Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

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Topic Author
ef11
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Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by ef11 » Tue Aug 13, 2019 6:38 pm

Hello Bogleheads,

I know what is to come of this thread...and I'm excited to read everyone's thoughts. I know everyone says these products are high-cost, low-performance trash that should be avoided at all costs. And I certainly tend to agree, but I would like some facts as I help educate my friend and help him make this decision.

He is 30 years old, married, one young child, high household income and maxing both 401ks and have other money piling up in taxable accounts. His main concern is that in retirement his 401k will be $10 MM + and all taxable, so he is open to hearing about creating any tax-free money he can pull from.

My immediate recommendation is to start doing backdoor Roths to the tune of $12,000 a year, but he has received the below two quotes from insurance agents. I put together a calculation showing $12,000 a year into a Roth minus $720 a year for a $1 MM 30 year term and it comes out to have about $1.1 MM in a Roth at 65. And no one here would say with $1.1 MM at 65 you could draw down $96,000 a year until age 90 like the Midland National policy says.

First policy is from Minnesota Life - Shows a $1,000/mo premium, 7.44% illustrated rate, includes four $35,000 loans for daughters college, and $72,000 in tax-free loans from 65-90 years of age.

Second policy is from Midland National - Same illustration as above but with a 6.23% illustrated rate, shows he can take $96,000 in tax-free loans from age 65-90 years of age.

This all seems way too good to be true, but the illustrated rates don't seem that unreasonable? My assumption is charges will actually go up vs. what they illustrate and the rate he will actually get will be much less, but both policies show the history of the indexes and what would have been credited and it doesn't seem too outlandish.

Any help is greatly appreciated. I am very sorry the images aren't crystal clear on here, on my PC they look fine...

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FiveK
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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by FiveK » Tue Aug 13, 2019 7:46 pm

ef11 wrote:
Tue Aug 13, 2019 6:38 pm
His main concern is that in retirement his 401k will be $10 MM + and all taxable, so he is open to hearing about creating any tax-free money he can pull from.
If that is his main concern, is it valid? In other words, what is he assuming to get the $10 MM number?

Does either 401k plan offer
- a Roth option?
- a non-Roth after tax option?

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Nate79
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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by Nate79 » Tue Aug 13, 2019 8:07 pm

Sounds like he has a salesman after his money and attempting to sell these scam like products. Do a search on here to reach about these horrendous products. No real reason to dig into the details of the policies.

$10m is not really that much and following Boglehead principles of investing is just fine -extremely tax efficient and low cost compared to what he is being sold.

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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by thx1138 » Tue Aug 13, 2019 8:07 pm

How are you getting 1.1M?

If you use their assumption of 8% return then the correct IRA balance to compare to is 2.23M for 12,000 per year. (Or 2.08M if you knock off the 720 per year for insurance). These are *nominal* and not *real* income and balance numbers the same as the insurance is listing.

Note that the life insurance scam (I’m sorry, I meant policy) is giving a *nominal* income in retirement.

The rule of thumb 4% SWR from an IRA is for *real* income. So starting with a 2.08M *nominal* balance at age 65 the IRA will produce 80K of *real* income in age 65 dollars. The insurance policy illustrations are showing *declining* real income through retirement. Not good.

Anyway I’m not very familiar with these things but I suspect you probably sensibly used *real* return rates in your IRA calculation while the predators selling to your friend are using misleading *nominal* rates.

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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by FoolStreet » Tue Aug 13, 2019 8:17 pm

ef11 wrote:
Tue Aug 13, 2019 6:38 pm
Hello Bogleheads,

I know what is to come of this thread...and I'm excited to read everyone's thoughts. I know everyone says these products are high-cost, low-performance trash that should be avoided at all costs. And I certainly tend to agree, but I would like some facts as I help educate my friend and help him make this decision.

He is 30 years old, married, one young child, high household income and maxing both 401ks and have other money piling up in taxable accounts. His main concern is that in retirement his 401k will be $10 MM + and all taxable, so he is open to hearing about creating any tax-free money he can pull from.

My immediate recommendation is to start doing backdoor Roths to the tune of $12,000 a year, but he has received the below two quotes from insurance agents. I put together a calculation showing $12,000 a year into a Roth minus $720 a year for a $1 MM 30 year term and it comes out to have about $1.1 MM in a Roth at 65. And no one here would say with $1.1 MM at 65 you could draw down $96,000 a year until age 90 like the Midland National policy says.

First policy is from Minnesota Life - Shows a $1,000/mo premium, 7.44% illustrated rate, includes four $35,000 loans for daughters college, and $72,000 in tax-free loans from 65-90 years of age.

Second policy is from Midland National - Same illustration as above but with a 6.23% illustrated rate, shows he can take $96,000 in tax-free loans from age 65-90 years of age.

This all seems way too good to be true, but the illustrated rates don't seem that unreasonable? My assumption is charges will actually go up vs. what they illustrate and the rate he will actually get will be much less, but both policies show the history of the indexes and what would have been credited and it doesn't seem too outlandish.

Any help is greatly appreciated. I am very sorry the images aren't crystal clear on here, on my PC they look fine...
For heavens sake this is complicated and ridiculous. In year one, he pays 12k and has a surrender value of about 9k. It cost him 3k for how much insurance? Run, don’t walk away.

What is an illustrated rate?

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David Jay
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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by David Jay » Tue Aug 13, 2019 8:26 pm

thx1138 wrote:
Tue Aug 13, 2019 8:07 pm
If you use their assumption of 8% return then the correct IRA balance to compare to is 2.23M for 12,000 per year.
Their return is for the SP 500 INDEX (not SP500 total return), so with dividends the 8% becomes upper-9%, very close to 10%. Unrealistic, but needs to be calculated in for an IRA balance.
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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by thx1138 » Tue Aug 13, 2019 8:38 pm

David Jay wrote:
Tue Aug 13, 2019 8:26 pm
thx1138 wrote:
Tue Aug 13, 2019 8:07 pm
If you use their assumption of 8% return then the correct IRA balance to compare to is 2.23M for 12,000 per year.
Their return is for the SP 500 INDEX (not SP500 total return), so with dividends the 8% becomes upper-9%, very close to 10%. Unrealistic, but needs to be calculated in for an IRA balance.
Yes they have the usual “you only get the upside” deal with a “0% growth floor” all for the low, low cost of them pocketing all the dividends. Another form of predatory sales.

But given their overly rosy estimates on everything I was just having the IRA use the same unrealistic fixed rate they used in their example to show how far off the OPs IRA calculation was if it was to make similar assumptions as the insurance example.

As you point out though there are layers and layers of dishonesty on top of that.

mhalley
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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by mhalley » Tue Aug 13, 2019 8:48 pm

Sounds like a first world problem. Do the backdoor Roth’s, mega backdoor Roth if available, hsa, cut back on 401k and invest in taxable account instead. Don’t know if this guy meets the criteria for the very few that need whole life. I don’t see “has a lot of money in 401k”on WCI list.
https://www.whitecoatinvestor.com/appro ... insurance/
From another WCI article on myths of whole life
. Myth # 6 Whole Life Is A Great Way To Save On Taxes
Whole life isn’t the best way to lower your investment tax bill, retirement accounts are. Many agents like to tout the tax benefits of whole life insurance, often comparing it to a 401K or a Roth IRA. The cash value does grow in a tax-protected manner, the cash value can be borrowed tax-free, and proceeds from the policy at your death are income (although not estate) tax-free. So some whole life advocates suggest you use whole life insurance instead of a retirement account like a 401K or a Roth IRA. However, a 401K or Roth IRA not only provides MORE tax savings and allows you to invest in riskier investments that are likely to provide you a higher return, but you also don’t have to borrow your own money, nor pay interest for the privilege of doing so.

