Indexed Universal Life Insurance

[shadowfax222]

Currently I am looking to start a 250k IUL policy from Aviva. I have read all over the internet, and it seems people are very bipolar when it comes to any sort of cash value life insurance policy. Some love and some hate. Given my current situation, what do you think?

I am 25 years old, married with one child. I make 95k a year and my wife stays home with our baby. We have no debt (other than house payment) and I am in good health (also non smoker). I already have a 500k term insurance policy through Northwestern Mutual. I also have a 401k plan. I am looking into a cash value life insurance policy as something to start early and get good dividends on in 35-40 years. My father lost most of his retirement from his 401k when the market crashed in '07, so I am nervous with putting all my eggs in the 401k basket. What do you think, IUL a bad idea?

[disneysteve]

Don't do it!

Keep your investments and your insurance separate. Universal/Whole/Variable life insurance is NOT an investment and should NOT be used as one. If you want to invest outside of your 401k, that's great. Open an account with a good no-load mutual fund company like Vanguard or Fidelity or T. Rowe Price or with a discount online broker like e-Trade or Scottrade.

As for the "401k basket", remember that a 401k is just that, a basket. What you choose to put in that basket is up to you (within the choices available). You can be very aggressive and high risk, you can be more moderate or you can be ultra-conservative. If you father got wiped out in 2007, he probably wasn't well diversified or had too much in risky investments.

Also, have you figured out if 500K is enough insurance? That's only 5 times your income. The typical guideline is 10 times income though not everyone needs that much. If you were to die, is 500K going to support your wife and child for more than a few years? Not likely.

[jpg7n16]

Currently I am looking to start a 250k IUL policy from Aviva. I have read all over the internet, and it seems people are very bipolar when it comes to any sort of cash value life insurance policy. Some love and some hate. Given my current situation, what do you think?

Well what is your need for the insurance? Over what timeframe do you need the protection?

I am 25 years old, married with one child. I make 95k a year and my wife stays home with our baby. We have no debt (other than house payment) and I am in good health (also non smoker). I already have a 500k term insurance policy through Northwestern Mutual. I also have a 401k plan. I am looking into a cash value life insurance policy as something to start early and get good dividends on in 35-40 years.

Those "dividends" are in most cases just you borrowing your own money back from the excess you paid in. Sure your excess earns a little, but if you had just invested that excess in the first place, you'd make significantly more.

My father lost most of his retirement from his 401k when the market crashed in '07, so I am nervous with putting all my eggs in the 401k basket. What do you think, IUL a bad idea?

As long as your father didn't sell out everything to cash during the crash, he's likely made most (if not all) of it back. And he likely still has much more in the account than he paid in.


Take for instance a Vanguard Target 2025 (resonable retirement allocation for your dad to have): Vanguard Target Retirement 2025 Inv: MUTF:VTTVX quotes & news - Google Finance

In the peak of 2007, it was in the low $14's ($14.15 or so), and now it's back to $13.18. That's not down that much (7% down still) Before 2007, the price was always below $11, and since we can assume he's been adding to the account for a while, he's likely made a lot more than he put in.

Obv he invested differently, but the example just shows how it's possible to be down since 2007, but up overall.

[cohan99]

I am not a fan of universal life UNLESS you fund it properly and i am totally against EI UL. now, i havent seen your available EIUL but many of them have a minimum (good for you) and maximum (terrible for you) cap. lets focus on the terrible part ... ooops, partS.

1st: the maximum caps are ALWAYS below historical returns on the market. meaning if the market performs as it has (of course no one can promise this) then you are out of luck. this cap varies so yours may be lower or higher (but rarely very close to the historical averages).

2d: most EIUL will provide you indexed returns that will not include dividends. these can be substantial! but you get NONE of them.

[jpg7n16]

Besides, the cash value in an Indexed UL policy would have lost money in 2008 too.

The cash value on indexed policies track an index like the S&P 500, just like your father's 401k did.

What is indexed universal life insurance?

[dczech09]

Life insurance agents like to sell permanent life policies such as IUL as if it is a "safe investment alternative."

First of all, it is not an investment. The cash value exists in the event that you surrender the policy early. If you surrender early, the insurance company is required by law to pay back the cash value because of the shortened time frame that they were covering you.

Otherwise, if you keep the insurance until you die, then the cash value does not mean anything. What happens is the insurance company uses your cash value to help pay the death benefit. It essentially is a piece of "leverage" for them in the end. The higher your cash value, the less they have to pay out of their own pockets in order to cover the death benefit.

