Indexed Universal Life Insurance

[jIM_Ohio]

It's not the Term and invest the difference method that is in question. It's the suitability. You can do all the numbers you want but remember, it's not all about the numbers. Suitability accounts for everything including the numbers.



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There are two standards, suitability and fiduciary. What customers need to know is most insurance companies cannot employ professionals whose designations require them to meet the fiduciary standard. Fiduciary is a very high standard, and CFPs and other designations are required to meet this in every transaction. Most insurance carriers do not meet this standard (for example State Farm will require a CFP to reliquish their designation prior to getting hired).

[bp019j]

There are two standards, suitability and fiduciary. What customers need to know is most insurance companies cannot employ professionals whose designations require them to meet the fiduciary standard. Fiduciary is a very high standard, and CFPs and other designations are required to meet this in every transaction. Most insurance carriers do not meet this standard (for example State Farm will require a CFP to reliquish their designation prior to getting hired).

That is good to know about State Farm. They are a captive agency system anyway, which means the agents are looking to sell State Farm's products. I highly doubt State Farm agents shop the outside market for competitive quotes for their clients..

CLU has merit in the life insurance industry. There is nothing upholding an agent with a CLU designation to do what is in the client's best interest.

[jIM_Ohio]

That is good to know about State Farm. They are a captive agency system anyway, which means the agents are looking to sell State Farm's products. I highly doubt State Farm agents shop the outside market for competitive quotes for their clients..

CLU has merit in the life insurance industry. There is nothing upholding an agent with a CLU designation to do what is in the client's best interest.

But the CLU does not REQUIRE agents to use the higher standard, which is my point.

[bp019j]

Oh, I understand what you are saying. You are using the term "pre-tax" incorrectly in order to make cash value life insurance seem better than it is. You are attempting to convey that any growth in the cash value being used towards premium equates to the premiums being paid "pre-tax".

I'm saying your claim is a misrepresentation.

Now you are amending to "may have the ability".

The bottom line is that it is foolish to pay 20k for something which only costs 8.5k. Even if it were true that life insuance premiums were paid with pre-tax dollars, one would have to be in a marginal tax bracket greater than 57.5% to come out ahead. Currently, the highest tax bracket for individuals is 39.6%.

The C0ST OF INSURANCE IS ALMOST THE SAME for both policies. The problem many individuals are sold a straight WHOLE LIFE contract with excessive sales loads -- going straight into the pocket of the salesman. That is why in most cases whole life is a rip-off.

I clearly made reference to the translation confusion, which you misunderstood and probably still do. There is no misrepresentation in my threads or conversations with clients - because at the end of the day they understand what it is they are buying - term or cash value (cash value is not for everyone, I get that).

Right 'may have the ability' because as you know some agents do not properly design cash value policies for their clients. An industry expert states that approximately 70% of cash value policies are not designed properly. If done properly, YOU WILL HAVE THE ABILITY, which includes using a reputable insurer that pays it's policyholders.

The bigger picture here is that a high income earner may be concerned about their retirement, given the contribution limitations that 401k plans have. High net worth individuals seek tax deferred vehicles to grow wealth or supplement their retirement income. When done properly life insurance can be a very efficient vehicle to save money over the long term. An likely more efficient than an annuity.

The potential to receive tax free income is not a bad deal for these HNW individuals. Don't forget the new health-care of approximately 3% for High Net Worth Individuals.

[bp019j]

But the CLU does not REQUIRE agents to use the higher standard, which is my point.

YEP, it is a shame.

[bp019j]

The insurance products I offer are through a broker which strips commissions from the products. Fee-only insurance is cheaper.

We reduce commissions as well using blended policies. Can't remember the name of the agency that uses no load life insurance products. We do with one carrier.

Is this broker rebating? Not sure how that is possible? Curious to know how or what is being done.

[bp019j]

I used your own example.

Person A buys 300K in term coverage for 20 years for $8,500.
Person B buys 300K in whole life for 20 years for $20,000.

Both people die in year 19.

Person A's beneficiary gets 300K.
Person B's beneficiary gets 300K.

Who had the better deal?

The beneficiary received the benefit in both cases. I view any policy that pays a claim as a good policy. In terms of financing, the term coverage wins. It is all about life expectancy and probabilities.

[disneysteve]

I view any policy that pays a claim as a good policy.

Even if it costs $20,000 instead of $8,500 for the same coverage?

In terms of financing, the term coverage wins. It is all about life expectancy and probabilities.

True. Term wins from a financial standpoint. Buying insurance is a financial transaction. For 99% of the population, term is the better choice. I understand that there are some legitimate estate planning benefits in some cases to whole life but I believe that only applies if your estate exceeds a pretty high number so it doesn't apply to most people.

