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

[blashmet]

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.

I misspoke when I said the IUL would come out on top if they both averaged 7.5%.

The IUL supposedly comes out on top when it uses leveraging.

See the IUL illustration here: LINK REMOVED BY MODERATOR

Comparing this with the Roth 401k illustration (not attached) that gets 7.5% per year, the IUL supposedly comes out on top.

What do you guys think?

[blashmet]

[QUOTE=jIM_Ohio;378183]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.

I think you get both.

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.

I don't think the withdrawals are taxed at all. Maybe because the withdrawals are loans? I'm not sure.

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.

I think the expenses are taken out of the premium.

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.

The article here says that "IUL contracts are effectively a professionally managed “buy term and invest the difference” strategy, with market growth hedged against any risks of annual market loss, and tax-sheltered against capital gains taxes and income taxes."

[Petunia 100]

I misspoke when I said the IUL would come out on top if they both averaged 7.5%.

The IUL supposedly comes out on top when it uses leveraging.

See the IUL illustration here: h**p://imageshack.com/a/img46/4015/kpsb.jpg

Comparing this with the Roth 401k illustration (not attached) that gets 7.5% per year, the IUL supposedly comes out on top.

What do you guys think?

Leveraging means using borrowed money; it increases risk and potential returns. Leveraging does not accurately describe what happens with an IUL. You will put up your own capital in an IUL. Where are the increased potential returns? You give them away to the insurance company.

So, I think this is yet another example of the fact-twisting used to sell this insurance product.

[Petunia 100]

Blashmet, I suggest you read this column from CNN Money: http://money.cnn.com/2010/05/20/pf/e...campaign=helen, including the link he includes towards the end to the Consumer Federation of America report on various life insurance products. They get to equity indexed universal life policy on pages 6 to 8.

I'll give you their conclusion from page 8:

We recommend consumers stay away from EIULs. Low-cost term life insurance plus low-cost mutual funds should work out better, especially if tax laws continue to favor direct investments in stock mutual funds.

If you still think it's a good idea, then sure, buy one. It's your money.

[blashmet]

Blashmet, I suggest you read this column from CNN Money: , including the link he includes towards the end to the Consumer Federation of America report on various life insurance products. They get to equity indexed universal life policy on pages 6 to 8.

I'll give you their conclusion from page 8:

We recommend consumers stay away from EIULs. Low-cost term life insurance plus low-cost mutual funds should work out better, especially if tax laws continue to favor direct investments in stock mutual funds.

If you still think it's a good idea, then sure, buy one. It's your money.

Thank you for your replies. I don't necessarily think it's a good idea; I'm very undecided since I'm hearing conflicting information from multiple sources.

I understand I put up my capital for the premiums, but the particular IUL I posted is advertised as using leveraging. I start borrowing money and investing it back into the policy in year 3. Is that not correct?

[dczech09]

Thank you for your replies. I don't necessarily think it's a good idea; I'm very undecided since I'm hearing conflicting information from multiple sources.

I understand I put up my capital for the premiums, but the particular IUL I posted is advertised as using leveraging. I start borrowing money and investing it back into the policy in year 3. Is that not correct?

If you do not think it is a good idea, then do not do it! You should never do something unless you understand it and believe in it. So no matter what, you're not ready to sink money in this. I would recommend that you never do, but ultimately that is your decision.

You're hearing conflicting information. I would be willing to be that the only people who believe that IUL is a good idea are those who sell it, or support it against their will.

The only way that your beneficiary will get both the death benefit AND the cash value is if you buy a rider, which costs more money!

The IUL is using leveraging, which is BORROWED money. Translation: you would be borrowing money in order to invest, which is a monumentally stupid idea! At best, it would be a zero-sum game after you factor in the risk that you have assumed.

Here is the scoop, you borrow the money and invest it back. However, you pay the interest rate out of your own pocket. So not only are you funding the principle, but also the interest. It is all a shell game in the end.

If you're looking for a "fast" way to build wealth, then stop! There are no tricks. It takes time. Use a 401k/IRA or Roth 401k/IRA. Use any other traditional retirement plans. Stick to basic investments life good growth stock mutual funds, with some real estate, emerging markets, international, and small-cap mixed in there. And please take the time to understand what you are investing in before you do so!

