S&P Indexed Life Insurance

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diehard
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Location: Rocky Mountains

S&P Indexed Life Insurance

Post by diehard » Fri Aug 11, 2017 10:01 am

I am a still employed, totally healthy 65 yr. old in a very comfortable financial situation. For a variety of reasons, the life insurance policies that I purchased about 25 yrs. ago needs to be changed as soon as possible. There are 2 policies: $1M with a cash value taxable gain of $120,453 and a $500K policy with a gain of $55,398. They are both in an irrevocable life insurance trust with my wife and daughters as the beneficiaries. My choices are as follows:

Option A - A death benefit of $529,000 is issued with a single premium of $146,348 from the tax advantaged transfer of the Guardian policy (no other premiums are required). Or you can surrender the policy and get that amount of cash deposited in the trust. The policy contains a long term care benefit of $10,580 per month, to have at your disposal should you need it. This policy also has a cash value, $120,905 at the first anniversary & $163,730 at year 10, assuming earnings of 6.17%.

Option B - A death benefit of $1,115,000 is issued with a single premium of $300,654 from the tax advantaged transfer of the Guardian policy (no other premiums are required). Or you can surrender the policy and get that amount of cash deposited in the trust. The policy contains a long term care benefit of $22,300 per month, to have at your disposal should you need it. This policy also has a cash value, $247,749 at the first anniversary & $337,047 at year 10, assuming earnings of 6.17%.

These are the long-term care benefits available under your policies.
 Adult Day Care
 Assisted Living facilities
 Nursing Home Stay
 Hospice Care Durable Medical Equipment
 Home Modification.

Option C - Cash one or both in, pay the taxes and reinvest the remainder. I have been advised by my agent not to withdraw the basis amount (nontaxable) and just buy a new Indexed Policy with the gains as it might trigger a tax audit.

What are your thoughts? I am considering this as a way to transfer wealth only at this point as neither I nor my wife need these assets even upon my demise. And, I don't know if I could do better in the market. On the other hand, I don't have a great deal of trust in the insurance industry.

pintail07
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Re: S&P Indexed Life Insurance

Post by pintail07 » Fri Aug 11, 2017 10:16 am

How long does the long term care benefit last? Since you are not a beneficiary of the trust, who benefits from the long term care benefit?

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David Jay
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Re: S&P Indexed Life Insurance

Post by David Jay » Fri Aug 11, 2017 10:22 am

I love the assumed earnings of 6.17% (two digits after the decimal!). I would estimate no more than 6.13 :happy

Can you post a link to the policy prospectuses (prospecti?) so we can look at them?

Be advised that virtually all so called S&P indexed policies use the S&P 500 index as their baseline, which does not include dividends of 1.8% or so. What this means is that you will get almost 2% less than the market, then there are very likely participation formulas that limit the amount of the index gain that you can receive and finally there are account fees of perhaps 1%.

You will likely underperform a SP500 mutual fund by about 3%-5% PER YEAR. Compound that out for 10 or 20 years and you get the idea.

White Coat Investor has a great page on "permanent" life insurance products that includes a flow-chart to help you evaluate the choices. The title says "whole life" but the flow-chart covers all permanent life categories. Link here: https://www.whitecoatinvestor.com/12-qu ... insurance/
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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BL
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Re: S&P Indexed Life Insurance

Post by BL » Fri Aug 11, 2017 10:37 am

I agree that your insurance person has a conflict of interest in recommending one of their products which generates a big commission for him.

Perhaps consider calling the Vanguard annuity folks to see about converting to their lower-cost annuities. I think they can be trusted to give you straight information. The cost would be much lower than what you have considered and would defer taxes if done in the proper manner. However, someone will probably have to pay the tax at some time and it still won't be Capital Gains.

Why are you selling the original policies? You have already paid the commissions on them so they might be better than any replacement. Is it universal life that increases in cost the longer you live?

