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Why Purchase an EIUL?

by David Shafer on December 6, 2012 · 42 comments

  
EIUL

An Equity Indexed Universal Life Insurance Policy is a financial tool that is growing in popularity.

For most people who purchase an EIUL, it becomes a part of their well thought out purposeful financial plan. As only one part of a plan it must work in complementary ways to the other parts. There are four key components of an EIUL that attract folks; taxation, liquidity, death benefit and solid internal rates of returns with low variance.

EIUL’s Have Tax Advantages

Money placed in a properly structured EIUL can be accessed via policy loans without incurring a taxable event. At death a death benefit goes to heirs free on income tax, but could incur estate tax depending on what the rest of the estate looks like. This taxation benefit is what initially attracted Wall Street to life insurance causing them to develop universal life insurance. Large corporations and wealthy individuals have used this aspect of universal life insurance for their benefit since its inception in the 1970s. As the government increasingly looked to the middle class to fund its operations, taxation has become one of the biggest risks a middle class investor has to deal with. For example, look at what is about to happen if congress doesn’t get its act together this month:

  • Top two tax brackets to go to 39.6% and 36% from 35% and 33;
  • Capital Gains tax rate to go to 20% from 15-18%; and
  • Qualified Dividend Income to go to the taxpayers regular income tax rate from 15%.

Of course no one knows what will happen, but with huge budget deficits the government must find new revenue. By placing wealth in an EIUL you eliminate this risk and cut the government out of your pocket. I have California clients that will now avoid close to 50% taxation [federal and state] on their retirement funds that they would have paid had they continued with their 401K. Even those in lower tax brackets avoid 25% or more taxation in many states. I think readers can immediately understand how this can give you Bigger Pockets in retirement.

EIUL’s Offer Liquidity

Liquidity is important to all folks and its lack is the leading cause of bankruptcy. Money inside an EIUL can be accessed without penalties or taxation. Money accessed can be critically important to real estate investors giving them time to deal with cash flow issues avoiding fire-sale situations. Once cash flow issues are dealt with the money can be put back into the policy with little financial costs unlike accessing funds from an IRA/401K or through traditional loans. Job loss is the #1 reason people cash in their retirement funds and the government penalizes these folks severely. Some folks work for companies that simply won’t allow access to 401K funds while continuing to work for that company, essentially locking out folks from their money!

Death Benefits Are Included

This is a life insurance policy at its core. The death benefit is an understated benefit. If death occurs in the earlier years of the policy then your $$ are leveraged. Most people have family or organizations that they are supporting and would want to be financially protected from their early death. Who will take over your real estate investing if you were to die? Wouldn’t it be nice to have your financial plan be completed or at least your loved one’s have cash to buy time to deal with your real estate investments no matter what age you die?

EIULS Can Provide Solid Investment Returns

EIULs get annual interest credits that are tied to a stock index with a floor and a ceiling commonly called the cap rate. After you receive the interest credit it is locked in permanently. Cap’s range from 11% to 16% at this point. Generally, the floor is 0%. So that means each year you will receive between 0% and 16% depending on the index. If the index goes negative then you get the 0%. If the index goes positive from 0% to the cap rate, that is what you receive. If the index goes up more than the cap rate then you receive the cap rate. Using historic numbers for the indexes, this strategy beats the index average by 1-2%. The power is not having negative numbers which have to be overcome. The other advantage is limiting sequence of return risk. So if you have $1M of cash value in your policy in the years before you start using it, you know you will have at least that $1M when you need it. Now it is highly unlikely that you will get double digit returns. However using historic number as a guide you should get 7.5% at the lowest to around 9%.
Now there are some costs that come along with the advantages.

A Long Term Investing Strategy

This is a long term strategy and should not be purchased by folks who have a short time horizon or who can’t keep within a plan. Expenses in all life insurance policies are taken out mostly in the early years. There are also surrender fees that go for 10-15 years if you were to decide to surrender the policy. So it is best to wait 15 years before you start taking out cash value without the intent of replacing it. When kept to death, most of the policies I structure have an overall expenses percentage of less than 1.75%, some less than 1%. This includes all expenses including insurance expenses. This can’t be understated, these policies are designed to keep for live and with this intent is how it should be bought. Those that expect to need the money before around 15 years, should not buy this product either as it needs that time to get beyond the majority of the expenses and really start to perform well.

Who Should Not Buy a EIUL

Those that have serious health issues, might not want to purchase this product. Because the IRS rules go by ratio’s I can overcome most of the increased insurance cost with correct structuring, but when the issues force us way down the rating scale we do lose some efficiency.

Finally, those that haven’t done the basics, like build up short term reserves should get their financial house in order before locking up any money in any retirement strategy.

This should be a good primer for EIULs and allow folks to decide if looking more deeply into this product is worth their time. Ultimately, the decision should be based on if this financial tool complements their current strategies and fits their financial plan. Only you can answer those questions.