I’ve posted previously about the Three Ways A 401K Saves You On Taxes and on how Whole Life Insurance Is Not Like a Roth IRA. I’ve also posted about how tax-efficient investments in a Taxable Investing Account don’t carry nearly the tax burden agents like to tell you they do. Are there tax benefits of investing in life insurance? Yes, but they are dramatically oversold.

Topic Author
ef11
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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by ef11 » Tue Aug 13, 2019 9:03 pm

Thank you all for the replies. I agree that all I've ever been told is these products are trash, but when looking at the illustrations, they seem to look pretty good. So what other ammo can I use besides just saying they are crappy products?
FiveK wrote:
Tue Aug 13, 2019 7:46 pm
ef11 wrote:
Tue Aug 13, 2019 6:38 pm
His main concern is that in retirement his 401k will be $10 MM + and all taxable, so he is open to hearing about creating any tax-free money he can pull from.
If that is his main concern, is it valid? In other words, what is he assuming to get the $10 MM number?

Does either 401k plan offer
- a Roth option?
- a non-Roth after tax option?
He is assuming both maxing 401k out and an additional $12,000 in backdoor Roths, so $50,000 a year starting at $250,000 at 30. Getting $10 MM + is certainly doable.

I did have him send me his 401k prospectus and SPD to see if he MAY have Mega Backdoor Roth option (I used it at Mega Corp for several years) but he does not have it. He does have Roth 401k option though, but he does like the tax deduction he gets now. So I don't think the answer is switch to all Roth 401k.
thx1138 wrote:
Tue Aug 13, 2019 8:07 pm
How are you getting 1.1M?

If you use their assumption of 8% return then the correct IRA balance to compare to is 2.23M for 12,000 per year. (Or 2.08M if you knock off the 720 per year for insurance). These are *nominal* and not *real* income and balance numbers the same as the insurance is listing.

Note that the life insurance scam (I’m sorry, I meant policy) is giving a *nominal* income in retirement.

The rule of thumb 4% SWR from an IRA is for *real* income. So starting with a 2.08M *nominal* balance at age 65 the IRA will produce 80K of *real* income in age 65 dollars. The insurance policy illustrations are showing *declining* real income through retirement. Not good.

Anyway I’m not very familiar with these things but I suspect you probably sensibly used *real* return rates in your IRA calculation while the predators selling to your friend are using misleading *nominal* rates.
I think the main thing that you left out was the $140,000 in loans for college that the life insurance and I took out in our comparisons. That is why the numbers are lower. I wouldn't say taking that money out of a Roth account is the best solution, BUT I was trying to provide an apples to apples comparison for him.
FoolStreet wrote:
Tue Aug 13, 2019 8:17 pm
For heavens sake this is complicated and ridiculous. In year one, he pays 12k and has a surrender value of about 9k. It cost him 3k for how much insurance? Run, don’t walk away.

What is an illustrated rate?
Well he is looking at age 65, not after year one. But yes, I see your point.

My understanding is the Illustrated rate is the rate they create the illustration with.

What really throws me for a loop is the Minnesota ones uses a higher rate but shows less retirement income than Midland, and it is a very big difference...
mhalley wrote:
Tue Aug 13, 2019 8:48 pm
Sounds like a first world problem. Do the backdoor Roth’s, mega backdoor Roth if available, hsa, cut back on 401k and invest in taxable account instead. Don’t know if this guy meets the criteria for the very few that need whole life. I don’t see “has a lot of money in 401k”on WCI list.
https://www.whitecoatinvestor.com/appro ... insurance/
From another WCI article on myths of whole life
Cut back on 401k and invest in taxable account instead? That isn't truly a better option for him is it? I understand it may make him feel his tax liability is less but I don't think this would truly be advised for him?
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unclescrooge
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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by unclescrooge » Tue Aug 13, 2019 9:09 pm

Wife's co-worker was sold 2 of these policies by her CPA.

She asked me if I could help her understand why they hadn't really grown much over the past 9 years, even though she was expecting 5-6% return.

I read the contracts and recalculated the returns over the past 9 years.

Tthe policy was solid into 2. Part I said she would make either zero lower bound or the SP500 up to 6% a year. Part II said she would make either zero lower bound or if SP500 was positive, she would make a flat 4.5% return. Seems like a no brainer way to make 5.25% a year, right?

When I calculated the actual results based on sp500 returns, it turns out she made 1.9% a year.

Stock market volatility kills your returns.

JBTX
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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by JBTX » Tue Aug 13, 2019 9:12 pm

So if I'm reading this right, the growth cap can be changed at the end of any one year segment due to "market conditions" or if they aren't making enough money.

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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by BruDude » Tue Aug 13, 2019 9:13 pm

Insurance agent here - a few points:

1. These policies are not variable. Variable policies can lose value and require a securities license to be sold, and they do not have a 0% growth floor.

2. The illustrated rates returned are very high. Agents should not be illustrating 7% returns (my personal opinion). 5% is considered a "safely illustrated" projection, 7% is definitely bordering on unrealistic. Of course, the agent wants to illustrate a high number because it looks better to the client.

3. The insurance company can raise the cost of insurance within the policy at any time. They can also decrease the caps on the interest rates at any time. When both of these happen together, they can have a massive impact on the long-term policy performance. See: 1980's universal life insurance policies that were illustrated with 8-12% interest rates that are now getting 3-4% with significantly higher cost of insurance charges.

4. Policy loans can also have a huge impact on the policy performance, especially if you are taking a loan at the same time that the market is returning lower interest rates and/or the insurance company has raised the cost of insurance charges.

5. The policy illustration that the insured has to sign will have 3 sections being illustrated - the "current" scenario, a.k.a. the best possible scenario, the "guaranteed" scenario which is the worst-case and assumes the insurance company maxes out the cost of insurance charges and the policy interest returns 0% or the minimum amount every year (unrealistic, but possible), and the "mid-point" scenario in between the two, which is probably the most realistic. The agent appears to only be featuring the "current" pie-in-the-sky scenario on the first policy instead of fully explaining the risks of the policy and what happens on the guaranteed/mid-point scenarios. Of course, I don't know the agent so maybe he explained this to your friend, but agents frequently gloss over these items because they don't help sell anything.

You can see these in the second policy example. Look how fast the policy crashes in the guaranteed and mid-point scenarios - 17 years in on the guaranteed side and 38 years in on the mid-point. It would really suck to pay $12,000/year in premiums for a policy that is designed to build cash value and be left with nothing after 20-40 years.

6. If the loan is not paid back, the policy can "crash" where there is no cash value left and no death benefit. It can also crash without a loan, but a loan accelerates how fast it would happen because you are removing cash value from the policy and therefore not receiving interest on that cash value, while at the same time paying interest on the amount taken out. If the accumulated value exceeds the premiums paid for the policy, when the policy crashes, he would have to pay a tax on the gain or inject more money into the policy to avoid it crashing.

