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

[disneysteve]

We've mentioned commissions but let's talk about them in more specific detail.

The typical commission for the salesman who drags you into this policy is 85% of your first year premium. So if you pay $250/month, that's $3,000/year. That means the sales guy gets a payout of $2,550 just for suckering you into this deal. Then, every year you keep the policy, he gets an ongoing commission of 3% of your premium so another $90/year.

What's the point of all of this? The insurance company needs to cover the commission, the "guarantee" to you, and still make a profit on top of that. Even though they are guaranteeing you between 1 and 12%, they can obviously only pay you a fraction of the actual return of the S&P 500 in order to do all of that. Don't forget this. It is the key reason why your return will ALWAYS, ALWAYS, ALWAYS trail well behind investing this money on your own.

Here's a good article on why you shouldn't get involved:

http://www.infinitebanking.org/wp-content/uploads/2012/05/BankNotes-May-2012.pdf

[dczech09]

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.

If you invest in an IUL that is indexed to the S&P 500, you will get the same return as if you invested in an S&P 500 index within an IRA or 401k. If both "shelters" have the same investment (index fund) under the hood, you will have the same return. This should be an "oh duh" type of thing.

The difference is fees. Typically, IRAs and 401ks do have operating fees. The IUL will have that as well, along with commission expenses that you are covering through whatever the insurance carrier charges. On average, fees on permanent insurance policies are MUCH higher. While an operating fee on an IRA or 401k is typically 1% to 2% per year, the average fees on IUL range in the 2% to 4% per year range. Also, the insurance company can adjust fees as they need to keep up with internal costs.

As kv pointed out, the CAGR of an S&P 500 index would be about 11.5% per year. Some years, it is up, and other years it is down. With an IUL, you cap your upside to just over the average while your downside is pathetically low.

To add insult to injury- I hope you take the time to understand the following...

Your cash value is not an investment account! So we cannot even really compare these things "apples to apples." The cash value is NOT legally yours; it is the property of the insurance company.

If you take draws, you are really just borrowing from the insurance company and paying interest yourself. Agents like to sell this as "tax-free draws," however it is only tax-free because it is a LOAN!

If you surrender the policy, they will nail you with a surrender charge.

If you surrender the policy, and the cash value exceeds the premiums paid (almost NEVER happens), then you will be taxed on the difference. Insurance companies do a good job structuring these things and charging enough so that the cash value almost never gets that high!

If you try to "over fund" the policy in order to make more of a return, you may run the risk of the policy becoming a "Modified Endowment Contract." If that happens, draws can be taxable to an extent, effectively eliminating any tax benefit that the agent promised.

Again, the product's name has the word "insurance" in it! That should be a clue as to what this is! This is simply a life insurance policy with no expiration date. You should only buy it if you NEED life insurance permanently.

It is illegal for these to be sold as investments. That should be another hint!

Stop trying to look for counter-arguments that you can make to the agent. You probably will not convince them, because if you do, they will need to quit their job (if they have integrity). So the stakes are pretty high! Most salespeople are convinced AGAINST their will. I used to be an agent for a VERY short while. And believe me, the "training" these agents receive is not technical understanding of how these policies work; it is all about selling. Most agents have no idea how these policies work, and they are usually as "brainwashed" as you were making yourself to be earlier in the thread.

If you are looking for investments, then look no further than mutual funds and tax-shelters such as the IRA and 401k. Avoid life insurance as an investment tax-shelter; that is not how they were designed.

The only reason why the cash value exists is just in case the policy owner surrenders early- they are entitled to get back the "unearned premium" that the insurance company holds on to.

[disneysteve]

If you surrender the policy, and the cash value exceeds the premiums paid (almost NEVER happens)

Actually, I'm pretty sure it isn't even possible for the cash value to ever exceed what you've paid in. The fees and commissions coupled with the anemic returns guarantee that you will always lose money on the deal. Otherwise, the insurance company couldn't continue to offer these policies.

[dczech09]

Actually, I'm pretty sure it isn't even possible for the cash value to ever exceed what you've paid in. The fees and commissions coupled with the anemic returns guarantee that you will always lose money on the deal. Otherwise, the insurance company couldn't continue to offer these policies.

It happens, albeit very rarely, which is why I said it almost never happens. But you are right- these policies are structured and engineered very carefully with fees, commissions, and small returns. And yeah if these policies did grow too large, it would mean the insurance company was losing money on the deal.