Photo: Alex Proimos

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{ 42 comments… read them below or add one }

Jeff Brown December 6, 2012 at 4:02 pm

EIULs, especially for those clients with at least a 20 year horizon love this approach. It’s not for everyone, as you point out, Dave, but those for whom it makes sense, it rocks.

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Anne Faber July 11, 2014 at 12:02 pm

Thank you so very much Jeff and Dave. I am 25 and never heard of EIULs, but it is something I definitely want to think about for the future. I’m also letting my sister know immediately! Such good advice. Thanks for sharing!

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Mike December 6, 2012 at 4:28 pm

Are these contracts contractually guaranteed not to lapse under these income strategies? I’ve heard that because of the variability of cash values and rising mortality costs in these contracts that there is risk to an income strategy that exceeds what you could otherwise get with guarantees with a straight whole life contract.

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Kevin Yeats December 6, 2012 at 9:12 pm

I will add to what Mike asked … and dig a little deeper.

What happens if a policy holder reaches retirement and begins taking distributions and either the stock market (or underlying index in the EIUL) stays flat (no return) or if the policyholder lives to age 99?

My understanding is that both scenarios can present very dire circumstances to the policyholder.

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David Shafer December 7, 2012 at 7:38 am

Mike and Kevin, thanks for your thoughtful questions. I think both the questions are aimed at the same concepts so I will answer them together. There is much propaganda and misunderstanding regarding this.
First, every policy I sell I put on a rider called an “overloan rider,” which prevents the “dire circumstances” referred to by Kevin [most but not all companies have this option]. There is no initial cost to this rider, but if in the later years of this policy so much cash is taken out of the policy that the insurance expense can no longer be covered this rider is initiated. The policy is then frozen at current death benefit and guaranteed at that death benefit until the insured dies.
This prevents an accidental surrender of the policy which could trigger an tax event.

Permanent life insurance is structured differently from term insurance specifically to handle the increasing insurance costs as you age. Universal life insurance added flexibility on both premium and death benefit to whole life policies. This flexibility is important and one of the main reasons the policies work so well for retirement income. It is easier to see this with an entire illustration in front of you, but I will give an example of how this works from a recent illustration I created for a client. UL when structured for minimum life insurance and maximum cash value build up allows for the death benefit to adjust both up and down during the life of the policy. Following IRS guidelines you have to have a “corridor” between the cash value build up and the death benefit. But, the theory behind permanent life insurance is that you pay a premium that is more than the costs in the early years, that extra builds up and is used to lower the amount of actual life insurance you are paying for [this is different than the death benefit]. If you had to actually pay for the insurance costs at upper ages the costs would be astronomical as the odds of dying approach 100%. Here is an example from a 32 year old man:
After year one there is $530,000 in death benefit, but $14,000 in accumulated value. So this person would be paying insurance costs on the difference or $516,000. The cost is $238. Going to age 65, the accumulated value has gone up to $1.4M, so IRS rules has forced the death benefit up to $1.8M. So at age 65 he is paying for $400,000 of insurance at a cost of $3,000. But remember he is getting interest credit on $1.4M at this point, so it only takes a small interest credit to cover the $3,000. Now this clients starts to take distributions from the policy and the death benefit starts to decrease as a result. So at age 80 he has $1M in accumulated value and a death benefit of $1.16M. So he is now only paying for $160,000 of insurance at a cost of $4,900. But he is still getting an interest credit on the $1M of accumulated value. As the policy goes forward the minimum corridor is maintained. So, if there is no or a small interest credit in any given year, then the death benefit goes down more to account for that and the distribution.
Add in the flexibility for the amount of distribution which gives you the ability to be more or less aggressive with your distributions without having to worry about cost of insurance issues.

I know this might seem confusing, but it becomes clearer when you look at a complete illustration and can see the interplay between accumulated value, death benefit, and cost of insurance. The bottom line is that the policy is designed to render distributions, but not have large cost of insurance during old age.

One other comment on the comparison to whole life. Whole life is designed to maintain death benefit for life. That is what it does best. EIULs are designed to maximize cash value and provide distributions. That is what it does best. The internal rates of return inside EIULs, using historical data, indicates that EIULs will get around 2 what the best whole life IRRs will get. If death benefit is what you want to guarantee then whole life is your product. If cash value build-up and distributions is your intent, then EIULs [not Variable Universal Life which is a different animal] works best.

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David Shafer December 7, 2012 at 7:54 am

Sorry, in the next to last line I left out the word “times.” The line should read, “The internal rate of return inside EIULs, using historic data, indicates that EIULs will get about 2 times the best whole life IRRs will get.”

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Kevin Yeats December 7, 2012 at 8:33 am

As I have stated in other responses to blog messages – financial plans … and as David’s lengthy response here illustrates … the purchase of life insurance is a complicated topic. Determining the AMOUNT and the TYPE (term versus whole life versus any form of universal life) involves many complex issues. Most consumers would be best served by discussing these issues at length with a qualified financial professional.

