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

[Worldbuilder]

To clear all of the confusion I would like to state that the IUL you have is a "decent"life insurance product. Under current Internal Revenue Service (IRS) and Canada (CRA) guidelines , insurance policies receive many favorable tax advantages. Tax Free Death Benefits, Tax Deferred Earnings, Tax Free Withdrawls and Tax Free Loans. There is an importance to tax advantages and it is ONLY good if you have gains and significant accumulation of money over time. If you have term, all these tax free benefits are of no use because term has no cash. In permanent life , if you have little money in it, it also makes little difference. Past traditional policies with low rates of interest did not help accumulate high cash values. Thus your IUL can highly favor you if you know the history of insurance and power of it. Are you aware that there are different types of IULs. Hint: How do you think the wealthy continue to make more and pay less tax. Think about the growth if you were to save $300 a month for 30 years at 15% compound interest , ( all the benefits stated above) and it's all tax free!

....now you see your brain wheels spinning!

[dczech09]

Hint: How do you think the wealthy continue to make more and pay less tax.

They make more by working hard and creating businesses. They invest in real assets and do not sink there money into an INSURANCE policy. Key word: insurance.

They do not pay "less" in taxes. This is actually a myth that is extremely easy to debunk. It is called "capital gains" which are taxed at a flat 15%/20% (depending on your income) if they are long-term gains.

This is not the 70's anymore. We are not in a high inflationary period which did support these types of policies as investments. Also, the "tax advantages" to these IUL policies are now gone with the enactment of Modified Endowment Contract laws. These days, there are no tax advantages to cash value policies that cannot be obtained through traditional qualified plans.

Think about the growth if you were to save $300 a month for 30 years at 15% compound interest , ( all the benefits stated above) and it's all tax free!!

I invest more than two times that amount. I am 27, and will be investing for a LONG TIME. Compound interest is also attainable. What do I use? A Roth IRA and a Traditional 401k with funds invested in mutual funds.

I receive a small tax deduction with my 401k, and my Roth IRA investments grow tax-free. It is not magic!

And 15%?! While I do have mutual funds that have hit that, I have never even heard of a cash value policy coming anywhere near that amount (once fees are netted out). That 15% projection is extremely rosey. And don't forget, it is not real growth as you do not even own the freaking cash value in the first place (the insurance company does).

Keep it coming, cash value folks! I can keep going

[blashmet]

Wow, I thought this thread died long ago! I came back to read it and it seems like a lot of good info was added.

After reading everything, it still seems unclear to me whether the IUL is better than a 401k in terms of growth over time.


I appreciate the chart that was posted and definitely the math that was done for facotoring in 2% fees.


It'd be extremely beneficial if we could gather up the numbers and come to a solid conclusion on this. I would do it, but I'm not sure what numbers we need.

This is the IUL that I referenced initially. Can anyone say what page the relevant numbers are on and I'll crunch them?

http://www2.pennmutual.com/content/public/individuals-families/customer-service/department-labor/accumulation-builder2-iul.html

[disneysteve]

After reading everything, it still seems unclear to me whether the IUL is better than a 401k in terms of growth over time.

Then you haven't been reading much of anything that we've said. Unless you are an insurance salesman here trying to drum up business, I can't imagine how anybody could possibly not understand what a horrible deal the IUL is.

You want numbers? Look at the page titled Accumulation Builder Disclosure Resource Sheet.

Premium Load 5%
Monthly Fee $9/month in year 1; $5/month thereafter

Compare that to a 401k

Premium Load ZERO
Monthly Fee ZERO

If you put $1,000 into this IUL and I put $1,000 into my 401k, you immediately lose $50 to the load. You then have to cough up another $9/month for 12 months. So at the end of 1 year, you will have paid $158 in fees and I will have paid nothing. If both of our accounts earn 6%, who will be ahead?

And that's before we look at fund expenses. The Penn Series Large Growth Stock Fund has an expense ratio of 1.00%. Vanguard's Total Stock Market Index fund has an EF of 0.17%, less than 1/5 the cost.

So the IUL has much higher fees and much higher expenses. If you're still convinced that it is the better "investment" then good luck to you.

[blashmet]

Then you haven't been reading much of anything that we've said. Unless you are an insurance salesman here trying to drum up business, I can't imagine how anybody could possibly not understand what a horrible deal the IUL is.

You want numbers? Look at the page titled Accumulation Builder Disclosure Resource Sheet.