7. I know BH is anti-whole life, but if he wants to do this the "safe" way, he should be doing it with a whole life policy. There are ways to overfund/max fund a whole life policy to generate maximum cash value instead of maximum death benefit. IUL policies are very complicated even for most agents to understand, let alone your average person. When he looks at the policy in 5 or 10 years, will he even remember what was explained to him by the agent? Whole life policies are fully guaranteed and carry less risk since they can't "crash" like a UL policy.

Depending on what state your friend lives in, a cash value life insurance policy can also serve as asset protection that can't be touched by creditors. Every state has different laws regarding this. In Florida for example, 100% of the cash value in a life insurance policy cannot be claimed by creditors in the event of a bankruptcy or lawsuit (such as a malpractice suit that exceeds the limits a doctor is insured for).

In short, I am not a fan of IUL policies in general. They are extremely complicated, have too many moving parts, and what you are promised today is not likely to be what you get over the course of 30+ years. Whole policies are a much safer bet and the major mutual companies (Guardian, Mass Mutual, New York Life, etc) have a 100+ year track record of paying a dividend on the policies every year, so at least they are consistent. That is not to say it's the best option for your friend, but it is certainly much safer and he wouldn't be risking $300k+ in premiums hoping that everything works out as shown in the quote.

thx1138 wrote:
Tue Aug 13, 2019 8:38 pm
David Jay wrote:
Tue Aug 13, 2019 8:26 pm
thx1138 wrote:
Tue Aug 13, 2019 8:07 pm
If you use their assumption of 8% return then the correct IRA balance to compare to is 2.23M for 12,000 per year.
Their return is for the SP 500 INDEX (not SP500 total return), so with dividends the 8% becomes upper-9%, very close to 10%. Unrealistic, but needs to be calculated in for an IRA balance.
Yes they have the usual “you only get the upside” deal with a “0% growth floor” all for the low, low cost of them pocketing all the dividends. Another form of predatory sales.

But given their overly rosy estimates on everything I was just having the IRA use the same unrealistic fixed rate they used in their example to show how far off the OPs IRA calculation was if it was to make similar assumptions as the insurance example.

As you point out though there are layers and layers of dishonesty on top of that.
They don't pocket the dividends. An IUL policy is not directly invested in the stock market, the interest rate returned just tracks the index.

FoolStreet
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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by FoolStreet » Tue Aug 13, 2019 9:16 pm

unclescrooge wrote:
Tue Aug 13, 2019 9:09 pm
Wife's co-worker was sold 2 of these policies by her CPA.

She asked me if I could help her understand why they hadn't really grown much over the past 9 years, even though she was expecting 5-6% return.

I read the contracts and recalculated the returns over the past 9 years.

Tthe policy was solid into 2. Part I said she would make either zero lower bound or the SP500 up to 6% a year. Part II said she would make either zero lower bound or if SP500 was positive, she would make a flat 4.5% return. Seems like a no brainer way to make 5.25% a year, right?

When I calculated the actual results based on sp500 returns, it turns out she made 1.9% a year.

Stock market volatility kills your returns.
By her CPA??? Complete conflict of interest. Disgusting.

02nz
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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by 02nz » Tue Aug 13, 2019 9:17 pm

So complicated ... which is the point. Insurance companies have opaque and complex products where they hide the high cost. If your friend needs insurance, buy (term) life insurance. But I would never, ever buy an investment product marketed by an insurance company. Easy way to overpay.

Stick to low-cost investments. If he really does end up with a $10 million retirement balance and has to pay a lot of taxes, well that's a very nice problem to have (and can be mitigated with any number of strategies that don't involve high-cost insurance products).

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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by BruDude » Tue Aug 13, 2019 9:20 pm

FoolStreet wrote:
Tue Aug 13, 2019 9:16 pm
unclescrooge wrote:
Tue Aug 13, 2019 9:09 pm
Wife's co-worker was sold 2 of these policies by her CPA.

She asked me if I could help her understand why they hadn't really grown much over the past 9 years, even though she was expecting 5-6% return.

I read the contracts and recalculated the returns over the past 9 years.

Tthe policy was solid into 2. Part I said she would make either zero lower bound or the SP500 up to 6% a year. Part II said she would make either zero lower bound or if SP500 was positive, she would make a flat 4.5% return. Seems like a no brainer way to make 5.25% a year, right?

When I calculated the actual results based on sp500 returns, it turns out she made 1.9% a year.

Stock market volatility kills your returns.
By her CPA??? Complete conflict of interest. Disgusting.
x2, a CPA that sells insurance is not really a CPA. If they were any good, they wouldn't need to sell insurance on the side, not to mention the conflict of interest. Jack of all trades, master of none.

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FiveK
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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by FiveK » Tue Aug 13, 2019 9:37 pm

ef11 wrote:
Tue Aug 13, 2019 9:03 pm
He is assuming both maxing 401k out and an additional $12,000 in backdoor Roths, so $50,000 a year starting at $250,000 at 30. Getting $10 MM + is certainly doable.
1. The backdoor Roth will grow and be withdrawn tax free, so that doesn't count.
2. Appears the assumptions (in addition to the given $250K in the t401k at age 30) are
- retire at age 65
- contribute $38K/yr for 35 years
- earn 8% real CAGR over those 35 years.

It's a free country so one can make whatever assumptions one wants, but the possibilities of
- shorter and/or interrupted careers, either by choice or not
- lower real returns
suggest that "fears" of a $10 million traditional account may be overblown.

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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by mhalley » Tue Aug 13, 2019 9:47 pm

No, I’m not really suggesting not maxing all retirement accounts, just noting a way to not have 10million in 401k while not buying whole life. I would love to have 10 million. Would I rather have it in a Roth or a taxable account? Sure, but I wouldn’t cry myself to sleep if it was in my 401k.
I can’t recall if anyone mentioned doing qcds from the 10 million dollar 401k.
https://www.kiplinger.com/article/taxes ... -rmds.html

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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by Grt2bOutdoors » Tue Aug 13, 2019 10:05 pm

BruDude wrote:
Tue Aug 13, 2019 9:20 pm
FoolStreet wrote:
Tue Aug 13, 2019 9:16 pm
unclescrooge wrote:
Tue Aug 13, 2019 9:09 pm
Wife's co-worker was sold 2 of these policies by her CPA.

She asked me if I could help her understand why they hadn't really grown much over the past 9 years, even though she was expecting 5-6% return.

I read the contracts and recalculated the returns over the past 9 years.

Tthe policy was solid into 2. Part I said she would make either zero lower bound or the SP500 up to 6% a year. Part II said she would make either zero lower bound or if SP500 was positive, she would make a flat 4.5% return. Seems like a no brainer way to make 5.25% a year, right?

When I calculated the actual results based on sp500 returns, it turns out she made 1.9% a year.

Stock market volatility kills your returns.
By her CPA??? Complete conflict of interest. Disgusting.
x2, a CPA that sells insurance is not really a CPA. If they were any good, they wouldn't need to sell insurance on the side, not to mention the conflict of interest. Jack of all trades, master of none.
+3. Btw, thanks for explaining the quicksand one who buys these policies will find themselves in.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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unclescrooge
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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by unclescrooge » Tue Aug 13, 2019 10:09 pm

FoolStreet wrote:
Tue Aug 13, 2019 9:16 pm
unclescrooge wrote:
Tue Aug 13, 2019 9:09 pm
Wife's co-worker was sold 2 of these policies by her CPA.