But I have to take issue with one point. You state that the investment strategy within the EIUL “beats the index average by 1-2%.” Why then do investors or indeed just a mutual fund follow this strategy? Why shouldn’t I just take 95% of my retirement funds and buy bank CDs or Treasuries (the safest investments) and then take the other 5% and buy options on various stock market indexes? You claim that this results in beating the indexes by 1% or 2%.

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David Shafer December 7, 2012 at 9:05 am

Kevin, I would agree with you that you should make careful consideration before purchasing any financial instrument. But, EIULs aren’t really that tough to understand if you take the time and have an agent willing to help you. If one can master real estate investing, then they can understand EIULs.

Your comment on “beating the index” misunderstands what I was saying. The interest credit that has a 0% floor and a cap rate between 13-16% beats the actual index by 1-2%.
The interest crediting strategy was created by the insurance companies based on their investing portfolio that includes mostly fixed rate securities and some european style options [along with other types of investments]. Your ability to mimic an insurance companies investing is limited by your level of investing sophistication, size of portfolio, experience, risk management, etc. Insurance companies are some of the best large scale investors out there and I for one do not think I am as experienced or have the same economy of scales and sophistication as they do. Nor do I have the time on a daily basis. But, even if you could mimic them in a personal account, you would have the taxation issues I talked about in the post.

The simple truth is that EIULs have been around for over 15 years now, through the bad times and a little of good times, and have worked as advertised. That should be what counts, right? Actual evidence of what works and what doesn’t. Just like Real Estate investing, actual evidence of what works and what doesn’t is the guide. At least that is how I look at it.

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Jeff Brown December 7, 2012 at 9:39 am

This post and the comments, followed by Dave’s replies are the perfect illustrations of why he’s an integral part of my team. Simply awesome.

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Mike December 7, 2012 at 10:15 am

I’m financial consultant and sell life insurance. I’m also a real estate investor. Real estate and permanent insurance integrated together properly can be a fantastic blend of protection savings and growth. I’m personally inclined though towards minimizing risk in my insurance planning. I like guarantees and never having to unwind a bad situation for a client. No one’s come back to me after owning whole life for 20yrs and wants to cancel it because its too conservative. I have plenty of risk and growth potential in my real estate side; I don’t need risk in my life insurance. So I’m partial to straight whole life as reservoir for profits. There’s no magic pill there either; no single product or single strategy is “the” answer for anyone. It’s really the careful coordination of financial strategies in such a way that it makes one financially bullet-proof that’s what matters most.

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David Shafer December 10, 2012 at 6:46 am

Mike, couldn’t agree more.
But I am a little confused about your use of the word risk.
You seem to imply that an EIUL is more risky than whole life.
If this is what you are saying, then I disagree with this sentiment.
Whole life is designed for stability of death benefit with guarantees of the death benefit.
EIULs are designed for maximum increase of cash value with guarantees attached to cash value build up.
WL companies declare a dividend or an interest credit at the end of each year which varies depending on how well the companies investments did that year.
EIULs give an interest credit based on an index movement that comes from the companies investments.
Ultimately, both are dependent upon the investment returns of the company.
Universal life has flexibility of premium payments as well as death benefit. This is what makes the ability to increase performance well above what most life insurance has traditionally given [ie whole life].

I don’t see the increased risk in EIUL over WL? In fact, I think because EIULs have more flexibility, they provide easier ways to manage any inherent risk.

Ultimately, it goes back to what do you want to accomplish with the insurance contract.
Pass on a fixed amount to an heir or produce a tax-free income stream? One should use the right tool for the job.

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Ben Phillips August 11, 2013 at 12:36 am

Hi David,

Thank you very much for all of your posts on this topic, this is truly a transformational discovery for me. I had a few hardball questions though and was wondering if you would answer them. Basically I am trying to figure out “worst case scenarios”. What are the risks of an EIUL? From what I’ve read so far, here are the risks I know of. But I am sure you might know of more risks as well.

- Risk A: At some point in the future, I find myself in a situation where I can’t afford to pay the premium I agreed to. What happens? Do I incur fees? Worse?
- Risk B: “counter party risk”, ie the insurer fails, finds themselves underfunded in the future, or other risks of that nature.
- Risk C: The government decides to abolish the tax free loaning feature and imposes a tax. (This would at least be somewhat tolerable, just very sad.)

Wondering how these are mitigated. Thanks!

- Ben Phillips
http://www.biggerpockets.com/users/benphillips

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David Shafer August 11, 2013 at 6:06 am

Ben, thanks for the questions.

A. The premiums in Universal Life are flexible. That means that once you have some cash value build up, you can skip payments, make smaller payments, only pay enough to cover the expenses, etc. Once your financial issues are over you can then catch up to the original schedule. Or, if the financial problems are permanent you can lower the death benefit to keep future expenses low. Now, obviously you lose some efficiency if this happens, but because a properly structured EIUL already has minimized the death benefit and expenses, the policy should continue on and provide for future benefits, just a lower amount.

