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

[dczech09]

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?

An investment is any asset that is purchased with the expectation or hope of material gain in the future.

Insurance is an equitable transfer of risk of loss from one entity to another in exchange of payment. You are expected to "lose" money with insurance as you are buying protection (which is intangible). By its definition, insurance is an expense which means that it is supposed to cost you.

It is illegal for agents to call life insurance, or even its cash value, an investment. It is mis-representation. Also, the SEC has not defined these products as securities (fancy name for investment). If you do not believe on us on the legality issue, do some research on Metlife and their class action lawsuit from a few years ago...

Also, I still haven't seen a chart that shows an IUL vs a 401k that takes into account fees...

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.

I have tried making this, as I am sure others have too. Guess what? It's mission impossible.

Nothing like this exists, although it would be very valuable. The reason why it does not exist is because no two cash value insurance policies are exactly the same. Also, insurance companies like to keep as much information under lock and key as possible. Why? Because the more information consumers have, the less likely they are to buy these products.

The point is that access to this information is extremely difficult. Have you read the disclosure statements of the IUL you are considering? What types of fees and expenses are there associated with it? Is it indexed to the S&P 500?

Keep in mind that these variables can (and often do) change. These types of life insurance programs are usually "breathing," meaning that the terms are subject to change.

Even if such a chart could be made, what good would it do? You do realize that the cash value growth is theory, right? Remember, the cash value is not really yours and its growth is all smoke in mirrors as a result. Yes, the cash value can be set up to go to your beneficiaries along with your death benefit, but you have to pay approximately TWO TIMES the premium for this to happen!

I think you are looking for some magic formula or diamond in the rough that does not actually exist. And even if you find it, it really does not change anything.

[disneysteve]

I have tried making this, as I am sure others have too. Guess what? It's mission impossible.

Nothing like this exists, although it would be very valuable. The reason why it does not exist is because no two cash value insurance policies are exactly the same. Also, insurance companies like to keep as much information under lock and key as possible. Why? Because the more information consumers have, the less likely they are to buy these products.

OP, I think this is one thing you aren't understanding. The information you are looking for can't be found. Investment companies - publicly traded companies, mutual funds, etc. - are required by law to publish this info. They have to tell us performance numbers, fees, expenses, etc. Insurance companies ARE NOT investments and are not subject to the same laws. They don't and won't tell you their fees, expenses, or actual returns. All they will do is show you glossy "projected" returns. You need to understand that those projections are fantasy. They don't exist. They have never and will never exist. The accounts associated with whole life products can and do lose money. They do have negative years. In fact, as one of the articles I linked to discusses, they are pretty much guaranteed to be negative for the first 10 years or so after you open your account. Fees and commissions decimate any actual gains from these accounts. First year commission alone can be as high as 90%.

You can search all you want for data to use to compare a whole life policy to an actual investment but you are never going to find it.

[blashmet]

OP, I think this is one thing you aren't understanding. The information you are looking for can't be found. Investment companies - publicly traded companies, mutual funds, etc. - are required by law to publish this info. They have to tell us performance numbers, fees, expenses, etc. Insurance companies ARE NOT investments and are not subject to the same laws. They don't and won't tell you their fees, expenses, or actual returns. All they will do is show you glossy "projected" returns. You need to understand that those projections are fantasy. They don't exist. They have never and will never exist. The accounts associated with whole life products can and do lose money. They do have negative years. In fact, as one of the articles I linked to discusses, they are pretty much guaranteed to be negative for the first 10 years or so after you open your account. Fees and commissions decimate any actual gains from these accounts. First year commission alone can be as high as 90%.

You can search all you want for data to use to compare a whole life policy to an actual investment but you are never going to find it.

A few other things adding to my uncertainty...

1. You say "whole life," but the initial post is about an IUL (indexed universal life). The sales people stress that these are completely different products. Are you sure IULs can have negative years (you said whole life, but that's not what we're talking about).

