Retirement Income from Life Insurance

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Retirement Income from Life Insurance

Postby mk2013 » Wed Jun 19, 2013 7:28 pm

Hi all,

I have been analyzing using a permanent variable life insurance product as opposed to buying term and investing the difference. The need decreases over time, so I have used Prudential's 20 year term product to be able to decrease the death benefit. I then have used TC Life's best variable product as a comparison to see which strategy can provide for the highest amount of income. Funding for 18 years at $100K/yr and then income for 20 years thereafter, assuming a 7.00% gross rate of return for both the life insurance and brokerage account, which I feel is reasonable. The VUL provides for $4.46M of income over the 20 years while the buy term and invest the difference provides for $4.02M. I also included ordinary income and capital gains taxes and split each years gain/growth on the investment 70% CG and 30% OI. I also assumed that $0 capital gains tax will be paid until income is taken out.

Any comments, questions, critiques on my analysis would be appreciated.
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Re: Retirement Income from Life Insurance

Postby livesoft » Wed Jun 19, 2013 7:30 pm

The life insurance account will not return 7.00%. There was a post here where someone actually got less than 0.5% return on life insurance where the guaranteed rate was much, much higher. Can you find it?

The life insurance should probably pay about 6% less than the brokerage account no matter what the brokerage account pays. How does the math work out in that case?
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Retirement Income from Life Insurance

Postby mk2013 » Wed Jun 19, 2013 7:43 pm

Clearly, if the LI product returned 1%, then the brokerage account would be much greater. And I do remember that post, although I believe that post was referring to a whole life policy which more than likely had higher costs of insurance, was all base (higher commissions), and was not structured properly for cash accumulation and income. The product that I am referring to is variable, investing in the same types of mutual funds that the brokerage account is, and is blended to lower agent commissions to increase the return.
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Re: Retirement Income from Life Insurance

Postby fishndoc » Wed Jun 19, 2013 8:13 pm

Well, there are two options here:

1. Invest directly in a low cost, broadly diversified portfolio of bonds and equities (also buying low-cost term insurance to cover your obligations until you have saved enough), and receive ALL the returns from your investments, OR

2. Give your money to the insurance company, who will first deduct profit to the company stock holders, large commissions for the sales weasles (I mean agents :wink: ), administrative costs, advertising, and over-priced life insurance, (repeating these deduction every year) and then invest what is left of your money in a broadly diversified portfolio of bonds and equities, giving what little return is left over to you.

Which do you think will give the investor the most money to spend?

Unless Insurance companies can find a way to print money, the answer is pretty simple.
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Re: Retirement Income from Life Insurance

Postby dhodson » Wed Jun 19, 2013 9:13 pm

As ive mentioned, there isn't a way to overcome the excessive costs both of insurance and the investments to make this a smart move as an investment. Normally agents compare it to straw people by pretending they know the tax laws in the future will benefit insurance, that the costs of investing in a tax efficient index fund needs to have excessive costs like AUM fees, that they should be comparing it to tax inefficient investments, they use unrealistic expectations on when someone will die compared to how they are rated by the insurance company so as to reduce the real costs of insurance/loans or they fail to consider how negative years affect performance but instead assume a straight trajectory on the investments within the VUL and this NEVER happens.

You didn't actually provide a spreadsheet and illustration. You didn't list any of the costs for this product (which are much greater and will make the 7% unrealistic). Might also want to see how bad people get hurt in retirement when the "investment" side has some negative years. Adds TONS of risk to a situation. It isn't realistic for someone in the best of health in order to qualify for the best rate to fund did you say for 18 years (so if they were retiring at age 60 purchasing at 42) and then not think about what happens after they heat 80 (which is the avg lifespan and those who qualified for best rate are very likely to live longer than that). Let me guess, you also taxed all the money from the non insurance account at the marginal tax rate which is inappropriate.
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Re: Retirement Income from Life Insurance

Postby abuss368 » Wed Jun 19, 2013 9:34 pm

I am not an expert here but I would be surprised if it is 7% in these low rate times. Most articles I read are noting the pensions and life insurance entities are really getting squeezed.

How can it come out ahead when the fees are typically much higher? Did the assumption model account for the difference?
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Re: Retirement Income from Life Insurance

Postby mk2013 » Thu Jun 20, 2013 4:30 pm

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.

