Indexed Universal Life Question

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CAGR
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Indexed Universal Life Question

Post by CAGR » Tue Jan 30, 2018 6:58 pm

I am a new member here and wish I had found this site, and you all, about 5 years ago.

A couple of years ago I was convinced to purchase IUL policies for my wife and I. The benefits we were sold on were the typical guaranteed
returns in a down market, asset protection being physicians, and use of the policies to build cash value to take it as income in retirement.

I have read quite a bit lately about the reasons not to buy these policies including the wiki and this article:
http://www.mdmag.com/physicians-money-d ... urance?p=3

Now, I am trying to figure out what is the right thing to do at this point.

My wife and I are in our 30s, both physicians, have about 500K in retirement accts and 1,500K in brokerage accounts.
Only debt is mortgage of about 500K at 3%. 5 kids with 529s.
Expected annual income is about 850K per year combined.
We will have a 50k per year government pension starting at age 60.

The policy we both have is Penn Mutual Accumulation Builder II IUL
https://www2.pennmutual.com/content/pub ... 2-iul.html

We have cash value in each of our IULs of about 70K and a listed cost basis of 71K.
Looking at the yearly statement for one of the accounts it shows - 11K in premiums paid, 6K in interest credited, and 2K in charges.

So my question to the insurance experts, is what to do now? Or at least what variables should I be looking at to make that decision.
I understand a cheap term policy is typically the right answer.

Appreciate your advice and time.

CAGR

CAGR
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Joined: Tue Jan 30, 2018 6:26 pm

Re: Indexed Universal Life Question

Post by CAGR » Wed Jan 31, 2018 12:31 pm

Any advice on the way forward with this policy?

Dottie57
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Re: Indexed Universal Life Question

Post by Dottie57 » Wed Jan 31, 2018 1:05 pm

CAGR wrote:
Tue Jan 30, 2018 6:58 pm
I am a new member here and wish I had found this site, and you all, about 5 years ago.

A couple of years ago I was convinced to purchase IUL policies for my wife and I. The benefits we were sold on were the typical guaranteed
returns in a down market, asset protection being physicians, and use of the policies to build cash value to take it as income in retirement.

I have read quite a bit lately about the reasons not to buy these policies including the wiki and this article:
http://www.mdmag.com/physicians-money-d ... urance?p=3

Now, I am trying to figure out what is the right thing to do at this point.

My wife and I are in our 30s, both physicians, have about 500K in retirement accts and 1,500K in brokerage accounts.
Only debt is mortgage of about 500K at 3%. 5 kids with 529s.
Expected annual income is about 850K per year combined.
We will have a 50k per year government pension starting at age 60.

The policy we both have is Penn Mutual Accumulation Builder II IUL
https://www2.pennmutual.com/content/pub ... 2-iul.html

We have cash value in each of our IULs of about 70K and a listed cost basis of 71K.
Looking at the yearly statement for one of the accounts it shows - 11K in premiums paid, 6K in interest credited, and 2K in charges.

So my question to the insurance experts, is what to do now? Or at least what variables should I be looking at to make that decision.
I understand a cheap term policy is typically the right answer.

Appreciate your advice and time.

CAGR
I think more info is needed.

Can you surrender it?
Is there a penalty to surrender?
How long are you obligated to hold?
Are you satisfied with returns?
What would you do with money if redeemed?
What are your he fees on an annual basis?
Last edited by Dottie57 on Wed Jan 31, 2018 5:30 pm, edited 1 time in total.

afan
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Re: Indexed Universal Life Question

Post by afan » Wed Jan 31, 2018 1:14 pm

There is more good news than bad news.
If the 70k is SURRENDER value, not just cash value, then you can get out with little or no loss. You will have lost the growth you would have had with those premiums had you invested them, so you are getting off free, but many people are in worse shape.

You can get an in force illustration for the policies but that is of limited use since you don't know what will be the returns of the markets in which you are invested inside the policies. For education you could get the company to illustrate the policies with whatever they want to use for market returns. Then compare putting the same amount into such an investment directly, without the insurance policy. The company will not be interested in doing that part for you.

You likely will want a large amount of life insurance if you are like typical doctors. Most docs assume all their kids will go to college and probably get advanced degrees. Multiply by five and that is a lot of money.

Before dropping these cash value policies figure out how much death benefit you need and get that in place with term. Then cash out.

Depending on when the next premium is due, where you are on surrender charges and the policy anniversaries, you might actually be better off paying for another year to give yourself time to do all of this. It might also pay to keep the policies a bit longer if there is a big drop in surrender charges coming up.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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BL
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Re: Indexed Universal Life Question

Post by BL » Wed Jan 31, 2018 1:23 pm

Is there a surrender fee?
Have you received an in-force illustration? Ask the company for one showing guaranteed values for the future.

Have your read white coat investor (for high-income individuals) web pages on the product? There could be more advantage for high income folks but I doubt the high cost is worth it.