In order for this to happen, one would need a variable policy with mutual fund subaccounts. They would also need abnormal returns, and possibly a slight overfunding of a policy (as long as the policy does not go MEC which would screw everything up).

With an IUL capping out at 12% return per year, I think we could pretty safely assume that the cash value will never exceed what was paid into the policy.

Put is this way- with a term or IUL policy, you will be paying for the mortality charges and administrative expenses (built into the premium). With IUL, you also cover the insurance company for higher risk. Basically, the insurance company is leveraging their risk off of your back! When you look at it from that perspective, it is pretty obvious that the cash value should never exceed the premiums. I really don't think the insurance company is going to set up a deal where they lose money

[blashmet]

In regards to selling an IUL as an investment being illegal, I found the following on Wikipedia:

"In the US it is illegal under the Investment Advisers Act of 1940 to offer Universal Life Insurance as an "investment" to individuals, but it is frequently offered by agents as a tax-advantaged financial vehicle from which they can borrow as needed later without tax penalties. This also makes it an alternative for individuals who are not able to contribute to a Roth IRA due to IRS income restraints.

It is illegal to market Index Universal Life (IUL) as an "investment security", as defined by the Securities Act of 1933 & the Securities Act of 1934. These Acts of Congress gave birth to the SEC, in reaction to the stock market crash of 1929 that led to the Great Depression. Today, the SEC oversees FINRA and they both regulate the marketing and sale of securities. IUL is an insurance product and does not meet the definition of a security, so it does not fall under the authority of the SEC or FINRA.

Therefore, under the authority of the SEC and FINRA, Index Universal Life Insurance cannot be marketed or sold as, a "security", "variable security", "variable investment" or direct investment in a "security" (or the stock market), because it is not. However, IUL can be marketed and sold as an investment."

The last part is confusing. Is the bottom line that it's illegal to sell them as "investment securities" but legal to sell them as "investments"?

[dczech09]

In regards to selling an IUL as an investment being illegal, I found the following on Wikipedia:

You are surprised that you found a contradictory statement on Wikipedia?! Remember that anyone can say anything they want on Wikipedia.

The bottom line with all of this is that financial advisors must be registered under an investment advisor and have the proper licensing in order to sell any variable-type life insurance policy.

The mutual funds used in the subaccounts can be marketed as investments, but the policy itself cannot be sold as such. It is very convoluted. In order it to be called an investment, the life insurance programs would have to be filed as such under many federal acts. Life insurance companies petitioned in 1971 to receive exemption from being registered under those laws, but it did not happen. As a result, variable-type life insurance (the policies themselves) cannot be sold as investments or securities as they are not registered under the SEC and FINRA which are the authoritative bodies which oversee the sales practices of investments. This is the same exact reason why a 401k is not an investment: it is a tax-shelter/retirement plan and is not regulated by the SEC and FINRA.

If permanent life insurance policies in general were considered investments, they would have to be filed under the proper laws, be registered with SEC and FINRA, and only people licensed to sell investments could sell the policies. However, today that is not the case. A financial advisor does not need to be licensed to sell investments in order to sell whole or universal life. They would still require investment licensing, however, in order to sell any variable-type policy because variable-type policies possess mutual funds as the underlying investments in the subaccounts. The mutual funds are obviously considered investments, however the variable-life vehicle is not an investment.

The fact that variable-life policies can only be sold by a licensed investment professional always confuses this fact.

But yes, it is illegal for any life insurance policy in general to be sold as an investment. Reps get away with it though because it is often hard to prove that they did so. Also, a lot of reps will sell it as an "alternative to investing" which technically is not illegal because of the wording.

Its law. Extremely complicated.

[bellsbendboy]

not much to go on in this thread!

A properly structured IUL will outperform the Roth ALL of the time.

The Roth can lose money; the iul cannot as there is no downside risk.

The Roth does not provide a self completing clause (rider) many iul's do.

The Roth has no death benefit.

The Roth has no long term care provision; many iul's do.

The Roth is not liquid; the iul is after a few years.

I could go on but you get the picture!

bbb

[disneysteve]

A properly structured IUL will outperform the Roth ALL of the time.

The Roth can lose money; the iul cannot as there is no downside risk.

The Roth does not provide a self completing clause (rider) many iul's do.

The Roth has no death benefit.