Dhodson, I completely agree that negative return years, especially during the income taking years, will severely affect the life insurance product. However, they will affect the brokerage account as well. Also, I agree that someone needs to think about what will happen if they live past life expectancy. But isn't that the point of taking out the income stream and using some of this cash flow to fund one's lifestyle or save for even further down the road.

BTW, I'm rather new here, so if anyone could let me know of how to upload a spreadsheet or illustration for review, it would be appreciated.
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Re: Retirement Income from Life Insurance

Postby fishndoc » Thu Jun 20, 2013 5:59 pm

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.

Could you explain the "tax-free nature of life insurance" (investing)? In specific terms, not vague generalities?
And not the tax-free death benefit - that is the same with the buy-term-and-invest-the-rest approach.
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Re: Retirement Income from Life Insurance

Postby mk2013 » Thu Jun 20, 2013 6:29 pm

What I am referring to is the tax-free nature of an income stream that can be provided by a life insurance product. As long as the policy is not a MEC (Modified Endowment Contract), then the withdrawals from the policy are taxed on a FIFO basis, meaning withdrawals are simply a return of basis (premiums) first and then taxed. However, many of these variable policies have wash loan provisions. This means that once all basis has been returned, the policyholder will take out loans (as opposed to taxable withdrawals) to supplement their cash flow. These loans often have interest rates in the 4% - 9% range, however they will credit the policy a specific percentage back. Sometimes this can be a total wash (8% interest charged with 8% credit back) or there will be a minimal interest rate charge (8% interest charged with 7.5% credit back). Either way, the income taken from the policy is tax free to the policy holder.
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Re: Retirement Income from Life Insurance

Postby fishndoc » Thu Jun 20, 2013 10:13 pm

Either way, the income taken from the policy is tax free to the policy holder.

Gee, maybe you could help this young man with his tax problems from all this "Tax free income":
http://www.bogleheads.org/forum/viewtopic.php?f=2&t=116341#p1694390

Again, you are using generalities, trying to ignore what Mr Bogle calls the relentless rules of arithmetic: you can't magically produce more income when you are deducting several percent a year in expenses; money out = money invested + investment return, minus expenses.

Insurance companies have no secret investments not available to individual investors, it's the same bonds (mainly) and equities that we all have access to. Unless they can print money, the return has to be lower.
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Re: Retirement Income from Life Insurance

Postby dhodson » Thu Jun 20, 2013 10:31 pm

fish that guy has whole life but the problem is still the same which is its unrealistic to withdrawl money from insurance without severe consequences in the manner presented here. With the VUL you aren't investing typically in their general fund. You are using over priced cost of insurance (its much more expensive then even ART) and every single investment that might produce higher returns has extreme costs which all bogleheads knows is a real problem and why they favor vanguard.

look you are very unrealistic with your assumptions. just as a start.

1. You assumed the same return in both the taxable and the VUL. There isn't a single VUL out there that has the same fees for investing. Most have outrageously high expenses for a "similar" investment from vanguard per say. This right there kills it and makes everything you say untrue but isn't the only reason.
2. It isn't the same problem by having negative years in retirement for both the taxable and the VUL. It is about 40% worse in the VUL since all of the gains would be immediately taxed as income when the policy crashes and you have set this up to crash with unrealistic expectations on returns, unrealistic time of death, and unrealistic costs of loans. 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. Almost nobody in their right mind would set a person up with insurance costs like this since they aren't guaranteed and in the majority of cases going to persist a lot longer and have much higher tolls than you indicate. Im not talking about living past a realistic life expectancy. You have unrealistically timed death too soon. If they qualify for the best rates then assuming anything less than age 90 isn't appropriate and even that number is on the low side.
3. You didn't say enough about how you taxed the taxable but I bet you taxed all the income at the marginal rate and probably a high one at that. That isn't appropriate. A good portion wouldn't be taxed when you consider standard deductions.
4. What are the stipulations on investing when you try to get a wash loan and is it truly a wash most of the time? The answer is no by the way.

You have made so many "mistakes" with your assumptions that im not sure why you think people should take you seriously. Might want to ask the mods about uploading.
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Re: Retirement Income from Life Insurance

Postby Frugal Al » Fri Jun 21, 2013 8:47 am

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.