[dczech09]

IRC 7702 http://www.nongnu.org/lmi/7702.html

Tax Laws for Life Insurance:

TEFRA - Tax Equity and Fiscal Responsibility Act of 1982
DEFRA - Deficit Reduction Act of 1984
TAMRA - Technical and Miscellaneous Revenue Act of 1998

Such laws were put into place to prevent misuse and abuse of the tax advantages of life insurance.
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Yes, these laws were enacted to prevent wealthier people from utilizing life insurance as a tax shelter. IE- these law effectively removed any tax advantages that did exist. This means that the tax advantages no longer exist. Petunia has been saying that there are no tax advantages, which for today is correct.

Back in the 70's during high interest times, wealthier people would utilize life insurance, overfund the policies, then basically turn them into ATM's. These laws were passed in order to stop that from being possible by eliminating any "tax advantage" that could be realized.

Today, we have some bozo's on the radio talking about things like "Bank On Yourself" which tell you to engage in this practice. The problem is that these idiots don't mention MEC. So people overfund the policies for some supposed tax advantage (which no longer exists), then their policy becomes MEC and they get nailed.

Some life insurance agents teach their clients to overfund only to an extent that they don't fall into the MEC trap. Basically, they are walking a financial tight-rope and if they slip or a bad wind comes around, they fall. It is stupid because managing money does not need to be this freaking difficult.

"Pre-tax" refers to income that has been deducted from a line of taxes (and thus not taxed on that level). For example, Medicare wages is Gross Wages net of any wages that are "pre-tax" to Medicare, meaning that they are not subject to Medicare taxes. That is what Petunia is referring to. As of today, life insurance premiums CANNOT be deducted from any line of taxes, hence they are not pre-tax (or deducted).

The articles above did not mention anything about life insurance premiums being deducted from taxes on any level. Those articles talk about MEC, or Modified Endowment Contract.

What you are referring to is an accounting term known as "earnings before taxes (EBT)" or "income before taxes (IBT)."

So actually you two were on two completely different wave-lengths.

[blashmet]

On the legality of of selling it as an "investment", I found this 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 kind of confusing. Is the bottom line that it can be sold as an "investment" but not an "investment security"?

[disneysteve]

it is frequently offered by agents as a tax-advantaged financial vehicle from which they can borrow as needed later without tax penalties.

There are never tax penalties for "borrowing" your own money. Also, since these policies lose money 100% of the time, there are never gains to worry about from a tax standpoint.

[Preston]

[QUOTE=shadowfax222;317636]

I know this response is three years in the making, but I will tell you now, I believe you should go with the IUL and here are the reasons why.

1. Never take a loss on your money. THINK ON THAT FOR A MOMENT - NEVER is your hard earned money at risk.
2. Access to money prior to 59 1/2 without penalty or let it grow without accessing past 70 1/2 - again without, t penalty.
3. Allows you to save more than a Roth IRA (you set the limits, not the government). I've got a client that puts away 300.00 a week!
4. The uncertainty of future tax rates - given your age, you are 30 years away from your retirement tax bracket. With qualified funds, the IRS is your business partner for life and if they change the rules, well then, you have to live with it. In short, you don't know what your tax bracket will be at retirement and that is a headache and gamble you don't need.
5. Pay taxes on the seed, not the harvest. When is the best time to pay taxes? When you are saving money, not replacing a salary. The only reason the government allows you to defer taxes is because its to the government's advantage.
6. Riders - there are IULs with disability riders that cost nothing - until you need them and even then, the fee is very small, meaning you can tap into the death benefit should you become disabled while your alive...don't think that's important? Go check the cost of a nursing home at today's rates. UGLY stuff. Wait till you are 50; today's cost for a Long Term Care policy is about 200 a month. that's 48k for 20 years and should you not need it, its money lost. That 48k could be doing alot more for your retirement needs.
7. Per my CPA, you can access about 10% per year of an IUL, but only 3-5% of a 401k due to structure, so you don't need to save as much.
8. You are diversified by 500. Since the index is based up the growth of the SP 500, or other indices should you choose, you need not worry about having the right stock or fearful of when to get out of the market since your money is never in the market and the SP500 represents the largest held companies, equity wise, in the US and these 500 constitute the bulk (nearly 70%) of our economy. So its blue chips all the way. Oh and the SP 500 has averaged nearly 10% per year over the last 80 years, 8.1 over the last 20 odd years. That is a great ROI since loss never comes into play.

If you want to read something about this, go pick up the book called, "The Retirement Miracle." Its worth it. The 401k is really a "one trick pony" and it doesn't even do its one job very well. Don't believe me? Then listen to Warren Buffet. He said, "After surveying the last 40 years of managed funds, it would have been better to invest in those companies themselves rather than the stocks they suggested."

So yeah, you were on the right track.