Comparing a 401K to a IUL

Oct 12, 2017

  1. Justin Bilyj
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    Justin Bilyj Guru

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    Agents who arent security licensed shouldn't be comparing an IUL to an investment in terms of them both being investments. My own understanding of the rules is:
    • You can compare the risk of having investments in general against having money build in an IUL in terms of market risk (as long as you disclose all fees & facts)
    • Never talk about IUL in terms of ROI, but you can talk about the IRR in order to compare potential gains to other financial vehicles
    • Never recommend taking money from investments to fund life insurance in general - you can show them what a certain premium would provide in terms of death benefit and potential cash value
    I don't have a series anything - but would like clarification on these 3 points from someone that does.
     
  2. DHK
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    DHK "YOU CAN'T HANDLE THE TRUTH!"

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    Justin - I'm going to slightly re-write your post and I'm going to substitute the word 'security' instead of investments. Everything we put money into, is an "investment" of some sort, but not every investment is a security... and that's where we get into trouble as agents try to make these comparisons.

    Every investment should be compared on three levels: Risk, Potential Return, and Costs to make that investment. This bullet point talks about both risk and potential return.

    This comparison is about comparing the potential of IUL vs the potential of securities. Past performance does NOT guarantee or indicate future results. And this comparison does so with the understanding that one is a security and the other is not. Yet, the one that IS a security does not have principal protection (but unlimited upside and limited downside to ZERO value - but you cannot owe money past zero value in nearly all cases), but the one that is NOT a security DOES have principal protection, with limited upside subject to caps, but no downside (other than policy costs).

    The reason that most agents talk about IRR is because IUL requires an illustration to sell it. The illustration takes the average returns of the past and assumes that it will continue every year for the indefinite future. Because these illustrations conform to NAIC requirements, it's too easy for an amateur agent to make the same assumptions.

    IUL is a concept sale, just like putting money into a security. You cannot guarantee the returns on either, but you can have principal protections in the IUL that do not exist with securities. I wouldn't sell by illustration, except to outline the available potential cash values and accessing those cash values due to surrender charge schedules.

    In general, this is great advice, particularly money from qualified plans being moved to life insurance over time via 72t distributions. Yes, it can be done, but it should not be done by someone who doesn't know how to calculate a 72t distribution or the rules regarding qualified plans OR a plan to preserve the original balance so that it will fund what it needs to fund without reverse dollar-cost-averaging during market volatility.

    Another area to compare is how the Internal Revenue Service would compare distributions from Qualified Plans, After-tax Accounts, and Life Insurance for both an income taxation perspective and the taxation of Social Security Benefits. Now, I don't know how people would think of Life Insurance as a place to store cash, but I will tell people how the IRS and the SSA would look at it.


    Here's the rub: Permanent life insurance is NOT a short-term strategy. (Notice I used 'strategy' instead of 'investment'.) To really get the most out of a permanent life policy, it needs to be funded properly and with a long-term (15+ year) mindset.

    With securities, it used to be that if someone had a "short-term" investment time-frame (1-3 years), you put them in C-shares. If they had a longer-term time frame, then you sell them A-shares, particularly with breakpoints. The differences are in costs.

    Life insurance, even when funded right, can have 50% or more available cash values (different policies/companies have different strengths in this area), but you still have the costs of the death benefit. It can take about 8 years or so (per illustrations) to break-even, let alone to earn a gain over having other investments.

    Life insurance is probably better compared to buying and owning a home than investing in securities.
    • If you get out of your home too soon, you won't get any money back.
    • You can transfer your home equity from one home to another via 1031 exchange.
    • You can borrow against it, but that doesn't mean you can skip mortgage payments while you do so.
    • The biggest difference with life insurance is that you are GUARANTEED to get your equity back should you cancel your plan (try that with a foreclosure)
    • You are GUARANTEED to be able to access your cash values via loan regardless of your credit situation (try that with a home and bad credit)
    • Life insurance premiums are not tax-deductible.
     
    DHK, Jan 22, 2018
    #12
  3. paulallred
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    paulallred Expert

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    Actually I've always used a reduced after tax contribution for the IUL ie. 25% tax bracket, if funding the 401k with $20k/A then $15k/A in the IUL.
    Yhe IUL outperforms the 401k still so much it should be embarrassing for anyone to defend it.
    Basically when you own a 401k plan you are setting up a IRA for the IRS.
    So the pre-tax feature is just a hustle for the IRS to tax you at whatever tax rate they feel like later on.
     