She asked me if I could help her understand why they hadn't really grown much over the past 9 years, even though she was expecting 5-6% return.

I read the contracts and recalculated the returns over the past 9 years.

Tthe policy was solid into 2. Part I said she would make either zero lower bound or the SP500 up to 6% a year. Part II said she would make either zero lower bound or if SP500 was positive, she would make a flat 4.5% return. Seems like a no brainer way to make 5.25% a year, right?

When I calculated the actual results based on sp500 returns, it turns out she made 1.9% a year.

Stock market volatility kills your returns.
By her CPA??? Complete conflict of interest. Disgusting.
That's exactly what I said. CPAs are supposed to be gate keepers protecting their clients assets. Not selling them some awful product.

Apparently he is affiliated with HDVest, which specializes in providing CPAs the tools they need to fleece their client.

He was also pitching her a direct real estate investment in a company called AEI funds.

The fund seems interesting. NNN commercial lease that pays out 5% monthly.

What he didn't tell her, and I found out through great difficulty was he gets paid a 9% commission off the top. On top of that, AEI collects a 3% entry load, charges 5% a year, self liquidates the fund in year 7 and also has the gall to take 20% any profit. :shock:

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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by ivk5 » Tue Aug 13, 2019 11:23 pm

unclescrooge wrote:
Tue Aug 13, 2019 10:09 pm
FoolStreet wrote:
Tue Aug 13, 2019 9:16 pm
unclescrooge wrote:
Tue Aug 13, 2019 9:09 pm
Wife's co-worker was sold 2 of these policies by her CPA.

[...]
By her CPA??? Complete conflict of interest. Disgusting.
That's exactly what I said. CPAs are supposed to be gate keepers protecting their clients assets. Not selling them some awful product.

Apparently he is affiliated with HDVest, which specializes in providing CPAs the tools they need to fleece their client.

He was also pitching her a direct real estate investment in a company called AEI funds.

The fund seems interesting. NNN commercial lease that pays out 5% monthly.

What he didn't tell her, and I found out through great difficulty was he gets paid a 9% commission off the top. On top of that, AEI collects a 3% entry load, charges 5% a year, self liquidates the fund in year 7 and also has the gall to take 20% any profit. :shock:


Your state licensing agency may take an interest. (Example for NY: http://www.op.nysed.gov/opd/complain.htm)

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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by FIREchief » Tue Aug 13, 2019 11:35 pm

OP: Bogleheads has some of the smartest people I know. Sometimes they disagree:

a) should I invest my equities in 100% US or global market weighted?
b) should I invest a lump sum immediately or dollar cost average?
c) is it okay for a person under 40 to invest 100% in stocks?

There will never be full agreement on those issues, so it warrants taking the time to understand the arguments on both sides before choosing a course of action. It is likely that twenty years from now we may look back and see that either it didn't make much difference or some unknowable aspect made one or the other the more profitable choice.

Sometimes they agree:
a) insurance is a lousy investment mechanism
b) market timing is a bad approach
c) nobody has any idea what the markets will do over the next one, two, five years

When there is strong consensus on this forum, then there is little point in wasting time trying to understand all the why's (might make a good hobby, but the answer won't change). It would take a lot of work to fully decipher those insurance scenarios, but why bother? Tell your friend to buy term insurance to protect his family and then to come here for investing advice. :sharebeer
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by unclescrooge » Tue Aug 13, 2019 11:38 pm

ivk5 wrote:
Tue Aug 13, 2019 11:23 pm
unclescrooge wrote:
Tue Aug 13, 2019 10:09 pm
FoolStreet wrote:
Tue Aug 13, 2019 9:16 pm
unclescrooge wrote:
Tue Aug 13, 2019 9:09 pm
Wife's co-worker was sold 2 of these policies by her CPA.

[...]
By her CPA??? Complete conflict of interest. Disgusting.
That's exactly what I said. CPAs are supposed to be gate keepers protecting their clients assets. Not selling them some awful product.

Apparently he is affiliated with HDVest, which specializes in providing CPAs the tools they need to fleece their client.

He was also pitching her a direct real estate investment in a company called AEI funds.

The fund seems interesting. NNN commercial lease that pays out 5% monthly.

What he didn't tell her, and I found out through great difficulty was he gets paid a 9% commission off the top. On top of that, AEI collects a 3% entry load, charges 5% a year, self liquidates the fund in year 7 and also has the gall to take 20% any profit. :shock:
Your state licensing agency may take an interest. (Example for NY: http://www.op.nysed.gov/opd/complain.htm)
He probably has a securities license and follows the suitability standard. Not sure there is anything illegal about what he's doing.

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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by DarkHelmetII » Wed Aug 14, 2019 11:16 am

1) Consider TIAA / Ameritas for VUL. I have run some critical numbers of taxable accounts vs. these low-cost VUL platforms and if everything goes to plan the VUL may win out a little bit due to the tax advantages. But there are so many ways the strategy could backfire (e.g. max / higher charges, tax "time bomb" if policy lapses, mismanagement of MEC status, funding velocity is different than projected). My assumption is that with Midland or Minnesota life expenses will exceed TIAA / Ameritas and as such would be better off with taxable account.

2) The fact that major low-cost providers such as TIAA and Ameritas don't even offer the IUL says something about the commission structure / expenses on that product.

3) IUL, cost aside, is probably too conservative assuming friend can take the swings of a typical boglehead portfolio.

4) Seek cost-effective, highly specialized, impartial advice through https://evaluatelifeinsurance.org/. Dude is an actuary and retired insurance commissioner.

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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by Stinky » Wed Aug 14, 2019 2:04 pm

FIREchief wrote:
Tue Aug 13, 2019 11:35 pm

When there is strong consensus on this forum, then there is little point in wasting time trying to understand all the why's (might make a good hobby, but the answer won't change). It would take a lot of work to fully decipher those insurance scenarios, but why bother? Tell your friend to buy term insurance to protect his family and then to come here for investing advice. :sharebeer
There is definitely strong consensus on this forum about variable and indexed UL being trash. I'm in that camp, 99.99% of the time.

This time is no exception. If your friend needs life insurance, tell him to buy level term life insurance. If he needs to invest, then maximize his tax-deferred and tax-sheltered opportunities, and invest in a taxable account.

Insurance companies don't have any magic way to grow someone's UL policy at a rate higher than the market grows. (I know, I worked for one, and saw many products like this.) Actually, an insurance product will produce less than the return that you could get in a taxable account, because:
- The insurance company needs to pay the agent a commission.
- The insurance company needs to pay policy administration and acquisition expenses.
- The insurance company needs to make a profit.
- The insurance company needs to put up capital to support the product. The capital has a cost that is factored into the product.
- The insurance company is limited to relatively less-risky investments.
- Etc., etc.

