indexed universal life

[LivingAlmostLarge]

I have this guy trying to sell me universal indexed life insurance. He says that when you are done saving in retirement accounts and all open avenues and still have money, why not invest in life insurance? Unlike taxable accounts it's tax free when you draw on it. I nodded but can't help but think there is always a catch.

Do you guys understand more about how whole life, universal life insurance works? Is it something people really do to preserve money?

Is it really tax free? What's the catch to this sort of thing?

[disneysteve]

why not invest in life insurance?

LAL, you've been around here for a long time. Surely you've seen multiple threads on why whole life is a rip off. I'll find a link or two to prior conversations.

Why not invest in life insurance? Because life insurance is NOT an investment and it is illegal to promote it as such, but insurance sales people continue to do so despite the legality of doing so.

Is it tax free? Yes. Why? Because you are just borrowing your own money. There's no profit involved. There's nothing to tax.

Stay far away from whole life and tell this guy to get lost and go scam someone else.

[disneysteve]

http://www.savingadvice.com/forums/personal-finance/64417-indexed-universal-life-insurance.html

Here's a good conversation we had.

[kork13]

Is it tax free? Yes. Why? Because you are just borrowing your own money. There's no profit involved. There's nothing to tax.

Totally agreed with Steve, whole/universal life insurance is not and should not be an investment vehicle. Its costs eat a cavernous hole into your returns, despite how the salesmen try to sugar coat it.

One point of clarification, though -- these policies are tax free because life insurance payouts are tax free. The outrageous sum of money you put in is considered your premium (not investment), and any/all money that you might later on try to pull out (after termination, sale, and every other fee/restriction under the sun is applied) is considered a life insurance payout. Thus, the tax-free status that is the root of this entire industry thinking they can con people into using insurance as an investment strategy.

The only life insurance products you should ever need are low-cost level term policies, and perhaps an SPIA (single payment immediate annuity) if you want to create an paycheck-like retirement income stream.

[MonkeyMama]

Is it something people really do to preserve money?

No.

The catch is that the investment returns are very low (generally eaten by fees). I remember some sales person bragging on the SA forum once that the universal life returns were better than the stock market AND cash interest one year. Because their 1% return was better than current cash rates and a down stock market. It's sad when that is your selling point. But I think that sums it up pretty well. You would do better to invest in just about anything else. I am sure you can do better in a tax-free muni bond.

[disneysteve]

You would do better to invest in just about anything else. I am sure you can do better in a tax-free muni bond.

You would likely do better in an online savings account with Ally or Discover or Capital One.

[LivingAlmostLarge]

I read through that thread. I must have missed it first time around.

[amarowsky]

LAL, you've been around here for a long time. Surely you've seen multiple threads on why whole life is a rip off. I'll find a link or two to prior conversations.

Why not invest in life insurance? Because life insurance is NOT an investment and it is illegal to promote it as such, but insurance sales people continue to do so despite the legality of doing so.

Is it tax free? Yes. Why? Because you are just borrowing your own money. There's no profit involved. There's nothing to tax.

Stay far away from whole life and tell this guy to get lost and go scam someone else.

DS is the undisputed heavy weight champion of knocking out "Universal / Whole life insurance as investment pushers".

And it's good to have him on our side.