The ULTIMATE "life ins. is not an investment" thread

Nov 4, 2007

  1. Survivor
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    Survivor Super Genius

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    I hear a lot of people say that life insurance is not an investment. IMO, people do not know how to financially manipulate a life policy to make it an investment. "Buy term and invest the rest" sounds great but most people don't know to to invest, and wouldn't know how to balance their portfolio and decrease their exposure to risk over time. I believe that life insurance can be used to replace the risk free (as in the portion in treasury securities) portion of one's portfolio.

    From my limited experience, UL and even SWL policies pay a higher crediting interest rate than an annuity. My strategy involves having a life policy for the period of time when it is most important (kids growing up, mortgage, etc) and then using a 1035 exchange to roll the UL policy into an annuity to allow for steady income. I will also show how it is more advantageous to use a life insurance policy vs. a Certificate of Deposit.

    (Try to grind through the numbers before you make any statement here)

    I was trying to crunch through some numbers for my dad mainly, so these number's are based off a certain companies products and rates on a 44yo male, preferred NT.

    If you over funded a level UL policy by paying a $160 premium each month, you would have a cash surrender value of $55967 with total premiums paid being $38,400 and interest earned being $17567.

    If you had a CD that paid 5.75% interest, and you wanted to save money throughout the year and buy a $1498 CD each year, paying 10% taxes on all gains, you would effectively earn (as in net of tax) 5.175% interest each year. After 20 years, you would have 50458 in cash -- with no tax liability. I selected $1498 because it is $160 * 12 - $422; with $422 being the cost of a 20 year term for the above individual.

    It is important to note, that with the policies I am working with the above individual would have the benefit of accelerated benefits riders in the event of cancer, critical, or terminal illness -- essentially creating a small edge against incurring large amounts of debt or OOP expenses.

    With the CD, you have 50,458 with no tax liability available for, say, an annuity. With the UL policy, you have nearly 55,967 with a tax liability on only $17567. However, through the use of a 1035 exchange rolling the life policy into an annuity you can essentially cause the tax liability to be expensed over a long period of time -- and the annuity has more to gain interest on in the first place. If you know anything about the time value of money, trickling your taxes to uncle Sam while earning interest on your tax liability is GOOD.

    Annuity with 50,458 (CD route) @ 3.5% interest:
    If the accumulation period is 6 years (the individual would be 70 in this example), the owner would have a value of 62,025 at the time of it begins to annuitize. If the annuity were to pay for a period of 10 years (age 80), the owner would receive $613 a month. $96 is tax liability/month. Net of taxes the payment is $517 each month. In today's dollars, at 3% inflation the tax liability is essentially $43.49 and the monthly payment is worth 234.
    Annuity with 55967 (UL route) @ 3.5% interest:

    If the accumulation period is 6 years, the owner would have a value of 68,798. If the annuity were to pay for a period of 10 years (age 80), the owner would receive $680 a month. $250 is tax liability/month. The monthly payment is $430. At 3% inflation, in 26 years $1 of today's money is worth 45 cents later. Thus, "today's" tax liability is essentially 114 and that payment is worth $194.

    Thus, we can conclude that for 40 dollars a month of TODAY'S money, the individual in this case could give himself the option to continue his life insurance to death, allowing him to pass money tax free to his heirs and outside of his estate. That $9600 dollars over a lifetime also gives him the possibility of receiving living benefits from his life insurance for cancer, critical, or terminal illness during the 20 years (or longer, if he had elected to keep the UL policy. Term would not provide this.
     
  2. James
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    Why not just harvest the money out of the UL and face no taxation and a longer harvesting period or a greater monthly harvest?

    The main problem isn't calculation of interest made or even funding retirement, it is basically the way people have been inform from the very first steps of proper financial planning. Let us face certain facts, parents of the last generation and this generation don't know enough to educate themselves much or less their children. Public Education is unable to educate such thing as solid financial living and the press and financial planners, well the best they can come up with is "Buy Term and Invest the Difference", wow, that really helps! I really don't think most are listening, unless they think by Investing the Difference means they should go out an buy new furniture, take a bigger vacation or maybe a new car, yea cars are a great investment! Have you price a 65 Mustang lately?

    Unless people understand that financial health comes before expensive cars and bigger homes there really is no reason to even mess with them. Obviously this is a societal problem, one many will pay a hefty price eventually. The majority of people today are so it seems to me don't think they are reasonable for their own medical needs, now we want them to take responsiblility of their financial health? Maybe we are expecting a tad too much?
     
    James, Nov 4, 2007
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  3. djs
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    djs Super Moderator Moderator

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    When you want to start talking investments, especially specific cases, anyone qualified to provide any reasonable feedback (i.e., a true investment advisor) can't speak up at all due to compliance issues. The hands get tied of those with the licenses to do this type of work.

    That said, in general, you have to look a lot broader at the individual, understand risk tolerance, and what the goals and time horizon are, before having a conversation about how to invest any money. Life insurance sales tend to be much narrower in scope (not always, but usually).

    Dan
     
    djs, Nov 4, 2007
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  4. CHUMPS FROM OXFORD
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    CHUMPS FROM OXFORD Guru

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    " anyone qualified to provide any reasonable feedback (i.e., a true investment advisor) can't speak up at all due to compliance issues"

    That's why I reluctantly stay quiet on these threads.

    However...using a broad definition, life Insurance is an "investment." The ROR is another issue.
     
  5. Survivor
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    James:
    When you ask, "why not harvest the money from the UL" are you asking why the client shouldn't just leave the money in the UL?

