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Anyone have experience with permanent life insurance/overfunded?
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Date: September 5th, 2010 9:58 AM Author: Arrogant philosopher-king kitty Bunch of financial advisors pitch this product to lawyers. Sounds like a decent product but wondering if anyone here has experience with it. Essentially tax free low risk investment product where your real cost is the cost of insurance (which isn't necessarily prohibitively expensive for what you get). Risk is credit risk of insurance company and their dividend rate. (http://www.autoadmit.com/thread.php?thread_id=1414896&forum_id=2#15968972) |
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Date: September 6th, 2010 10:02 AM Author: chestnut excitant rigor As far as I know, there are two or three major reasons people argue against it.
First, many insurance companies will not guaranty a rate, or if they do its very low, make sure whatever you buy has an acceptable guaranteed rate of return regardless of how the market performs.
Second, in some policies the administrative costs are ridiculous and it takes 2-3 years to actually build up any balance toward your cash value. In these policies the build up is slow and battling expensive "costs" other than the cost of insurance.
Third, as you know you are essentially buying a term policy bundled with a portfolio (with a guaranteed rate of return) along with a promised death benefit. As with index funds (compared to mutual funds), on the whole, people would be better off ignoring the product and doing it themselves (i.e., buying a very long horizon rate-guaranteed term policy and investing the difference in an index fund.)
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Date: September 6th, 2010 10:05 AM Author: Arrogant philosopher-king kitty Thanks.
The one that was pitched to me essentially was pure cost for first 3-4 years. Did not see a separate breakdown of administrative costs, I should ask.
I am comfortable with the third since I have become a very conservative investor and am just looking to get assets that are negatively correlated to my career. So I am just shifting assets that I would be keeping in bank accounts to this. |
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Date: September 6th, 2010 10:07 AM Author: chestnut excitant rigor Absolutely get a breakdown of the "costs." You are a smart guy just be careful with insurance salesmen, they entire job is to obscure the bad and deal with smart people. (http://www.autoadmit.com/thread.php?thread_id=1414896&forum_id=2#15976966) |
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Date: September 6th, 2010 10:17 AM Author: Arrogant philosopher-king kitty Yeah that is one aspect too; I don't know anyone who has it and also I know that the salesman is getting a huge comission. Still it doesn't mean it's not a win/win situation, but does get me to put my suspicious hat on. (http://www.autoadmit.com/thread.php?thread_id=1414896&forum_id=2#15976989) |
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Date: September 6th, 2010 10:08 AM Author: chestnut excitant rigor Another reason it is great, is that in my state at least, life insurance is exempt from seizure from creditors. (I assume thats what you meant). (http://www.autoadmit.com/thread.php?thread_id=1414896&forum_id=2#15976969) |
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Date: September 6th, 2010 10:16 AM Author: Arrogant philosopher-king kitty Not what I meant, but also a good sell point (pretty sure creditors can't get it in most states). Also it never shows up on your tax documents; wonder if you have to report it for financial aid purposes for college.
I meant that the only way I would lose money on this long term is if the insurance company went AIG or something or invests the money so poorly that they would not be able to spin out any dividends. |
Date: September 6th, 2010 9:05 AM Author: Arrogant philosopher-king kitty Anybody? (http://www.autoadmit.com/thread.php?thread_id=1414896&forum_id=2#15976847) |
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Date: September 6th, 2010 9:58 AM Author: chestnut excitant rigor Yeah I own some and the FinAdvisors I get referrals from make a LOT of money selling it. What do you want to know? (http://www.autoadmit.com/thread.php?thread_id=1414896&forum_id=2#15976938) |
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Date: September 6th, 2010 10:01 AM Author: Arrogant philosopher-king kitty Is it really as good as it sounds i.e. no tax ever, only downside being having to pay cost of insurance and credit risk of insurance company( which has a decent history of high dividend rates)?
What are pitfalls for investor, i.e. can they mess it up and then you don't get the tax benefits and are holding the bag (and insurance company won't fix situation or make you whole)? |
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Date: September 6th, 2010 10:06 AM Author: chestnut excitant rigor I think the most advantageous thing about permanent policies is that it costs less than whole, and your insurance covers you for, basically, ever. I anticipate my health to deteriorate quicker than average, so term is a poor insurance choice.
No tax ever, you are essentially using your universal life policy as a Roth IRA, along with a death benefit.
Because its a life insurance policy, I do not know how you could mess it up, if you are dealing with an ILIT or corporate owned policies, then yes, obviously implications will depend on the arrangement, but just an individual owned policy is intended to and is one of the "simplest" (for the consumer) investment decisions. |
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Date: September 6th, 2010 10:19 AM Author: Arrogant philosopher-king kitty Thank you, you've been very helpful.