While yes your cash value is getting some return on it, you have to understand that the insurance company is investing in order to get you that return. So if markets are doing cruddy, your return will be all the more cruddy (not that it was that good in the first place).

The only time you should take on a permanent life policy is if you legitimately NEED the life insurance for the rest of your life. For 99% of people, life insurance is only a temporary need. Keep the term for the time that you need it, and avoid permanent life insurance.

[disneysteve]

if you keep the insurance until you die, then the cash value does not mean anything.

This is something that people don't seem to understand, and the salespeople certainly don't explain it. This is NOT an investment. You will NEVER get the money that is supposedly being invested. You can borrow it but then when you die, the death benefit is reduced by that amount. If you never touch the cash value, the company keeps it when you die.

Let's say you buy that 250K policy and in 20 years, you have a cash value of 100K. You die. Your beneficiary gets ONLY the 250K death benefit. The other 100K of cash value is gone.

If, instead, you bought 250K in term and over 20 years saved up 100K in a mutual fund, when you died, your beneficiary would get the 250K insurance AND the 100K investment account.

[dczech09]

Let's say you buy that 250K policy and in 20 years, you have a cash value of 100K. You die. Your beneficiary gets ONLY the 250K death benefit. The other 100K of cash value is gone.

If, instead, you bought 250K in term and over 20 years saved up 100K in a mutual fund, when you died, your beneficiary would get the 250K insurance AND the 100K investment account.

I argue that most agents are uninformed and do not actually understand these products themselves. At least in my experiences that has been the case.

Lets say that you died with $100k in cash value on a $250k whole life policy. The insurance company would pay the beneficiaries $100k from the cash value and $150k out of their own pockets. If the cash value were only $10k, they would pay $10k from the cash value and $240k out of their own pockets.

So in otherwords, this cash value is a leveraging tool for the insurance company. They need this leverage because they are taking on an extremely high level of risk. I put a video on YouTube where I explained that the insurance company is insuring against a sure thing when they sign a permanent life policy with you.

Another thing is that if you read the contracts for these permanent life policies, the language will actually tell you that the cash value is the property of the insurance company NOT the policyowner.

When we say avoid permanent life policies like the plague, we literally mean avoid them like the plague

[Wayde]

Currently I am looking to start a 250k IUL policy from Aviva. I have read all over the internet, and it seems people are very bipolar when it comes to any sort of cash value life insurance policy. Some love and some hate. Given my current situation, what do you think?

First, make sure you are fully covered, especially when you are the sole income provider. Income, debts, Assets, child care, college, emergency fund, etc...all need to be fully covered with insurance. It is strange that most of us buy Full coverage for our Homes, Cars, and valuable items but we forget to fully cover our Life. With the information you provided, you are no where near fully covered. Use Term Life to get fully covered so it's affordable.

I am 25 years old, married with one child. I make 95k a year and my wife stays home with our baby. We have no debt (other than house payment) and I am in good health (also non smoker). I already have a 500k term insurance policy through Northwestern Mutual. I also have a 401k plan. I am looking into a cash value life insurance policy as something to start early and get good dividends on in 35-40 years. My father lost most of his retirement from his 401k when the market crashed in '07, so I am nervous with putting all my eggs in the 401k basket. What do you think, IUL a bad idea?

Investing in a 401k is not a bad thing. Unfortunately, most people who invest money in a 401k don't have the time to watch it on a daily basis. They are relying on the Fund Managers, crossing their fingers that hopefully all is well. This kind of investing, 401ks, IRAs, Mutual Funds, etc...are the thing of the past. You can still invest in them, but the Key is to have a Personal Investment Adviser to watch over it constantly ---this is called Active Management

Your father probably did not have a person Actively Managing his 401K and that is the primary reason why he lost so much. It is one thing to Gain but it is another to Preserve the Gain. You can 't just put your money into any mutual funds these days and cross your fingers hoping it will be ok. That was the 90's ...those days are over.

As for your question on the IUL -- they are a great vehicle if you know how to use them the right way. Many people don't understand how they work and that is why there might be some negative press about it. Again, make sure to fully insure yourself first. Once you do that then open up an IUL (make sure to open it with an agent who understands it), fund your 401k (make sure to have it Actively Managed), and lastly diversify in other things too so you don't have all your eggs in one basket.