The Roth has no long term care provision; many iul's do.

The Roth is not liquid; the iul is after a few years.

I could go on but you get the picture!

bbb

How long have you been an insurance company salesperson?

We "get the picture" just fine if you've read the thread.

- Roth can lose money. That's true, but so what. I'd rather have unlimited upside potential and a downside risk than be locked into a lifetime of 1 or 2% returns.

- Roth has no death benefit? Of course it does. When I die, my beneficiary inherits all of the money in my account.

- Roth is not liquid? That's not true. Money deposited in the Roth can be withdrawn at any time for any reason with no penalty.

You might want to get your facts straight and find another line of work.

[dczech09]

A properly structured IUL will outperform the Roth ALL of the time.

The Roth can lose money; the iul cannot as there is no downside risk.

The Roth does not provide a self completing clause (rider) many iul's do.

The Roth has no death benefit.

The Roth has no long term care provision; many iul's do.

The Roth is not liquid; the iul is after a few years.

I could go on but you get the picture!

bbb

Yes, the Roth has downside, but so does IUL. What if the insurance company goes insolvent? What if the insurance company's investment perform poorly? Insurance companies have exposure to traditional investments, so policy-owners also have exposure to such investments by proxy. Bond investments (which insurance companies use) can be just as risky as stocks.

The Roth certainly does have a death benefit. On mine, my parents are my beneficiaries (since I am not yet married). If I die, they get the money. Plain and simple. Now that may not be an "insurance benefit," however a Roth IRA is not insurance. And IUL is not an investment.

Roths do not carry riders because they are tax-shelters for investments. IUL has riders, which means that it is an insurance policy - not an investment.

Roths do not need a long-term care provision because it is not insurance.

Roths can be as liquid as the investment options that you use. Ever hear of money market mutual funds?

My contention is this: I am NOT against IUL or other permanent life insurance policies. Please do not misunderstand. I am against IUL and other permanent life insurance being sold as investments.

IUL and other similar policies are life insurance policies! Please do not conflate life insurance and investing; they are two completely different things. You CANNOT achieve the same investment benefits with a life insurance policy that you can achieve with Roths and other tax-shelters. Keep investing and insurance separate.

I appreciate that you are just looking out for your commission check, as well as fellow salespeople's checks. But selling life insurance as an investment is inaccurate, misrepresenting your product, and is ILLEGAL!

And as DS stated, please get your facts straight

[disneysteve]

My contention is this: I am NOT against IUL or other permanent life insurance policies.

I'll have to disagree there. I AM against IUL and other permanent life policies. For 99.9% of the population, they are horrendously bad purchases. There is an exceedingly small number of people who may actually benefit from what a whole life policy offers. Add in the fact that the "investments" linked to these policies always underperform comparable investments over time and you've got a really crappy product all around.

[bellsbendboy]

More iul's were sold in 2013 than the previous five years combined measuring in the billions.

It is "investment grade insurance.

Roth's may not need long term care, or disability ...but real people do.

Most iul's are projecting about 8% and studies show over a 25 year period they are within 1% of that projection.

A properly structured iul, minimizes the death benefit, which reduces the cost of insurance, which in turn substantially increases the growth rate.

Lastly, assuming, or for that matter suggesting, that the cash value will not exceed the premiums paid in shows a complete lack of grasp of iul's and there growth potential.

bbb

[17million]

So I came across this thread doing some research of my own and decided to do some more digging. What I found is that this product falls under the 7702 plan which allows significant tax advantages as well. It should not be marketed as an investment product because your money never even goes into any of the "markets"...this product simply "mirrors" the market and you are credited interest at the rate of return that the "linked" index performed at. And maybe this is the loophole that allows this to be sold by non-securities licensed people.

- Also, I found that with an "Increasing" death benefit option (as opposed to "Level" option), the cash value PLUS the death benefit is what the beneficiary will receive.

- In regards to the modified endowment contract that was mentioned, this proves to be true if you over fund it too much but it seems there is plenty of wiggle room. Depending on the face amount of the policy, there is maximum allowable contributions per year before it becomes a MEC and I think this is defined by government guidelines. For example, let's say a $500,000 face amount IUL with a Long Term Care rider for a 27 yr old male has target premiums around $260/month, or $3120 a year. The max allowable amount per year is around $12,500 that you can contribute and it will still remain within the tax advantaged 7702 plan guidelines and not become a MEC. Don't quote me on exact numbers but it's something in that range from what I saw on an illustration.