You never know. DH, I know you read James Hunt's insurance articles. Although it's a bit off topic, I really like this story he uses to make a point. I would imagine this lawyer was quite proud of the deal he'd made:

In 1965, Jeanne Calment, age 90 with no living heirs, sold her Paris condominium to a French lawyer, age
47, reserving the right to the apartment as long as she lived. The lawyer made monthly payments to her in
a kind of reverse mortgage. More than thirty years later, about one year after the lawyer had died at age
77, Jeanne Calment died at age 122. The value of the apartment was worth about ten years of payments at
the time of the transaction; the lawyer’s widow had to continue payments after his death. Jeanne Calment
is the only undisputed person to have lived at least 120 years.

http://www.consumerfed.org/elements/www ... ackage.pdf
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Re: Retirement Income from Life Insurance

Postby HomerJ » Fri Jun 21, 2013 10:29 am

mk2013 wrote:assuming a 7.00% gross rate of return for both the life insurance and brokerage account, which I feel is reasonable.


It's real simple... VULs will not return as much as the market because fees are much higher.

I pay 0.05% per year for Total Stock Market Index Fund... $100,000 invested costs me $50 dollars a year... FIFTY dollars. Compared to $2000 (2%) in fees from the life insurance company.

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.

Taxes are not an issue... TSM is very tax-efficient. Dividends of 2% taxed at 15% means $100,000 costs you only $300 a year... So it's still $350 in costs a year compared to $2000 for the insurance company.

You absolutely will have more money buying term and investing the difference... Insurance is not a good investment.
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Re: Retirement Income from Life Insurance

Postby Bobbybell » Fri Jun 21, 2013 10:41 am

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.
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Re: Retirement Income from Life Insurance

Postby HomerJ » Fri Jun 21, 2013 11:32 am

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.


Ah, yes thank you for the correction... It's the EIULs that have those weird caps to benefit the insurance company.

So easy to get confused when dealing with insurance products. I wonder if that's for the consumer's benefit? Or the insurance company?
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Re: Retirement Income from Life Insurance

Postby HomerJ » Fri Jun 21, 2013 12:08 pm

http://money.cnn.com/2007/02/05/pf/expe ... .moneymag/

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.


There is no way the VUL has more cash value than investing in a low-cost index fund... Those fees eat up all the returns.. I'm guessing mk2013's spreadsheet is assuming 1.5% mutual fund fees on top of 1% financial advisor management fees for the brokerage account... People on this board don't need a financial advisor and we pay 0.05% - 0.20% for Vanguard Index funds.
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Re: Retirement Income from Life Insurance

Postby mk2013 » Fri Jun 21, 2013 6:13 pm

1. You assumed the same return in both the taxable and the VUL. There isn't a single VUL out there that has the same fees for investing. Most have outrageously high expenses for a "similar" investment from vanguard per say. This right there kills it and makes everything you say untrue but isn't the only reason.
Yes, I did assume the same returns for each scenario. Either way, the funds are going to be invested in the market. The sub-account expenses on this product are .55% so yes they are higher than a Vanguard index fund, but not the 2% that has been shown. Also, there is no way around getting out of COI charges if you purchase life insurance. But, by making sure the face amount is the minimum amount necessary (not being over insured) and blending the product with a term rider, you can limit these COIs.
2. It isn't the same problem by having negative years in retirement for both the taxable and the VUL. It is about 40% worse in the VUL since all of the gains would be immediately taxed as income when the policy crashes and you have set this up to crash with unrealistic expectations on returns, unrealistic time of death, and unrealistic costs of loans. 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. Almost nobody in their right mind would set a person up with insurance costs like this since they aren't guaranteed and in the majority of cases going to persist a lot longer and have much higher tolls than you indicate. Im not talking about living past a realistic life expectancy. You have unrealistically timed death too soon. If they qualify for the best rates then assuming anything less than age 90 isn't appropriate and even that number is on the low side.
This policy lasts through life expectancy all the way to 121, so death is not timed too soon. There is no reason to buy a product that is guaranteed considering all the guarantee does is guarantee the COI charges. COIs have continually dropped over time and will continue to do so. So why guarantee a charge if it can become cheaper?
3. You didn't say enough about how you taxed the taxable but I bet you taxed all the income at the marginal rate and probably a high one at that. That isn't appropriate. A good portion wouldn't be taxed when you consider standard deductions.
I taxed OI at 30% and CG at 15%. I feel this is reasonable as an effective rate, although depending on the situation I can see going lower or higher depending on the person's own income tax situation.
4. What are the stipulations on investing when you try to get a wash loan and is it truly a wash most of the time? The answer is no by the way.
Clearly a wash loan will have no effect on investing; although I would rather have a wash loan as opposed to being charged interest
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Re: Retirement Income from Life Insurance

