Author Topic: Index Funds vs. Variable Life Insurance  (Read 886 times)

sjmeche

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Index Funds vs. Variable Life Insurance
« on: May 13, 2018, 08:06:16 AM »
I am new to the FI community and I have been learning so much in the past 6 months.  Currently, I am working on optimizing my expenses.  I have $240,000 in my 401K at age 31 and am looking on how to invest my extra money each month.  I am trying to "retire" in the next 10 years and most of my eggs are in the 401K basket, which i can not touch until age 59 1/2.  My other investments are that i bought my first rental property this year and i have a variable life insurance policy through Northwestern Mutual.  The reason i have a variable life insurance policy is due to both my good friend and brother-in-law working as financial advisors for Northwestern Mutual and New York Life, respectively.  From everything i have read, the FI community is big on low cost index funds.  I really want to put some of my savings ($50K) in these funds, but my "financial advisers" are not really high on these.  They continue to recommend the variable life insurance due to it always gaining 4 - 5% and you can take it out take free.  At least both of their advice is consistent.  I am reaching out to this community to see where you guys stand or if you have a different recommendation for me. 

Thanks in advance for your help

Frankies Girl

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Re: Index Funds vs. Variable Life Insurance
« Reply #1 on: May 13, 2018, 08:40:25 AM »
If I heard from anyone that said to me "I think life insurance wrappers are way better than index funds for investing" I'd laugh my ass off at them, and assume one of two things: 1) They are a booger-eating moron; or 2) They have a motive for trying to push life insurance. There is zero reason to not recognize index investing is superior to "investing" in life insurance. Seriously. We could have lively debates til the end of time about index investing versus other types of investing in general, but no one, anywhere, that knows about this stuff would ever recommend life insurance over index funds unless they were making money for themselves by doing so.

Life insurance is for protecting your dependents in the event of your death. If you don't have dependents, you don't need life insurance, and term life is the only product that most anyone here would even bother to recommend and only for the time you'd need it for (like 20 year when you have a kid - so that kid is old enough to have been launched into the world). Life insurance is NOT an investment.

Your friend and BIL are sales reps; not financial advisers. Don't confuse the two. It's too bad you thought they were looking out for you, but they're not. They are biased and they make money (lots of actually) for talking you into bad moves like life insurance when you don't have dependents (you didn't mention, so assuming there isn't a spouse or kids), or steer you away from basic investing to dump more money with their companies.

Life insurance companies are not going to advise you to "invest" in anything else because why would they? That's their bread and butter. If you're already on the hook, they'll keep pushing you to give them more. I'd honestly think about digging into how the policies you have currently work (post the details here if you want to get it broken down) and whether you should just get out of them ASAP and hope you can get most of your money back.



If you're interested in learning, here's some basic investing stuff:

https://www.bogleheads.org/wiki/Main_Page
https://www.bogleheads.org/wiki/Getting_started
https://www.bogleheads.org/wiki/Investment_policy_statement

http://jlcollinsnh.com/stock-series/
^online or get his book. This series really made all this stuff easy to understand in simple language.

And ask LOTS of questions on forums like this one. There are some great people that are smart and don't mind helping out. And none of us are going to be trying to make money off your decisions.
« Last Edit: May 13, 2018, 09:28:49 AM by Frankies Girl »
I frequently have no idea what I'm talking about. Like now.

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pecunia

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Re: Index Funds vs. Variable Life Insurance
« Reply #2 on: May 13, 2018, 09:12:54 AM »
Quote
If I heard from anyone that said to me "I think life insurance wrappers are way better than index funds for investing" I'd laugh my ass off at them, and assume one of two things: 1) They are a booger-eating moron; or 2) They have a motive for trying to push life insurance. There is zero reason to not recognize index investing is superior to "investing" in life insurance.

Great skill with words and she is right.  I was sold an annuity product a couple years back. (by Wells Fargo by the way)  They preyed on my worries.  They gave me the pitch that it is principal protected.  Your money is locked in.  You take a hit if you withdraw it, and the yield has not been what Index funds give.  They are basically renting your money at a low rental rate.

You are smart in consulting the smart people on this site.  I wish I had known about it at that time.


Telecaster

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Re: Index Funds vs. Variable Life Insurance
« Reply #3 on: May 13, 2018, 09:24:16 AM »
I am new to the FI community and I have been learning so much in the past 6 months.  Currently, I am working on optimizing my expenses.  I have $240,000 in my 401K at age 31 and am looking on how to invest my extra money each month.  I am trying to "retire" in the next 10 years and most of my eggs are in the 401K basket, which i can not touch until age 59 1/2.  My other investments are that i bought my first rental property this year and i have a variable life insurance policy through Northwestern Mutual.  The reason i have a variable life insurance policy is due to both my good friend and brother-in-law working as financial advisors for Northwestern Mutual and New York Life, respectively.  From everything i have read, the FI community is big on low cost index funds.  I really want to put some of my savings ($50K) in these funds, but my "financial advisers" are not really high on these.  They continue to recommend the variable life insurance due to it always gaining 4 - 5% and you can take it out take free.  At least both of their advice is consistent.  I am reaching out to this community to see where you guys stand or if you have a different recommendation for me. 