  4. scagnt83
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    scagnt83 Worldwide Expert of Everything

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    Total BS.

    If your calculations are coming out in favor of the IUL in that situation, then you are using totally crazy assumptions for the IUL... or you are purposely using very low assumptions about the 401k performance.

    And over 70% of 401k plans provide some type of company match. When that enters the calculations then it really does blow the IUL away. The IUL would have to perform anywhere from 60%-120% better than the 401k just to be equal.

    I have sold tons of IUL over the years and am one of the biggest advocates for it on this forum.

    But it is downright negligent to say that IUL is going to outperform a 401k.

    Its agents like you that will cause the huge class-action lawsuits that UL saw in the late 90s and early 2000s.

    ----

    Im sure you probably fool a bunch of people with that sales pitch of "your setting up an IRA for the IRS". But its total BS.
     
  5. paulallred
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    paulallred Expert

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    My own IUL is the only testament needed. 35 years in the business and not one complaint ever. 7% on an uncapped IUL is hardly a crazy assumption. I run the 401k at 7% as well with a 2% fee, which statistically is crazy because with the losses they incur and hidden fees they don't even come close to earning 7%. Take in the enormous hidden fees and then taxes, well you might as well go buy Muni's.
    It's quite obvious you don't advocate MAX funding IUL and therefore that's why you haven't seen such favorable results.
    You also sound ignorant and naive thinking that interest sensitive UL from back in the day is the same product as the IUL.
    I've written IUL for nearly 14 years now (approximately $7MM of target premium) and every single IUL (nearly all MAX funded) has produced more money (Tax-Free money) than any 401k plan ever could. Also lets the clients sleep well at night. Instead of worrying like in the early 200's and 2008
    Did I mention I had a 401k plan for nearly 20 years and a 457 plan? Yep, therefore I know exactly why a 401k plan is inferior and for naive people like you.

    There will be no further communication from me to you, because you started this conversation with insult and false testimony.
    I have the truth and proof.
    It ain;t what you know, it's what you think you know that ain't so...
     
  6. scagnt83
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    scagnt83 Worldwide Expert of Everything

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    I dont even know where to start with that. Your third sentence proves that you use incorrect assumptions in your sales pitch.

    You have already proven that your only intent on this forum is to spam us and promote your IMO.

    Running an IUL at the same return of a 401k is negligent and 100% misleading. If an IUL is getting 7% (long term) then the market is performing higher than that. You are using bull market assumptions and results. Which is completely negligent and misleading.

    Carriers would drop your contracts if they found out that was in your sales pitch.

    If you have spent even 10 minutes on this forum, you would know that I am a huge advocate for max funding IULs. I have taught many on this forum how to max fund IULs.

    But I dont go around telling lies and making false assumptions when I present to clients.

    I work in the life insurance business as well as the 401k business. I can not only compare my own IUL policies to my own 401k, but I can also compare 100s of other peoples 401k returns vs. the millions in max funded IUL sales Ive placed.

    The more you talk, the deeper you dig Paula. If any agent on this forum uses you as an upline they are a fool.
     
  7. scagnt83
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    scagnt83 Worldwide Expert of Everything

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    Paula,
    Instead of making personal attacks via PMs, you are welcome to debate actual facts openly and publicly here on the forum.
     
  8. walthamny
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    walthamny Guru

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    And what happens to the IUL when the tax treatment of cash value is repealed retroactively. Yes congress can change future tax rates and they can also change the tax treatment of permanent life insurance. IUL tax treatment is not protected by the constitution.
     
  9. DHK
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    DHK "YOU CAN'T HANDLE THE TRUTH!"

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    No, but we can look back in history back to TAMRA, TEFRA, and DEFRA and understand that all policies sold before a prior date were 'grandfathered' under the old rules.

    No problem.
     
    DHK, Feb 3, 2018
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  10. walthamny
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    walthamny Guru

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    Sure but that is one sided. Congress has gone after BOLI tax treatment few times and many things were not grandfathered. We have for the first time in history,a president who has made it a campaign promise to tax cash value life insurance. If congress changes and Trump is still the president, dont count him out bringing this back as a compromise to Democrats. But going back, congress has the power to tax IUL retroactively and Congress has the power to increase income tax rates. I can counter predict congress in the future could get rid off income tax all together and replace it with a sales tax or VAT and that would make your 401k look much better than IUL. I sell IUL but I never sell it because income tax rates will go up and cash value life insurance will always remain tax free. 401k will have a higher rate of return than IUL under most market circumstances over the years.
     
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