Postby dhodson » Sat Jun 22, 2013 8:25 am

1. You didn't list all the fees for investing in this product did you? The sub account fee isnt the only fee and I bet you cherry picked one investment from the list. There are typically other quarterly admin or other fees that you havent accounted for. Is the prospectus for this product on line so you can link it? Even still why didn't you consider this in your study? Well because it makes your product perform worse even though you know its a real problem.
2. You cant remove all of the cash from the policy and then have it go one more year longer than that. You haven't shown how you are paying for the COI after removing the pretend more cash available. You also didn't account for costs of loans. Again you know these exist but purposefully avoid them. I think its interesting that you want people to believe its for certain COI will go down. Why is it then that insurance companies charge so much more for the guaranteed rider? Is it that they don't think you are right or are they just hoping people place their money on a suckers bet? If its for certain that COI will go down then shouldn't the rider be almost free? But it isn't is it.
3. You purposefully made up the 30% for OI to make your situation look better. It definitely is too high especially in retirement. You didn't use any real data to come up with that number but picked a number that was fairly high in order to make insurance look good. What percentage of even the relatively wealthy are paying that number let alone the general population in retirement?
4. The loans aren't frequently guaranteed to be a true wash.

If you want to keep making wrong assumptions that favor insurance then surprise surprise you will come up with a conclusion that insurance is better.
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Re: Retirement Income from Life Insurance

Postby TomatoTomahto » Sat Jun 22, 2013 9:33 am

We should have a forum policy ( :twisted: ) about shills who post without any intention of asking a question that actually wants answering, putting forth a disinterested view, etc. In the long run, it is like tobacco commercials -- you can put all the disclaimers in the world in the commercial, but for some vulnerable people, it will increase their likelihood of smoking. Which is why those commercials were eventually banned. And which is why these "debates" don't do anything good for the majority of readers, in spite of the light that is being shed on insurance products.
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Re: Retirement Income from Life Insurance

Postby MN Finance » Sat Jun 22, 2013 9:34 am

Clearly you're a producer, so you should talk to your internal wholesaler about your assumptions. No rational investor with a neutral opinion coming to the table would ever choose life insurance as a retirement savings vehicle unless sold the product. Why do producers come here to "ask" questions like this.
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Re: Retirement Income from Life Insurance

Postby Dandy » Mon Jun 24, 2013 9:47 am

Other than term life insurance or a no frills immediate annuity I would avoid products offered by life/annuity insurers. As pointed out they must charge large fees to compensate sales people, don't have access to different investments than most individuals or certainly mutual funds, have to build in margins of error because their contracts are usually long term and they can't cancel them if things go against their assumptions. All this requires contracts that are very difficult to understand and are often filled with clauses that allow the company to mitigate exposure e.g. backend charges, ability to increase fees, restricting investment choices to their in house funds (which they can change and/or change the expense ratio), etc.

In order to sell these complex products they need to offer bells and whistles that make them sound good. terms like guaranteed income, stock indexed etc. The complexity makes it expensive to administer, market and support. Imagine the time it takes to train an agency force on these products and how often an agent spends time and the product is so complex they don't make a sale.
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Re: Retirement Income from Life Insurance

Postby mk2013 » Tue Jun 25, 2013 7:09 pm

I apologize to all who think that I am simply posting because they think I am a producer and are here just to talk up insurance and not "ask" any real questions. My intent was simple, to prove or disprove that life insurance could be used as a retirement income producing asset, as opposed to simply dismissing it and only buying term insurance. While in college and at my previous job, I agreed with many of you that life insurance was too complicated and too expensive for it to be used for any real purpose, besides term. I often only encountered the 100% base whole life products or NLG products that were loaded with tremendous fees and served no real purpose. 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. I was just trying to share it with you all and see what the responses were and if LI could defend itself against a variety of responses.