Your friend will regret buying a policy like this. Tell him not to buy it.
It's a GREAT day to be alive - Travis Tritt

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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by Olemiss540 » Wed Aug 14, 2019 2:50 pm

Rediculous that salesmen can convince people they would be worse off being wealthy and owning income taxes, all to make the purchaser feel they are getting in on some scheme to evade taxes and not be getting sold some BS product created to pay the salesman an extremely hefty commission and the insurance company a guaranteed expense ratio.
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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by deikel » Wed Aug 14, 2019 3:22 pm

Besides the specific product discussed, I don't understand the underlying assumptions:

Is this product purchased within his 401k or IRA ? If so, then whatever great product this is (or not) would get taxed on its way out of the account anyway, where is the tax advantage - if that was the initial concern of having 10 mil in a 401k (nice problem to have btw) ?

or is this intended to be purchased with after tax dollars compared to a taxable account ? Then why on earth would I want such a complicated product and not directly invest into the underlying investment and conceptually pocket the processing fees and risk fees (neither openly stated I guess) myself ?

I really don't like that they pretend an investment product to be an insurance, every insurance agent should protest this since they use the positive connotation of insurance to piggy back it onto a risky investment product.

What benefits are they really selling - guaranteed investment wins capped up and down ? Who is taking such stuff serious ?
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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by deikel » Wed Aug 14, 2019 3:26 pm

Olemiss540 wrote:
Wed Aug 14, 2019 2:50 pm
Rediculous that salesmen can convince people they would be worse off being wealthy and owning income taxes, all to make the purchaser feel they are getting in on some scheme to evade taxes and not be getting sold some BS product created to pay the salesman an extremely hefty commission and the insurance company a guaranteed expense ratio.
+1

...wagging the dog with the tax tail....and scaring people into making money because they have to pay some taxes from it....the only good thing that can be said is that they are screwing over a rich person (in this case anyway)...
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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by SuperSaver1975 » Wed Aug 14, 2019 3:31 pm

FoolStreet wrote:
Tue Aug 13, 2019 8:17 pm
What is an illustrated rate?
A fictional rate. ;-)

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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by SuperSaver1975 » Wed Aug 14, 2019 4:02 pm

ef11 wrote:
Tue Aug 13, 2019 9:03 pm
So what other ammo can I use besides just saying they are crappy products?
Here's one way of thinking about it:

Start with the life insurance aspect. Plain ol' term life insurance is the way to go. It's simple, easy to understand. Lots of competition, so you know you are not getting ripped off. Once enough money is saved, the life insurance is no longer needed in the later years. By the time your friend saves millions, he'll no longer need a life insurance policy.

With that out of the way, think about the investment part: The info on this site shows you how to invest with the lowest possible cost. The people selling these trash insurance policies make money both on the huge commissions at the beginning, and skimming off the profits for themselves, year after year, decade after decade. How would it even be possible to make more money with these leaches getting fat off your friend's money? He can't make more money by inserting a bunch of greedy middlemen between himself and his money. The obvious answer is he should invest it himself, without middlemen.

These products are designed to be confusing to make it easier to fleece people. The answer is to keep insurance separate from investing, and to have a simple approach for both.

A financial "advisor" (insurance salesman) wanted to sell us a whole life policy. He could run simulations for us. Simulation 1 invested $16,000/year in a whole life policy. Simulation 2 invested the same amount in a taxable account. Even in these biased simulations run by the FA to try to sell the insurance policies, the taxable account came out ahead in a side-by-side comparison. The taxable account made a lot more, and even after paying taxes, the taxable investing was better. Plus, in real life, the rate of return for the whole life would have been a lot less than the "illustrated rate" used to sell the policy. The FA kept pointing out how we'd pay more taxes by using the taxable account, but I kept pointing out that regardless of taxes, I like the scenario where I have more money after taxes. And he kept saying "yeah, but you'll pay more in taxes!" We kept going around in circles and I fired him.

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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by ef11 » Wed Aug 14, 2019 6:39 pm

Thank you all for the thoughtful replies. Certainly a bad CPA being discussed above.
unclescrooge wrote:
Tue Aug 13, 2019 9:09 pm
Wife's co-worker was sold 2 of these policies by her CPA.

She asked me if I could help her understand why they hadn't really grown much over the past 9 years, even though she was expecting 5-6% return.

I read the contracts and recalculated the returns over the past 9 years.

Tthe policy was solid into 2. Part I said she would make either zero lower bound or the SP500 up to 6% a year. Part II said she would make either zero lower bound or if SP500 was positive, she would make a flat 4.5% return. Seems like a no brainer way to make 5.25% a year, right?

When I calculated the actual results based on sp500 returns, it turns out she made 1.9% a year.

Stock market volatility kills your returns.
Wow, so in a huge bull market run over the past 9 years she made 1.9% annualized? That seems almost impossible. Is that based on the surrender value or the account value? I wish there was a database of stories like this where people could upload their original illustrations and then 5, 10, 20 years later post their actual results...this might be the nail in the coffin these products need.
JBTX wrote:
Tue Aug 13, 2019 9:12 pm
So if I'm reading this right, the growth cap can be changed at the end of any one year segment due to "market conditions" or if they aren't making enough money.
That's how I read it as well...not comforting.
BruDude wrote:
Tue Aug 13, 2019 9:13 pm
Insurance agent here - a few points:

1. These policies are not variable. Variable policies can lose value and require a securities license to be sold, and they do not have a 0% growth floor.
On the Minnesota Life policy it shows 100% of the illustration allocated to variable subaccounts, so I think the first one is variable?
Stinky wrote:
Wed Aug 14, 2019 2:04 pm
FIREchief wrote:
Tue Aug 13, 2019 11:35 pm

When there is strong consensus on this forum, then there is little point in wasting time trying to understand all the why's (might make a good hobby, but the answer won't change). It would take a lot of work to fully decipher those insurance scenarios, but why bother? Tell your friend to buy term insurance to protect his family and then to come here for investing advice. :sharebeer
There is definitely strong consensus on this forum about variable and indexed UL being trash. I'm in that camp, 99.99% of the time.

This time is no exception. If your friend needs life insurance, tell him to buy level term life insurance. If he needs to invest, then maximize his tax-deferred and tax-sheltered opportunities, and invest in a taxable account.

Insurance companies don't have any magic way to grow someone's UL policy at a rate higher than the market grows. (I know, I worked for one, and saw many products like this.) Actually, an insurance product will produce less than the return that you could get in a taxable account, because:
- The insurance company needs to pay the agent a commission.
- The insurance company needs to pay policy administration and acquisition expenses.
- The insurance company needs to make a profit.
- The insurance company needs to put up capital to support the product. The capital has a cost that is factored into the product.
- The insurance company is limited to relatively less-risky investments.
- Etc., etc.

Your friend will regret buying a policy like this. Tell him not to buy it.
Both great points and I agree, in theory it makes no sense that an investment company can outperform the underlying indexes on their own. But the illustrations do such a great job making it seem like they can perform extremely well and turn after-tax dollars into tax-free dollars via policy loans (oh, and of course when you take loans the crediting rate is sold as being higher than the loan rate, so you still make money on the loan).
Olemiss540 wrote:
Wed Aug 14, 2019 2:50 pm
Rediculous that salesmen can convince people they would be worse off being wealthy and owning income taxes, all to make the purchaser feel they are getting in on some scheme to evade taxes and not be getting sold some BS product created to pay the salesman an extremely hefty commission and the insurance company a guaranteed expense ratio.
Well said
SuperSaver1975 wrote:
Wed Aug 14, 2019 4:02 pm
ef11 wrote:
Tue Aug 13, 2019 9:03 pm
So what other ammo can I use besides just saying they are crappy products?
Here's one way of thinking about it:

Start with the life insurance aspect. Plain ol' term life insurance is the way to go. It's simple, easy to understand. Lots of competition, so you know you are not getting ripped off. Once enough money is saved, the life insurance is no longer needed in the later years. By the time your friend saves millions, he'll no longer need a life insurance policy.