With such a short time owned, my gut reaction is to sell. There is ordinary tax if you have gains, so more tax if you wait.

afan
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Re: Indexed Universal Life Question

Post by afan » Wed Jan 31, 2018 1:47 pm

In general, the high fees and expenses make indexed universal life a bad deal. The costs are so high that they swamp the advantages. The advantages, as I am sure they told you, are the build up of cash value inside the policy is not taxed and you can tap some of that cash by borrowing, rather than surrendering. But the cash value growth is only on the amount that makes it to the cash value in the first place. A large part of the premium goes to fees. Then there are on going expenses.

You don't get the full return of the underlying market in which you are invested. You get some fraction of that and it can take a lot of digging to figure out what that fraction may be. It tends to be truncated at the top, so that you will not get anywhere close to the return if the stock market has a big year.

If you are invested in mutual funds inside the policy they typically have much higher fees than you would pay if you bought a low cost index fund or ETF.

Yes, you can borrow against the cash value in retirement and not pay taxes on what you take out. But yout stock broker would be happy to lend you money against the value of your holdings. Both the insurance company and the broker would.charge you interest. With both your investment would continue to earn returns. With the life insurance, sometimes they put an amount of money equal to the cash value you borrowed into a separate, low paying, investment.

If you keep the policies for a long time, paying premiums while working and borrowing against cash value after retirement you can walk in to a trap. People have found that decades of growth have made the cash value larger tahn the toal of premiums paid. They then, over years, borrow out much more than their basis. At this point they have to keep the policies in force. If they let them lapse then all of that borrowed money becomes taxable. So they would owe a huge tax bill if they were to let it lapse. Why would they let it lapse? Once they have borrowed out almost all of the cash value then there would not be enough money in the policy to cover the next premium and with the cash value depleted they have to start directly paying interest. To avoid lapse they would have to come up with enough cash to keep the policy alive paying principle and interest. That can also be a big hit.

All of this to avoid taxes on the investment returns. If you put the money in stock index funds and munis in a taxable account all that would be taxed each year would be the stock dividends. These are taxed at a low rate, even in your tax bracket.

Overall, usually a bad deal. But look to the details of your policies.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

itstoomuch
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Location: midValley OR

Re: Indexed Universal Life Question

Post by itstoomuch » Wed Jan 31, 2018 2:09 pm

You bought for what reasons?
If you bought for life insurance; Term is cheaper, if you are in good health.
If you bought for Investment; Most anything is like wise cheaper and better returns with fewer restrictions.
YMMV
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

CAGR
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Joined: Tue Jan 30, 2018 6:26 pm

Re: Indexed Universal Life Question

Post by CAGR » Wed Jan 31, 2018 5:24 pm

Thank you all for the responses and information.

I confirmed that I can surrender the policy and get back right at 71K - about 1500 less than I have put in. I was wrong above - I have had the policy for almost 5 years . . .how time flies.

It was asked above what I would do with the money if I did surrender it - I would dump the money into Vanguard VTSAX in a regular brokerage account.

I got an in force illustration of the policy which was shown with a hypothetical gross rate of return of 7.2%.
It shows a dividend rate of return of 2%, capital growth rate of 5.2%, hypothetical gross rate of return 7.2% and investment expenses of 1%.
It says expenses are included in the projection.

It shows with current 14k annual policy premiums will have 1.28M cash value at age 64 with a 1.6M death benefit.
The projection then shows taking out 120K a year until age 95 when there will be a 660K cash value remaining with 770K death benefit.

The benefits I was told that is important for physicians is the cash value is protected from claimants and creditors. And then the up to 3M in tax free retirement income while still having a death benefit for 5 kids.

Appreciate your thoughts/opinions

Dottie57
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Joined: Thu May 19, 2016 5:43 pm

Re: Indexed Universal Life Question

Post by Dottie57 » Wed Jan 31, 2018 5:36 pm

CAGR wrote:
Wed Jan 31, 2018 5:24 pm
Thank you all for the responses and information.

I confirmed that I can surrender the policy and get back right at 71K - about 1500 less than I have put in. I was wrong above - I have had the policy for almost 5 years . . .how time flies.

It was asked above what I would do with the money if I did surrender it - I would dump the money into Vanguard VTSAX in a regular brokerage account.

I got an in force illustration of the policy which was shown with a hypothetical gross rate of return of 7.2%.
It shows a dividend rate of return of 2%, capital growth rate of 5.2%, hypothetical gross rate of return 7.2% and investment expenses of 1%.
It says expenses are included in the projection.

It shows with current 14k annual policy premiums will have 1.28M cash value at age 64 with a 1.6M death benefit.
The projection then shows taking out 120K a year until age 95 when there will be a 660K cash value remaining with 770K death benefit.

The benefits I was told that is important for physicians is the cash value is protected from claimants and creditors. And then the up to 3M in tax free retirement income while still having a death benefit for 5 kids.

Appreciate your thoughts/opinions
Never believe a salesperson without verification from other sources. Buy a large umbrella policy to protect yourself.

