IUL vs. Roth 401k/401k vs. Roth IRA/IRA

[blashmet]

Simply put, is it a good idea to invest in an IUL (indexed universal life) policy rather than a 401k/IRA or Roth 401k/IRA?

I've seen illustrations showing that a specific type of IUL (Penn Mutual Accumulation Builder II) outgrows these other types of accounts if they all have the same average rate of return. For example, if over 40 years, a Roth 401k and an IUL average a 7.5% rate of return, the final value of the IUL is a lot more than the Roth 401k (and moreover one receives a death benefit).

However, I've also read posts that say the IUL is a "scam" and it is illegal to sell it as an investment product because the policy value is technically the property of the insurance company.

Any info/help would be appreciated.

Thanks.

[Petunia 100]

Simply put, is it a good idea to invest in an IUL (indexed universal life) policy rather than a 401k/IRA or Roth 401k/IRA?

No.

I've seen illustrations showing that a specific type of IUL (Penn Mutual Accumulation Builder II) outgrows these other types of accounts if they all have the same average rate of return. For example, if over 40 years, a Roth 401k and an IUL average a 7.5% rate of return, the final value of the IUL is a lot more than the Roth 401k (and moreover one receives a death benefit).

This is mathematically impossible. $1 compounded for 40 years at a rate of 7.5% = $1 compounded for 40 years at a rate of 7.5%. To get one side to be larger/smaller than the other, you must change something. You can charge more/less fees on one than the other, which would impact the rate of return and change the final number. You can tax one differently than the other, which would change the net.

Sometimes in the wonderful world of insurance products, you forfeit your equity if the death benefit pays out. So please read any policy you are considering very carefully.

[snafu]

Fact is with ROTH you can allocate according to prevalent circumstances and buy low cost, low fee products. Insurance is necessary for auto, house, and term life if you have people dependent on you. Annuities are terrific for the sales representative's commission and firm's profit. How much will you pay in fees and MER rates in the proposed IUL over the life of the contract?

[jIM_Ohio]

Simply put, is it a good idea to invest in an IUL (indexed universal life) policy rather than a 401k/IRA or Roth 401k/IRA?

I've seen illustrations showing that a specific type of IUL (Penn Mutual Accumulation Builder II) outgrows these other types of accounts if they all have the same average rate of return. For example, if over 40 years, a Roth 401k and an IUL average a 7.5% rate of return, the final value of the IUL is a lot more than the Roth 401k (and moreover one receives a death benefit).

However, I've also read posts that say the IUL is a "scam" and it is illegal to sell it as an investment product because the policy value is technically the property of the insurance company.

Any info/help would be appreciated.



Thanks.

Ask questions. Make sure you get direct answers.

For example, do you get a death benefit and the cash value, or one or the other?
If you bought term and invested the difference, you would get both.
Ask what a term policy with same benefit would cost.

Beating a Roth? HOW? Roth is tax free on way out, the death benefit might be tax free, but the investing returns would be taxed. Ask them at what rate the withdraws are taxed from the iul.

Ask if the return in the projection is before or after expenses from the insurance product. Ask what the yearly expenses are. The 7.5% return of the Roth is both conservative and after expenses. This is because mutual fund returns are reported net of expenses. Insurance product illustrations are not reported this way.

Buy term, invest the difference
Make sure you work with fee-only salespeople (so their fee does not change whether you buy iul, term or a variable product). Avoid commission sales people like the plague.

FYI, I am securities and insurance licensed, and run a fee-only practice. I have NEVER sold any indexed insurance products because buying term works 75% of the time, and there are a couple of whole life products which round out the other 25%.

[blashmet]

No.



This is mathematically impossible. $1 compounded for 40 years at a rate of 7.5% = $1 compounded for 40 years at a rate of 7.5%. To get one side to be larger/smaller than the other, you must change something. You can charge more/less fees on one than the other, which would impact the rate of return and change the final number. You can tax one differently than the other, which would change the net.