B. Rarely has an insurer failed, but it has happened. In those cases two things have happened. In the latest [AIG], the government stepped in and kept the insurer whole. During this situation, Berkshire and other insurers attempted to purchase the book of business. AIG was able to hold on to the business but in 2 other cases that I am aware of the book of business was sold. No life insurance policy owner has been harmed by an insurance company failure that I am aware of. This brings up an important point. Only purchase life insurance policies from financially strong companies. Comdex rating of less than 90 is a non-starter for me as I only sell products from the strongest companies.

C. Agree that this would be sad. When the IRS has changed rulings in the past they have grandfathered in folks. That means that even if the IRS would reverse itself of its multiple decisions on the taxation of life insurance that current policy owners would most likely not be effected. But, ultimately we are all subject to the whims of the government.

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Kevin Yeats August 11, 2013 at 1:45 pm

Ben, as I have stated and other concurred above, meet with an independent professional … especially one that is NOT selling ANY products … to help clarify these questions and determine the BEST steps for you to take.

According to Weiss Ratings (www.weissratings.com), since 2008 One hundred twelve (112) insurance companies have failed. Weiss identifies 22 of these are “Life and Health” companies. Interestingly two of those failed Life companies had in excess of $1 billion in assets (but more liabilities) and a third company had in excess of $2 billion in assets. (Large companies). Nonetheless, these companies failed. What I find even more interesting is that Weiss, a company that dedicated resources solely to monitoring and rating insurance companies, did NOT have these with the lowest ratings either at the time of failure or one year prior) (The ratings at time of failure and 1 year prior: First company B:B … second company C-:D+ … third company C,C) Comparing Weiss’ track record versus its ratings on failed banks which are nearly universally E- and E- and I can conclude that Weiss, which dedicates resources to this activity cannot accurately forecast insurance company failures.

Bottom line, Ben, you are right to ask these questions. Be very careful of the sources and accuracy of the answers you receive. Your financial well being and that of your heirs will depend on these decisions.

Bottom bottom line: Go meet with a fee-based financial planner (independent)

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David Shafer August 13, 2013 at 8:12 pm
Ben Phillips August 14, 2013 at 3:49 pm

David, thank you very much for the responses. Greatly appreciate it.

Kevin, thanks for the advice. I will continue to educate myself a bit on these.

Regards,
Ben

Lucas November 10, 2013 at 8:09 am

There are some serious lapses in your discussion of EIULs.
1) Most seriously you didn’t include any information about the increasing price of the mortality benefit over time.
2) you didn’t discuss the cost of taking “loans” from your policy
3) Indexed returns do not include dividends so you would loose out completely on that (and they have been increasing as a percentage of “returns” from stocks in recent years.
4) The “guaranteed” return is often set over a series of years not just one, which means you can loose money in exactly the way you claimed you couldn’t. For example the 1% guaranteed return is usually for a period of 5 years not one year. So you can have a -10,+10,-20,+20,+5 and this counts as a 1% return.

see this link for more info
http://www.infinitebanking.org/the-top-10-reasons-not-to-buy-equity-indexed-universal-life/

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David Shafer November 12, 2013 at 3:56 pm

When you cut and paste from a propaganda hit piece from the whole life folks you lose any credibility you might have.

Note this thread was not meant as a full discussion. For that, give me a call. I spend hours on the phone and e-mailing my clients to make sure they understand the product and get all their questions answered.

As to the specifics of your comments:
1. Mortality costs on all life insurance go up each year as you are a year closer to your death. If you understand how all permanent life insurance is structured to account for this, then you understand it isn’t an issue. On top of that, I am lowering the death benefit down as low as the IRS rules allow, keeping the mortality expenses low from the start.
2. No I didn’t as it goes well beyond the scope of this thread. FYI it maxes at .1% if you take out a fixed loan after year 10, .9% before year 10. And if you take a variable loan you could actually make money on the loan over the long run [1-2% using historic numbers over 20-30 years].
3. So what, that aren’t included in the historic numbers presented in the illustrations.
4. Wrong. The annual return is never below the floor of 0%. The guarantees are on the life of the policy. You can lose principal if you surrender the policy during the first 10 years when there are surrender fees and the majority of the expenses are coming out. This is not a risk-less place to put your money. I would never sell it as such.

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Lucas November 12, 2013 at 6:09 pm

ok, so given i didn’t have a lot of time to research this, my comments were maybe a little hasty. These things are very complicated, so you obviously have a heads up. But you don’t get that much more credibility for your article as it was was pretty much just a sales pitch with very minimal actual discussion of some of the risks and COSTS involved which according to my research are a MAJOR risk!

1) so can you provide a link that shows what the minimum costs are per year for the death benefit and how they add up? Looks like this is significant, but i can’t find any life insurance salesmen to post accurate cumulative numbers. also what happens to all your guarantees if you miss a payment anywhere (my quick research shows that they can all go out the window), and if the policy lapses you will be liable for income taxes on all the money you pulled out in loans?