So if I am understanding it correctly, you can take out the earnings tax free. Is that because you are forced to take it out as a loan (and pay some nominal interest to the insurance company); a loan not being a taxable event? Or can you actually take the earnings out too tax free.
I think I've also read that there are investors out there who will buy these policies and play the whether you will die sooner than expected game. |
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Date: September 6th, 2010 10:31 AM Author: chestnut excitant rigor Second market viaticals (sp?) are huge, especially in Europe. Sounds immoral as fuck though.
That it is a nominal loan is my understanding as well, but I'm not clear on that. My policy was small enough for that never to be a real concern (hopefully). Get the specifics on that as the terms of withdrawal is very policy specific and a place where I imagine some companies impose "costs." |
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Date: September 6th, 2010 10:34 AM Author: Arrogant philosopher-king kitty Yeah, just pointing out there is incremental liquidity on this as well since you can just sell it someone if for some reason you needed a boatload of cash immediately and the nominal loan thing didn't work. (http://www.autoadmit.com/thread.php?thread_id=1414896&forum_id=2#15977061) |
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Date: September 6th, 2010 10:54 AM Author: Arrogant philosopher-king kitty Do you think any of the insurance companies are any better than the others at this or is there a big enough market for this that everything comes out to a wash, e.g. AXA or Northwestern Mutual? (http://www.autoadmit.com/thread.php?thread_id=1414896&forum_id=2#15977181) |
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Date: September 6th, 2010 11:05 AM Author: chestnut excitant rigor Honestly that is way above my pay grade. I keep a BEST rating manual in my office and put my trust in them. (http://www.autoadmit.com/thread.php?thread_id=1414896&forum_id=2#15977215) |
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Date: September 6th, 2010 11:07 AM Author: Arrogant philosopher-king kitty Cool, thanks - very information talking to you. By the way, do you happen to be a customer of private banking or anything like that? (http://www.autoadmit.com/thread.php?thread_id=1414896&forum_id=2#15977225) |
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Date: September 6th, 2010 11:18 AM Author: chestnut excitant rigor I'm not that fancy, but I'll just say that because of my geographic location, customers and relationships I get a very unusual exposure to financial planning/relationships. (http://www.autoadmit.com/thread.php?thread_id=1414896&forum_id=2#15977279) |
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Date: September 6th, 2010 10:29 AM Author: out-of-control temple depressive the tax deferral is quite nice, but it's important to take into account the insane fees. don't let the tax benefit trump the overall goal, which is a higher post-tax return. tax deferral plus exclusion from beneficiaries' income on death is a great benefit, but the same is true of holding a stock until death, provided your assets are under the estate tax exemption.
doesn't even seem worth considering until one has maxed out 401(k) (which I assume most have), nondeductible IRA to Roth, and a 529 plan.
even then, post-fees, are you doing better than long-term amt-exempt munis? perhaps after year 20, but almost certainly not after years 1 through 5. |
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Date: September 6th, 2010 10:33 AM Author: Arrogant philosopher-king kitty I agree, I have maxed out all of that stuff but don't want more exposure to the market, either in bonds (I am very afraid of interest rate risk right now) or in stocks (too much correlation to my future income/career).
The projections that were run showed about 6-8% tax free over my lifetime, which I am reasonably happy with, considering the opportunity cost for this money would have been my sticking it into CDs or a bank account. |
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Date: September 6th, 2010 10:39 AM Author: out-of-control temple depressive if the return *on* investment is a compounded 6-8% net of fees for life, that is very impressive
are you sure these numbers aren't a simple calculation of aggregate annual distributions net of fees as a percentage of investment, in which case part of the 6-8% is a return *of* investment? |
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Date: September 6th, 2010 10:40 AM Author: Arrogant philosopher-king kitty Pretty sure it is return on investment. You really don't get a return of investment until you die in which case the face amount of your policy is paid to your beneficiary (though you can take a loan against the policy and then leave nothing for your beneficiary, which is what I intend to do). (http://www.autoadmit.com/thread.php?thread_id=1414896&forum_id=2#15977102) |
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Date: September 6th, 2010 10:39 AM Author: Arrogant philosopher-king kitty The estate tax exemption isn't very much.
Also I wonder if you could dump all your money into this when your kid applies to college and then report 0 assets and income and qualify for financial aid. |
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Date: September 6th, 2010 10:41 AM Author: out-of-control temple depressive isn't very much? it was 3.5m last year and will only be 1m next year because of the sunset of the bush legislation - it seems very unlikely that it will stay that low. between that (which really is double if you have a spouse), annual and lifetime gift tax exclusion, and various simple estate planning strategies, it seems like a non-issue for most, even those with 10-20m net worth (http://www.autoadmit.com/thread.php?thread_id=1414896&forum_id=2#15977106) |
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Date: September 6th, 2010 10:43 AM Author: Arrogant philosopher-king kitty *Shrug*, I thought it was still at $2 million and then will just get inflation adjustments.
