Fishndoc, what am I trying to show (or determine) is if the tax-free nature of life insurance performs outweighs the fees that are being charged on it, compared to a taxable investment account with management fees also on that.
Either way, the income taken from the policy is tax free to the policy holder.
dhodson wrote:Why do you think most agents who sell no lapse gUL get very nervous about selling anything less than guaranteed to 100. Some want to go to 121 but I think that's too much.
mk2013 wrote:assuming a 7.00% gross rate of return for both the life insurance and brokerage account, which I feel is reasonable.
Plus, many VULs have weird rules where you don't actually get stock market returns.. They might have a cap of 1.5% a month... so the market may return 15% in a year, but if most of that happened in 3 months (say 3% each month), you won't see the same return in the VUL... Plus VULs don't calculate dividends, just price changes... There's another 2% you'll get investing yourself.
Bobbybell wrote:Plus, many VULs have weird rules where you don't actually get stock market returns.. They might have a cap of 1.5% a month... so the market may return 15% in a year, but if most of that happened in 3 months (say 3% each month), you won't see the same return in the VUL... Plus VULs don't calculate dividends, just price changes... There's another 2% you'll get investing yourself.
You are confusing variable universal life with equity indexed universal life (VUL vs. EIUL). With VUL, there are no weird rules. The money is in a separate account and whatever it earns, it earns. With EIUL, the money is in the general account of the insurance company and interest is paid based upon a formula which will have rules to it.
The pitch for a VUL: Now, I suspect that part of the sales pitch for this VUL policy was the promise of tax-free returns down the road. With a VUL, part of the premium you pay goes to the insurance part of the policy, which pays the benefit, or face amount of the policy, to your beneficiary if you die. But you get to invest the rest of your premium in the policy's "subaccounts," which are essentially the equivalent of mutual funds.
The idea is that these subaccounts build value over time - this is known as the "cash value" portion of the policy - and you eventually tap that cash value when you need it for, say, a house down payment or child's education expenses or even for retirement.
And here's where the real sales hook comes in. Instead of just selling some of your investments and withdrawing money from the policy, you borrow (usually at a very attractive rate) against the policy's cash value. Since loan proceeds aren't taxable, you're effectively gotten a tax-free rate of return. Isn't VUL wonderful?
The pitfalls: Well, it seems that way until you understand the pitfalls. One major downside is that these policies are loaded with fees.
Fees for the insurance protection itself (which, by the way, is usually more expensive than what you would pay for a regular term insurance policy). Fees for marketing and sales commissions. Then there are the investment management fees that can run as high as 2 percent a year. And on top of that there's an annual fee that can run upwards of 0.90 percent that goes by the name of the "M&E," or mortality and expense charge. This is essentially a fee thrown in to assure the insurance company a profit even if all those other fees somehow don't.
As you can imagine, this fee-for-all arrangement can really drag down your returns.
But there's another risk you should be aware of-namely, those tax-free withdrawals can backfire. Once you start borrowing from one of these policies, you've pretty much got to keep it going the rest of your life.
Why? Well, if the policy lapses, all the investment earnings you've withdrawn immediately become taxable. If that happens at an inconvenient time - like when you're retired, have been drawing on the policy for income and may not have lots of extra cash on hand for the IRS - you could have quite a tax headache.
Brian2d wrote:I am not advocating keeping the policy, but if you do, be cognizant of the following:
One thing to be cognizant of is that if the policy lapses while you are alive, you then have to pay back taxes on the loan amount.
Some policies have a protection provision to prevent this from happening. If you choose to hold onto the contract, find out if you have it, and if so, how to be sure it gets invoked when it needs to.
TomatoTomahto wrote: I know people (mostly engineers) who are almost pathologically unable to let a lie/distortion go without response. An interesting question is what OP actually expects to get out of this.
cheese_breath wrote:I don't know if it's fair to call OP a shill. He may just be some poor individual who's been so brainwashed by insurance salesmen's radio 'financial advice' programs that he can't accept any other views.
mk2013 wrote:However, coming over to my current job and be able to learn and understand the different life insurance products, how they work, and how they perform, it changed my viewpoint on them.
mk2013 wrote:, assuming a 7.00% gross rate of return for both the life insurance and brokerage account, which I feel is reasonable.
EmergDoc wrote:mk2013 wrote:, assuming a 7.00% gross rate of return for both the life insurance and brokerage account, which I feel is reasonable.
You have an interesting definition of reasonable. If you mean before all the insurance/investment costs and fees then yea, I guess that's reasonable. I know an advisor working on a comparison like this one, and I can't believe how complicated it has gotten to do a fair comparison. There are dozens and dozens of variables that affect any comparison.
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