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

[disneysteve]

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

You don't need a chart. Just look at the numbers. This policy has a maximum return of 12%. Vanguard's S&P 500 index fund has a 5-year average annual return of 19.05%. That's just over 7% per year better than the most the policy could have paid. How could the policy be the better choice when it lags the market by at least 7%/year? And that isn't even counting the 4% interest you'd be paying on that insane loan.

I'm really curious. How did you learn of this policy? How do you know the salesperson? Are they related to you?

[dczech09]

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.

Most permanent life insurance policies never return what they "project" after fees. They SOAK you with fees! And that is besides the 4% you would pay when borrowing from the policy. And do not give the whole "well, I am paying myself the interest!" crap. That is one of the biggest crap myths out there.

Let me ask you this: why on Earth would you cap your upside at 12%? So you limit your downside to 1%? That does not make sense.

The S&P 500 averages over 8% per year over the long-term (some time periods over 10%). Last year, a lot of people averaged over 20%. I manage my 401k, IRA, and 529 plans for my niece and nephew, all of which returned over 20% in 2013. And you are going to place a cap at 12% just so that you get 1% during a down-time? Does not make sense, does it? Especially since the market has such a good track record (despite what the media would have you explain).

Why are you so sold on this product? You came on the forum asking for advice, but you keep defending it. It is like you're buying into the talking points of the salesperson? I am guessing the salesperson is a relative or good friend.

Do yourself a favor, and read up on this stuff. READ A LOT! Also, have your salesperson do the same thing. Chances are your salesperson believes that this is the best thing since sliced bread because the broker/dealer brainwashed him/her. Do read up!

Also one final thing...

STOP REFERREDING TO INVESTMENT RETURNS WHEN TALKING ABOUT A LIFE INSURANCE POLICY!!!

Seriously. This is a life insurance policy. "Insurance" should be your first clue as to what this is. This is not an investment, it is illegal for sales reps to sell it as an investment (they also never get caught though), and you do not buy insurance in order to get a return on investment!

You buy life insurance to cover the risk of lost income due to death. If someone plans their finances the right way, they only need life insurance for a period of time (while their kids are growing up and living at home). Save up. Build up a nest egg. Then you can become "self insured" which is MUCH cheaper than paying premiums into a policy forever (or until it is "paid up").

Life insurance does not need to be this freaking complicated! These permanent policies are way too freaking complicated for the typical man on the street to understand. Stick to the basics. Buy insurance for insurance, and buy investments for investments. Keep them separated.

With all that being said, the only time a permanent life insurance policy makes sense is for someone who either has a PERMANENT need for life insurance, or someone who has special estate planning requirements. For 95% of us, it is not necessary! Rant over!

[blashmet]

You don't need a chart. Just look at the numbers. This policy has a maximum return of 12%. Vanguard's S&P 500 index fund has a 5-year average annual return of 19.05%. That's just over 7% per year better than the most the policy could have paid. How could the policy be the better choice when it lags the market by at least 7%/year? And that isn't even counting the 4% interest you'd be paying on that insane loan.

A chart with all the numbers would help me visualize it. I feel like all the charts I see (both from salespeople and any I find online) don't include ALL the relevant numbers.

I'm really curious. How did you learn of this policy? How do you know the salesperson? Are they related to you?

The salesperson is a friend of a friend. They have two websites:


LINKS REMOVED BY MODERATOR

Some articles from the site:

LINK REMOVED BY MODERATOR

Comparing IUL to Roth401kw/Rider:

LINK REMOVED BY MODERATOR

I mentioned the average rate of return of the stock market and mutual funds to the sales person and they said its one of the things people get confused about. Basically, he said that "two accounts over time can have the same average rate of return, but different actual rates of return: the negative years hurt you more in the long run."

An example I found online is this:

"When you take $100k and apply +50%; your account will be worth $150k. Then take the $150k and -50%; now you only have $75k. That is a -25% loss from your original $100k. Why is this? Any time you have one year of losses your average return will not equal your actual return. Losses have greater weight and impact on your actual dollars than gains do."

So the rationale they use against leaving your money in mutual funds is that over 40 years, there will be plenty of negative years that hurt you and can potentially wipe out the whole account right when you want to retire (for example, the 2008 crash). With the IUL, you only have positive years on the premium (you can get -3%, but that's only on the loaned portion, not the initial premium).


Now, this reasoning isn't entirely convincing to me, but the problem is I can't say exactly why. If you (or anyone) can pinpoint it that would be most helpful.

[disneysteve]

OP Please read the forum rules:

http://www.savingadvice.com/forums/general-discussion/1874-basic-forum-rules-links-signatures.html

[disneysteve]

Basically, he said that "two accounts over time can have the same average rate of return, but different actual rates of return: the negative years hurt you more in the long run."

It's true that 2 accounts can have the same average but get there in a different way.