Premium Load 5%
Monthly Fee $9/month in year 1; $5/month thereafter

Compare that to a 401k

Premium Load ZERO
Monthly Fee ZERO

If you put $1,000 into this IUL and I put $1,000 into my 401k, you immediately lose $50 to the load. You then have to cough up another $9/month for 12 months. So at the end of 1 year, you will have paid $158 in fees and I will have paid nothing. If both of our accounts earn 6%, who will be ahead?

And that's before we look at fund expenses. The Penn Series Large Growth Stock Fund has an expense ratio of 1.00%. Vanguard's Total Stock Market Index fund has an EF of 0.17%, less than 1/5 the cost.

So the IUL has much higher fees and much higher expenses. If you're still convinced that it is the better "investment" then good luck to you.

I think the main claims that are causing me to be uncertain is that the IUL's cash value has no negative years, and that this causes it to come out ahead over time. Even though the average rate of return is the same, the negative years cause the mutual fund to be lower. Of course, it'd be complicated to add in the fees for the mutual fund and the IUL, which is kinda where I'm stuck.

[disneysteve]

I think the main claims that are causing me to be uncertain is that the IUL's cash value has no negative years, and that this causes it to come out ahead over time. Even though the average rate of return is the same, the negative years cause the mutual fund to be lower. Of course, it'd be complicated to add in the fees for the mutual fund and the IUL, which is kinda where I'm stuck.

Good luck with that IUL. I think you've been thoroughly warned.

[blashmet]

Good luck with that IUL. I think you've been thoroughly warned.

Your posts seem to imply that I advocate or am sold on the idea of buying one.

It's quite the opposite.

I want a clear, sure fire way to say that one is better than the other.

Various attempts have been made at this, but they always leave out a variable.

For example, your post left out the fact that negative years hurt more over time than positive years give.

We haven't seen a chart that incorporate this fact in addition to the various fees. I assume it's because it's hard to generate one, but I'm sure it can be done.

[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.

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.

This is mathematically impossible.

Your posts seem to imply that I advocate or am sold on the idea of buying one.

It's quite the opposite.

I want a clear, sure fire way to say that one is better than the other.

Various attempts have been made at this, but they always leave out a variable.

For example, your post left out the fact that negative years hurt more over time than positive years give.

We haven't seen a chart that incorporate this fact in addition to the various fees. I assume it's because it's hard to generate one, but I'm sure it can be done.

Your questions were very clearly and accurately answered in the very first response by Petunia. This thread has now gone on for 6 pages over 2 months. If you aren't convinced yet, I'm not wasting any more of my time trying.

[blashmet]

Your questions were very clearly and accurately answered in the very first response by Petunia. This thread has now gone on for 6 pages over 2 months. If you aren't convinced yet, I'm not wasting any more of my time trying.

It's pretty easy to show that two investments can have the same initial investment, the same AVERAGE rate of return, yet end up in different amounts. It makes a difference when the negative and positive years take place.

http://www.foxbusiness.com/personal-finance/2012/04/30/solving-myth-rate-return/

This same thing is said to happen with an IUL and 401k. The IUL never has negative years (on the cash value at least), so it doesn't have to catch up after the negative years.

Do you disagree with that?

It seems the question of whether an IUL beats a 401k over time would boil down to having a chart that:

1) showed an IUL vs 401k with the same initial investment and a history of both positive and negative years, but with the IUL as capped at 12% and floored at 1%.

2) It would also factor in the fees for each.


Do you agree that this chart would basically answer our question? If not, why?

[Petunia 100]

It's pretty easy to show that two investments can have the same initial investment, the same AVERAGE rate of return, yet end up in different amounts. It makes a difference when the negative and positive years take place.

http://www.foxbusiness.com/personal-finance/2012/04/30/solving-myth-rate-return/

This same thing is said to happen with an IUL and 401k. The IUL never has negative years (on the cash value at least), so it doesn't have to catch up after the negative years.

Do you disagree with that?

It seems the question of whether an IUL beats a 401k over time would boil down to having a chart that:

1) showed an IUL vs 401k with the same initial investment and a history of both positive and negative years, but with the IUL as capped at 12% and floored at 1%.

2) It would also factor in the fees for each.


Do you agree that this chart would basically answer our question? If not, why?

No, I do not agree that it would. Why? Because illustrated IUL returns and actual IUL returns are not the same. Since you don't get to spend the illustrated returns, they are meaningless. Show me actual returns of what actual IUL customers have actually received. That will answer our question.

[dczech09]

This same thing is said to happen with an IUL and 401k. The IUL never has negative years (on the cash value at least), so it doesn't have to catch up after the negative years.

Do you disagree with that?