Avoid life insurance as investment at all costs. It is way too expensive, the "returns" are horrible, and at the end of the day it is not an investment. These are life insurance policies! The "cash value" is not an investment; it is more of an accounting measure that regulators have forced upon life insurers. They have been "repackaged" and are sold as investments, which is illegal because it is misrepresentation.

Do what you want to do. But you asked for our input, and this is it. Avoid this at all costs!

[disneysteve]

I'm hearing conflicting information from multiple sources.

Have you found anybody who thinks this is a good idea other than people who sell this crap?

We've told you repeatedly why this is bad, and why it is actually illegal the way it is being marketed. If you still do it, that's up to you, but don't say we didn't warn you.

[feh]

Have you found anybody who thinks this is a good idea other than people who sell this crap?

Exactly. Never accept advice from somebody that will benefit monetarily from the transaction.

These policies are good for one person - the person selling them. Not only should the OP not buy, but he should run away from this advisor like they have the plague.

[Petunia 100]

I understand I put up my capital for the premiums, but the particular IUL I posted is advertised as using leveraging. I start borrowing money and investing it back into the policy in year 3. Is that not correct?

Who's money do you borrow?

[blashmet]

Who's money do you borrow?

It's a policy loan from Penn Mutual (same company that I buy the IUL from).

I take the loan out at 4% and put it right back into the fund, which is guaranteed to get between 1%-12% each year.

[Petunia 100]

It's a policy loan from Penn Mutual (same company that I buy the IUL from).

I take the loan out at 4% and put it right back into the fund, which is guaranteed to get between 1%-12% each year.

You take out a loan against your policy. Who has put the money into the policy?

[disneysteve]

I take the loan out at 4% and put it right back into the fund, which is guaranteed to get between 1%-12% each year.

Can you not see the insanity of doing this?

You are borrowing money at a fixed rate of 4% with a minimum guaranteed return of 1%.

Forget about the 12%. That will virtually never happen. You need to do your planning based on the guaranteed minimum.

I don't know how many more ways we can explain what a scam this is. Either you just aren't comprehending it or you are a troll from the insurance company trying to promote this garbage but nobody here is buying it.

[blashmet]

Can you not see the insanity of doing this?

You are borrowing money at a fixed rate of 4% with a minimum guaranteed return of 1%.

Forget about the 12%. That will virtually never happen. You need to do your planning based on the guaranteed minimum.

I don't know how many more ways we can explain what a scam this is. Either you just aren't comprehending it or you are a troll from the insurance company trying to promote this garbage but nobody here is buying it.

Why won't the 12% ever happen if it's tied to the S&P 500 index? I don't work for any insurance company. I was considering using this as an investment because the illustration I was shown shows that if a Roth401k and an IUL get 7.5% every year with the same premium, then the IUL comes out on top because it uses "leveraging", and morever I get the death benefit. I guess thats not really a fair comparison though because more money is going into the IUL from the loans.

[jIM_Ohio]

Why won't the 12% ever happen if it's tied to the S&P 500 index? I don't work for any insurance company. I was considering using this as an investment because the illustration I was shown shows that if a Roth401k and an IUL get 7.5% every year with the same premium, then the IUL comes out on top because it uses "leveraging", and morever I get the death benefit. I guess thats not really a fair comparison though because more money is going into the IUL from the loans.

Insurance agents are not fiduciaries, they have no obligation to provide advice in your best interest. The illustration does not have to present all information either.

Focus on expenses, and you will discover the IUL will not come out ahead in a bull market. There are threads about this on bogleheads. If you want to do this, it is much cheaper to buy term and purchase the option contracts yourself.

[blashmet]

Insurance agents are not fiduciaries, they have no obligation to provide advice in your best interest. The illustration does not have to present all information either.

Focus on expenses, and you will discover the IUL will not come out ahead in a bull market. There are threads about this on bogleheads. If you want to do this, it is much cheaper to buy term and purchase the option contracts yourself.

Thanks for the link; I'll check it out. What threads do you suggest?

Do you know of any good charts that include all the fees and stuff that show why a 401k is better?

Thank you for your help.