I don't plan on leaving anything, so that aspect of this whole structuring is of little value to me.
I am afraid however, that I might have been dead wrong in having done Traditional 401k instead of Roth 401k over the years, so this would be a nice way to hedge that as well. |
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Date: September 6th, 2010 10:49 AM Author: out-of-control temple depressive ok, so we can ignore the tax benefit related to the death benefit.
you get the same deferral benefit from simply holding a stock that does not pay dividends, and unlike the life policy, you can sell the stock whenever you want without fees, and get capital gain treatment on the sale.
by contrast, if you ever need the life insurance money during your lifetime, it appears you get ordinary income on the gain from sale.
i don't mean to be super anti-insurance as investment, in fact i know one lawyer who swears by it, but i have always been highly wary and the numbers and benefits don't add up to me. |
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Date: September 6th, 2010 10:53 AM Author: Arrogant philosopher-king kitty No, if you need the life insurance money during lifetime, you take it as a loan against your policy at a nominal interest rate. Not a taxable event.
On the "invest the rest" idea, it's very different from holding onto a stock. This policy ends up guaranteing some minimal rate of return which is somewhat correlated with the market in the upside, but not in the downside scenario. |
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Date: September 6th, 2010 10:58 AM Author: out-of-control temple depressive You can take the entire amount out as a loan against your policy? There's no fee for this? Is the interest deductible? It's also possible to borrow against stock.
As to the second point - you can synthetically create whatever kind of exposure you want through options, notes, etc - it's not necessary to invest in an insurance product to get it.
You sound like you are fairly savvy and I'm sure you'll read everything in detail, so beyond this I think it's just difference of opinion - probably not worthwhile to debate beyond this. |
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Date: September 6th, 2010 11:01 AM Author: Arrogant philosopher-king kitty No fee, interest may be tax deductible. I think the way it technically works is that the insurance company is lending you the money at a nominal rate, your money is still in your policy and earning whatever % dividends year to year; so if you are borrowing at less than what you making in the policy, you are in a good carry situation (particularly if you can deduct the nominal interest too). Another reason I don't feel great about this is that I clearly know more about tax than the guy selling me the product so I don't have a ton of confidence in the sales brochure type of stuff he is spouting. Again, doesn't necessarily mean it's not a good product.
I don't think it's that cost effective to create a synthetic exposure for a $1 million investment amount in general, though I know there are some insurance companies selling products that will give you S&P up to 15% (capped upside) but will guarantee that you don't lose money. I have no idea what the expense ratio is on it; you think that's a pretty product? So underlying risk is again credit risk of insurance company going belly up (or CDO market or whatever they are doing in the backroom setting this up crashes). |
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Date: September 6th, 2010 11:10 AM Author: out-of-control temple depressive I don't know. I'd check out the non-insurance version of this kind of product (exchange-linked notes and the like). It's probably worth noting that the S&P is a fairly volatile index and that much of the annualized return of the index over 20 years comes from 2 years in which the index appreciated 25-30% and 4 years where it appreciated 30+%. Would you do better backtested if you'd invested in the index fund and rolled long-dated at the money puts every three years? Answer seems likely to be yes but I readily concede that I get nowhere without backtesting. (http://www.autoadmit.com/thread.php?thread_id=1414896&forum_id=2#15977237) |
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Date: September 6th, 2010 2:26 PM Author: Arrogant philosopher-king kitty That sounds fair. (http://www.autoadmit.com/thread.php?thread_id=1414896&forum_id=2#15978571) |
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Date: September 6th, 2010 10:47 AM Author: Arrogant philosopher-king kitty Hey, did either of you guys roll over your traditional (whether non-deductible or not) IRAs to Roth's this year? (http://www.autoadmit.com/thread.php?thread_id=1414896&forum_id=2#15977149) |
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Date: September 6th, 2010 11:09 AM Author: chestnut excitant rigor I'm quasi self-employed, so I have a SEP which I dump as money into as possible as an employer contribution. I have a ROTH IRA. (http://www.autoadmit.com/thread.php?thread_id=1414896&forum_id=2#15977236) |
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Date: September 6th, 2010 2:27 PM Author: Arrogant philosopher-king kitty Nice. (http://www.autoadmit.com/thread.php?thread_id=1414896&forum_id=2#15978573) |