It seems the question of whether an IUL beats a 401k over time would boil down to having a chart that:

1) showed an IUL vs 401k with the same initial investment and a history of both positive and negative years, but with the IUL as capped at 12% and floored at 1%.

2) It would also factor in the fees for each.


Do you agree that this chart would basically answer our question? If not, why?

You could impose a 12% cap and a 1% floor on the IUL, and have the 401k or IRA grow at market. Which one performs best with have to do with the market's performance. In most years, both would grow at an equivalent rate (before expenses) because the rate of return would likely be in between the cap and floor.

In good years, the 401k or IRA would outperform due to the IUL being capped at 12%.

In bad years, the IUL would outperform... right? Sure. However, it is important to keep in mind that there has NEVER been a 20 year time period in the stock market's history where you would have lost money. Do you really want to bet against that type of track record?

It would be naive to look at the gross returns and not the net returns. Just as it would be foolish to consider only projections, as opposed to actual returns. The IUL has a massive premium load of 5% that is imposed on all premiums paid-in! Not to mention, there are the monthly maintenance fees. Those high expenses have an indirect impact on the productivity of the IUL.

Basically, you are paying for insurance on an insurance product. The 5% fee provides access to the cap and floor which provides some "stability."

Ultimately, the IUL's cap and ceiling is not really 12% and 1%. It is those, less any expenses. These expenses are much lower (and in some cases non-existent) for 401k and IRA.

This is all moot for IUL however. Everything that I just mentioned is an albeit naive way of looking at things. It presupposes that the IUL cash value is actually your property, which it isn't. This presupposes that the insurance company does not keep your cash value when you die, which they do (unless you pay more money for a riders that changes this). This all presupposes that the 12% cap and 1% floor is what you make, which it isn't.

You cannot talk about rate of return when referring to an IUL. It is NOT an investment, thus rate of return does not really exist (it is all smoke in mirrors).

Please go back and re-read things in this thread. Clearly you are not grasping a very important concept. Clearly you are not understanding that the cash value on a IUL is not even your money in the first place. Clearly you are ignoring the fact that this is an Indexed Universal Life Insurance policy that we are talking about (hint: this is INSURANCE).

Do not confuse insurance and investment. The two serve very different purposes!

At least when you have a 401k or IRA, that money will go to your beneficiaries when you die, and you don't pay extra for that to happen! At least what the 401k and IRA returns, it is actually your money, and you do not pay extra for it.

[blashmet]

You could impose a 12% cap and a 1% floor on the IUL, and have the 401k or IRA grow at market. Which one performs best with have to do with the market's performance. In most years, both would grow at an equivalent rate (before expenses) because the rate of return would likely be in between the cap and floor.

In good years, the 401k or IRA would outperform due to the IUL being capped at 12%.

In bad years, the IUL would outperform... right? Sure. However, it is important to keep in mind that there has NEVER been a 20 year time period in the stock market's history where you would have lost money. Do you really want to bet against that type of track record?

It would be naive to look at the gross returns and not the net returns. Just as it would be foolish to consider only projections, as opposed to actual returns. The IUL has a massive premium load of 5% that is imposed on all premiums paid-in! Not to mention, there are the monthly maintenance fees. Those high expenses have an indirect impact on the productivity of the IUL.

Basically, you are paying for insurance on an insurance product. The 5% fee provides access to the cap and floor which provides some "stability."

Ultimately, the IUL's cap and ceiling is not really 12% and 1%. It is those, less any expenses. These expenses are much lower (and in some cases non-existent) for 401k and IRA.

This is all moot for IUL however. Everything that I just mentioned is an albeit naive way of looking at things. It presupposes that the IUL cash value is actually your property, which it isn't. This presupposes that the insurance company does not keep your cash value when you die, which they do (unless you pay more money for a riders that changes this). This all presupposes that the 12% cap and 1% floor is what you make, which it isn't.

You cannot talk about rate of return when referring to an IUL. It is NOT an investment, thus rate of return does not really exist (it is all smoke in mirrors).

Please go back and re-read things in this thread. Clearly you are not grasping a very important concept. Clearly you are not understanding that the cash value on a IUL is not even your money in the first place. Clearly you are ignoring the fact that this is an Indexed Universal Life Insurance policy that we are talking about (hint: this is INSURANCE).

Do not confuse insurance and investment. The two serve very different purposes!

At least when you have a 401k or IRA, that money will go to your beneficiaries when you die, and you don't pay extra for that to happen! At least what the 401k and IRA returns, it is actually your money, and you do not pay extra for it.

