My plan to use policy loans to fund first five years of retirement

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delrinson
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My plan to use policy loans to fund first five years of retirement

Post by delrinson » Thu May 11, 2017 11:22 am

Currently in our mid 50's, we tentatively plan on retiring at 65. We do not plan on taking Social Security until 70 nor touching retirement accounts until 70-1/2 when RMDs begin.

Our current plan, from age 65-70, is to fund about half of our retirement income with loans from our life insurance policies. We have had our carrier run illustrations for us...it looks like we could do this for five or six years, not take out any more loans nor repay existing loans, and the policies would still have some cash value when we turn 100. The reason I like this approach is that it would enable us not to sell any assets until we turn 70....we could live off of income from loans and dividends from our taxable account. And of course, if we wanted to, we could sell some equities and borrow a bit less from insurance.

Any thoughts on this general approach? Any downsides I may be missing?

Thanks.

michaeljc70
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Re: My plan to use policy loans to fund first five years of retirement

Post by michaeljc70 » Thu May 11, 2017 11:28 am

The downside is the interest. What is the rate? You have 10 more years to save. I'm not sure why you are so against taking out of your retirement accounts. That is what they are for.

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Re: My plan to use policy loans to fund first five years of retirement

Post by barnaclebob » Thu May 11, 2017 11:42 am

so you would take out the loans and then just use the remaining cash value to pay off the loans instead of taking disbursements? That's the same as just selling an asset.

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Re: My plan to use policy loans to fund first five years of retirement

Post by delrinson » Thu May 11, 2017 11:43 am

The current rate is 5%...but that can change from year to year. But, whatever the interest is, it is offset by the gains in other instruments. Especially if that's a time when equity markets are low, I'd rather let my assets grow.

The proceeds of course are tax free, which is another advantage. For those first five years our only taxable income would be dividends from the taxable account, the vast majority of which are qualified. So we would have close to zero tax liability the first five years of retirement.

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Re: My plan to use policy loans to fund first five years of retirement

Post by delrinson » Thu May 11, 2017 11:55 am

barnaclebob wrote:so you would take out the loans and then just use the remaining cash value to pay off the loans instead of taking disbursements? That's the same as just selling an asset.
No, the loans wouldn't get paid off...they would continue to grow. So, over the course of 35 years, the cash value of the policy would erode. But that will be offset by the gains I realize in my other investments.

In any case, I certainly want to use the policies to help fund retirement. The other options are selling or annuitizing, which aren't as attractive.

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Re: My plan to use policy loans to fund first five years of retirement

Post by EATaxGuy » Thu May 11, 2017 11:59 am

Instead of having a fixed time period have you considered using the loans only when the rest of your portfolio returns are down? In other words, you could essentially insure your portfolio (to some degree) against sequence of returns risk - avoiding/minimizing withdrawals when returns are bad.
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Re: My plan to use policy loans to fund first five years of retirement

Post by bloom2708 » Thu May 11, 2017 12:00 pm

I'm having a difficult time wrapping my head around how much in premiums you have paid on these whole life/universal life policies to accumulate that much cash value.

Why take a loan on the cash value? That leaves the policy in place?
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Re: My plan to use policy loans to fund first five years of retirement

Post by michaeljc70 » Thu May 11, 2017 12:05 pm

delrinson wrote:The current rate is 5%...but that can change from year to year. But, whatever the interest is, it is offset by the gains in other instruments. Especially if that's a time when equity markets are low, I'd rather let my assets grow.

The proceeds of course are tax free, which is another advantage. For those first five years our only taxable income would be dividends from the taxable account, the vast majority of which are qualified. So we would have close to zero tax liability the first five years of retirement.
How do you know it will be offset? What if stocks or bonds are down that year?

How will you pay the interest? That affects if it is taxable.

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Re: My plan to use policy loans to fund first five years of retirement

Post by delrinson » Thu May 11, 2017 12:14 pm

EATaxGuy wrote:Instead of having a fixed time period have you considered using the loans only when the rest of your portfolio returns are down? In other words, you could essentially insure your portfolio (to some degree) against sequence of returns risk - avoiding/minimizing withdrawals when returns are bad.
That's a good idea...an option worth considering.

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Re: My plan to use policy loans to fund first five years of retirement

Post by delrinson » Thu May 11, 2017 12:14 pm

bloom2708 wrote:I'm having a difficult time wrapping my head around how much in premiums you have paid on these whole life/universal life policies to accumulate that much cash value.

Why take a loan on the cash value? That leaves the policy in place?
Exactly.

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Re: My plan to use policy loans to fund first five years of retirement

Post by delrinson » Thu May 11, 2017 12:15 pm

michaeljc70 wrote:
delrinson wrote:The current rate is 5%...but that can change from year to year. But, whatever the interest is, it is offset by the gains in other instruments. Especially if that's a time when equity markets are low, I'd rather let my assets grow.