Thanks in advance for your help


Variable life insurance is so horrible it is hard to even describe how horrible it is. 

Also, there are ways to access your 401(K) before 59 1/2.  Google  72(t) rule.   There are some forum threads on this as well.

Bicycle_B

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Re: Index Funds vs. Variable Life Insurance
« Reply #4 on: May 13, 2018, 11:11:28 AM »
It should be mentioned that your friend and BIL are not necessarily lying to you or consciously manipulating you for profit. 

It is very common that people who sell these products don't actually understand the relative advantages and disadvantages of the relevant investment products.  Commonly they have been taught a way of explaining the products they sell that sounds reasonable to them as well as to normal customers, and that's all they really know.  Most people in these positions haven't actually learned the true likely returns of the various choices to the point where they realize their own products are inferior from the standpoint of a wise investor.  They are aware of making income by selling these products, but not that they're doing anything wrong.  So they honestly think that what they're selling is good for you. 

IMHO the art here is to develop healthy relationships as well healthy finances.  Right now the finances are unhealthy and the relationships are too, because the relationships are damaging your finances.  To reach full health includes shifting your money to wiser investments (actual investments, not unneeded insurance that's in an inefficient format).  If possible, you also emerge later with a BIL who appreciates you as a relative and a friend who appreciates you as a friend.

If they pitch a hissy fit temporarily, that is probably because their own feelings are complicated, not because you did anything wrong.  Do not expect them to agree with your reasoning, because a person who understands your reasoning might have to consider changing their job.  Don't go that far.  Just remove your money and seek whenever possible to establish a new basis of relationship - one where you're not a customer.  For example, "BIL, I felt that moving my money into Vanguard is something I needed to do for me, but I treasure you as a BIL and I'm glad your in my family.  My sister's heart is in your hands, I love you for loving her and you better not f- it up.  See you at Thanksgiving."  Or whatever the right version is in your family!    :)

Also remember, their feelings will cool down soon if you stand your ground, but your wise decision now will pay dividends the rest of your life.  You may find later that over time they will respect you for your decision as well... emphasis on the "over time."  Give it a few months for the new relationship to start, and a few years (or more) for them to decide whether they will change their job or make peace with non-customers.  In any case, you do you, and eventually they will come around. 
« Last Edit: May 13, 2018, 11:22:07 AM by Bicycle_B »

CorpRaider

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Re: Index Funds vs. Variable Life Insurance
« Reply #5 on: May 13, 2018, 02:23:42 PM »
They probably believe what they are telling you.  It is really easy for a man to fool himself, particularly if the lie is remunerative.

If you were the type to absolutely freak out at the first sign of volatility, MAYBE you could make a cogent argument for an insurance product.
« Last Edit: May 14, 2018, 07:15:52 AM by CorpRaider »

MDM

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Re: Index Funds vs. Variable Life Insurance
« Reply #6 on: May 13, 2018, 03:12:51 PM »
I am trying to "retire" in the next 10 years and most of my eggs are in the 401K basket, which i can not touch until age 59 1/2.
Not true, as telecaster already noted.  See the aptly named How to withdraw funds from your IRA and 401k without penalty before age 59.5.

If the two financial advisors salesmen couldn't point this out, you might take that as indicative of their actual financial planning expertise.

sjmeche

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Re: Index Funds vs. Variable Life Insurance
« Reply #7 on: May 13, 2018, 07:18:08 PM »
@Frankies Girl, I appreciate your honesty.  I have been listing to podcast like choosefi and biggerpocketsmoney.  I have also read many blogs from Mr Money Mustache and the Mad Fientist.  This has opened me up to a whole new world.  There is where i have realized that i have options.  Its funny, i try to talk to both my friend and BIL about index funds and there is always a reason why.  I have yet to hear someone say index funds are bad for you.  I am actually ready JL Collins book right now.  So far, it is great.  I also appreciate the articles.  I guess i will have to figure out a crafty way to get out of these life insurance policies.

@pecunia thanks for your reply.  Must appreciated

@Telecaster thanks for your reply.  Yes, i actually listened to a podcast today on the roth conversion ladder. I will have to look further into the 72(t) rule

@Bicycle_B thanks for your comments.  Its good to hear a consistent message of what i was reading and hearing.

@CorpRaider thanks for your reply. I will listen to what most the FI community states and not worry what the stock market does.  That way i can not be worried about something i do not know.

@MDM thanks for your reply.  I will look into that as well.  It seems each day i learn more and more about what my options are.

MustacheAndaHalf

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Re: Index Funds vs. Variable Life Insurance
« Reply #8 on: May 14, 2018, 09:29:21 AM »
"Index Funds vs. Variable Life Insurance" ... "I am new to the FI community"

OP - Just so you know, those statements go together.  You would only put those two investments on a par if someone else was making your financial decisions for you - in their own best interest.  Has your trusted adviser ever volunteered how much of your money goes into his pocket when you purchase variable life insurance?

