Bogleheads

[BoglePhillip]

Does anyone have any thoughts about using indexed universal life insurance as an investment vehicle. Is this a good idea to build tax free earnings? A recent book I saw suggests using this instead of paying house off early and even preferred to tax deferred retirement accounts? Any one have any thoughts about this. Thanks

[EmergDoc]

[BoglePhillip]

I thought the same, just wondered if I was missing something in my analysis

[Mel Lindauer]

[BoglePhillip]

Thanks guys for the input. Here is a link to the book advocating this idea.
http://search.barnesandnoble.c....33&z=y

[mephistophles]

This guy partners with financial services providers. These financial service providers sell high cost, high commission Universal Life and similar products. They profit, you pay. They win, you lose.

They are experts at CNA.

Regards,

ole meph

[BoglePhillip]

I read the last section of this book in the bookstore to get the author's point and was a little intrigued. Glad I didn't waste my money on the book. Will steer clear of this one. Thanks

[FinancialPro]

[FinancialPro]

[EmergDoc]

Welcome to the forum financialpro. Being a pro, I'm sure you are well versed in the merits of various financial accounts such as Roth IRAs, 401ks/traditional IRAs and various types of cash value life insurance. In fact, if I didn't know better, I might think you even worked as a commission based life insurance salesman. Why would I think this? Perhaps because the arguments you posted above and in a related post sound extremely similar to the ones put to me by another "financial planner." If not, my sincerest apologies.

Let's take them one by one:

[xerty24]

So I understand that almost all VUL and related policies are sold trying to earn some guy a commission and have piles of fees. Perhaps a better question to ask would be "in what circumstances would a VUL make sense as an investment over other taxable options?"

Let me start off by assuming you already maxed out your 401k/IRA/529 options, and would otherwise be investing taxable dollars. Furthermore, let's assume that your AA calls for more allocation to tax inefficient assets (like TIPS) than you have space for in your IRA accounts. Also, let's assume you're pretty young so that the tax-deferred compounding relative to taxable investing would be substantial.

Is this a case where a VUL or variable annuity policy or something else might make sense? Are there policies that allow self-directed investment options, rather than just a few mutual fund-style choices?

[Valuethinker]

[EmergDoc]

[mephistophles]

You have correctly, and fluently, exposed FinancialPro as a fraud. And that is putting his status nicely.

FinancialPro says Universal Life insurance has no investment risk. This statement alone proves that he is full of .....(excuse my English.)


You know Doc, the really sad thing is, that there are always sheep out there waiting to be shorn, there are always those prepared to buy the Brooklyn Bridge. And there are always the unethical sociopaths who prey on them.

Regards,

ole meph

[Valuethinker]

[SpringMan]

EmergDoc your response was eloquent and right on. Like you said, a inexpensive annuity to hold inefficient asset classes like REITs, might make sense for someone with a long time horizon whom has no room in tax deferred, or tax free accounts. Another case for the insurance industry is that immediate annuities are sometimes beneficial to retirees for part of their nestegg.
Regards,
_________________
Best Wishes,
SpringMan

[Yuba]

Couple of things:

1) EmergDoc, I think that was an excellent post and somehow should be put in the library or sticky'd.

2) I actually had recently read the Missed Fortune Book (the later one) from the library. There seemed to be only 2 things that made any sense in the entire book

- The equity in your home has a zero percent rate of return. The house will appreciate at the same rate whether it is fully paid or fully mortgaged.
- When choosing a pension payout, consider Single Life, then add a life insurance policy to cover the widow shortfall. A Joint-survivor option in effect is a large deductible insurance policy against the loss of the primary spouse.

The problem of the book to me is that the numbers don't add up. He espouses a 33% tax to make some of his numbers work, assuming that the mortgage interest is also deductible on state taxes (don't know of any states that allow that), so that you get teh full 33% deduction when figuring after tax cost of mortgage (author overstates the benefit).

Even understanding that the house appreciates separate from the mortgage amount, you still need to have a better after-tax investment vehicle for the money. I do not believe that VUL (even indexed) fits the bill. The authors examples of returns from the VUL don't match reality. He states that you get the full return if above the guarantee with a cap. I've never seen one setup that way that doesn't subtract the costs from the return below the cap and above the guarantee. (but I'm just a noob).

So after reading the book, the only thing I might change is to look at the cost of a life insurance policy on me at the time of my retirement to determine if the single life pension payout would provide a better NPV, than a joint with 50% survivor (my only two options for my pension).

Rick dba Yuba

[winterescape]

[Jack]

I think Valuethinker is spot on when he points out that tax avoidance becomes the tail that wags the dog for people who fall prey to these types of investments.

The usual argument is that this is a tax shelter for high income people who have maxed out their tax advantaged accounts (although as we have seen above that doesn't stop them from trying to sell to others as well). But consider that there is a 5% tax on each month's payment in the form of a commission to the salesman. In addition there is a 2% to 3% annual tax on holdings in the form of high expense ratios. Finally, there is the ordinary income tax rate of up to 35% at withdrawal instead of the 15% rate for capital gains. When you add these up the advantage of tax deferral is overwhelmed by the high expenses.

Some people let their hatred of the IRS blind them to the fact their investment strategy ultimately pays out less.

[Random Musings]

Found this gem in a book called Missed Fortunes 123abc:

[Mel Lindauer]

Great post debunking the insurance salesman, EmergDoc!

Folks need to remember that insurance is insurance and investments are investments and the two shouldn't be confused.

Regards,

Mel

[BoglePhillip]

Thanks EmergDoc et al. I will stick with the basics of appropriate asset allocation, low cost index funds & re-balancing in my ROTH and 401-k. Not trading in my term life for any indexed universal life. You guys are great and again, thanks for saving me the time chasing the indexed universal life rabbit only to discover outrageous fees and all the other negatives noted.

[Valuethinker]