Anyways,

I realize that I did not list out all fees, however the subaccount fees are the only ones concerning the investments. My point was that if you are purchasing a life insurance product, you have to know that there will be more fees that just the subaccount fee. All of these other fees are accounted for in the illustration that I used to compare the taxable account to the LI product. I chose the weighted average approach for the subaccounts, using a gross 7% rate, as opposed to specifying funds. The loans are accounted for in the illustration. Additionally, I didn't make myself clear, but the policy was solving for a specific amount of cash at A100. So even though there was an income stream, the policy will continue on in order to reach A100, based on all of the assumptions used in the illustration. I chose 30% for OI due the fact that where I work deals with primarily the wealthy/business owners, who are either making a rather large salary or have a large retirement plan, therefore placing them in a high marginal tax bracket and increasing the effective rate. Obviously, that would have to be changed for each situation.

Insurance companies charge so much because then they will be on the hook for the death benefit and have a much higher net amount at risk. They know that many people end up discontinuing their LI policies for a variety of reasons, so why would they automatically guarantee the death benefit without having a fee? Besides, people live longer now than they did 30 years ago, and that trend will continue into the future. That's why I'm saying that COI's will continue to decrease. Clearly, carrier strength will have something to do with this, as financially stronger carriers can afford to decrease COI charges.
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Re: Retirement Income from Life Insurance

Postby dhodson » Tue Jun 25, 2013 7:41 pm

I love how you keep pretending things that just aren't even remotely likely to happen are okay to assume as normal and how you keep changing or adding information.

Lets be clear....Your illustration is completely bogus and you never actually provided it or a link to the prospectus. There is ZERO chance the policy will behave anything like that. Down years in the retirement phase will completely crush this. You know it but your pretend it doesn't matter and we both know it is going to happen. You think that this is an okay assumption bc in a taxable account there would be down years. Complete rubbish since in your example, one has to keep the policy in force in addition to supplying income. You don't have to keep a policy in force in your taxable account.

You keep trying the same garbage where you cherry pick numbers on purpose in order to pretend an insurance advantage. There isn't any good reason to pick the numbers you keep picking except that it pretends to make insurance look good. People discontinue their insurance polices for a variety of reasons may be true but the main reasons are probably that they always turn out to be horrible investments as opposed to what they were lead to believe. I think its funny that you think you know that people will live longer in the future. If they do then the chances of this failing just increases since insurance companies aren't known for making it easy to keep a policy in force. Less than 20% currently do and if that were to change then the costs go up for the insurance company and those holding the polices. gUL for someone of the age you are talking about still has huge lapse rates as well (likely no different then other permanent products).

I don't believe that you came here to prove or disprove something. You wouldn't have been playing this game of improper assumptions if you even remotely wanted to honestly discuss the issue. You wouldn't have attempted to hide or fail to disclose your poor assumptions but make people fish them out. Im sure there are other poor assumptions that haven't even been discussed. I seriously doubt anyone who reads this thread will believe you have valid evidence but you go ahead and keep believing you discovered real evidence that isn't published by any independent group.
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Re: Retirement Income from Life Insurance

Postby mk2013 » Tue Jun 25, 2013 8:14 pm

I dont have a link to the prospectus, but here is a link to the product that it is based on: http://www1.tiaa-cref.org/public/prospe ... policy.pdf
The product that I was looking at was M Financial's version of this product. Need a log in to access it.

I agree with you that a down year, say 2008, will severely damper this product and projected income stream. And yes a LI product would suffer worse since there are fees that are being taken out of the policy regardless of how the market performs. I feel though that either way, you would be suffering. Losing 40% of your taxable account or 43% (due to COI charges) of your life insurance cash value will hurt one's retirement.

What numbers am I cherry-picking? I tried to make the assumptions as close as possible to illustrate these two scenarios. If you have a better way of trying to show these two scenarios, let me know. I have tried to disclose my assumptions as much as possible and if anyone has any other questions regarding my assumptions, please let me know and i will provide them. If I could show my spreadsheet, I would. I apologize that I do not know how to do that.
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Re: Retirement Income from Life Insurance

Postby dhodson » Tue Jun 25, 2013 9:46 pm

I love how you NOW want to say its based on a company that I said had the cheapest/most vanguard product out there but still wasn't worth purchasing. It isn't based on their product, you just want me to believe that. Let me guess you think its even better?