With that out of the way, think about the investment part: The info on this site shows you how to invest with the lowest possible cost. The people selling these trash insurance policies make money both on the huge commissions at the beginning, and skimming off the profits for themselves, year after year, decade after decade. How would it even be possible to make more money with these leaches getting fat off your friend's money? He can't make more money by inserting a bunch of greedy middlemen between himself and his money. The obvious answer is he should invest it himself, without middlemen.

These products are designed to be confusing to make it easier to fleece people. The answer is to keep insurance separate from investing, and to have a simple approach for both.

A financial "advisor" (insurance salesman) wanted to sell us a whole life policy. He could run simulations for us. Simulation 1 invested $16,000/year in a whole life policy. Simulation 2 invested the same amount in a taxable account. Even in these biased simulations run by the FA to try to sell the insurance policies, the taxable account came out ahead in a side-by-side comparison. The taxable account made a lot more, and even after paying taxes, the taxable investing was better. Plus, in real life, the rate of return for the whole life would have been a lot less than the "illustrated rate" used to sell the policy. The FA kept pointing out how we'd pay more taxes by using the taxable account, but I kept pointing out that regardless of taxes, I like the scenario where I have more money after taxes. And he kept saying "yeah, but you'll pay more in taxes!" We kept going around in circles and I fired him.
Thanks for the reply, and the laugh!
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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by unclescrooge » Wed Aug 14, 2019 7:34 pm

SuperSaver1975 wrote:
Wed Aug 14, 2019 4:02 pm
...And he kept saying "yeah, but you'll pay more in taxes!" We kept going around in circles and I fired him.
LOL. Classic!

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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by JBTX » Wed Aug 14, 2019 7:41 pm

I find that the people that push these push the earnings tax deferral angle pretty hard. When you mention that eventually the earnings comes out at ordinary income rates vs partly capital gains it doesn't seem to phase them. More than likely the higher eventual ordinary income tax rates will cost you more than the lower capital gains rate income earned now and later, and ordinary interest income now. And that doesn't even include the impact of fees.

It is basically like investing in a non deductible IRA with a high front end load and a liquidation penalty.

One positive of annuities is I think they have better asset protection than ordinary taxable assets. Some annuities might make sense for somebody currently in a very high tax rate, and has exhausted all retirement options and has plenty of liquidity and desires asset protection and wants to set it and forget it. But if you are going to do one I'd look for a low fee one, not ones sold directly by insurance companies or insurance agents.

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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by dratkinson » Wed Aug 14, 2019 8:00 pm

Skipped over policy analysis stuff. Beyond my understanding anyway.

Suggest your friend pay attention to the sections on costs (Can they be raised at any time? Can new costs be added at any time?) and surrender fees (believe 1st year surrender fee is salesman's commission). If these sections promise ill, then policy is made to sell, not to buy. Why? What the salesman promiseth, higher/new fees taketh away.



If he expects to have $10M in 401Ks at retirement, then he expect to have >$10M in taxable. Assuming half of taxable is in a 2% SEC yield muni bond fund, then that's >$100K/yr (=50% x >$10M x 2%) tax free (may be triple tax exempt) dividends.

Note: This gives him more/yr in retirement than insurance policy, and he didn't have to pay any salesman's commission. Suggest reading Swedroe's bond book, The Only Guide to a Winning Bond Strategy You'll Ever Need, to come up to speed on suggested bond fund options.


If DD will need 4x $32K/yr loans for college, then put enough principal into a 529 plan now, and let it grow tax-free to cover DD's need. The sooner invested, the more needed-growth is covered by compound interest.


Insurance for a growing family. Buy lowest cost term insurance that matches his need (pay off home, DD's college,...).


If he has a HDHP (high-deductible health plan) and HSA (health savings account), can use HSA as a stealth IRA. (Search forum for discussions. Have never had this option, but have read others' favorable opinions.)


Agree friend should move as much annually as possible into Roth IRA(s) (use backdoor Roth + mega backdoor Roth if available) for tax-free growth/withdrawals and to minimize RMDs in retirement. (Can search forum for "how to".)


In retirement, spend >$100K/yr tax-free from muni dividends (don't touch principal to maintain dividend stream) + RMDs + enough extra to cover need.


His is a nice problem to have. Believe he can solve it more reliably for himself without paying a salesman's commission.
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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by Stinky » Wed Aug 14, 2019 8:01 pm

ef11 wrote:
Wed Aug 14, 2019 6:39 pm

I agree, in theory fact it makes no sense that an investment company can outperform the underlying indexes on their own.

But the illustrations do such a great job making it seem like they can perform extremely well and turn after-tax dollars into tax-free dollars via policy loans

Because the illustrations are entirely misleading.
It's a GREAT day to be alive - Travis Tritt

Topic Author
ef11
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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by ef11 » Wed Aug 14, 2019 8:17 pm

JBTX wrote:
Wed Aug 14, 2019 7:41 pm
I find that the people that push these push the earnings tax deferral angle pretty hard. When you mention that eventually the earnings comes out at ordinary income rates vs partly capital gains it doesn't seem to phase them. More than likely the higher eventual ordinary income tax rates will cost you more than the lower capital gains rate income earned now and later, and ordinary interest income now. And that doesn't even include the impact of fees.

It is basically like investing in a non deductible IRA with a high front end load and a liquidation penalty.

One positive of annuities is I think they have better asset protection than ordinary taxable assets. Some annuities might make sense for somebody currently in a very high tax rate, and has exhausted all retirement options and has plenty of liquidity and desires asset protection and wants to set it and forget it. But if you are going to do one I'd look for a low fee one, not ones sold directly by insurance companies or insurance agents.
Just wanted to point out that this is not an annuity. And I don't think the earnings on these policies would eventually come out at ordinary income rates. The purchaser would just take tax-free loans from the policy, reducing the cash value and the death benefit. Although it doesn't seem to reduce it by THAT much, because the interest is credited to the account value and not the cash surrender value, apparently...
dratkinson wrote:
Wed Aug 14, 2019 8:00 pm
Skipped over policy analysis stuff. Beyond my understanding anyway.

Suggest your friend pay attention to the sections on costs (Can they be raised at any time? Can new costs be added at any time?) and surrender fees (believe 1st year surrender fee is salesman's commission). If these sections promise ill, then policy is made to sell, not to buy. Why? What the salesman promiseth, higher/new fees taketh away.

If he expects to have $10M in 401Ks at retirement, then he expect to have >$10M in taxable. Assuming half of taxable is in a 2% SEC yield muni bond fund, then that's >$100K/yr (=50% x >$10M x 2%) tax free (may be triple tax exempt) dividends.

Note: This gives him more/yr in retirement than insurance policy, and he didn't have to pay any salesman's commission. Suggest reading Swedroe's bond book, The Only Guide to a Winning Bond Strategy You'll Ever Need, to come up to speed on suggested bond fund options.