[Wayde]

[QUOTE=jpg7n16;317644]Besides, the cash value in an Indexed UL policy would have lost money in 2008 too.

The cash value on indexed policies track an index like the S&P 500, just like your father's 401k did.

Sorry, that is incorrect. The cash value in an IUL did not lose money that year. Cash in an IUL is never directly invested in any investment market. The Insurance Carriers use Indexes to calculate how much interest they will credit the client if any was earned that year. If nothing was earned than they don't credit anything...although some insurance carriers do have minimums of 2-3% even if the market is negative. Again, cash in an IUL is never invested in any market. The types of policies that are invested directly into the markets are called Variable Universal Life policies.

[Wayde]

This is something that people don't seem to understand, and the salespeople certainly don't explain it. This is NOT an investment. You will NEVER get the money that is supposedly being invested. You can borrow it but then when you die, the death benefit is reduced by that amount. If you never touch the cash value, the company keeps it when you die.

Let's say you buy that 250K policy and in 20 years, you have a cash value of 100K. You die. Your beneficiary gets ONLY the 250K death benefit. The other 100K of cash value is gone.

If, instead, you bought 250K in term and over 20 years saved up 100K in a mutual fund, when you died, your beneficiary would get the 250K insurance AND the 100K investment account.

Steve, the customer does have a choice if he/she wants the cash value to be included in the Death benefit in an IUL policy.

[jpg7n16]

Your father probably did not have a person Actively Managing his 401K and that is the primary reason why he lost so much.

Every stock based investment fell substantially in 2008. A portfolio manager wouldn't have saved you from it.

You can 't just put your money into any mutual funds these days and cross your fingers hoping it will be ok. That was the 90's ...those days are over.

And the 80's, 70's, 50's, 40's etc. In fact every long term period (every rolling 15+ year period in the history of the market) has been positive (so far). That includes the year ending the Great Depression. What makes you say it's all different? I bet people were saying the same thing after the Great Depression. "Things will never be the same. Stocks aren't safe. Didn't you see what just happened??"

Sorry, that is incorrect. The cash value in an IUL did not lose money that year.

You're absolutely right. I did some more research, and although I thought they acted just like Variable UL policies, I was wrong. There is a floor each year, coupled with a cap on the returns. So the IUL cash value wouldn't have lost money in 2008. I was wrong.


But I also found some very interesting info about the limit on returns that cap brings. Yes, you avoid the negative years, but WOW what a price you pay to do it!

Since I find this interesting, hopefully others will as well.

The question: How much does the cap cost if you had say - $10,000 Index UL vs a $10,000 index fund??

Let's use the year ending 2008 (since the market has doubled since then, and admittedly 2008 was a bad year - that will give a worst case scenario for the index fund, so you can't say I just picked a good timeframe)

ING - Index Universal Life - CV

New Value over X year holding period ending 2008 -- IUL (9% cap/1% floor) vs 100% stock portfolio:
1 year: $10,100.... vs $6,278 -- IUL wins by $3k
5 years: $13,261.... vs $8,899 -- IUL wins again by $4k
10 years: $16,233... vs $8,626 -- IUL wins by $7k and the tides begin to change
15 years: $23,186... vs $25,512 -- stocks win by $2k
20 years: $32,633... vs $50,489 -- stocks win by $17k
25 years: $47,327... vs $130,836 -- stocks win by $56k
30 years: $67,464... vs $231,195 -- stocks win by $164k

Now, is it unreasonable to assume that someone buying such a policy would be in their mid 30's, buying life insurance and planning for retirement 30 years away? I don't think so. The index cap would have cost them 100's of thousands of retirement $$$. Remember, that's $164k on just a single $10k investment. (And yes, that includes the 32% loss in 2008)

Oh and my fav, just cause I want to post it:
70 years: $683,498... vs $10,634,890

The cap cost $10 million on a one time $10k investment. Wow.


This would be someone who bought the policy at 25 and lived to age 95. It seems the longer you live, the more the policy costs you.


In the short term, the no loss guarantee looks nice. But when you look at the long term - WOW what a price you pay!


ProducersWeb - Eight precautions when using indexed universal life to save for retirement

Steve, the customer does have a choice if he/she wants the cash value to be included in the Death benefit in an IUL policy.

Although this is true, you pay more for the priviledge. In essence, in a Type B Universal policy, you pay for a 2nd policy equal to the value of your cash value.