Sometimes in the wonderful world of insurance products, you forfeit your equity if the death benefit pays out. So please read any policy you are considering very carefully.

I should have been more clear about how this particular IUL works.

After year 3, I start borrowing money from Penn Mutual (5k per year) at an interest rate of 4% and invest it back into the policy.

There is a 1% floor and a 12% cap on the return I get each year (tied to the S&P 500 index).

[disneysteve]

Simply put, is it a good idea to invest in an IUL (indexed universal life) policy rather than a 401k/IRA or Roth 401k/IRA?

NO, NO, NO. It is never a good idea to comingle insurance policies and "investments".

it is illegal to sell it as an investment product

Very true. There was a huge law suit years ago because of insurance companies misrepresenting whole policies as investment vehicles and the insurance industry lost big time. Unfortunately, it didn't really change anything. They paid out millions of dollars in retribution to customers and then proceeded to go right on doing what they had been doing all along - selling policies as investment vehicles. Stay away.

After year 3, I start borrowing money from Penn Mutual (5k per year) at an interest rate of 4% and invest it back into the policy.

They are going to lend you money at 4% that they will then invest on your behalf with the hopes of getting a higher return. Talk about a scam.

Would you go to your bank and take out a loan at 4% in order to get money to invest in the stock market? I'm hoping the answer is no, so why would you possibly think it would be okay to do it in this setting?

[blashmet]

Very true. There was a huge law suit years ago because of insurance companies misrepresenting whole policies as investment vehicles and the insurance industry lost big time. Unfortunately, it didn't really change anything. They paid out millions of dollars in retribution to customers and then proceeded to go right on doing what they had been doing all along - selling policies as investment vehicles. Stay away.

Is it still illegal to sell an IUL as an investment?

They are going to lend you money at 4% that they will then invest on your behalf with the hopes of getting a higher return. Talk about a scam.

Well, the policy has a guaranteed interest payment of 1%-12% based on how the S&P does. The illustration shows the IUL vs. a 401k over 40 years, with both averaging 7.5% per year. Why do you think this is a "scam"?

Would you go to your bank and take out a loan at 4% in order to get money to invest in the stock market? I'm hoping the answer is no, so why would you possibly think it would be okay to do it in this setting?

Well, doesn't it depend? If you could get a loan of $10,000 at 4%, what would be wrong with investing it in a company like JNJ or MCD that offers a dividend of ~3%, increases the dividend every year, and has a history of going up? I wonder what this investment would look like over 40 years.

I suppose the idea is that the loan money makes you an average of 3% extra every year, which adds up when compounded over the 40 years. I think this is the reason it beats a 401k if they both average 7.5%. I guess the reason it wins is because more money is being invested into it. I wonder what the 401k would look like if you borrowed money and reinvested it. Is that part of the "scam"?

The sales pitch is that mutual funds have negative years and this ruins the compounding. The IUL never has a negative year as it has a guaranteed 1% floor.

What do you think about this?

[disneysteve]

There is a 1% floor and a 12% cap on the return I get each year (tied to the S&P 500 index).

What do you think about this?

So in a bad year, you borrow at 4% and earn 1% for a loss of 3%.

In an average year, you borrow at 4% and earn 7% for a net gain of only 3%.

In a good year, like 2013, you borrow at 4% and earn 12% for a net gain of 8%. But those of us who bought term insurance and invested on our own earned 32.33%.

No matter how you crunch the numbers, you will always come out behind with the whole life policy.

[Petunia 100]

Is it still illegal to sell an IUL as an investment?

Yes. Insurance salespeople are licensed to sell insurance. They are not licensed to sell investments.

[Petunia 100]

Well, the policy has a guaranteed interest payment of 1%-12% based on how the S&P does. The illustration shows the IUL vs. a 401k over 40 years, with both averaging 7.5% per year. Why do you think this is a "scam"


Well, doesn't it depend? If you could get a loan of $10,000 at 4%, what would be wrong with investing it in a company like JNJ or MCD that offers a dividend of ~3%, increases the dividend every year, and has a history of going up? I wonder what this investment would look like over 40 years.