2) Ok, so you can clear up something here. so what you are saying is that you pay like 6% interest on the money but you still get returns credited against that money? So quote on gaining value is if the index return is higher then the loan costs?

3) dividends are a huge part of the S&P 500 return. giving them up is at least a 2-3% hidden cost that you did not account for compared to investing directly in an index. Anyone interested should look at these charts to see the affects of dividends vs no dividends: http://avemariafunds.com/pdf-files/SmartInvestingSeries/The%20Importance%20of%20Dividends.pdf, http://qvmgroup.com/invest/2012/03/28/sp-500-with-and-without-dividends-30-years-from-1981/

4) ok but are the returns guaranteed every year ? “So that means each year you will receive between 0% and 16% depending on the index. If the index goes negative then you get the 0%” http://www.bankonyourself.com/7-reasons-to-be-wary-of-equity-indexed-universal-life flat out disagrees with this statement. if they are true then you might get 0% at the end but you would lose out on a lot of gains along the way. i honestly had trouble getting a policy to read to confirm this though. If your secondary comment about the guarantee being on the life of the policy then your initial comment isn’t true about it being every year. This is a very important distinction that most people wouldn’t catch.

5) what about all the “costs” that the insurance company can change by playing with participation rate, investment fees, etc. . Mutual funds can change fees as well, but you can just move money to another one. what are the costs to move your money? Seems like you are locking in a lot of risk that way?

Overall I am not saying that EIULs could never work for anyone, but you are obviously paying a company to take some of the risk for you. Life insurance companies are great at statistics and so they are sure to make sure that they will earn money over time. but even a 1% fee on your money is a huge drain over the long run that most people completely fail to understand. a 1% fee is equivalent to a yearly tax of 10-20% on your earnings (1% / ~5-10% after inflation return). I have done these calculations myself an I would rather pay taxes on dividends in a taxable account (invested in a .1% cost index) and deal with capital gains taxes at the end then have a 1% fee on all my assets.

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David Shafer November 13, 2013 at 5:58 am

Lucas, I would be happy to give you an illustration that includes costs and internal rate of return per annum. I do that for all my clients. That way you can see for yourself what they are.

Part of the issue is that you are trying to compare apples and oranges when you are comparing mutual funds to an insurance policy. The strategy employed for the insurance policy interest credit historically gives you a greater return than a mutual fund mirroring the same index because of not going negative. That is just math. If you are just concerned with total expenses, and see that as the primary risk, then an insurance policy probably isn’t the correct vehicle for you as you will always be able to find mutual funds that have less overall expenses.

But, the biggest risk IMO is not expenses, nor overall returns, but sequence of returns. What happens when that mutual fund goes negative right before or right after you start to use the money? And there is over a 90% chance that there will be a big negative event in that time period.

Then there is the tax-risk, how high will taxes be when you start taking the money? An EIUL eliminates these risks.

You are right on the money when you say that you are paying the insurance company to take on market risk. An EIUL purchase is not you investing in the market like a mutual fund purchase. The insurance company is investing to support the product.

Once again you insinuate that there are distinctions that folks won’t catch as if I am hiding something from my clients. Once again, I mention that my clients and I spend much time with the illustrations getting a full understanding of how EIULs work [or don't] for their particular circumstances.

Returns are locked in. So any positive annual movement in the index is then locked in to your accumulation account and can’t go down from there no matter what the index does the following year or at any time. Hence the better overall returns and the elimination of sequence of return risk.

EIULs are the fastest growing life insurance policies being issued over the last decade. Whole life folks, like you have found, are fearful of this and feel the need to propagandize against it. Bad strategy on their part. They should just allow the consumer to choose which product works best for them in their circumstances. There are some circumstances where the death benefit guarantees of whole life makes sense over the higher returns in the EIUL.

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lucas November 13, 2013 at 7:01 am

I am definitely not advocating “whole life”. It just happened to be the only information i (as an educated person who is good at web searches) could find on the true nature of EIULs because the entire life insurance industry is shrouded in misinformation and sales pitches. Fortunately there are little cracks where there is competition that allow small bits of information out. Do i have the whole picture, no, but you clearly didn’t present it either.

You are accusing me of comparing apples and oranges?? firstly that is exactly what you should be doing with your clients!!! if you aren’t giving them the whole picture of opportunity cost between their options then you ARE giving them miss information. secondly of all you completely misrepresented my comparison to your advantage. I did not compare mutual funds to EIULs, i compared to low cost index funds. There is a world of difference, but i don’t see any EIUL articles or advisers doing this comparison because it would be completely disadvantageous to them. Almost every EIUL article I could find is a well spun sales pitch with very selective comparisons and assumptions that most people would not catch.

You are obviously good at spinning words as well as you keep avoiding a written factual answer to my questions, and are continually very selective on your comparisons. I will note that you have still not answered my question about fees on loans, how the base returns are indexed over time (vs per year), insurance costs per year (even in an example), etc. . . I honestly don’t expect you to as it would ruin your sales pitch (which you are free to make), but I am trying to do a service to anyone who is now considering EIULs that there is a lot of information they need to get honest full answers on, and to be extremely wary of selective comparisons.