So the rationale they use against leaving your money in mutual funds is that over 40 years, there will be plenty of negative years that hurt you and can potentially wipe out the whole account right when you want to retire (for example, the 2008 crash). With the IUL, you only have positive years on the premium (you can get -3%, but that's only on the loaned portion, not the initial premium).

Now, this reasoning isn't entirely convincing to me, but the problem is I can't say exactly why. If you (or anyone) can pinpoint it that would be most helpful.

Yes, mutual funds can and will have down years. No, it can not "potentially wipe out the whole account". It would have to be down 100% for that to happen and that isn't possible.

You mention the 2008 crash. Certainly, many people's accounts took a big hit that year. In response, a lot of people panicked and sold everything at the bottom. If, however, you hung in there, within 5 years you would have recovered all of your losses and then some. Even if you had retired in 2008, you wouldn't have needed all of your retirement savings immediately so you still could have retired, drawn out just what you needed, and left the rest alone to recover, which is exactly what happened.

Since 1970, so 43 years, the S&P 500 has been down for the year 9 times. Of course, that means it's bee up 34 years. 23 of those years, it was up more than 12%, so more than what this policy would pay (again, not even counting the 4% you'd pay in interest. If we count up the years it has been over 8% (12%-4%), it was 25 years. So in 25 of the last 43 years, this ridiculous policy would have underperformed the market. Do you still think this is a good "investment"?

[blashmet]

Most permanent life insurance policies never return what they "project" after fees. They SOAK you with fees! And that is besides the 4% you would pay when borrowing from the policy. And do not give the whole "well, I am paying myself the interest!" crap. That is one of the biggest crap myths out there.

Let me ask you this: why on Earth would you cap your upside at 12%? So you limit your downside to 1%? That does not make sense.

The S&P 500 averages over 8% per year over the long-term (some time periods over 10%). Last year, a lot of people averaged over 20%. I manage my 401k, IRA, and 529 plans for my niece and nephew, all of which returned over 20% in 2013. And you are going to place a cap at 12% just so that you get 1% during a down-time? Does not make sense, does it? Especially since the market has such a good track record (despite what the media would have you explain).

Why are you so sold on this product? You came on the forum asking for advice, but you keep defending it. It is like you're buying into the talking points of the salesperson? I am guessing the salesperson is a relative or good friend.

Do yourself a favor, and read up on this stuff. READ A LOT! Also, have your salesperson do the same thing. Chances are your salesperson believes that this is the best thing since sliced bread because the broker/dealer brainwashed him/her. Do read up!

Also one final thing...

STOP REFERREDING TO INVESTMENT RETURNS WHEN TALKING ABOUT A LIFE INSURANCE POLICY!!!

Seriously. This is a life insurance policy. "Insurance" should be your first clue as to what this is. This is not an investment, it is illegal for sales reps to sell it as an investment (they also never get caught though), and you do not buy insurance in order to get a return on investment!

You buy life insurance to cover the risk of lost income due to death. If someone plans their finances the right way, they only need life insurance for a period of time (while their kids are growing up and living at home). Save up. Build up a nest egg. Then you can become "self insured" which is MUCH cheaper than paying premiums into a policy forever (or until it is "paid up").

Life insurance does not need to be this freaking complicated! These permanent policies are way too freaking complicated for the typical man on the street to understand. Stick to the basics. Buy insurance for insurance, and buy investments for investments. Keep them separated.

With all that being said, the only time a permanent life insurance policy makes sense is for someone who either has a PERMANENT need for life insurance, or someone who has special estate planning requirements. For 95% of us, it is not necessary! Rant over!

My intention isn't to defend the IUL. I'm just trying to let you know all of the info I've been given so you can give advice accordingly. I appreciate your response\help.

[disneysteve]

My intention isn't to defend the IUL. I'm just trying to let you know all of the info I've been given so you can give advice accordingly. I appreciate your response\help.

I think what we're wondering is what it will take to convince you. I think all of the responses you've gotten have been quite clear.

[jIM_Ohio]

Don't invest in something you don't understand.

If you do not know how to buy options contracts to mimic the IUL on your own, don't hire someone to do it for you.

If the OP is not going to educate himself, the forum would be best to close the thread and not allow troll like responses (including this one).

Ask why a VUL would not work better with an S&P 500 mutual fund?

I've posted lots of questions the OP has not responded to. Yet he questions every other poster... hmmmm....

[blashmet]

Don't invest in something you don't understand.

If you do not know how to buy options contracts to mimic the IUL on your own, don't hire someone to do it for you.

Agreed.

If the OP is not going to educate himself, the forum would be best to close the thread and not allow troll like responses (including this one).

I'm educating myself by reading articles and posting on forums such as this...

Ask why a VUL would not work better with an S&P 500 mutual fund?