You only get the cash value, because you're paying for insurance on it.

[dczech09]

Investing in a 401k is not a bad thing. Unfortunately, most people who invest money in a 401k don't have the time to watch it on a daily basis. They are relying on the Fund Managers, crossing their fingers that hopefully all is well. This kind of investing, 401ks, IRAs, Mutual Funds, etc...are the thing of the past. You can still invest in them, but the Key is to have a Personal Investment Adviser to watch over it constantly ---this is called Active Management

Your father probably did not have a person Actively Managing his 401K and that is the primary reason why he lost so much. It is one thing to Gain but it is another to Preserve the Gain. You can 't just put your money into any mutual funds these days and cross your fingers hoping it will be ok. That was the 90's ...those days are over.

As for your question on the IUL -- they are a great vehicle if you know how to use them the right way. Many people don't understand how they work and that is why there might be some negative press about it. Again, make sure to fully insure yourself first. Once you do that then open up an IUL (make sure to open it with an agent who understands it), fund your 401k (make sure to have it Actively Managed), and lastly diversify in other things too so you don't have all your eggs in one basket.

First of all, no one invests in a 401k. They invest in mutual funds. A 401k is a tax shelter, not a type of investment. Saying whether or not a 401k is any good is gonna depend on whats under the hood.

Having a Personal Investment Advisor will not save you from market crashes. Market crashes happen. Did the stock market crash in 2008? Big time! Did the market rebound yet? Yes, and then some. If you would have left your money alone, it would have recovered its losses for the most part. If you were actively managing your money and making trades, you probably would have lost. If your mutual funds were experiencing high turnover, then you probably lost money as you were trading by proxy.

If you actively manage your investments yourself, or through an advisor, you are prone to market fluctuations. Its like trying to snowboard uphill.

As for your post about the IUL being good if you know how to use it- spoken like a true life insurance salesman!

Good if you know how to use it? You know, I read and research a lot. The people who say that very thing about any cash value life insurance are selling systems such as "bank on yourself" or "be your own bank." The idea is to overfund a policy and use the excess premiums as a bank account. That is smart until you make a bad step, overextend, and end up losing the policy. Also as myself, DS, and jpg have shown stated, these things have lousy returns.

You know, a garbage can could be a good vehicle if I use it the right way. It could also be a good instrument. However I would rather use the garbage can for its intended purpose. The same goes with life insurance.

The intended purpose of life insurance (any kind) is to provide coverage. It was never intended to be used as an investment. The financial services industry has seen huge opportunity in misrepresenting these things in order to make money.

[disneysteve]

most people who invest money in a 401k don't have the time to watch it on a daily basis.

Nor should they. Your retirement account is a LONG TERM investment. You shouldn't be watching it on a daily basis. You shouldn't be constantly trading or adjusting it. You should set up your desired asset allocation and check in maybe quarterly and readjust as needed.

They are relying on the Fund Managers, crossing their fingers that hopefully all is well. This kind of investing, 401ks, IRAs, Mutual Funds, etc...are the thing of the past. You can still invest in them, but the Key is to have a Personal Investment Adviser to watch over it constantly ---this is called Active Management

First off, you are lumping together things that simply don't go together. 401ks and IRAs are types of accounts, not types of investments, so saying they are a "thing of the past" makes no sense at all. And mutual funds span the spectrum of types of investments - stocks, bonds, real estate, commodities, precious metals, etc. so to just use the term "mutual fund" and say anything good or bad about it also doesn't make sense.

As for promoting "active management", virtually every study ever done has shown that active management results in worse returns over time. Index funds that track the market always outperform over the long run. Sure there will be times when an individual beats the market average but it can never be sustained. So telling people to give up on passive investing in favor of active management is pretty irresponsible advice.

IUL -- they are a great vehicle if you know how to use them the right way.

I won't even comment on this statement. I think it has already been adequately addressed.

So tell us, Wayde, what do you do for a living?

[Scanner]

This is all good advice. . .I don't want to throw in a red herring just for the sake of disrupting good advice, but I think there oculd be ONE reason for using life insurance as a vehicle for investing (besides estate planning).

I beleive colleges, when determining financial aid, do NOT count CASH VALUE life insurance against financial aid when doing means testing to see if you qualify or not.

I really could be wrong on this and there would only probably be specific circumstances where this was necessary.

After all, 529's let you stuff a boatload of money away that earn money tax free.