I don't think the retirement income would be tax free but deferred - not sure.

I bet you wiil have much more staying with a mutual fund and paying taxes than continuing with something that eats at your returns every single year.

EHEngineer
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Re: Indexed Universal Life Question

Post by EHEngineer » Wed Jan 31, 2018 5:59 pm

CAGR wrote:
Tue Jan 30, 2018 6:58 pm
So my question to the insurance experts, is what to do now? Or at least what variables should I be looking at to make that decision.
I understand a cheap term policy is typically the right answer.

Appreciate your advice and time.

CAGR
Make sure you have a term policy(s) in place before you cancel the IUL(s).

A note of congratulations. 5 years to breakeven is excellent. This is the best (shortest) breakeven periods of which I have ever heard for any cash value life insurance policy. My own permanant life policies are 20 years to breakeven (not including inflation).
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius

noraz123
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Re: Indexed Universal Life Question

Post by noraz123 » Wed Jan 31, 2018 6:26 pm

EHEngineer wrote:
Wed Jan 31, 2018 5:59 pm
A note of congratulations. 5 years to breakeven is excellent. This is the best (shortest) breakeven periods of which I have ever heard for any cash value life insurance policy. My own permanant life policies are 20 years to breakeven (not including inflation).
This. Moreover, since you already at breakeven, there is no need to play any tax games with variable annuities. For any others reading or coming across this thread, if you are thinking of canceling a permanent life insurance policy (indexed universal, universal, whole, etc.), there is a great article at The White Coat Advisor (the blogger also is a frequent contributor to Bogleheads) on how best to cancel these policies, especially if you have a loss. Article is here - https://www.whitecoatinvestor.com/how-t ... ife-policy

Nate79
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Location: Portland, OR

Re: Indexed Universal Life Question

Post by Nate79 » Wed Jan 31, 2018 6:40 pm

Dump this junk.

afan
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Re: Indexed Universal Life Question

Post by afan » Thu Feb 01, 2018 1:00 pm

With those figures you can run a spreadsheet using the same gross returns, same from dividends and from unrealized captial gains. Use 0.05% as the expenses, tax the dividends at your rate for dividends.

Starting at retirement age start borrowing from your taxable fund instead of the life insurance policy. Assume you buy 20 year level term policies, then cancel them. So after 20 years you would no longer be paying insurance premiums. You can then compare the value in retirement to the value of the insurance policy.

The money you get from borrowing against your taxable account or borrowing against your life insurance both will be free of income taxes.

Keep in mind that if investment returns are considerably worse than projected during retirement all that happens with the taxable account is that you might be limited in what you can borrow. Bad enough and you get a margin call to restore the funds in the account. With the insurance policy you can find yourself far underwater with mortality charges that continue long after your need for a death benefit. Then you can face a huge bill to keep the policies in force or a huge tax bill if you let it lapse.

But I seriously doubt the 1% figure includes all the expenses. This might be the expense ratio on the investment account but somewhere the insurance company is also charging for insuring your lives.

That cost goes up as you get older and with the insurance strategy you are forced to pay for this long past the point at which you need it.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

pintail07
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Re: Indexed Universal Life Question

Post by pintail07 » Thu Feb 01, 2018 8:45 pm

As an old mentor use to tell me about insurance illustration projections, the only thing this proves is that paper takes ink. Never base anything with insurance based on anything but guarantees. I am a 38year veteran of the business and would never ever recommend this product.

afan
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Re: Indexed Universal Life Question

Post by afan » Fri Feb 09, 2018 2:16 pm

Your agent will REALLY not want to talk about the guarantees. Those returns will look terrible.

Among the many problems with the indexed products is that the share of the market return you get is capped. What the cap might be varies, but for example: If the market returned 7% one year you might get 7%. If it returned 15% you might get the cap instead, say 10%. Since the market returns vary widely year by year, a design like this will ensure you get a return well below the market, even if you choose a figure well below the cap as the illustrated long term mean. That long term mean includes those years with returns above the cap. Your performance will not include those high returns and you will still be paying all the fees.


Back in my insurance shopping days I had some agents who would get an illustration from the company, then remove most of the pages and send me only the ones that showed a nice performance. I actually had to point out to them that it was printed ON THE ILLUSTRATION that it was not valid without all the pages.

It would be just about impossible for an indexed product to have good guaranteed rates of return.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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BL
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Re: Indexed Universal Life Question

Post by BL » Fri Feb 09, 2018 9:55 pm

The projection then shows taking out 120K a year until age 95 when there will be a 660K cash value remaining with 770K death benefit.
I do believe you don't get both cash value AND death benefit, so just death benefit when you die.
The insurance costs go way up as you get old, so more and more money is required to keep policy in force. If you have borrowed too much so that the policy crashes, you will probably owe ordinary tax on the amount over your basis.

The link you provided was by the White Coat Investor, or EmergDoc when he posts here. I know he has also written a book on investing; his blog has lots of topics you may be interested in.

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