For anyone reading this: FEES are the biggest risk, hands down. Do not let fear of “loosing money” by the RISK of a market decline, make you blind to the fact that you are GUARANTEED to “loose money” to fees and costs. Life insurance and mutual fund companies make billions of dollars by leaching investors money. It might be worth it in some cases, but before you commit to anything do yourself a favor and get REAL historical returns for any investment (if you can find one for EIULs let me know, i can’t), and do a real net present value calculation (net present values account for inflation) of the expected value counting all fees and adding in expected tax rates (make sure to use marginal rates when saving and AVERAGE rate when retired).

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David Shafer November 13, 2013 at 7:17 am

WOW…….
1. I did reply to you about fees on loans. I repeat the charge is .1% after 10 years. .9% before that. And you have an option for a variable loan which allows for positive or negative arbitrage.
2. I did reply about index interest credit. It is applied annually and locked in once received.
3. I did reply about costs and offered to give you an illustration that demonstrates costs. [they vary depending on age, gender, premium payment structure and rating]

I have mentioned before that tend to be between .5%-1.5% overall.

Your distinction between mutual funds and low cost index funds is a red herring. You can use whatever mutual fund you like, but they work very differently [insurance and mutual funds]. And no mention of market risk or sequence of return of risk from you. When you do a comparison you might want to include those issues too!

Believe me my clients are fully aware of low cost index mutual funds and come to the same conclusion I did over 10 years ago that they are bad vehicles for producing retirement income. But, many folks don’t agree. So be it.

The offer still stands to produce a 40 page illustration for you full of numbers for you to analyze including costs and internal rates of returns! But once again, for some folks expenses are the most important item [instead of future income] and they will never be interested in an EIUL because it does have significant up front expenses.

Have a great day.

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lucas November 13, 2013 at 1:18 pm

1) should have said interest rate on loans (as i stated in my above post). You state that there is a .1% fee on the loan (so if i had a $50000 loan i would be paying $500 per year for the right to have that loan). But what is the interest rate?? What i am reading is that you are charged an interest rate on that loaned money (say 6%), but don’t have to pay it back (gets marked as collateral in the policy). If the market beats 6% then you could maybe still make a bit of money on your loaned assets, but if the market is under that, then you effectively loose money on the value of your account (which is precisely the chained return problem you saying was avoided – although with a max loss of say 5% a year). Is this correct or not?

2) Are all indexes credited every year? or just the ones you recommend. I found several sources that clearly state that most are not credited every year, but only by the life of your policy or some other year variant. Your own words implied the life of the loan as well.

3) I know we have been going at it on here, but i might take you up on the offer as I do really want to understand this setup. I have a hard time believing that the fees/costs involved would be worth it. Some people obviously like EIULs though.

4) I don’t think the distinction between mutual funds and index funds is a red hearing. The average large cap mutual fund fee is ~1.3% (http://www.finra.org/Investors/ToolsCalculators/P117437) , where the an s&p 500 indexs are around .17% (VFINX) . A quote from your own article (http://shaferfinancial.wordpress.com/2010/07/19/why-eiul/) is ” In the long run the expenses will cost you between .5% and 1.5%. This is actually below the average expenses from the mutual fund industry.” So you made the comparison first, I am just saying that comparing to index funds with lower expense is a much better comparison as the alpha for actively managed mutual funds is extremely low (.13% before fees -http://seekingalpha.com/article/321304-seeking-alternatives-to-actively-managed-mutual-funds). and doesn’t even cover fees. Plus EIUL funds are indexed not actively traded, so comparing to an index fund is even more appropriate.

Kevin Yeats November 13, 2013 at 2:16 pm

Lucas,

Go meet with a fee-based financial planner and tell the planner that you would like to discuss the best life insurance strategy so that you can accomplish __________. You will need to fill in that blank (leave an estate, leave a large amount to your favorite charity, protect your assets from lawsuits, protect your family & business if something happens to you “too soon,” avoid taxes, other).

Tell the planner that you are open to:
Term Insurance
Whole life insurance
Universal life insurance
Variable Universal life insurance
Private placement Universal life insurance

OR ANY COMBINATION OF THE ABOVE.

Good luck

Mike November 13, 2013 at 8:56 am

This thread lives on, though not sure why on a “real estate investors” forum. So be it.

On the issue of complexity of universal life insurance, I would also submit some real life experience. I work in the life insurance industry and recently had the opportunity to review a retiring agents book of insurance business, meaning I got to evaluate the condition of policies he had sold 25 to 30 years ago. Of the 500 or so policies I reviewed, the vast majority of the contracts that were in danger of lapsing and generally not in good health were Universal life contracts. The reason for this was people had not paid to target premiums and the illustrated rates had not materialized. Conversely the whole life insurance contracts that were on the books were quite stable, despite the fact that people were no hadn’t paid premiums in a long time.

