indexed universal life insurance

[follicular]

Can anyone give me the honest lowdown on this type of insurance product? I am within eyeshot of retirement with about $500k in several different retirement plans--401k, ira, roth, etc.
thanks.

[bleumanchu]

I will first admit that I am just recently gaining familiarity with IUL insurance, but yesterday there was a post on the White Coat Investor site which you might find useful.  Geared towards physicians, but might be a useful starting point.

http://whitecoatinvestor.com/5-reasons-not-to-buy-indexed-universal-life-insurance/

[arebelspy]

It's a trap!

Investments and life insurance should not be mixed.  Period.  It's just a way to send your insurance company some of your investment funds straight to their bottom line.

A rare case may be made for individuals with 10MM+ and certain tax scenarios.

[CanuckStache]

Here's a tax scenario. I've got a universal life insurance policy. I was sold by being told that because of my tax situation I don't have 'regular' tax deferrment options. I'm self employed and am paid in dividends - therefore I don't generate any 'room' in an RRSP (Canada - similar to a 401k I think). So, I figured sure sign up for this and it's $100 a month and hopefully when I'm 50 - 65 I can pull the money out or something as a retirement bonus.

But I keep reading now that universal policies are poor financial vehicles...however, of course, articles that mention that are almost always for the 'normal' person working as an employee somewhere. So now I keep debating if I should cancel the policy.

Thoughts?

[arebelspy]

I was sold by being told that because of my tax situation I don't have 'regular' tax deferrment options.

Of course.  They always sell it as a tax benefit, whether they tell you it's better than 401k/RRSP, or that if you're maxing it that it's another way, or if you don't have one that it's a way to get tax deferred, etc.

My thoughts are: do you have a net worth of > 10MM and had a custom one set up for you and your scenario?  If no, you're probably getting *.

There's lots of articles out there debunking Universal Life as an investment vehicle.  EIUL is just the latest spin on it (adding "equity indexed" -- whee?).

Here's the fundamental problem with it: they're going to take your money, invest it for you in something that tracks the indices, take their high commissions/fees/etc. and then somehow pay you more than you would get if you did it without them?

They specifically cap your returns so they can keep the upside.  Then they typically guarantee a floor, and keep a nice spread themselves.

Here's a previous discussion on the topic:
http://forum.mrmoneymustache.com/investor-alley/why-whole-life-universal-life-insurance-is-a-bad-idea/

[follicular]

thanks for all your collective responses. I am going to research further this product but it does sound too good to be true as in lock and reset to market indices, no taxes on principle or interest, guaranteed returns, payments made to the product are not assets and cash flow in the form of taking out loans from the account is not tagged as income for social security purposes, etc.

I am looking for something that will offer a 'guaranteed' monthly cash flow (like an annuity but tax advantaged) and these insurance products all tout this as one of their major features.

[arebelspy]

I am looking for something that will offer a 'guaranteed' monthly cash flow (like an annuity but tax advantaged) and these insurance products all tout this as one of their major features.

Pretty much the only annuity you don't get * on is the SPIA - Single Premium Immediate Annuity.. and even then you need to research which one you're getting and the company you're getting it from.

More info: http://whitecoatinvestor.com/spia-the-good-annuity/

The taxed advantaged stuff generally is so inferior so as to negate that benefit and you just lose out overall.

[chasesfish]

I am looking for something that will offer a 'guaranteed' monthly cash flow (like an annuity but tax advantaged) and these insurance products all tout this as one of their major features.

Pretty much the only annuity you don't get * on is the SPIA - Single Premium Immediate Annuity.. and even then you need to research which one you're getting and the company you're getting it from.

More info: http://whitecoatinvestor.com/spia-the-good-annuity/

The taxed advantaged stuff generally is so inferior so as to negate that benefit and you just lose out overall.

I completely agree with the statement above.  I can understand the math behind a SPIA and Term Life.  I might even could get comfortable with a plain vanilla whole life policy for some self employed scenarios.  After that, if its takes more than 30 seconds to explain to a buyer, its probably too complicated for me.

[follicular]

arebelspy....I appreciate your feedback. I have had the pleasure of reading past advice, insights from you and felt that all you have contributed has been spot on. Please keep it up!
Thanks

[arebelspy]

arebelspy....I appreciate your feedback. I have had the pleasure of reading past advice, insights from you and felt that all you have contributed has been spot on. Please keep it up!
Thanks

Thanks for the kind words.  :)

[pom]

Disclaimer: I work for an insurance company.

It is not that insurance companies are crooks (some are but most are not), it is just pure economics.

Other than the mandatory kind (car insurance is an exemple), Insurance is sold and is not bought. To get someone to sell it you need to pay them. Obviously to pay them, pay your expenses and make profits you need to build it in the product fees.

So that means that most (and probably all) of these products are full of fees. Unless you need insurance to protect your family against you dying, this is a bad idea.

If you need insurance for your family, I would suggest that you look at a 10 years or 20 years term life, it will be much cheaper.  Don't buy any of the riders or waivers, that is where the fees are hidden.

[TomTX]

It's a trap!

Investments and life insurance should not be mixed.  Period.  It's just a way to send your insurance company some of your investment funds straight to their bottom line.

A rare case may be made for individuals with 10MM+ and certain tax scenarios.

++

This is just about all most people here need to know about all the variants of Universal and Whole Life insurance.

It's a trap. It's a package: Term life insurance coupled with an investment, but wrapped in a layer of fees and misdirection/handwaving.

Unless you have $10,000,000+:  You will be better off just getting cheap term life and investing at Vanguard with a stock-heavy AA. If you don't need life insurance, you will be WAY better off just investing at Vanguard with a stock-heavy AA.

Even if you have $10,000,000+ you will very likely be worse off with the Universal/Whole. You need a tax expert (who isn't the one selling the insurance) to do the analysis for you.

[KBecks2]

Agree w the others, don't do it

[ProfWinkie]

Buy term invest the difference