Why is it that people as they near retirement need to reduce their percentage in equities? Well bc its foolish not to since those down years in retirement will increase your risk of running out of money. It isn't JUST the 43% vs 40%....ITS THE FACT THAT THE PROBABILITY OF THE POLICY HAVING ZERO CSV BEFORE DEATH IS OUTRAGEOUSLY HIGH in your example. You just don't want to face the truth. It wont work with any respectable reliability in any monte carlo based scenario where real world events are included. It wont work reliably when you factor in possible sequence of returns. It wont work unless you put in an unrealistic expectation of a constant positive return with the hope of a wash or near wash loan. Why did you pick 7%. You picked it bc you looked at the numbers and said hey if they ignore real world and also assume 7% then I can try to float this. Why didn't you show what would happen at 6% even with your unrealistic ideas of a constant return well bc that wont continue to float the COI. Sure the taxable would also have less money but it isn't about just having less money, its about the unrealistic ability to keep the policy in force. Why did you average out the costs for the subaccounts well bc those with likely lower returns happen to have lower costs and this then lowers your assumed costs within the VUL. Why not look at a very tax efficient appropriate fund such as the vanguard total stock and compare it to the closest with the VUL. id do so more research on actual effective tax rates instead of just using your cherry picked numbers. You didnt provide any evidence they were accurate for any significant portion of the population. Additionally the costs for investments aren't guaranteed within the policy. There are already insurance companies forcing people to change their variable accounts with VAs in order to maintain riders. It isn't a stretch at all for them to increase costs for investments. Once the policy is purchased, you cant get out unlike a taxable index fund where you can change providers if desired. Why didn't you consider tax loss harvesting? Maybe you should try to hook up with someone who can run real monte carlo like scenarios and you will see that this is a risky situation.
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Re: Retirement Income from Life Insurance

Postby Frugal Al » Wed Jun 26, 2013 8:14 am

DH, all good points. Additionally, the policy loans can only be collateralized by the fixed investment portion of the VUL policy--this will also impact the overall return. This really is a bad idea that would be only marginal in the very best of circumstances and assumptions, i.e, highly doubtful. mk2013, you've done nothing except promote "investing" in insurance products since you've arrived on this board. Are you sure you're on the right board? Do not commingle insurance and investing. With insurance, any investment return should be incidental to the insurance need, not the raison d'être.
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Re: Retirement Income from Life Insurance

Postby TomatoTomahto » Wed Jun 26, 2013 9:04 am

I'm guilty of this also, but it seems to me that shills benefit from being taken at face value and debating with them. Their threads keep getting bumped up. If we don't feed the shill, he will go away.
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Re: Retirement Income from Life Insurance

Postby dhodson » Wed Jun 26, 2013 9:13 am

my concerns is that if we dont provide the proper response to the false claims that people who search will wrongly believe that bogleheads find this an appropriate plan. no doubt im also guilty of feeding.
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Re: Retirement Income from Life Insurance

Postby TomatoTomahto » Wed Jun 26, 2013 10:02 am

DH, I land on both sides of the issue of how to deal with it. On the one hand, misrepresentation gone unchallenged stands, well, unchallenged. On the other hand, a careless reader might think, "well, this subject must still be open to debate, because they've discussed the intricacies for many posts and it keeps coming up as recent."

I think I know why you're involved: you hate to see misrepresentations sit there without disagreeing; 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.
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Re: Retirement Income from Life Insurance

Postby Brian2d » Wed Jun 26, 2013 10:02 am

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.
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Re: Retirement Income from Life Insurance

Postby HomerJ » Wed Jun 26, 2013 10:46 am

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.


And recognize that a protection provision won't be free. That will be yet another fee on top of the other 16 fees.
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Re: Retirement Income from Life Insurance

Postby Frugal Al » Wed Jun 26, 2013 11:11 am

And there's this timely article about policies that over promise and under deliver, requiring extraordinary action to keep the policies from crashing. There is a reason the author uses the word "consistent" in the third paragraph. Sequence of returns can be much more damaging to these policies than a conventional investment portfolio, more so if loans are involved. The fact that the author is talking about VULs that promise 12% instead of 7% is of little consequence if the value has been borrowed out and returns can't cover the cost of insurance. http://www.forbes.com/sites/ashleaebeli ... -a-rescue/
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Re: Retirement Income from Life Insurance

Postby Frugal Al » Wed Jun 26, 2013 11:29 am

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.