I've posted lots of questions the OP has not responded to. Yet he questions every other poster... hmmmm....

I responded to your main post point by point on the first page of this thread.

[jIM_Ohio]

Agreed.



I'm educating myself by reading articles and posting on forums such as this...




I responded to your main post point by point on the first page of this thread.

LOL you responded without answering anything.

"...I think"
is not a valid answer, you need to learn to do more homework.
a response is not an answer
but an answer is a response

[blashmet]

I think what we're wondering is what it will take to convince you. I think all of the responses you've gotten have been quite clear.

A chart showing a roth401k vs an IUL would help. It's not enough to say that a roth401k or mutual fund will have years that have 30% gains. Their argument is that even though mutual funds have a larger average rate of return over time, the IUL's actual rate of return is higher because it never has negative years. I would post a link that shows the difference between actual/average, but I can't yet.

[kv968]

I mentioned the average rate of return of the stock market and mutual funds to the sales person and they said its one of the things people get confused about. Basically, he said that "two accounts over time can have the same average rate of return, but different actual rates of return: the negative years hurt you more in the long run."

An example I found online is this:

"When you take $100k and apply +50%; your account will be worth $150k. Then take the $150k and -50%; now you only have $75k. That is a -25% loss from your original $100k. Why is this? Any time you have one year of losses your average return will not equal your actual return. Losses have greater weight and impact on your actual dollars than gains do."

I see its time for the old annual "Insurance isn't an investment" debate

Blashmet, what you said is true, the AVERAGE rate of return (arithmetic mean) is different than what you would actually realize since it doesn't properly take into consideration the effect of the downside. However, CAGR (compound annual growth rate) or the ANNUALIZED rate (geometric mean) does.

With that, the average annual return of the S&P 500 over the last 30 years has been 13%. The CAGR rate (or the true rate you would have experienced) is 11.5% with a standard deviation of about 17%. So a difference of about 2% per year with a pretty average volatility. Granted if the investment was more volatile the spread between the average and annualized would be bigger but 2% seems about right for most investments.

What I'm getting at is even with 11.5% CAGR returns, you'd never see that high of a return over time even though you're capped at 12% (over the actual return) due to the high fees I'm sure you'd be paying for the "insurance". Sure there will be times when the S&P is down 15-20% and your "investment" doesn't lose money but there will also be time when the S&P is up 30%+ (last year) and you won't even realize half of that. Again it comes down to the CAGR and with the cap and fees of the "investment" you most likely won't realize a return that high even if you "never lose money".

[feh]

A chart showing a roth401k vs an IUL would help. It's not enough to say that a roth401k or mutual fund will have years that have 30% gains. Their argument is that even though mutual funds have a larger average rate of return over time, the IUL's actual rate of return is higher because it never has negative years. I would post a link that shows the difference between actual/average, but I can't yet.

Go buy the IUL. Everybody on this forum and bogleheads has told you it's a bad idea, yet you continue to believe the salesperson.

It's obvious you've been convinced by their pitch. Go buy the IUL.

[blashmet]

Go buy the IUL. Everybody on this forum and bogleheads has told you it's a bad idea, yet you continue to believe the salesperson.

It's obvious you've been convinced by their pitch. Go buy the IUL.

I'm not even close to convinced; that's why I'm posting what they're telling me so I can get counter arguments. It's to gain more information/knowledge.

For example, kv968's post is something that I was looking for. It provides deeper insight into how the growth works.

[blashmet]

I see its time for the old annual "Insurance isn't an investment" debate

Blashmet, what you said is true, the AVERAGE rate of return (arithmetic mean) is different than what you would actually realize since it doesn't properly take into consideration the effect of the downside. However, CAGR (compound annual growth rate) or the ANNUALIZED rate (geometric mean) does.

With that, the average annual return of the S&P 500 over the last 30 years has been 13%. The CAGR rate (or the true rate you would have experienced) is 11.5% with a standard deviation of about 17%. So a difference of about 2% per year with a pretty average volatility. Granted if the investment was more volatile the spread between the average and annualized would be bigger but 2% seems about right for most investments.

What I'm getting at is even with 11.5% CAGR returns, you'd never see that high of a return over time even though you're capped at 12% (over the actual return) due to the high fees I'm sure you'd be paying for the "insurance". Sure there will be times when the S&P is down 15-20% and your "investment" doesn't lose money but there will also be time when the S&P is up 30%+ (last year) and you won't even realize half of that. Again it comes down to the CAGR and with the cap and fees of the "investment" you most likely won't realize a return that high even if you "never lose money".

This is an excellent post and something like what I was looking for.

How does one calculate the CAGR and annualized over a period of time?

To see if I understand, basically you're saying that the CAGR is 11.5% which takes into account the effect of the downside and this will be larger than the gains I would experience with a 1-12% guarantee with the IUL?