I suppose the idea is that the loan money makes you an average of 3% extra every year, which adds up when compounded over the 40 years. I think this is the reason it beats a 401k if they both average 7.5%. I guess the reason it wins is because more money is being invested into it. I wonder what the 401k would look like if you borrowed money and reinvested it. Is that part of the "scam"?

The sales pitch is that mutual funds have negative years and this ruins the compounding. The IUL never has a negative year as it has a guaranteed 1% floor.

What do you think about this?

Read the contract. The projections they show you are just that, projections. An illustration of what might happen. But guess what? The internal costs can change at any time. The mortality costs can change at any time. And guess who gets to make those decisions? Not you. But guess who gets to pay? Well, that would be you.

[Petunia 100]

So in a bad year, you borrow at 4% and earn 1% for a loss of 3%.

In an average year, you borrow at 4% and earn 7% for a net gain of only 3%.

In a good year, like 2013, you borrow at 4% and earn 12% for a net gain of 8%. But those of us who bought term insurance and invested on our own earned 32.33%.

No matter how you crunch the numbers, you will always come out behind with the whole life policy.

Which only makes sense. If the customer came out ahead, the insurance company would stop selling the product or go bankrupt.

[disneysteve]

Which only makes sense. If the customer came out ahead, the insurance company would stop selling the product or go bankrupt.

And actually I realized my post is wrong. The policy wouldn't pay the full return of the S&P 500. It would only pay a portion of the actual gain. So if the market was up 7%, the policyholders might only see 4 or 5% so it would be more of a break even. In order to get 12%, the market would probably need to be up 15% or more.

[dczech09]

If you meet with a financial advisor of any kind and they say that their "program" that they are offering can beat any 401k or IRA, the first thing you should do is RUN FOR THE HILLS!!!

Seriously. They cannot accurately say whether or not their insurance policy beats any 401k or IRA without first explaining what is in the 401k or IRA (as far as investments go). A 401k or IRA is not an investment alone; they are simply tax shelters.

Also, if the investment person says that the IUL policy will come out ahead even if both the IUL and 401k/IRA make 7.5% per year....well, that advisor had better get his license revoked because he or she cannot do math. Any two investments making 7.5% are making 7.5%! They would be the same, wouldn't they not? Assuming that time, investment amount, and tax consequences were the same.

Did the investment dude mention the tax consequences of IUL? Did they review the TYPES of investments? Did they talk about their commission and fee structure?

It is very illegal for any licensed financial professional to sell IUL as an investment. The problem is that they almost always get away with it! It is illegal to sell it that way, regardless of licensing, for one reason - it is misrepresentation! Investments are investments. Insurance is insurance. IUL is an insurance policy. Period. Just because you put a tuxedo on a goat does not mean it is a prince.

As far as borrowing money at 4% on the policy to invest... ARE YOU KIDDING ME?! That is extremely dumb. You have no guarantee of reward, but do you know what you have a guarantee of? The interest that you must pay back! At best, you might net like 1% after taxes, fees, and inflation. And you took on risk to do so. If you adjust for risk, it is a mathematically stupid idea.

This guy is a salesperson. That's it. Do not buy the IUL. Do not do business with them AT ALL. You need to stay away from them; they do not have your best interest at heart. They are just trying to sell a product and take a commission. Either that, or they are truly ignorant of what they are selling, which is probably worse.

[jIM_Ohio]

And actually I realized my post is wrong. The policy wouldn't pay the full return of the S&P 500. It would only pay a portion of the actual gain. So if the market was up 7%, the policyholders might only see 4 or 5% so it would be more of a break even. In order to get 12%, the market would probably need to be up 15% or more.

This is because the insurance companies use options contracts on the index, and the options contracts don't pay dividends.

All legit ways to invest, but no reason a person could not do this on their own outside the insurance contract.

[disneysteve]

All legit ways to invest, but no reason a person could not do this on their own outside the insurance contract.

And at a much lower cost.