I'm very skeptical of your claim that you can "for free" withdraw money from your variable life insurance policy.  Did you get that in writing?  Since there's no cost, have you tried it?

I'd like you to compare two things.  First, search for "VTI", which is Vanguard Total Stock Market ETF.  It holds a slice of the U.S. stock market, and you can view it's performance on several websites (vanguard, morningstar, Yahoo finance, Google Finance, ...).  On each website, you'll see VTI's returns for the past 5 years have been over 12%.  A year.

Now look at your adviser's recommendation.  While 12%/year is rather good, and not expected every year, you would certainly agree it beats 4%.  Why is your adviser, who pockets some of the money from a variable life insurance policy, recommending an investment that has done about -8% than the total stock market each year?

I'd suggest all you new money go towards index funds that you pick and control.  Funds you can view on multiple third party websites, and can sell whenever you choose.  None of that is true of your current adviser.  I hope your plan to retire doesn't depend on the variable life insurance as an investment, as it's a very poor vehicle for investing.

I'd suggest you skip the insurance middle man, and buy the market.  Vanguard, Schwab and Fidelity all offer S&P 500 index funds with low annual costs.

VaCPA

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Re: Index Funds vs. Variable Life Insurance
« Reply #9 on: May 14, 2018, 02:12:08 PM »
Northwestern Mutual pushes the life insurance hard. I had an old acquaintance reach out to me a couple months ago who just started working there and he was pushing product on me. I don't really think their people are sleazy and trying to take advantage of customers. I think NM does a really good job of training them and making them think the products they're selling are a really good fit for people. In some instances they could be(like high net worth people) but for most Americans who have enough trouble saving as it is they shouldn't be touching these complicated & expensive products.

sjmeche

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Re: Index Funds vs. Variable Life Insurance
« Reply #10 on: May 14, 2018, 05:56:38 PM »
@VaCPA I agree with you there.  They are pushing what they know.  I do not necessarily think they are taking advantage of me.  I think they are trying to do what they think is best, its just the FI community has found better ways of doing things and they just do not know that.  If they pushed what you guys know, they would be broke.

MDM

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Re: Index Funds vs. Variable Life Insurance
« Reply #11 on: May 14, 2018, 06:47:56 PM »
@VaCPA I agree with you there.  They are pushing what they know.  I do not necessarily think they are taking advantage of me.  I think they are trying to do what they think is best, its just the FI community has found better ways of doing things and they just do not know that.  If they pushed what you guys know, they would be broke.
Indeed, It Is Difficult to Get a Man to Understand Something When His Salary Depends Upon His Not Understanding It.

Dicey

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Re: Index Funds vs. Variable Life Insurance
« Reply #12 on: May 15, 2018, 01:21:26 PM »
Love this thread. You guys are great! As always, @Frankies Girl belts one out of the park and the rest of the team follows suit.
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ILikeDividends

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Re: Index Funds vs. Variable Life Insurance
« Reply #13 on: May 15, 2018, 05:08:53 PM »
They probably believe what they are telling you.  It is really easy for a man to fool himself, particularly if the lie is remunerative.

+1

If a hammer is the only tool in the toolbox, then every problem looks like a nail.

Another angle to visualize this question is by looking at a five year chart of KIE, which is the SPDRŽ S&P Insurance ETF.  In that time the ETF has risen from 18.25 to 30.48. That's a 10.803% CAGR over 5 years, not including reinvested dividends. So the money they're making, after paying the sales staff for selling you a policy, and after cashing out earlier policies, is going to the shareholders.

I'm not at all recommending an investment in KIE, but if you were willing to settle for 5% (max) return on a life insurance policy, you could probably do lot better than that by just buying this ETF.  Then you really could get out of it any time you wanted to.

Now, would you rather buy an insurance policy, or would you rather own the insurance company that is selling them?




« Last Edit: May 15, 2018, 06:43:16 PM by ILikeDividends »

FlorenG

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Re: Index Funds vs. Variable Life Insurance
« Reply #14 on: May 18, 2018, 12:41:40 PM »
Hi there,

If it makes you feel better I'm a schmuck that got sold a variable life insurance and... an annuity. Furthermore, I opened a brokerage account with them for a ~1.6% managing fee and funds with expense ratios averaging ~0.8% Also by Northwestern Mutual. ------  I shall live in shame forever.

To make their advice even worse, they suggested that I put my money in the 401(k) Roth because taxes were historically low, even though my tax bracket was actually rather high! If I had put it into a 401(k) I would have saved SOOOO much in taxes is not even funny. Not to mention that with the conversion ladder I could avoid paying taxes later on as well.

I don't even want to know how much more money I could have made if I had just put it all into my 401(k), invested in index funds on my own, and told them to shove the variable annuities and and life insurances up their various behinds. BUT I have to admit that it was better than just saving it into a Money Market (I tell that to myself so I can sleep at night)

Anyway, live and learn.

As you guys do I'd like to believe that they honestly think what they are doing is right, but I'm having more and more trouble with that because it took me just a few months of research on my own to realize how much better than that I can do. And unlike them I would not call myself a financial planner or expert, or make a career out of it.