You can argue why the above scenario this is the case. Your arguments for why or how this could’ve easily been avoided with Universal life contracts are probably correct. But human nature is what it is, and the likelihood of an agent and a client keeping up with complex life insurance contracts for 20, 30, 40 years to make sure that everything works out has proven unlikely. Most people just aren’t that sophisticated or interested. And for real estate investors who’ve already got their hands full with admin issues, I’d have additional reservations about structuring their life insurance with much reliance on universal life insurance. Rather. It would be a non-essential/critical piece of their planning if used at all.

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David Shafer November 13, 2013 at 9:09 am

Mike, yes indeed. My own father-in-law had to lapse his policy at age 90. When he talked to his agent that sold him the policy he stated “we didn’t plan on you living to 90!”

But, alas, its an easy fix. Minimizing the death benefit at the start. Keeps total expenses way down and total performance up. You see it is all in how you structure the policy.

And again for the thousandth time, if death benefit guarantee is your goal, then whole life is your tool. If cash value accumulation is your goal, then a properly structured EIUL is your tool.

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David Shafer November 13, 2013 at 9:16 am

Oh, and to Kevin’s comment on human nature, we don’t make sweeping generalizations on real estate investing based on those house flippers from 2007-2010 that lost their shirts so we shouldn’t do the same to those who bought universal life and failed to fund them properly [no matter the poor advice either groups received].

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Mike November 13, 2013 at 9:22 am

David … On your last two posts…I agree.

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David Shafer November 13, 2013 at 9:26 am

Lucas, I missed one comment.
The historic returns. I have published the historic returns for the life of the Minnesota Life EIUL in another thread on here. Don’t have time to look it up, but you can find it if you look for it.

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lucas November 13, 2013 at 12:22 pm

Your historical returns post is here: http://www.biggerpockets.com/renewsblog/2013/02/21/news-eiul-front/

“They added an index option that given historic data would have produced good results.
Here are the historic 20 year returns for the various index options:
Blended [35% S&P 500, 35% Barclay Aggregate Bond, 20% Eurostoxx50, 10% Russell 2000] -8.9%
Eurostoxx50- 8.89%
S&P 500- 7.55%
S&P 500 140% participation 3 year- 7.38%
S&P 500 140% participation annual- 7.05%

Based on your words i will assume this is not actual returns, but a “projection” of what the returns would have been if the indexing option was around during that whole period. What i would really want to see is this by year with fees included in the calculation. you make no mention of whether fees are included in this or not either.

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lucas November 13, 2013 at 2:10 pm

So i see the absolute worst indexed S&P 500 return (non inflation adjusted) over a 20 year period as 7.1%. With a maximum of 18%, and an average of ~12%. If you have minor fees (.2% via an index fund), how would this possible get beaten by 7% – fees at income generation?

http://www.avemariafunds.com/pdf-files/SmartInvestingSeries/Patience%20Rewarded.pdf
http://www.istockanalyst.com/article/viewarticle/articleid/2803347

I just personally ran some INFLATION ADJUSTED S&P 500 numbers against a EUIL with 100% participation rate, 1% floor, and 12% max, but excluding dividends. and i got an average before fees return on the S&P 500 off 8.07%, so ~7.90% average return after inflation., for the EIUL i got 5.8% – ~1% fees = 4.8% after inflation return (which is in line with your numbers above as well 4.8+~2.2% average inflation = 7% return).

I used S&P price data from http://www.multpl.com/s-p-500-price/table, dividends from http://www.multpl.com/s-p-500-dividend-yield/table

ok, so income out of the EIUL is tax free, so that makes up some of it. But you paid 25% taxes going in (vs a 401k) so that reduced your initial cash value, plus you pay taxes at marginal rate going in, but only average rate coming out. Because of tax deferred savings and very low expenses my marginal rate right now is ~22% (state & federal), with an average rate of 7%. This is a huge different most people don’t calculate. this would narrow some without kids deductions in retirement, but i still project <10% average tax rate (if you are married and have 75k income straight from a 401k you will pay only an average of 10% federal tax + whatever your state is -5% for me).

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David Shafer November 13, 2013 at 4:48 pm

Lucas that is the interest credit for the 20 year loopback without expenses.

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Kevin Yeats November 13, 2013 at 12:15 pm

Where did I make a comment about human nature>

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David Shafer November 13, 2013 at 5:04 pm

Lucas, 1st you aren’t accounting for sequence of returns. Using average returns is a fatal flaw in any analysis if you plan to actually use the money.

2nd, you aren’t using total return. Average return is a incorrect statistic to use because it doesn’t account for the damage of negative numbers.

3rd, you are using a “best case” situation for taxes. Assuming taxes won’t increase is sketchy at best. But, of course it is just another risk you assume if you go that route.

4th, you use a 12% cap. No EIUL I use have a history of 12% cap average.