If DD will need 4x $32K/yr loans for college, then put enough principal into a 529 plan now, and let it grow tax-free to cover DD's need. The sooner invested, the more needed-growth is covered by compound interest.

Insurance for a growing family. Buy lowest cost term insurance that matches his need (pay off home, DD's college,...).

If he has a HDHP (high-deductible health plan) and HSA (health savings account), can use HSA as a stealth IRA. (Search forum for discussions. Have never had this option, but have read others' favorable opinions.)

Agree friend should move as much annually as possible into Roth IRA(s) (use backdoor Roth + mega backdoor Roth if available) for tax-free growth/withdrawals and to minimize RMDs in retirement. (Can search forum for "how to".)

In retirement, spend >$100K/yr tax-free from muni dividends (don't touch principal to maintain dividend stream) + RMDs + enough extra to cover need.

His is a nice problem to have. Believe he can solve it more reliably for himself without paying a salesman's commission.
I agree with what you have laid out, and it mirrors my initial thoughts for him pretty closely:
- Use DIME to determine roughly how much term life insurance he needs
- Place as much money into backdoor + mega backdoor Roth
- 529 plan for college savings
- Continuing saving and investing as much as possible, including tax-efficient taxable accounts.
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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by stlutz » Wed Aug 14, 2019 10:09 pm

ef11 wrote:
Tue Aug 13, 2019 9:03 pm
Thank you all for the replies. I agree that all I've ever been told is these products are trash, but when looking at the illustrations, they seem to look pretty good. So what other ammo can I use besides just saying they are crappy products?
Another way to look at these is to look at what actual historical returns would have been. Let's take the "Indexed Account A" option. It gives you a minimum return of 0% and a capped return of 9.25%. This is based on the price-only return of the index, not total return.

I took the S&P 500 total returns for the past 60 years (using the Simba/Simamond backtesting spreadsheet). For each year I subtracted 2% for dividends. That's probably a bit low but it works for this. I then compounded the returns based on those min=0%, max=9.25% parameters. The compound annual growth rate over that period would have been 5.83%. Note that this assumes absolutely no fees, interest on loans or insurance costs--I'll just treat those as zero.

For my comparison, I took the S&P 500 total return and compounded that over 60 years. The resulting return was 9.66%/yr. If divide 5.83%/9.66% per year, I get that the IUL would have given you 60% of the market returns over that time, again assuming absolutely no fees. So, this product only starts to make sense in taxable space if your friend's capital gain tax rate is over 40%. That is higher than the current maximum of 23.8% + your state's tax rate. This assumes that the investor is a bit dumb and books all of his gains every year. If you defer gains, then the tax rate to break even becomes even higher.

Again, this assumes absolutely no fees. In reality, the info. posted says there are costs of .56% per year. Once you start taking loans you also have to pay interest to the insurance company. The taxable investor only has the fee of the fund (.03% at Vanguard), but otherwise no costs.

Hopefully anybody will correct me if my logic/math is wrong.

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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by unclescrooge » Thu Aug 15, 2019 12:07 am

stlutz wrote:
Wed Aug 14, 2019 10:09 pm
ef11 wrote:
Tue Aug 13, 2019 9:03 pm
Thank you all for the replies. I agree that all I've ever been told is these products are trash, but when looking at the illustrations, they seem to look pretty good. So what other ammo can I use besides just saying they are crappy products?
Another way to look at these is to look at what actual historical returns would have been. Let's take the "Indexed Account A" option. It gives you a minimum return of 0% and a capped return of 9.25%. This is based on the price-only return of the index, not total return.

I took the S&P 500 total returns for the past 60 years (using the Simba/Simamond backtesting spreadsheet). For each year I subtracted 2% for dividends. That's probably a bit low but it works for this. I then compounded the returns based on those min=0%, max=9.25% parameters. The compound annual growth rate over that period would have been 5.83%. Note that this assumes absolutely no fees, interest on loans or insurance costs--I'll just treat those as zero.

For my comparison, I took the S&P 500 total return and compounded that over 60 years. The resulting return was 9.66%/yr. If divide 5.83%/9.66% per year, I get that the IUL would have given you 60% of the market returns over that time, again assuming absolutely no fees. So, this product only starts to make sense in taxable space if your friend's capital gain tax rate is over 40%. That is higher than the current maximum of 23.8% + your state's tax rate. This assumes that the investor is a bit dumb and books all of his gains every year. If you defer gains, then the tax rate to break even becomes even higher.

Again, this assumes absolutely no fees. In reality, the info. posted says there are costs of .56% per year. Once you start taking loans you also have to pay interest to the insurance company. The taxable investor only has the fee of the fund (.03% at Vanguard), but otherwise no costs.

Hopefully anybody will correct me if my logic/math is wrong.
Looks solid.

Would you mind running your model where the upper bound is 14.35%? I just saw a proposal from an insurance salesman with this projection. Over the past 8 years, returned just over 9%.

There was a similar proposal using the msci eafe index. The return was only 4.7%, but it beat the actual price index.

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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by BruDude » Thu Aug 15, 2019 12:20 am

Everyone here is missing half of the equation. The interest rate isn’t the only thing that matters because the cost of insurance also determines the overall results. Even if the policy returned the exact same rate as the S&P 500, if the insurance company jacked up the cost of insurance it could look the same as a policy with half the interest rate return.

Extreme example: the policy could return 50% every year, but if the annual cost of insurance charge was large enough to offset that, it could result in the same cash value as a policy with a 5% interest rate.

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unclescrooge
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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by unclescrooge » Thu Aug 15, 2019 12:51 am

BruDude wrote:
Thu Aug 15, 2019 12:20 am
Everyone here is missing half of the equation. The interest rate isn’t the only thing that matters because the cost of insurance also determines the overall results. Even if the policy returned the exact same rate as the S&P 500, if the insurance company jacked up the cost of insurance it could look the same as a policy with half the interest rate return.

Extreme example: the policy could return 50% every year, but if the annual cost of insurance charge was large enough to offset that, it could result in the same cash value as a policy with a 5% interest rate.
Shouldn't the fees be disclosed in the policy?

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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by BruDude » Thu Aug 15, 2019 1:42 am

unclescrooge wrote:
Thu Aug 15, 2019 12:51 am
BruDude wrote:
Thu Aug 15, 2019 12:20 am
Everyone here is missing half of the equation. The interest rate isn’t the only thing that matters because the cost of insurance also determines the overall results. Even if the policy returned the exact same rate as the S&P 500, if the insurance company jacked up the cost of insurance it could look the same as a policy with half the interest rate return.

Extreme example: the policy could return 50% every year, but if the annual cost of insurance charge was large enough to offset that, it could result in the same cash value as a policy with a 5% interest rate.
Shouldn't the fees be disclosed in the policy?
They are, sort of. Look at the guaranteed side of the illustration, that's the worst case scenario. But worrying about the interest rate without knowing whether the insurance company will charge the "current" cost of insurance or the "guaranteed" cost of insurance in the future is only half of the equation. Since it is impossible to know the cost of insurance charges at any given time in the future, focusing on the interest rate only is missing a major part of how the policy works. Another example:

Company A has a cap of 15% on the S&P returns. Company B has a cap of 9%. Company A charges the maximum cost of insurance at all times. Company B does not. Which company is better?