The proceeds of course are tax free, which is another advantage. For those first five years our only taxable income would be dividends from the taxable account, the vast majority of which are qualified. So we would have close to zero tax liability the first five years of retirement.
How do you know it will be offset? What if stocks or bonds are down that year?

How will you pay the interest? That affects if it is taxable.
The interest would keep accumulating...there are no tax consequences.

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Re: My plan to use policy loans to fund first five years of retirement

Post by michaeljc70 » Thu May 11, 2017 12:18 pm

delrinson wrote:The current rate is 5%...but that can change from year to year. But, whatever the interest is, it is offset by the gains in other instruments. Especially if that's a time when equity markets are low, I'd rather let my assets grow.
Sounds like market timing. What would be the criteria to know if the market is "low"? What if you don't sell and the market tanks?

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Re: My plan to use policy loans to fund first five years of retirement

Post by michaeljc70 » Thu May 11, 2017 12:23 pm

delrinson wrote:
michaeljc70 wrote:
delrinson wrote:The current rate is 5%...but that can change from year to year. But, whatever the interest is, it is offset by the gains in other instruments. Especially if that's a time when equity markets are low, I'd rather let my assets grow.

The proceeds of course are tax free, which is another advantage. For those first five years our only taxable income would be dividends from the taxable account, the vast majority of which are qualified. So we would have close to zero tax liability the first five years of retirement.
How do you know it will be offset? What if stocks or bonds are down that year?

How will you pay the interest? That affects if it is taxable.
The interest would keep accumulating...there are no tax consequences.
Okay. As long as you've figured that out. It is not automatic that there is no tax consequences. It sounds like up to age 100 though you are covered based on your first post. People get hit with a huge tax bill if they mess this up.

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Re: My plan to use policy loans to fund first five years of retirement

Post by delrinson » Thu May 11, 2017 12:27 pm

michaeljc70 wrote:
delrinson wrote:The current rate is 5%...but that can change from year to year. But, whatever the interest is, it is offset by the gains in other instruments. Especially if that's a time when equity markets are low, I'd rather let my assets grow.
Sounds like market timing. What would be the criteria to know if the market is "low"? What if you don't sell and the market tanks?
I'm not averse to assessing the intrinsic value of my equity positions from time to time.

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Re: My plan to use policy loans to fund first five years of retirement

Post by delrinson » Thu May 11, 2017 12:28 pm

delrinson wrote:
michaeljc70 wrote:
delrinson wrote:The current rate is 5%...but that can change from year to year. But, whatever the interest is, it is offset by the gains in other instruments. Especially if that's a time when equity markets are low, I'd rather let my assets grow.
Sounds like market timing. What would be the criteria to know if the market is "low"? What if you don't sell and the market tanks?
I'm not averse to assessing the intrinsic value of my equity positions from time to time.
The problem arises when people allow a policy to default...that triggers so-called phantom income and unpleasant tax consequences.

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Re: My plan to use policy loans to fund first five years of retirement

Post by michaeljc70 » Thu May 11, 2017 12:30 pm

delrinson wrote:
delrinson wrote:
michaeljc70 wrote:
delrinson wrote:The current rate is 5%...but that can change from year to year. But, whatever the interest is, it is offset by the gains in other instruments. Especially if that's a time when equity markets are low, I'd rather let my assets grow.
Sounds like market timing. What would be the criteria to know if the market is "low"? What if you don't sell and the market tanks?
I'm not averse to assessing the intrinsic value of my equity positions from time to time.
The problem arises when people allow a policy to default...that triggers so-called phantom income and unpleasant tax consequences.
Correct. Which happens when they allow to much interest to accrue. It can happen fairly fast if they take out a substantial portion as a loan and the rate is not low.

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Re: My plan to use policy loans to fund first five years of retirement

Post by HomerJ » Thu May 11, 2017 12:33 pm

delrinson wrote:The interest would keep accumulating...there are no tax consequences.
You better be sure you die before that policy runs out of cash value. If the policy is surrendered, you will owe a TON of taxes all at once.

That life insurance agent can show you "illustrations" all he wants. He won't be around in 35 years if you find yourself still alive at 90 and facing a huge tax bill. What are the guaranteed numbers?

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Re: My plan to use policy loans to fund first five years of retirement

Post by Jack FFR1846 » Thu May 11, 2017 12:37 pm

Won't you have to continue paying the (high) monthly premiums?
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Re: My plan to use policy loans to fund first five years of retirement

Post by delrinson » Thu May 11, 2017 12:45 pm

Jack FFR1846 wrote:Won't you have to continue paying the (high) monthly premiums?
Yes, but they will be paid out of the policy....all of which is accounted for in the illustrations we've run. Until retirement, though, we will pay the premium with outside funds to continue to maximize the value of the policy.

