Idk, spending money is fun no matter your income level.

 

[ltcajh]

@exoduskamman My wife and I clear $500k and itS EASY to save $200k and do whatever the hell we want.

This guy has a massive spending problem if he can’t come up with the $35k to max out tax advantaged accounts.

I have no sympathy for these people

 

[javelinda]

@exoduskamman What state does he live in?

 

[exoduskamman]

@javelinda TN; a no income tax state.

 

[javelinda]

@exoduskamman Nice! So he’ll be perfectly fine just tell him to get an indexed annuity it’s much better and it grows tax deferred he won’t lose any money he won’t need to borrow his money and he’s not exposed to the market far superior to IUL only thing is he has to be old enough to

 

[dinkold]

@exoduskamman A counter argument: Let's assume he has a number of employees in his business so he is limited in retirement choices. A 401k works, but costs him fee costs for his employees yet he is the highly compensated one so is severely limited in what he can contribute. Any other DB or DC plan is a high cost due to employees. Depending on the type of business entity he may end up being an owner rather than an employee and can't particpate in any retirement plan he does implement. He is profiting over $400k/year so is in a very high incremental tax bracket. So taxable returns either fixed or variable are reduced greatly by taxation. Assuming his $50k X ten years overfunds the IUL up to the MEC limit he will earn a cash on cash return within 1 or 2% of the actual in policy return and be able to access those returns without tax consequences. And let's assume he also needs or at least values the $1.25 mm of life insurance coverage he gets for little cost with this policy. Certainly less than the net cost of 30 year level term for that size policy. On balance this policy will likely equal his net after tax return from a taxable investment plus it gets him the insurance he wants/needs without additional cost.

 

[exoduskamman]

@dinkold Thank you for your time and valuable input. I wanted to see in I had any blind spots in my advice and this may show the true benefit of IUL.

 

[dinkold]

@exoduskamman I was not active in the insurance as a pension market but did occasionally see an opportunity with a client. That client situation was typically a high earner (over $250,000/year taxable income) without access to tax deferred retirement accounts or if they had access, they were already maximizing that access. Client had a need for life insurance death benefit for some reason and would have had to pay for that term insurance out of pocket in any case and had an additional minimum of $50,000/year to use to fund the policy for a number of years. I would also do a max non MEC fund quote and only buy the minimum amount of insurance to handle his/her planned deposits. Any additional insurance need over the amount that generated I would handle with level term insurance.

I am long retired and when I worked estate tax started at a much lower level, so I would often typically do a policy for both wife and husband but having the Husband own the Wife's policy and have the Wife own the Husband's policy. And I would fund each equally so that either would be somewhat equal if they decided to divorce. There are a lot of things that need to be considered when working with HNW or UHNW clients. Not every agent understands those considerations.

 

[justadog]

@exoduskamman Ask your friend to get illustrations with policy getting credited an average of 4-5% a year. If he is happy with that, consider it. If he needs a higher return for it to make sense, then pass. Anything higher is overly optimistic.

 

[connecterz]

@exoduskamman 401k is a lost cause I know of something with guaranteed gains you won't loose a single penny also no cap on gains. If you want a life policy instead how would you like every possible rider free included in your policy. If you really care about your friend i have what they are looking for they just need to listen you can join as well if you guys don't like what I'm offering which I highly doubt but we can do it over zoom to make it more comfortable there is zero risk in listening. You can even listen first before telling your friend because to me you care and are protecting them.