Bad ideas need to be killed, not just maimed or injured. As for engineers, if they don't kill a bad idea, it might be people that get killed. In many ways having someone kill their retirement can be just as bad.

The information that many of us take for granted here is offset by endless sales pitches and commercials that constantly bombard the casual visitor seeking guidance. I don't think it hurts to drive a point home. OK, I'm done now. :D
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Re: Retirement Income from Life Insurance

Postby leto » Wed Jun 26, 2013 1:57 pm

I really enjoy reading all the shill life insurance post. They are always entertaining fiction during my lunch break.
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Re: Retirement Income from Life Insurance

Postby TomatoTomahto » Thu Jun 27, 2013 11:02 am

leto wrote:I really enjoy reading all the shill life insurance post. They are always entertaining fiction during my lunch break.


Man, we have to get you a fun crowd to hang out with at lunch :D :sharebeer
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Re: Retirement Income from Life Insurance

Postby cheese_breath » Thu Jun 27, 2013 11:14 am

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.
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Re: Retirement Income from Life Insurance

Postby MN Finance » Thu Jun 27, 2013 11:36 am

Back to the original issue: with a low cost product stripped entirely of commissions it's not crazy that a VUL could be used. However it's like walking around with a loaded gun. You are forced to pay on the policy forever. And if the policy fails you just realized a taxable event for all the money used as tax free income. There was just another post that came up where mom and dad used a policy to fund kids education. Now kids are wondering what to do with the policy that still has some CV. If they cash it out, all the income used for education becomes taxable (and the whole purpose just defeated). That's a very common story. There's no guarantee (in most policies) that the interest rate will forever (forever) outpace the loan rate. Lots of policies failed in 2008 b/c the expected returns were no longer sufficient to pay the insurance costs - so you either let the policy lapse or increase premiums - both bad outcomes. There are lots of more traditional ways to fund retirement income than making it messy just to avoid taxes on the investment gains. High risk, low return strategy (so to speak)
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Re: Retirement Income from Life Insurance

Postby TomatoTomahto » Thu Jun 27, 2013 4:39 pm

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.


Walks like a duck, looks like a duck, quacks like a duck...

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.


Works for a duck company ...

Cheese_breath, if I'm ever in court, I hope you're on the jury :D
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Re: Retirement Income from Life Insurance

Postby cheese_breath » Thu Jun 27, 2013 6:00 pm

TomatoTomahto wrote:Cheese_breath, if I'm ever in court, I hope you're on the jury :D

Last time I was on a jury we found her guilty. :P
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Re: Retirement Income from Life Insurance

Postby EmergDoc » Thu Jun 27, 2013 7:36 pm

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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Re: Retirement Income from Life Insurance

Postby dhodson » Thu Jun 27, 2013 8:15 pm

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.


unfortunately that person likes to pretend things which just aren't true such as "eliminating costs" and then when confronted with the truth refuses to admit he was wrong. I doubt ill have any faith in anything that person says at this point and the person likely also isn't honest on how often he recommends a VUL. Its been over a month without "his response".
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Re: Retirement Income from Life Insurance

Postby mk2013 » Fri Jun 28, 2013 5:14 pm

The product that I was looking at is based on that product, however it is M Financial's version of the product. M Financial has a relationship with several carriers (JH, Pac, Pru, NW, TC Life) and all of these carriers offer products that are only available to M firms.

In addition, the 7% that I used was a gross rate, meaning before fees, etc. I simply used the weighted average method for the illustration, so I did not cherry pick any investments with lower fees. Obviously, there was a need for life insurance in this case as well as a need for income in retirement. Which is why I was comparing buying term and investing the difference to simply a VUL product. All I was wanting to know is trying to determine which method would be better in this situation, but clearly there are too many variables to dispute and discuss to make a fair and reasonable comparison.
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Re: Retirement Income from Life Insurance

Postby dhodson » Fri Jun 28, 2013 9:05 pm

as ive already mentioned, there isn't any independent site/group recommending the VUL for retirement income. There are tons of people out there with more sophisticated (and real instead of bogus) modeling methods. If it could be shown that VULs were superior, don't you think those powerful insurance companies would provide you with this data? Instead you chose to believe that you have worked out the data regardless of how many flaws have been pointed out. That isn't fair or reasonable at all. Im sure you are going to keep on believing and telling people to use VULs for retirement income.
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