As an aside, I imagine most Bogleheads take a dim view of permanent insurance....which is certainly fine. But we have found it to be a nice way to diversify. And making use of policy loans has really come in handy over the years. Has provided a lot of peace of mind, which is difficult to quantify.

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Re: My plan to use policy loans to fund first five years of retirement

Post by delrinson » Thu May 11, 2017 1:04 pm

We will also have a lot of flexibility on the back end. To the extent that we have borrowed, we can repay the loans if we want, especially if other investments have done really well. The death benefit is outside of the estate, so we will have some control over our kids getting money without paying any estate tax. Estate tax laws can always change, of course, but with current laws it's good to know that some of our assets won't be taxed.

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Re: My plan to use policy loans to fund first five years of retirement

Post by HomerJ » Thu May 11, 2017 1:08 pm

delrinson wrote:As an aside, I imagine most Bogleheads take a dim view of permanent insurance....which is certainly fine. But we have found it to be a nice way to diversify. And making use of policy loans has really come in handy over the years. Has provided a lot of peace of mind, which is difficult to quantify.
Well, you would have a ton more money, and could probably retire at 60 instead of 65 if you had gone with term instead. That's easy to quantify.

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Re: My plan to use policy loans to fund first five years of retirement

Post by celia » Thu May 11, 2017 1:10 pm

delrinson wrote:Our current plan, from age 65-70, is to fund about half of our retirement income with loans from our life insurance policies. We have had our carrier run illustrations for us...it looks like we could do this for five or six years, not take out any more loans nor repay existing loans, and the policies would still have some cash value when we turn 100. The reason I like this approach is that it would enable us not to sell any assets until we turn 70....
But you ARE selling some assets, your life insurance assets. You acknowledge the cash value would be a lot less when you are 100, because of taking these loans pay-outs early. To me that is the same as taking RMDs (except for the tax liability).
Any thoughts on this general approach? Any downsides I may be missing?
Yes, continue reading....
delrinson wrote:The proceeds of course are tax free, which is another advantage. For those first five years our only taxable income would be dividends from the taxable account, the vast majority of which are qualified. So we would have close to zero tax liability the first five years of retirement.
This IS THE PROBLEM. In exchange for low/zero tax liability for 5 years, you will have higher than necessary tax liability for the years after age 70. Usually you will be better off trying to get a level liability over your remaining years.


Here's something for you to look at. Make a spreadsheet showing the current value of your tax-deferred accounts (401Ks, 403Bs, tIRAs), and try to project the growth for the next 25 years. For each year, add in what you normally would contribute, then stop when you retire. Give the accounts a yearly growth rate (not counting the new contributions), close to what you've received the last 5 years or so. If you can't figure that out, use a conservative 5% or a possible 8%. Then look at what your age 70.5 RMD would be.

Open up your tax software and do a dummy tax return for age 71 and later. What do you think now?

Basically, I encourage you to look long term--at least until age 75. Consider all your income options and how they will impact your taxes.

If your idea is as good as you think it is, don't you think Bogleheads would be recommending it to each other? Luckily for you, you have 10 years or so to work on your plan and get firmer numbers as you get closer to retirement, as these are just estimates today.


P.S. Even if you have convinced yourself that you still want to draw down your life insurance, you can do that while doing Roth conversions between retirement and age 70.5 That will bring your post-age-70.5 RMDs down and decrease your taxes after age 70.5 while increasing them before age 70.5. This enables part of your IRAs (the Roth part) to continue to grow tax-free while decreasing the growth in the tax-deferred tIRAs.
Last edited by celia on Thu May 11, 2017 1:19 pm, edited 1 time in total.

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Re: My plan to use policy loans to fund first five years of retirement

Post by delrinson » Thu May 11, 2017 1:16 pm

celia wrote:
delrinson wrote:Our current plan, from age 65-70, is to fund about half of our retirement income with loans from our life insurance policies. We have had our carrier run illustrations for us...it looks like we could do this for five or six years, not take out any more loans nor repay existing loans, and the policies would still have some cash value when we turn 100. The reason I like this approach is that it would enable us not to sell any assets until we turn 70....
But you ARE selling some assets, your life insurance assets. You acknowledge the cash value would be a lot less when you are 100, because of taking these loans pay-outs early. To me that is the same as taking RMDs (except for the tax liability).
Any thoughts on this general approach? Any downsides I may be missing?
Yes, continue reading....
delrinson wrote:The proceeds of course are tax free, which is another advantage. For those first five years our only taxable income would be dividends from the taxable account, the vast majority of which are qualified. So we would have close to zero tax liability the first five years of retirement.
This IS THE PROBLEM. In exchange for low/zero tax liability for 5 years, you will have higher than necessary tax liability for the years after age 70. Usually you will be better off trying to get a level liability over your remaining years.