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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by stevew7 » Thu Aug 15, 2019 4:25 am

ef11 wrote:
Tue Aug 13, 2019 9:03 pm
Thank you all for the replies. I agree that all I've ever been told is these products are trash, but when looking at the illustrations, they seem to look pretty good. So what other ammo can I use besides just saying they are crappy products?
https://ibb.co/Nt0Y03f

I would have him review the guaranteed portion of the illustration above. Look at what happens. After 168k in contributions, he makes three 35k withdrawals, and then the policy crashes and is worth 0. Zero!

Sales agents always gloss over this part of the illustration. If the policy were so good and guaranteed, why doesn't the insurance company guarantee better performance?

Secondly, I would have him review the surrender policy. What happens if he changes his mind in five years? He will have contributed 60k and the guaranteed surrender value is 40.7k. The non guaranteed values are only a few thousand more. Again, if this is such a good policy with "guaranteed" returns, why is there a guaranteed loss early in the policy? Hint, it is due to policy costs and commissions to the selling agent.

I really dislike illustrations as all they are is a systematic way of showing the power of compounding. If you made a similar illustration for the sp500 reinvesting dividends and showing an annual return of 8%, the results would blow an insurance product out of the water.

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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by Stinky » Thu Aug 15, 2019 4:45 am

ef11 wrote:
Wed Aug 14, 2019 8:17 pm

my initial thoughts for him :
- Use DIME to determine roughly how much term life insurance he needs
- Place as much money into backdoor + mega backdoor Roth
- 529 plan for college savings
- Continuing saving and investing as much as possible, including tax-efficient taxable accounts.
Good answer.

Friends don't let friends buy an indexed or variable life insurance policy.
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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by ncbill » Thu Aug 15, 2019 12:24 pm

BruDude wrote:
Tue Aug 13, 2019 9:13 pm
Insurance agent here - a few points:

1. These policies are not variable. Variable policies can lose value and require a securities license to be sold, and they do not have a 0% growth floor.

2. The illustrated rates returned are very high. Agents should not be illustrating 7% returns (my personal opinion). 5% is considered a "safely illustrated" projection, 7% is definitely bordering on unrealistic. Of course, the agent wants to illustrate a high number because it looks better to the client.

3. The insurance company can raise the cost of insurance within the policy at any time. They can also decrease the caps on the interest rates at any time. When both of these happen together, they can have a massive impact on the long-term policy performance. See: 1980's universal life insurance policies that were illustrated with 8-12% interest rates that are now getting 3-4% with significantly higher cost of insurance charges.

4. Policy loans can also have a huge impact on the policy performance, especially if you are taking a loan at the same time that the market is returning lower interest rates and/or the insurance company has raised the cost of insurance charges.

5. The policy illustration that the insured has to sign will have 3 sections being illustrated - the "current" scenario, a.k.a. the best possible scenario, the "guaranteed" scenario which is the worst-case and assumes the insurance company maxes out the cost of insurance charges and the policy interest returns 0% or the minimum amount every year (unrealistic, but possible), and the "mid-point" scenario in between the two, which is probably the most realistic. The agent appears to only be featuring the "current" pie-in-the-sky scenario on the first policy instead of fully explaining the risks of the policy and what happens on the guaranteed/mid-point scenarios. Of course, I don't know the agent so maybe he explained this to your friend, but agents frequently gloss over these items because they don't help sell anything.

You can see these in the second policy example. Look how fast the policy crashes in the guaranteed and mid-point scenarios - 17 years in on the guaranteed side and 38 years in on the mid-point. It would really suck to pay $12,000/year in premiums for a policy that is designed to build cash value and be left with nothing after 20-40 years. ...

7. I know BH is anti-whole life, but if he wants to do this the "safe" way, he should be doing it with a whole life policy. There are ways to overfund/max fund a whole life policy to generate maximum cash value instead of maximum death benefit. IUL policies are very complicated even for most agents to understand, let alone your average person. When he looks at the policy in 5 or 10 years, will he even remember what was explained to him by the agent? Whole life policies are fully guaranteed and carry less risk since they can't "crash" like a UL policy...
Agree 100%.

I was forced into the position of having to pay for a few universal life policies (business continuation issues) and saw them ALL collapse to the guarantee.

So after 15-20 years they all "blew up" and lapsed because otherwise they would have required ridiculous sums to stay in force.

IMHO for permanent insurance whole life is the only type to consider...even with the significantly higher premiums over UL.

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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by aristotelian » Thu Aug 15, 2019 12:34 pm

Your friend is a big whale. They are going to give him the hard sell and he should be skeptical. Regardless of the merits of this policy, I would caution him not to put all his millions in any one thing, and also that annuities are easy to get into but hard to get out of.

Also, with that amount of money I would encourage him to think about estate planning and charity more so than any particular investment.

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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by BruDude » Thu Aug 15, 2019 12:41 pm

ncbill wrote:
Thu Aug 15, 2019 12:24 pm
IMHO for permanent insurance whole life is the only type to consider...even with the significantly higher premiums over UL.
A guaranteed UL policy is basically the equivalent of term insurance guaranteed for life. When someone wants a permanent death benefit at the lowest possible cost, it is the best option. There's little to no cash value in a GUL policy.

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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by Stinky » Thu Aug 15, 2019 1:27 pm

BruDude wrote:
Thu Aug 15, 2019 12:41 pm
ncbill wrote:
Thu Aug 15, 2019 12:24 pm
IMHO for permanent insurance whole life is the only type to consider...even with the significantly higher premiums over UL.
A guaranteed UL policy is basically the equivalent of term insurance guaranteed for life. When someone wants a permanent death benefit at the lowest possible cost, it is the best option. There's little to no cash value in a GUL policy.
Agreed.

There are a limited number of situations where permanent insurance is indicated. For example, a parent wanting to provide for a disabled child after the parents death. Or a business buy-sell situation.

In these situations, guaranteed universal life (sometimes called “secondary guarantee universal life (SGUL)” or “guaranteed premium universal life (GPUL)” is the best choice. Typically little or no cash value, and all of the premium goes to the insurance.
It's a GREAT day to be alive - Travis Tritt

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Re: Friend Being Offered Variable & Indexed Universal Life for Tax-free Retirement Income

Post by FoolStreet » Thu Aug 15, 2019 1:48 pm

Stinky wrote:
Thu Aug 15, 2019 1:27 pm
BruDude wrote:
Thu Aug 15, 2019 12:41 pm
ncbill wrote:
Thu Aug 15, 2019 12:24 pm
IMHO for permanent insurance whole life is the only type to consider...even with the significantly higher premiums over UL.
A guaranteed UL policy is basically the equivalent of term insurance guaranteed for life. When someone wants a permanent death benefit at the lowest possible cost, it is the best option. There's little to no cash value in a GUL policy.
Agreed.

There are a limited number of situations where permanent insurance is indicated. For example, a parent wanting to provide for a disabled child after the parents death. Or a business buy-sell situation.

In these situations, guaranteed universal life (sometimes called “secondary guarantee universal life (SGUL)” or “guaranteed premium universal life (GPUL)” is the best choice. Typically little or no cash value, and all of the premium goes to the insurance.
I assume this is the vehicle referred to in the book, Beyond the Grave, describing some alternatives for providing for heirs in mixed family situations where the property shouldn't be split etc.

Thanks for this clarification.

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