2. They are projected returns, yes. However, they used historical data to show what the returns would have been using an IUL vs a 401k. Your main argument against this is that they aren't factoring in their fees into this analysis. But how do you know that? Even if we found out that they weren't, their fees have to be listed somewhere, so why couldn't we factor those in, then use historical data to compare the IUL and 401k? Even if they aren't required by law to display them in the analysis, they have to be in the contract somewhere...

[disneysteve]

their fees have to be listed somewhere

Even if they aren't required by law to display them in the analysis, they have to be in the contract somewhere...

Good luck with that. When you find them, let us know.

[blashmet]

Good luck with that. When you find them, let us know.

Yeah looking pretty bad...

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

5% of each premium haha...

[disneysteve]

Yeah looking pretty bad...

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

5% of each premium haha...

I already gave you those numbers in post #109:

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

[dczech09]

I have read the whole topic. Most people like to buy term, and invest the difference. However, all people in this topic know how to invest by themselves. In other words, they know how to pick stocks. How about a person that doesn't know anything about investment. For example, I dont know how to invest in stock. I have Roth IRA. I just need to choose Target Retirement fund 2050. So do you think that if a person doesn't know how to choose fund for investment, should he/she invest in IUL? or Roth IRA (Target Retirement fund 2050)?

Some of the people on the forum know how to pick stocks. However I would be willing to bet that most people on the forum do not do very much stock-picking.

Personally, I know how to pick stocks (trust me, it is not rocket science), but I do not pick stocks for my retirement investing. I recommend, and I personally use, mutual funds that have good track records. First of all, you can achieve a higher degree of diversification which lowers your risk. Secondly, it makes financial sense unless you have A LOT of money and can achieve economies of scale with your stock picking.

I am throwing a lot of jargon out here, so I apologize. The key is the mutual funds are the best bet for retirement investing for 99% of people.

Your Target Retirement Fund 2050 is an example of a mutual fund. It is a mutual fund that invests in other mutual funds, stocks, and some bonds in order to achieve an asset mix that the managers believe to be good for someone retiring in year 2050. Since you do not yet know a whole lot about investing, I would say that the Target fund that you are in is a good choice!

Should someone invest in the IUL or Roth IRA? If you have read this thread from the beginning, you should know that my answer is Roth IRA, Traditional IRA (if you make too much for the Roth), 401k, 403b, etc. I would not even consider the IUL because it is not an investment in the first place! It is an insurance policy. Please do not forget that.

IUL and other permanent life policies really only make sense in the event of special needs and estate planning. Yes, I have said it could be good for people who are not disciplined to invest on their own, but really that is a cop-out since investing on your own is a crucial life-skill!

[dczech09]

Yeah looking pretty bad...

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

5% of each premium haha...

Now you are seeing the darkside of things for the IUL!

Yes, 5% of EACH premium is taken away in fees. Pretty crazy if you ask me. But that is how they make their money! When you have 5% being taken away off the top, it makes it pretty hard to make money on the policy.

They actually do this on purpose too. Think about it. Agents peddle permanent life insurance policies as being a tax-advantaged program; "you get tax-free growth in your cash value account!" They essentially PROMISE this tax-preferred treatment. However, the only way there is no taxes applied is if the policy does not net any profit after considering all of the premiums paid. The insurance company charges such high fees off the top in order to ensure that the cash value doesn't really make any money, that way the agent's promise of tax-free growth is protected.

Imagine that you took out a policy because the agent promised you tax-free growth. Then you make a bunch of money and get taxed. How upset would you be with your agent?

Insurance companies are anything but stupid. They carefully engineer these products to ensure that they make money, yet they can keep pie-in-the-sky promises to their clients. The fees they charge are part of that process. And guess what? These fees are never actually seen by the customer! They take the fees out of the premium so that the customer would not know on the surface that they are being taken for a ride. Pretty clever! It is the whole "out of sight, out of mind" thing.

If done right and used right, these policies can be beneficial for people with special needs or estate planning needs. However for the other 95% of us, we are better served going elsewhere. These are not appropriate for retirement investing!

[disneysteve]

So do you think that if a person doesn't know how to choose fund for investment, should he/she invest in IUL? or Roth IRA (Target Retirement fund 2050)?