Here's something for you to look at. Make a spreadsheet showing the current value of your tax-deferred accounts (401Ks, 403Bs, tIRAs), and try to project the growth for the next 25 years. For each year, add in what you normally would contribute, then stop when you retire. Give the accounts a yearly growth rate (not counting the new contributions), close to what you've received the last 5 years or so. If you can't figure that out, use a conservative 5% or a possible 8%. Then look at what your age 70.5 RMD would be.

Open up your tax software and do a dummy tax return for age 71 and later. What do you think now?

Basically, I encourage you to look long term--at least until age 75. Consider all your income options and how they will impact your taxes.

If your idea is as good as you think it is, don't you think Bogleheads would be recommending it to each other? Luckily for you, you have 10 years or so to work on your plan and get firmer numbers as you get closer to retirement, as these are just estimates today.
Good points. As you say, I have plenty of time to think about it and lots of options.

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Re: My plan to use policy loans to fund first five years of retirement

Post by #Cruncher » Thu May 11, 2017 2:28 pm

delrinson in original post wrote:The reason I like this approach is that it would enable us not to sell any assets until we turn 70.
delrinson in [url=https://www.bogleheads.org/forum/viewtopic.php?p=3364641#p3364641]this post[/url] wrote:The current [loan] rate is 5%...but that can change from year to year.
This can be considered simply as a choice between borrowing $X and selling $X of assets. Assuming some of your assets are bonds and they yield less than the loan's interest rate, you're better off selling some of those bonds to raise the $X of cash. Your portfolio allocation will be the same either way, but your net interest income will be more if you sell the bonds. To illustrate assume the following hypothetical situation:
  • Your total portfolio value is $1 million of which $400,000 are bonds.
  • The bonds yield 2%.
  • You need to raise $100,000.
The following shows the effect of raising the cash by either taking out a $100,000 loan at 5% or selling $100,000 of bonds. (In $000)

Code: Select all

                                                      Net Fixed     Net
                           Loan  Bonds  Other  Total  Income %   Interest
                           ----  -----  -----  -----  --------   --------
Now                          0     400    600  1,000   40%           8
Scenario 1 - take loan    (100)    400    600    900   33.33%        3
Scenario 2 - sell bonds      0     300    600    900   33.33%        6

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Re: My plan to use policy loans to fund first five years of retirement

Post by randomguy » Thu May 11, 2017 2:39 pm

delrinson wrote:Currently in our mid 50's, we tentatively plan on retiring at 65. We do not plan on taking Social Security until 70 nor touching retirement accounts until 70-1/2 when RMDs begin.

Our current plan, from age 65-70, is to fund about half of our retirement income with loans from our life insurance policies. We have had our carrier run illustrations for us...it looks like we could do this for five or six years, not take out any more loans nor repay existing loans, and the policies would still have some cash value when we turn 100. The reason I like this approach is that it would enable us not to sell any assets until we turn 70....we could live off of income from loans and dividends from our taxable account. And of course, if we wanted to, we could sell some equities and borrow a bit less from insurance.

Any thoughts on this general approach? Any downsides I may be missing?

Thanks.
Taking a loan now and selling assets later versus selling assets now, loan later is going to all come down to market timing and tax issues. The loan is a fine way of getting the cash out of the policey now versus when you die. If it is better to do it sooner or later is a lot harder to say. To some extent I think it comes down to if you are more about reducing risk or maximizing portfolio size.

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Re: My plan to use policy loans to fund first five years of retirement

Post by bloom2708 » Thu May 11, 2017 2:55 pm

Shouldn't the OP at least consider not paying the premium any longer and taking the cash value?

Is there term coverage in place and/or work place coverage? Or because of ages, "staying the course" with a very expensive "thing" is best?

At some point if the nest egg is big enough, the insurance isn't even needed. 15 more years of premiums.. :confused
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Re: My plan to use policy loans to fund first five years of retirement

Post by dratkinson » Thu May 11, 2017 3:00 pm

Recall in her book, Quinn's How to Make Your Money Last, she has a section on taking loans from insurance, and the bad things that can happen. As situation didn't apply to me, only skimmed it so don't remember details or if there is a preferred alternate route.

Recall book was dense with information/suggestions, but you'd need to read the whole thing to see which situations apply and might be more preferable, contain fewer gotchas.
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Re: My plan to use policy loans to fund first five years of retirement

Post by NotWhoYouThink » Thu May 11, 2017 3:21 pm

If you take the premiums you're going to pay for the next 12-13 years and put them in an online savings account, how much would you have? As much as you plan to borrow during those years?

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Re: My plan to use policy loans to fund first five years of retirement

Post by delrinson » Thu May 11, 2017 3:25 pm

bloom2708 wrote:Shouldn't the OP at least consider not paying the premium any longer and taking the cash value?

Is there term coverage in place and/or work place coverage? Or because of ages, "staying the course" with a very expensive "thing" is best?