    This is a legit question. It was late last night and it probably would be better to just go with an immediate annuity vs. a deferred and leave the money in the UL longer before you do the 1035.

    The idea of not just surrendering the UL for cash has to do with time value of money. The longer one defers taxes, the longer you that money will depreciate. Thus, the government gets the same actual dollar amount, but it is worth less today than it was years ago.

    Of course this "strategy" doesn't take into account the client's level of risk aversion. I would venture to say that it fits almost everyone. People with money that don't invest usually either have their head in the sand or are too risk averse to invest. People that do invest surely have a position in their portfolio for life insurance AND risk free securities.

    EDIT: For those that hold a securities license and can't comment, I ask that you PM any thoughts. I don't understand the restrictions of your license, but if you would be permitted to privately comment I ask that you do so. My post is not meant to be an authoratative statement, but rather an opinion. I'm open to insight from those more experienced than myself.
     
    Last edited: Nov 4, 2007
  6. James
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    In most cases I prefer WL, if your money is in WL that you have held for some years and had PUA and OPP from the beginning, why give up 8% or more in interest for a lower paying Annuity that you have to pay taxes on? Same basically goes for a good UL paying 6%, why transfer money out for an Annuity? It makes really no sense at all. Most SPIA's are paying around 4% and since there is a tax involvement the money can not last as long no matter what Value you wish too speak about. I would suggest if the WL or UL is performing as it is suppose to there is no reason to do a 1035 exchange.

    As far as Financial Advisors, if they can not work with the middle class or even the upper middle class as in redirecting their budgets and educating them on debt management then their services are of little use. If a Financial Advisor can not explain in a simple manner that the IO loan is always better then the 15 or 30 traditional fix mortgage, what good or they? None of these matters are covered by the SEC or FENA (or whatever they are calling themselves this year) under the Secret Code of Planners that would surely make us grow hair on our palms if they actually spoke of such matters to us lowly scummy agents.

    As I suggested, the average american household (middle and upper middle) are paying on average 34 cents per dollar just too cover their debt, it may not be that they are spending too much, but using the wrong debt management and budgeting. Including to todays preconcieve notions of investment strategy.
     
    Last edited: Nov 4, 2007
    James, Nov 4, 2007
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  7. Survivor
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    What companies are paying 8% crediting rates on WL policies?

    The idea of using the exchange to move to an annuity is to is to allow the client more access to the money. That is, they start getting the money regularly. Correct me if I'm wrong, but only certain whole life policies allow partial surrenders. Just how do you plan for the client to get money from the WL policy without a full cash surrender?

    Can we agree that deferring taxes is a good thing? If so, we must agree that further deferring taxes is a better thing. The exchange allows that tax liability to further depreciate while allowing those built up CVs to supplement income in later years.
     
  8. James
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    I think you are a little confused on how WL works, as I noted, if you have a Par. WL and purchase OPP as in PUA from the get go, you have several factors in the later years that create a linear and accumulation effects. Years 1-3 suck, 4-10 is mediocre put after 10 certain things starts happening. First off, you have the Guarantee Interest rate of around 2-3%, then you have Dividends plus dividends in a form of PUA's, so now outside of the interest rate that is guaranteed you have dividends being deposited within your policy increasing the DB and also earning more dividends increasing the CV, plus the interest being credited. As the dividends start getting deposited you earn "Interest" on them also, so you have the Guaranteed Interest on CV, Dividends being issued annually, and interest on Dividends and all of a sudden you see a Linear effect happening with the Reserves of the policies by the carrier. By year 20 the Par. WL is for the most part kicking ass if you actually set it up to perform at max.

    Now for the harvesting of the CV within the policy, first off you can take whatever you want and can even automate the withdrawals or loans to your liking, weekly, monthly or annually, however you want. First off, I would recommend just doing loans depending upon the policy you have. Also you have to look at the DB and exactly how much DB you want at the point of harvesting your money, likely the person would only need a fraction of what is there in the form of a DB. Now depending upon the policy you have may it be a WL or UL, if you take the loan and pay the interest it shouldn't effect the CV! In other words, its a loan not a withdrawal and the CV is uneffected outside of Interest that must be paid. Obviously most will want to use the portion of the loan to pay the interest, just take out an additional 5-6% and pay the interest. Depending upon how much you have in CV and how much one needs to take out of the account, this could go on for ever and work out a lot better then any annuity out there.

    Upon the Death of the person, loans would be taken out of the DB and no taxation would be triggered at all! This is if you set it up correctly from the beginning. Nothing performs as well as the Par WL, that is well funded or even a good UL policy that has sufficient CV (as in overloaded) at time of harvesting ones money in retirement.

    I know you are use to people bad mouthing WL, yet all these people will never talk about the later years of these policies, as in 20 plus and they sure don't want to talk about the harvesting of money (one of many failures of the financial planning community, sure they love the investing end but few know much about harvesting and give absolutely horrible and misguided advice). An annuity, 401, IRA or what have you will never outperform a WL at time of retirement, when money needs to be access and actually used. Sure you might beat the ROI on other things and not saying you shouldn't, but when it comes time to start taking money out, everything else fails in comparison. If you have to take money out of a 401 or whatever, you face taxes, certain amounts that need to be taken at 71 (even though new regulations seems to helping out in that, I'm sure more then one planner is scratching their heads thinking what does that mean?) and once you take the money you make no more interest from that money! Plus, the WL or UL will keep a certain DB if planned correctly at the time of death and taxes is of course, unheard of!
     
    James, Nov 5, 2007
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  9. Survivor
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    I appreciate your insight James. You have a good amount of knowledge and I'm trying to soak up everything you say. Keep the good replies coming!
     
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