You can't invest in an IUL. We keep trying to make that point. An IUL is NOT an investment. It is an insurance policy. At best, it could be considered a savings account with a negative interest rate since it is virtually impossible for the account to ever be worth more than you put in. That would be a pretty lousy investment in my mind.

If you don't know how to choose a mutual fund, there are a zillion places online where you can learn. It takes about 10 minutes, if that. You've already figured it out and put your Roth in the 2050 fund which is a perfectly reasonable choice. To throw away thousands or tens of thousands of dollars by buying an IUL instead would be epically stupid.

[joeqaz1016]

This of course begs the question: Is the Roth 401(k) really less expensive than IUL?
I just wondering...

[dczech09]

This of course begs the question: Is the Roth 401(k) really less expensive than IUL?
I just wondering...

That is actually difficult (if not impossible) to determine. And the reason why is that many expenses are not disclosed for IUL and similar policies.

A Roth 401k will have (mainly) two types of expenses...

An annual fee which may be assessed by the 401k administrator. These are generally pretty small and may be reduced or eliminated in certain cases. Generally speaking, these fees are as small as 0.25% of the 401k balance, and as high as 1.50% of the 401k balance.

Depending on the types of investments used within the 401k plan, there could be expense ratios charged. Expense ratios for mutual funds can range from about 0.05% to 2% of the balance. It is recommended that people stay under 1% for expense ratios (charged annually).



An IUL (or similar permanent life INSURANCE plan) will have many expenses...

They will have the standard fees charged on a monthly basis (rather than annually). These plans charge monthly fees which usually start out slightly larger, but will reduce later in the plans life. The one referenced in this thread charges $9 per month for the first year, the $5 per month after.

There will also be expenses charged for the types of investment sub-accounts used.

These two expenses listed above are very similar to what is charged for 401ks. In addition to these expenses, there will also be other charges. Some small, some large.

All premiums paid are assessed a charge. These will vary, however 5% is actually pretty standard (maybe even slightly conservative).

These policies will tack on cost of insurance charges that are usually assessed annually and are per $1,000 of death benefit coverage. This means that if you have the additional coverage rider which boosts the death benefit in order to match the increases in cash value, there will be more charged. These charges are usually not disclosed on disclosure statements as they can change on a whim. They also vary based on the age of the insured.



At the end of the day, not much money is actually going to work in the cash value of the policy. For example, you could put $200 per month into a Roth 401k or Roth IRA, but that same $200 going into an IUL? A very small portion will actually go to cash value.

Keep in mind that insurance companies purposely structure these policies so that the cash value will never (or at least rarely) exceed the total of premiums paid. Also, in the case of standard endowment policies, they structure them so that the cash value will equal the death benefit at age 100.

Making an apples-to-apples comparison of these plans with a Roth 401k or IRA would be impossible. Even though 401k fees are assessed per the balance (which will grow quite substantially over time), it would be rather naive to think that a 401k would cost more than an IUL. An IUL will have virtually the same expenses as a 401k, and then some!

Let's also not forget the main concept that myself and disneysteve have been emphazising: IUL is not an investment! It is an insurance policy! We cannot compare then apples-to-apples.

[disneysteve]

This of course begs the question: Is the Roth 401(k) really less expensive than IUL?
I just wondering...

That is actually difficult (if not impossible) to determine.

It is impossible to determine because you are trying to compare two entirely different things: an investment account and an insurance policy.

It is also impossible to compare because a Roth is not a uniform thing. What expenses your Roth account incurs will depend on where you have that account and what investments you hold within that account.

People need to stop trying to compare insurance products to investment products. If you are looking for life insurance, you can compare policies from different companies. If you are looking to open a Roth, you can compare different investment companies and different investments. You just can't cross the line and compare insurance to investment. It doesn't work.

[blashmet]

It is impossible to determine because you are trying to compare two entirely different things: an investment account and an insurance policy.

It is also impossible to compare because a Roth is not a uniform thing. What expenses your Roth account incurs will depend on where you have that account and what investments you hold within that account.