At some point if the nest egg is big enough, the insurance isn't even needed. 15 more years of premiums.. :confused
We have a term policy that expires at end of 2018....thus I'd be reluctant to forego the death benefit of the permanent policies.

Selling a policy is of course always a possibility. Not sure it would make good financial sense though.

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Re: My plan to use policy loans to fund first five years of retirement

Post by bloom2708 » Thu May 11, 2017 3:35 pm

delrinson wrote:
bloom2708 wrote:Shouldn't the OP at least consider not paying the premium any longer and taking the cash value?

Is there term coverage in place and/or work place coverage? Or because of ages, "staying the course" with a very expensive "thing" is best?

At some point if the nest egg is big enough, the insurance isn't even needed. 15 more years of premiums.. :confused
We have a term policy that expires at end of 2018....thus I'd be reluctant to forego the death benefit of the permanent policies.

Selling a policy is of course always a possibility. Not sure it would make good financial sense though.
I understand the death benefit. When you die, the cash value goes away. So all the "savings" is just "poof" gone and the face value is paid.

What you've paid, is paid, but I would look at every angle. As you age and your savings grow, you likely pay down/off your mortgage, kids go out on their own, nest egg grows, then the reasons for the policy diminish.
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Re: My plan to use policy loans to fund first five years of retirement

Post by powermega » Thu May 11, 2017 4:04 pm

Why not take withdrawals first? If your policy is not a Modified Endowment Contract (MEC), then you can take tax-free withdrawals from the policy as long as you have tax basis remaining in the policy. At that point, you could switch over to taking loans. This strategy is commonly known as a "switch at basis" distribution. You could have your inforce illustrations show you this scenario vs. the loan-only scenario. Depending on the loan interest rate, etc, it might have a better result than taking only loans.

Once you do take loans from the policy, if you ever feel that you need to put money back into the policy, always pay off the loan balance first before paying any premiums. That is the most efficient way of getting money back "into the policy".
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Re: My plan to use policy loans to fund first five years of retirement

Post by delrinson » Thu May 11, 2017 4:35 pm

bloom2708 wrote:
delrinson wrote:
bloom2708 wrote:Shouldn't the OP at least consider not paying the premium any longer and taking the cash value?

Is there term coverage in place and/or work place coverage? Or because of ages, "staying the course" with a very expensive "thing" is best?

At some point if the nest egg is big enough, the insurance isn't even needed. 15 more years of premiums.. :confused
We have a term policy that expires at end of 2018....thus I'd be reluctant to forego the death benefit of the permanent policies.

Selling a policy is of course always a possibility. Not sure it would make good financial sense though.
I understand the death benefit. When you die, the cash value goes away. So all the "savings" is just "poof" gone and the face value is paid.

What you've paid, is paid, but I would look at every angle. As you age and your savings grow, you likely pay down/off your mortgage, kids go out on their own, nest egg grows, then the reasons for the policy diminish.
No, the cashing value is adding to the death benefit over time.

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Re: My plan to use policy loans to fund first five years of retirement

Post by delrinson » Thu May 11, 2017 4:36 pm

powermega wrote:Why not take withdrawals first? If your policy is not a Modified Endowment Contract (MEC), then you can take tax-free withdrawals from the policy as long as you have tax basis remaining in the policy. At that point, you could switch over to taking loans. This strategy is commonly known as a "switch at basis" distribution. You could have your inforce illustrations show you this scenario vs. the loan-only scenario. Depending on the loan interest rate, etc, it might have a better result than taking only loans.

Once you do take loans from the policy, if you ever feel that you need to put money back into the policy, always pay off the loan balance first before paying any premiums. That is the most efficient way of getting money back "into the policy".
That's helpful to know...thank you.

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Re: My plan to use policy loans to fund first five years of retirement

Post by AZAttorney11 » Thu May 11, 2017 4:42 pm

Not to bash the OP, but I can't imagine the enormous premiums that must have been paid into the policy over the years to accumulate such a large cash value. I can only image what a low-cost, diversified 50/50 portfolio would have returned over the same period.

This is a classic example of how expensive life insurance can be. Buy term, invest the rest.

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Re: My plan to use policy loans to fund first five years of retirement

Post by AZAttorney11 » Thu May 11, 2017 4:43 pm

delrinson wrote:As an aside, I imagine most Bogleheads take a dim view of permanent insurance....which is certainly fine. But we have found it to be a nice way to diversify. And making use of policy loans has really come in handy over the years. Has provided a lot of peace of mind, which is difficult to quantify.
HomerJ wrote:Well, you would have a ton more money, and could probably retire at 60 instead of 65 if you had gone with term instead. That's easy to quantify.
Someone should run the numbers or something :sharebeer

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Re: My plan to use policy loans to fund first five years of retirement

Post by delrinson » Thu May 11, 2017 5:05 pm

I should have known I couldn't ask a question about how best to deploy an existing insurance asset without hearing from "buy term, invest the difference" peanut gallery. :happy :shock:

The two policies I own have been very flexible assets over the years...I have no regrets. Although I do acknowledge the obvious advantages of buying only term insurance. What many people don't consider are the estate transfer benefits of permanent insurance. There's a reason why high net worth individuals (I'm not one of them) buy permanent insurance products, often late in life and paying many years worth of premiums up front. And no, it's not because they've never heard the "buy term, invest the difference" pitch.

