Whole Life... Why Not to Love It?

[WCMason]

You espouse conventional wisdom because it's all you've learned so far, but remember... conventional wisdom had Columbus sailing off the edge of the earth.

Referring to concepts you aren't fully up to speed on as "gobbledegook " won't make you right, no matter how many emoticons you use.

Trust me... you will know things a year from now that you don't even know exists today - assuming you have an appropriately open mind.

Off topic but can't pass up the opportunity. Conventional wisdom in the 15th century did not hold that the world was flat. "Enlightened" people in later centuries hung that myth on the people of the Middle Ages. OK, back to whatever it was you were discussing.

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[Tahoe Ray]

All of the absolutes are what make this a tough conversation. We don't know what the future holds for WL dividends, stock dividends or tax rates.

What we do know is that a combination of strategies can be very effective in mitigating risk. Roth (if they qualify)+401k to match+WL can be very attractive.

I can see both sides...but I don't think that anyone can say one is "right" or "wrong" unless you can see 40 years into the future.

 

[Norwayguy]

All of the absolutes are what make this a tough conversation. We don't know what the future holds for WL dividends, stock dividends or tax rates.

What we do know is that a combination of strategies can be very effective in mitigating risk. Roth (if they qualify)+401k to match+WL can be very attractive.

I can see both sides...but I don't think that anyone can say one is "right" or "wrong" unless you can see 40 years into the future.

I just need a max of 7 days into the future....Powerball numbers here I come.

 

[Tahoe Ray]

I just need a max of 7 days into the future....Powerball numbers here I come.

Nice...how many people are using that strategy for their actual retirement plan?

Everyone here expects free lobsters if that happens.

 

[scagnt83]

The 25 year old could put $458.33 per month into a Roth IRA.
He could buy a large 30 year term life policy with the extra $41 per month.

He'd only have to earn 5.5% to have over $800,000 in it by age 65, giving him $44,000 of tax free income FOR LIFE and an $800,000 tax-free death benefit to his heirs when he dies.



And how do you guarantee that $44k for life?
Based on an $800k account value that is a 5.5% withdrawal rate.
That is higher than the traditional 4% withdrawals that The Journal of Financial Planning recommended back in the late 90s. They have recently revised that recommendation (it is based on a comprehensive study) down to 3% due to market volatility.

And he would only have an $800k DB if he died his first day of retirement. Every year that is reduced dollar for dollar. In a WL or UL withdrawals do not reduce the DB dollar for dollar.

Also, your 30y term runs out 10 years before retirement. But I will let that point pass.
...


Comparing to a 401k, an "after tax" $500 per month premium payment is equivalent to a 401k contribution of $670 per month for someone in a 25% tax bracket.

That $670 per month, invested in the 401k, earning 5.5% per year, grows to $1.17 million dollars in 40 years. That generates $58,592 per year "before tax" income. Assuming a 25% tax rate that's $44,000 of "after tax" income.

The kids get the $1.17 million dollars upon death (minus the taxes....even a 50% tax rate on that $1.17 million still leaves a higher death benefit to the kids than the WL policy you've used as your example.)


Again. The kids only get a $1.17DB if he dies at age 65.
And again you are assuming over 4% withdrawals (almost 5%).


But lets compare this to an IUL at 6%. (assuming a 0.5% fee on the 401k to make your 5.5%) (In reality it would be a 1%-2% fee)

At age 65 the IUL has $945K.

But what you dont understand is that permanent insurance is able to pay out a much higher withdrawal rate vs. a market account.

From that $945K you can take a $73K per year income (tax-free)

If you drop the rate down to 5.5% it gives you a $54K per year income. (tax-free)

And all of that is with a lower yearly contribution. Plus it keeps a higher DB than your (sinking DB) method.

Now if the 401k has a company match then the portion up to the match will outperform the IUL. But beyond that the IUL outperforms.

A permanent life policy is similar to a ROTH with an enhanced DB. It just has less flexibility.

 

[rousemark]

25 Year old male $500 month premium paid up @ age 65. 240,000 paid into policy, can withdraw 37,000/yr TAX FREE for 20 years.

On top of that leave a TAX FREE inheritance to his family of 343,000.

That is a total payout of 1,083,000 or a 451% return on premiums paid.

Par Whole Life insurance not only is a no brainer but should be the FOUNDATION of any plan.

Perhaps I missed it, but I don't see where anyone else questioned using the statement TAX FREE.. I assume you are making loans against teh cash accumulation otherwise taxes would be due once the wihtdrawals exceeded the basis.

But, even using loans, you can not guarantee TAX FREE.. Should your dividends not meet projections and the accumlated interst plus the policy loans cause the policy to lapse, then tax exceeeding the basis would be due. (and don't tell me dividend projections are always met because even though a company may have always paid a dividend, very few if any meet the projections they made during the 80s)

If everything works as planned, then the accumulated policy loan is counted as part of the death benefit and a 1M+ DB could trigger estate taxes.

 

[scagnt83]

Invest it in blue chip dividend paying stocks, like P&G, etc...you've got a 3+% return each year just from the dividends--regardless of what the market does.

You only need to average another 2% in capital appreciation per year to blow the roof off his WL example.

In reality, you'll average much more than 2% in capital appreciation per year.

All with very little risk.
- - - - - - - - - - - - - - - - - -

Your not going to be investing in P&G inside of a 401k.
And at $500/month you might be able to in a ROTH.

Dividends are great. But the 3% return is not the same regardless of what the market does.
That 3% is based on the stock price. And any dip in the market means that your 3% return is not 3% of your original investment, but 3% of your now lower amount.
In otherwords, the dollar amount of your dividends are reduced by whatever % your account is reduced when the market is down.

And the problem with down markets during retirement is that yearly withdrawals make the situation even worse.
Using 4% withdrawals, it takes 4 years of consistent 10% returns to recover from just one 10% drop.

 

[Mr_Ed]

Dividends are great. But the 3% return is not the same regardless of what the market does.
That 3% is based on the stock price. And any dip in the market means that your 3% return is not 3% of your original investment, but 3% of your now lower amount.
In other words, the dollar amount of your dividends are reduced by whatever % your account is reduced when the market is down.

Wow! I usually like your posts scagnt, but this post is
shockingly ignorant.

You have no idea how dividends work.

The dividends are a fixed dollar amount, not a percentage.
When the stock price goes down the percentage actually increases!


(and an individual 401k can invest in P&G stock.)

 

[scagnt83]

Perhaps I missed it, but I don't see where anyone else questioned using the statement TAX FREE.. I assume you are making loans against teh cash accumulation otherwise taxes would be due once the wihtdrawals exceeded the basis.

But, even using loans, you can not guarantee TAX FREE.. Should your dividends not meet projections and the accumlated interst plus the policy loans cause the policy to lapse, then tax exceeeding the basis would be due. (and don't tell me dividend projections are always met because even though a company may have always paid a dividend, very few if any meet the projections they made during the 80s)

If everything works as planned, then the accumulated policy loan is counted as part of the death benefit and a 1M+ DB could trigger estate taxes.

2 comments:

1) The loan is not added to the DB. The DB is what the loan has reduced it to when you die. The loan is not added on top of the DB.

2) This is why I like UL. Most ULs have an "overloan protection" feature that guarantees that if the CV goes to zero, the policy will stay in force for life with a very small DB.

Penn Mutual actually has this feature on their WL. They are the only company on the market who has this on WL.


With loans and overloan protection you can guarantee tax free.

 

[BNTRS]

Buy blue chips and live off the dividends? I know some former GE employees who have an opinion about that recommendation. Let's just say they wouldn't be cheering you on.