People need to stop trying to compare insurance products to investment products. If you are looking for life insurance, you can compare policies from different companies. If you are looking to open a Roth, you can compare different investment companies and different investments. You just can't cross the line and compare insurance to investment. It doesn't work.

I found an in depth analysis here: http://www.hullfinancialplanning.com...urance-policy/

It's interesting that the author favors buying term and investing the difference, but for a small percentage of each of the 6 scenarios the IUL comes out on top (although, obviously, buying term and investing the difference is the clear winner, at least according to this article).

What do you think of his analysis in general?

[dczech09]

I found an in depth analysis here: http://www.hullfinancialplanning.com...urance-policy/

It's interesting that the author favors buying term and investing the difference, but for a small percentage of each of the 6 scenarios the IUL comes out on top (although, obviously, buying term and investing the difference is the clear winner, at least according to this article).

What do you think of his analysis in general?

I have seen this analysis before and I think it is fair and accurate. The author does not hide that he favors "buy term and invest the difference" (neither do I), yet he gives permanent life the credit it deserves.

An important concept to understand is that this analysis really only holds water in a fantasy world where IUL and a Roth IRA could actually be compared apples-to-apples. They cannot be compared, and IUL isnt even an investment.

[Captain Save]

That is actually difficult (if not impossible) to determine. And the reason why is that many expenses are not disclosed for IUL and similar policies.

A Roth 401k will have (mainly) two types of expenses...

An annual fee which may be assessed by the 401k administrator. These are generally pretty small and may be reduced or eliminated in certain cases. Generally speaking, these fees are as small as 0.25% of the 401k balance, and as high as 1.50% of the 401k balance.

Depending on the types of investments used within the 401k plan, there could be expense ratios charged. Expense ratios for mutual funds can range from about 0.05% to 2% of the balance. It is recommended that people stay under 1% for expense ratios (charged annually).



An IUL (or similar permanent life INSURANCE plan) will have many expenses...

They will have the standard fees charged on a monthly basis (rather than annually). These plans charge monthly fees which usually start out slightly larger, but will reduce later in the plans life. The one referenced in this thread charges $9 per month for the first year, the $5 per month after.

There will also be expenses charged for the types of investment sub-accounts used.

These two expenses listed above are very similar to what is charged for 401ks. In addition to these expenses, there will also be other charges. Some small, some large.

All premiums paid are assessed a charge. These will vary, however 5% is actually pretty standard (maybe even slightly conservative).

These policies will tack on cost of insurance charges that are usually assessed annually and are per $1,000 of death benefit coverage. This means that if you have the additional coverage rider which boosts the death benefit in order to match the increases in cash value, there will be more charged. These charges are usually not disclosed on disclosure statements as they can change on a whim. They also vary based on the age of the insured.



At the end of the day, not much money is actually going to work in the cash value of the policy. For example, you could put $200 per month into a Roth 401k or Roth IRA, but that same $200 going into an IUL? A very small portion will actually go to cash value.

Keep in mind that insurance companies purposely structure these policies so that the cash value will never (or at least rarely) exceed the total of premiums paid. Also, in the case of standard endowment policies, they structure them so that the cash value will equal the death benefit at age 100.

Making an apples-to-apples comparison of these plans with a Roth 401k or IRA would be impossible. Even though 401k fees are assessed per the balance (which will grow quite substantially over time), it would be rather naive to think that a 401k would cost more than an IUL. An IUL will have virtually the same expenses as a 401k, and then some!

Let's also not forget the main concept that myself and disneysteve have been emphazising: IUL is not an investment! It is an insurance policy! We cannot compare then apples-to-apples.

I'm sorry .. this is completely wrong..

an IUL will have more fees in the short term .. way less fees in later years... especially during retirement ..

if the purpose is retirement .. you want less fees during retirement..

Most importantly when an agent presents an illustration .. the fees are included. When someone tells you they get you 8% on an IRA .. the fees are as a percentage of your total investment so it costs Way more in the long run .. .

Keep in mind when speaking about IUL we're talking about an overfunded IUL .. always.. if it's not overfunded up to or close to the MEC guideline .. stay away ..buy whole life