Why do you think the cash value is not the IUL owner's property? For the IUL I was shown, the IUL owner's beneficiaries get both the cash value and the life insurance benefit when the IUL owner dies.

[dczech09]

Why do you think the cash value is not the IUL owner's property? For the IUL I was shown, the IUL owner's beneficiaries get both the cash value and the life insurance benefit when the IUL owner dies.

It is standard that the policy-owner does not own the cash value. It is the insurance company's property. You only have a claim on it when and if you cancel early. In that situation, you would be paid back the cash value as it represents unearned premium for the insurance company.

In the early years, you will pay a much larger premium than what is actually due to cover mortality charges and the like. Those additional premium dollars accumulate to build up your cash value. In the later years, your premium that you pay will be much lower than such mortality charges; your cash value would (supposedly) cover the spread.

So really your cash value only accumulates because of premiums that you essentially overpay. Have you ever wondered why term life insurance does not have a cash value? It is precisely because this type of problem only exists with permanent life insurance policies.

In your case, your beneficiaries may very well get both the cash value and death benefit. This is actually pretty common and I have addressed this earlier in the thread. In order for your beneficiaries to receive both the cash value and death benefit, you would have to pay additional premium. Essentially, you are purchasing double insurance (two life insurance policies, one that is primary, and the other that covers your cash value). So it is a gimmick.

I guarantee you that if you dropped the cash value coverage and stuck with a normal arrangement where the insurance company would keep your cash value when you die, your premium would be roughly half what it is right now.

You are more than welcome to keep the insurance. No one is stopping you. However, I think you should know that there is a great chance that you are being "had." You are paying a lot more for an insurance policy than you should have to. I recommend sticking with term insurance and investing the difference in premium. For 99% of people, the NEED for life insurance is only temporary.

[blashmet]

It is standard that the policy-owner does not own the cash value. It is the insurance company's property. You only have a claim on it when and if you cancel early. In that situation, you would be paid back the cash value as it represents unearned premium for the insurance company.

In the early years, you will pay a much larger premium than what is actually due to cover mortality charges and the like. Those additional premium dollars accumulate to build up your cash value. In the later years, your premium that you pay will be much lower than such mortality charges; your cash value would (supposedly) cover the spread.

So really your cash value only accumulates because of premiums that you essentially overpay. Have you ever wondered why term life insurance does not have a cash value? It is precisely because this type of problem only exists with permanent life insurance policies.

In your case, your beneficiaries may very well get both the cash value and death benefit. This is actually pretty common and I have addressed this earlier in the thread. In order for your beneficiaries to receive both the cash value and death benefit, you would have to pay additional premium. Essentially, you are purchasing double insurance (two life insurance policies, one that is primary, and the other that covers your cash value). So it is a gimmick.

I guarantee you that if you dropped the cash value coverage and stuck with a normal arrangement where the insurance company would keep your cash value when you die, your premium would be roughly half what it is right now.

You are more than welcome to keep the insurance. No one is stopping you. However, I think you should know that there is a great chance that you are being "had." You are paying a lot more for an insurance policy than you should have to. I recommend sticking with term insurance and investing the difference in premium. For 99% of people, the NEED for life insurance is only temporary.

I haven't actually purchased the IUL yet. I'm just curious about it as an investment. I'm still confused as to why people say insurance is not an investment. Isn't an investment anything where money is put in and it has the potential to grow? Why does it matter if insurance is mixed in there somewhere?

Also, I still haven't seen a chart that shows an IUL vs a 401k that takes into account fees and the fact that negative years (and their timing) affects the final amount of two investments with the same average rate of return. The chart would just show an investment made in, for example, 1970,use the historical returns of the S&P 500 (the IUL would have a 1% floor and 12% cap), and have the same contributions made to each account throughout the investment time period (e.g., 1970-2015).

Basically, if we have a chart that shows this, then the question will be answered. I guess I'll have to make one myself, but it'll take awhile.

[disneysteve]

I haven't actually purchased the IUL yet. I'm just curious about it as an investment.

Insurance is not an investment.

Why isn't it an investment? Well the simplest answer to that question is that it is illegal in the US to offer whole life as an investment.

Why is it a bad idea to consider it as an investment? I think we've covered that ad nauseum but here are some other things to read since you don't believe us.

http://money.cnn.com/retirement/guide/insurance_life.moneymag/index10.htm

http://momanddadmoney.com/why-whole-life-insurance-is-a-bad-investment/

http://bucks.blogs.nytimes.com/2010/04/12/why-life-insurance-is-not-an-investment/?_r=0