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Re: My plan to use policy loans to fund first five years of retirement

Post by Nate79 » Thu May 11, 2017 5:18 pm

delrinson wrote:I should have known I couldn't ask a question about how best to deploy an existing insurance asset without hearing from "buy term, invest the difference" peanut gallery. :happy :shock:

The two policies I own have been very flexible assets over the years...I have no regrets. Although I do acknowledge the obvious advantages of buying only term insurance. What many people don't consider are the estate transfer benefits of permanent insurance. There's a reason why high net worth individuals (I'm not one of them) buy permanent insurance products, often late in life and paying many years worth of premiums up front. And no, it's not because they've never heard the "buy term, invest the difference" pitch.
It's always good to remind the readers that these products are horrible horrible horrible and that they should not be considered.

What to do with an existing junk product is one thing, making sure no one buys this junk is another.

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Re: My plan to use policy loans to fund first five years of retirement

Post by delrinson » Thu May 11, 2017 5:44 pm

Nate79 wrote:
delrinson wrote:I should have known I couldn't ask a question about how best to deploy an existing insurance asset without hearing from "buy term, invest the difference" peanut gallery. :happy :shock:

The two policies I own have been very flexible assets over the years...I have no regrets. Although I do acknowledge the obvious advantages of buying only term insurance. What many people don't consider are the estate transfer benefits of permanent insurance. There's a reason why high net worth individuals (I'm not one of them) buy permanent insurance products, often late in life and paying many years worth of premiums up front. And no, it's not because they've never heard the "buy term, invest the difference" pitch.
It's always good to remind the readers that these products are horrible horrible horrible and that they should not be considered.

What to do with an existing junk product is one thing, making sure no one buys this junk is another.
Tell us how you really feel! :happy

I doubt that such sweeping statements about ALL permanent insurance products are helpful....

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Re: My plan to use policy loans to fund first five years of retirement

Post by HomerJ » Thu May 11, 2017 7:43 pm

delrinson wrote:
Nate79 wrote:
delrinson wrote:I should have known I couldn't ask a question about how best to deploy an existing insurance asset without hearing from "buy term, invest the difference" peanut gallery. :happy :shock:

The two policies I own have been very flexible assets over the years...I have no regrets. Although I do acknowledge the obvious advantages of buying only term insurance. What many people don't consider are the estate transfer benefits of permanent insurance. There's a reason why high net worth individuals (I'm not one of them) buy permanent insurance products, often late in life and paying many years worth of premiums up front. And no, it's not because they've never heard the "buy term, invest the difference" pitch.
It's always good to remind the readers that these products are horrible horrible horrible and that they should not be considered.

What to do with an existing junk product is one thing, making sure no one buys this junk is another.
Tell us how you really feel! :happy

I doubt that such sweeping statements about ALL permanent insurance products are helpful....
Sorry, didn't mean to rain on your parade, but you brought it up first... No one in the "peanut gallery" said anything until you said, as an aside, how good the product was for diversifying and taking loans and giving you peace of mind.

All sweeping statements have exceptions, but in general, yes permanent insurance products are terrible investments. You really would have had a lot more money today if you had followed the conventional wisdom on this board of "buy term and invest the difference". Bonds, in general, pay 2% more than insurance policies... You know why? Because insurance companies invest in bonds, and take 2% fees.

That said, your ideas for efficient use of the permanent life insurance you have today are good. Just be very careful basing any plans off "illustrations" that go out 30-40 years. We have heard stories here from people who got caught... stuck between paying insane premiums to keep a policy in-force, or surrendering the policy and being hit with a 6-figure tax bill.

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Re: My plan to use policy loans to fund first five years of retirement

Post by delrinson » Thu May 11, 2017 8:12 pm

HomerJ wrote:
delrinson wrote:
Nate79 wrote:
delrinson wrote:I should have known I couldn't ask a question about how best to deploy an existing insurance asset without hearing from "buy term, invest the difference" peanut gallery. :happy :shock:

The two policies I own have been very flexible assets over the years...I have no regrets. Although I do acknowledge the obvious advantages of buying only term insurance. What many people don't consider are the estate transfer benefits of permanent insurance. There's a reason why high net worth individuals (I'm not one of them) buy permanent insurance products, often late in life and paying many years worth of premiums up front. And no, it's not because they've never heard the "buy term, invest the difference" pitch.
It's always good to remind the readers that these products are horrible horrible horrible and that they should not be considered.