I suspect, but don't know, that just cashing in and paying the tax so future gains will be CGs, just might work out better than buying something else.

diehard
Posts: 49
Joined: Mon Mar 10, 2008 12:17 am
Location: Rocky Mountains

Re: S&P Indexed Life Insurance

Post by diehard » Fri Aug 11, 2017 3:12 pm

Thank you for your responses - they seem to confirm what I think I should do at this point in time. I'm sorry I cannot post the prospectuses as I don't have them yet. I have to move away from my present policies as the Guardian requires that I continue to pay premiums because I am told that applying the dividends to pay them won't cover the costs ($15,000/yr.). I just don't want to pay that now as I don't need life insurance anymore. Good point on the long-term care advantage if I'm not the beneficiary of the policy. I will give The Vanguard a call but am leaning to just cashing out, taking the tax hit and re-investing an some index funds. Keeping a form of insurance is not likely worth it even though the floor of the investment is 0 loss (the high is capped at 12%).

pintail07
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Re: S&P Indexed Life Insurance

Post by pintail07 » Fri Aug 11, 2017 5:18 pm

Don't even consider the Index policy. Have you asked an independent agent how much paid up no lapse to 120 policies would be? I have done many of these and it seems the amounts offered are much lower than they could be unless you are in poor health. If looking for a legacy you might consider a second to die policy, lot more bang for the buck.

986racer
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Re: S&P Indexed Life Insurance

Post by 986racer » Sat Aug 12, 2017 5:49 am

With this being in an ILIT, I would greatly discount any language around long term care. Since you are the insured, the long term care benefit has to be for you. Since it is in a ILIT, I believe you are not allowed to benefit from the policy without losing the protections of the ILIT (bsteiner or one of the other lawyers on the board could confirm)

If you simply want to stop making payments, you may want to take a look at having dividends pay what it can and then have policy loans do the rest. After 25 years of payments (and I'm assuming dividends were reinvested) I would be surprised if the dividend payment is not somewhat close to the premium payment.

986racer
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Joined: Thu Aug 11, 2016 10:09 am

Re: S&P Indexed Life Insurance

Post by 986racer » Sat Aug 12, 2017 6:11 am

I'd also consider making the trust the beneficiary. Having your wife as a beneficiary would move money back into your combined estate should you die before she does.

Jack FFR1846
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Re: S&P Indexed Life Insurance

Post by Jack FFR1846 » Sat Aug 12, 2017 6:37 am

Have you asked for and received in force illustrations for both policies? It's not uncommon to see a surrender value that is far lower than the pie in the sky predictions that these policies are sold on.
Bogle: Smart Beta is stupid

itstoomuch
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Re: S&P Indexed Life Insurance

Post by itstoomuch » Sat Aug 12, 2017 7:06 am

IIRC , Indexed UNIVERSAL Life Insurance has a increasing annual renewable term component and a Cash Value component. The CV part funds the LI. Around the age of 65, the expense of the LI jumps and continues to escalate to where the the CV will be quickly used up. When the CV is used up, the policy implodes.

As for the LTC benefit, it is a either a loan on CV, or a draw on the death benefit. If it is loan , you will be charge interest which may be included in the loan to make look like no interest is charged andin your case taxed. If it is a draw on Death benefit, you will be charged interest and taxed.

The third option is to do a 1035 exchange of the LIKE to an annuity. Let the receiving company initiate the transfer. If you do try to do this, the sending company may try to screw the transaction against you by inadvertently calling this a withdrawal rather than a transfer.

You may want to see an Primerica agent (AL Williams) or Vangard annuity rep, Or wiki: 1035, Universal LI, Variable Universal, Index Universal or similar terms and combination of terms.
YpolicyMV, YMMV too. :annoyed
Last edited by itstoomuch on Sat Aug 12, 2017 7:18 am, edited 2 times in total.
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

pintail07
Posts: 239
Joined: Fri Nov 04, 2016 5:07 pm

Re: S&P Indexed Life Insurance

Post by pintail07 » Sat Aug 12, 2017 7:08 am

I would bet the policies are a blend of term and whole life, these types of policies have performed horribly compared to initial illustrations.

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