- Also, I see that almost every company out there offers some kind of IUL product now with different caps and floors including all of the famous insurance companies that you see commercials for every day (which I don't want to mention any and give them free plugs).

- I did some math since someone was talking about a chart on here and I was curious myself:

Based on S&P 500 since 1998 (numbers pulled from Wikipedia for S&P):

-$100,000 one time investment into a Mutual Fund-

1998 28.58% $128,580.00
1999 21.04% $155,633.23
2000 -9.10% $141,470.61
2001 -11.89% $124,649.75
2002 -22.10% $97,102.16
2003 28.68% $124,951.06
2004 10.88% $138,545.73
2005 4.91% $145,348.33
2006 15.79% $168,298.83
2007 5.49% $177,538.43
2008 -37.00% $111,849.21
2009 26.46% $141,444.51
2010 15.06% $162,746.06
2011 2.11% $166,180.00
2012 16.00% $192,768.80
2013 32.39% $255,206.61


-Now if you had $100,000 in the cash value of an IUL (based on one I found with a 0.75% floor and a 13.50% ceiling)-

1998 13.50% $113,500.00
1999 13.50% $128,822.50
2000 0.75% $129,788.67
2001 0.75% $130,762.08
2002 0.75% $131,742.80
2003 13.50% $149,528.08
2004 10.88% $165,796.74
2005 4.91% $173,937.35
2006 13.50% $197,418.90
2007 5.49% $208,257.20
2008 0.75% $209,819.12
2009 13.50% $238,144.71
2010 13.50% $270,294.24
2011 2.11% $275,997.45
2012 13.50% $313,257.11
2013 13.50% $355,546.81



So it seems by this math that having that cap/ceiling on it may be a worthy exchange for having that protection from losses with the floor.

I do understand with any insurance product, there is COI (cost of insurance), but I am talking about just the cash value portion. However, I think over $100,000 difference in a 16 year time frame is well over enough to cover this cost of insurance. Plus you do actually have a death benefit in addition to cash value that is also able to pass on to your beneficiary tax free. It doesn't seem like such a bad product as people were originally making it out to be.

When you get term and invest the difference, will you be able to invest the difference and grow it tax free? Where were people talking about "investing the difference"?

Also, from what I understand about a Roth is that you can only contribute up to $5500 annually.


Now I am no expert by any means, I just ask alot of questions and do alot of research (and I had someone do an IUL illustration for me). So please anyone chime in and correct me if I'm wrong on anything I found or if I missed anything...

[feh]

So it seems by this math that having that cap/ceiling on it may be a worthy exchange for having that protection from losses with the floor.

I do understand with any insurance product, there is COI (cost of insurance), but I am talking about just the cash value portion. However, I think over $100,000 difference in a 16 year time frame is well over enough to cover this cost of insurance.

The problem with your analysis is the time frame - 1998-2013 is not representative of the market's normal behavior. It just happens to include 2 very deep recessions.

IULs are a good deal - for the company/person selling them.

[17million]

I'm just doing the math though for the most recent time frame, which is what makes sense to me...from my understanding the IUL was created in 1997 so I used 1998 as a starting point. Why not use the most recent years?

I think later tonight I'll go make another spreadsheet going back to like 1940 and do the same calculations and see how it pans out. Even though the IUL wasn't created yet, I just want to know for arguments sake.

[dczech09]

The analysis is also kind of limited in its time frame. Also, how many people sink $100,000 or more into an IUL right off the bat?! So few.

The premiums paid in also factor in commissions, fees, and the cost of insurance. So to be fair, the amount of money put in the IUL would be more than $100,000. If you wanted $100,000 going into cash value, you have something like $200,000+ being the total upfront cost (I am just spit-balling a figure as it depends on many other variables not specified). If you wanted to do a fair analysis, you would have to factor in those other variables. The $100,000 going into cash value is contingent upon the other costs being met, so it cannot be ignored.

Putting aside the math, please consider the fact that many agents sell this stuff as an investment, while most consumers purchasing it are really just looking for insurance. This is a product that is SOLD, not BOUGHT. And it is sold for the wrong reasons.

If you want to sink money into one of these policies, be my guest. However, why are insurance company's so willing to give out the ceilings and floors? Because they will win long-term. The insurance company is not going to put together a contract where they lose money!