What to do with an existing junk product is one thing, making sure no one buys this junk is another.
Tell us how you really feel! :happy

I doubt that such sweeping statements about ALL permanent insurance products are helpful....
Sorry, didn't mean to rain on your parade, but you brought it up first... No one in the "peanut gallery" said anything until you said, as an aside, how good the product was for diversifying and taking loans and giving you peace of mind.

All sweeping statements have exceptions, but in general, yes permanent insurance products are terrible investments. You really would have had a lot more money today if you had followed the conventional wisdom on this board of "buy term and invest the difference". Bonds, in general, pay 2% more than insurance policies... You know why? Because insurance companies invest in bonds, and take 2% fees.

That said, your ideas for efficient use of the permanent life insurance you have today are good. Just be very careful basing any plans off "illustrations" that go out 30-40 years. We have heard stories here from people who got caught... stuck between paying insane premiums to keep a policy in-force, or surrendering the policy and being hit with a 6-figure tax bill.
What often gets left out of these discussions is the death benefit. Yes, if the difference between the permanent premium and the term premium had been invested in an index fund with a reasonable rate of return, the result would be greater than the current cash value of the policy (though not dramatically so, at least in my case...I guess have one of those exceptionally good policies :happy ). But the investment horizon does not terminate during my lifetime...it terminates when I die. At that point the death benefit (face value plus added cash value) FAR exceeds what would have accumulated in the index fund. In fact, I do not believe that any reasonable rate of market return can ever "catch" the death benefit. So, at the end, when I'm dead, the permanent life policy wins....and my wife or kids reap the benefit of my investment. In the meantime, which I hope and pray to be many more years, I can use the assets of the policy for all sorts of different things.

Of course the two policies I have are only a small portion of my portfolio. But they serve an important purpose. And, when they finally pay, they will reflect a very healthy and respectable rate of return....and all growth and distributions will be tax free.

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Re: My plan to use policy loans to fund first five years of retirement

Post by Malinois000 » Thu May 11, 2017 8:15 pm

OP - thanks for sharing and good use of your perm insurance policies. Although term policies have always resonated with me, I have both term and universal policies as I always wanted to have some permanent insurance in force as well.

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Re: My plan to use policy loans to fund first five years of retirement

Post by delrinson » Fri May 12, 2017 7:34 am

Just to give you all an idea of the hard numbers. One policy I've had for 26 years. If I die today, the amount of the death benefit would represent a 9% annualized increase, all tax free. Actually more than that if you subtract the term premiums that would have been in place in the absence of the permanent policy. Hence my view that it's a good investment....provided that the investment horizon extends to the day of my death.

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Re: My plan to use policy loans to fund first five years of retirement

Post by Two Headed Mule » Fri May 12, 2017 8:27 am

delrinson wrote:Just to give you all an idea of the hard numbers. One policy I've had for 26 years. If I die today, the amount of the death benefit would represent a 9% annualized increase, all tax free. Actually more than that if you subtract the term premiums that would have been in place in the absence of the permanent policy. Hence my view that it's a good investment....provided that the investment horizon extends to the day of my death.
Yes, but that is only because when you die before you are expected to, life insurance pays off. Unless the insurance company has mis-rated you (unlikely), your odds of dying in your mid-50s and getting that 9% return are slim. That annualized benefit will continue decreasing as the years go by and you approach your assumed actuarial death, when the return will be more bond-like (assuming this is a whole life policy, which isn't clear; the talk of getting both the death benefit and cash value seems to indicate a VUL). This isn't surprising because insurance companies hold mostly bonds in their reserves.

There's no magic here. The insurance company expects you to live to a certain age. It therefore charges you premiums that, when discounted to present value, will equal what it expects to pay out on your actuarial death. The "winners" die early and the "losers" die late. Dying early results in a slight to significant windfall, hence your "current" 9% return on death (of course, buying term and dying within the term window is the "best" return of all). Dying later results in a detriment (more years of premium payments past when the company expected you to live). There is simply no way an insurance company can pay out "market-beating" returns no matter the age at which you die.

People who buy term policies have essentially decided that, other than within the time period others will be harmed by premature death, there is no reason to continue the bet with the life insurance company over how long they will live.

Mule

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Re: My plan to use policy loans to fund first five years of retirement

Post by bloom2708 » Fri May 12, 2017 8:42 am

I still don't get it. You get the face value OR the cash value. Not both. Does the 9% gain include face + cash value?

If you had saved the 26 years of premiums and bought term insurance, you would get (the possibility) of spending (saving, giving) the money when you are alive.

The reward of dying is death. Your heirs will get the face value to spend or save or give. Like all, I am trying to learn, not point out forks in the road that should have been chosen. But, making 15 more years of premium payments is a current fork in the road that can be evaluated.
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Re: My plan to use policy loans to fund first five years of retirement

Post by afan » Fri May 12, 2017 9:05 am

bloom2708 wrote:I still don't get it. You get the face value OR the cash value. Not both.
Depends on the policy. There are policies that add the cash value to the death benefit. With this option the amount of insurance you are paying for is constant. Example: You buy a policy with an initial death benefit of 500k and it accumulates cash value. If you die immediately, they pay 500k. If you keep the policy for a long time and the cash value comes to 500k, the total paid at death would be $1M. This means that for every year you were paying the insurance company for 500k of death benefit coverage.

The alternative, which you are assuming to be universal, is that the amount insured goes down as the death benefit goes up. Here the amount of insurance you are buying goes down each year to reflect the cash value increase. Whenever you die the total paid out is 500k. Unless of course the cash value is higher than the face value of the policy.

The risk I see with the OP plan is if returns on the policy are lower than illustrated. If this plan works with guaranteed policy returns, then it could be fine. But I suspect the guaranteed returns are far worse. It also assumes the interest rate on the loans is either fixed (which is possible with an older policy) or will never be high enough for the policy to lapse if the rates go up- which is risky.

As I understand insurance, the company will not guarantee that your returns up to age 100 will make this work. It will only work if returns are considerably better than guaranteed. You can weigh your odds on living that long to decide how much risk you are taking.

Have you had them run the simulation with the guaranteed policy returns? With the maximum interest rates on the loans?

The usual BH take on cash value policies is that they are rarely worth buying, but old ones can be worth keeping. You have taken the hit years ago and the performance going forward may be ok.
The death benefit is outside of the estate, so we will have some control over our kids getting money without paying any estate tax.


Here I am puzzled. Who owns the policy?? If you own the policy the death benefit would be in your estate. If the policy is owned by a life insurance trust how come you get to have loans from the policy distributed to you?
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Re: My plan to use policy loans to fund first five years of retirement

Post by White Coat Investor » Fri May 12, 2017 9:15 am

delrinson wrote:Currently in our mid 50's, we tentatively plan on retiring at 65. We do not plan on taking Social Security until 70 nor touching retirement accounts until 70-1/2 when RMDs begin.

Our current plan, from age 65-70, is to fund about half of our retirement income with loans from our life insurance policies. We have had our carrier run illustrations for us...it looks like we could do this for five or six years, not take out any more loans nor repay existing loans, and the policies would still have some cash value when we turn 100. The reason I like this approach is that it would enable us not to sell any assets until we turn 70....we could live off of income from loans and dividends from our taxable account. And of course, if we wanted to, we could sell some equities and borrow a bit less from insurance.

Any thoughts on this general approach? Any downsides I may be missing?

Thanks.
My understanding is that you're usually better off taking policy loans last rather than first.
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Re: My plan to use policy loans to fund first five years of retirement

Post by bloom2708 » Fri May 12, 2017 9:15 am

Thank you afan. Good information.
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Re: My plan to use policy loans to fund first five years of retirement

Post by afan » Fri May 12, 2017 10:24 am

White Coat Investor wrote:
My understanding is that you're usually better off taking policy loans last rather than first.
Is that to minimize the risk of the policy lapsing?
That would be my worry with the OP's plan. Take out loans in the 60's and hope that the policy does not lapse over the subsequent decades. This runs the risk of being 95, having spent down a large share of retirement funds and needing to come up with a huge sum to keep the policy going or pay the taxes. By taking loans late, one avoids this risk.

Of course, depending on mortality charges and investment returns, there is a risk that the cash value to support sizable loans might not be there in the later years.
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Re: My plan to use policy loans to fund first five years of retirement

Post by delrinson » Fri May 12, 2017 2:39 pm

Sorry if I was unclear....death benefit is face value ($250,000) plus some portion of the cash value (current total is $296,000).

I own the policy...but the feds don't tax it upon my death and as far as I know no state would tax it (but perhaps there are some I'm not aware of). That's certainly worth something....every other asset I know of gets taxed, including retirement accounts.

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Re: My plan to use policy loans to fund first five years of retirement

Post by David Jay » Fri May 12, 2017 2:47 pm

delrinson wrote:I own the policy...but the feds don't tax it upon my death and as far as I know no state would tax it (but perhaps there are some I'm not aware of). That's certainly worth something....every other asset I know of gets taxed, including retirement accounts.
You paid for your policy with after tax dollars. If you had put those same after tax dollars into a Roth IRA (either directly or indirectly through a "backdoor Roth") then all withdrawals would be tax free (federal). My state does not tax Roth withdrawals.

Admittedly, the Roth IRA did not exist when you took out that policy 26 years ago but the Roth has been around for 20 years.
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