5th, the EIULs I sell have a bonus after year 10.

6th, somewhere I did include actual performance numbers from the ML EIUL. Just don’t have time to find it.

7th, again be happy to supply you with a realistic EIUL illustration, conservatively designed.

8th, ultimately your decision on what you purchase has as much to do with emotion as any rational argument. If rationality was all one needed to succeed at investing, there would be a lot of very wealthy doctors and engineers. Instead we see entrepreneurs as the most wealthy who go into their businesses on emotion! Just thought I would point out the limits of the discourse.

Taxes, sequence of returns/market risk and the risk of early death are vastly underestimated risks by the index mutual fund crowd [bogleheads] IMO. No one ever cheaped themselves into wealth despite the “stop buying that cup of coffee to wealth crowd!”

Feel free to contact me at my website for an illustration!

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lucas November 14, 2013 at 4:58 am

1 & 2) My 20 year returns numbers do include sequence of return – so I am accounting for those there. Of course doing a modeling with historical variable returns would be better then just assuming the average. This of course is a bigger risk when withdrawing money. But guess what? I could emulate EIULs strategy too when I get closer to withdraw stage. Just have my money in a self directed IRA, invested in money markets or lower risk bond funds, and buy index options calls. So most of my money earns a small % regardless of what the market does, and I can exercise my call option if the market goes up. And I avoid all the fees and lockins you get with a EIUL. If you are worried about human nature and people not being consistent with their plans – that is certainly a concern, but Mike also quoted that this is a big problem with Universal Life policies as well.

You also quoted assumed average for 20 years for something that actually isn’t proven either. I could also come up with a bunch of backdated index strategies that look great. And you still haven’t acknowledged that when you are withdrawing money you now become subject to loss risk as well due to the interest rate on the loans (although the loss range is compressed).

3) Major Tax risk for anyone who needs under $100k in income is very very small. Yes maybe they will go up a bit, but it would be political suicide to do much there as that is where the majority of the voting power is. I agree that above this though there is higher risk. But the highest risk for increased taxes long term is on consumption (either VAT or sales tax type increases), which would hit 401k or EIUL investors equally. The singular difference between Marginal and average rates escapes most people and is a huge difference. These are all assumptions though, so I do subscribe to diversification of tax strategies. I would argue that most people are better served through a ROTH, and HSA funds which also are tax free in withdraw stage.

4) What are the participation %, min indexed %, cap rates, and loan interest rates for the policies you recommend?

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Mike November 13, 2013 at 5:42 pm

“Taxes, sequence of returns/market risk and the risk of early death are vastly underestimated risks by the index mutual fund crowd [bogleheads] IMO. No one ever cheaped themselves into wealth despite the “stop buying that cup of coffee to wealth crowd!”

Actually, the risk of an ‘early’ death is not lost on the buy-term-invest-difference (BTID) crowd. Nor is it a weakness in their life-concept. Term insurance works fine in the instance of a very premature death. In fact, if a person KNEW he would die in the short-run he’d be wise to buy term and permanent insurance would be foolish. Why pay all the upfront costs and higher premiums compared to term? It makes no sense. What the BTID fails to acknowledge (and likely understand) is that if a person lives beyond the term of their insurance (as almost all do) then he goes into his later years. when he will most certainly die, with no life insurance. And that is a losing situation heading into this phase of life. Whether he dies early in retirement or lives long it is losing design for him and his family. A dependable death benefit in paid out in retirement matters a lot. The BTID and the high early cash value crowd miss this.

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David Shafer November 13, 2013 at 5:53 pm

Mike, I will add that the average length of term insurance policies are less than 3 years.
Most term is bought by 25-45 year olds. So, the bottom line is that most folks aren’t insured because of the low cost of exiting term insurance. Permanent insurance has high costs to early surrenders, therefore encouraging folks to keep insured.

From an financial planning point of view, you should always encourage permanent insurance over term if at all affordable. But, unfortunately, financial planners rarely start from how people actually behave, instead pretend that people are compliant to whatever financial planners think is correct.

Same issue with folks in mutual funds. Actually individual mutual fund returns are very low compared to the returns of mutual funds. But, financial planners keep advising them.

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lucas November 13, 2013 at 6:15 pm

Well I would agree that anyone who only keeps a term plan in effect for 3 years doesn’t know what they are doing.

Mike is correct on my plans. We could argue on amounts needed but I have a 500k 20 year term life policy outside of my work, plus 600k group term through my work. If something happened to me while these were still in effect the policy benefits would more than cover all my families needs. Also my wife and kids would also be eligible for significant social security survivor benefits, and be completely covered for the rest of their life (even if my work policy wasn’t in effect). If I make it to the end of these policies I will also be set for life based on my significant investments and 0 debt.

I personally know several Financially Independent and wealthy individuals who went my route (low expenses high investments), or real estate or small business owners, but none who got rich off any sort of life insurance plan.

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lucas November 13, 2013 at 6:22 pm

forgot to add – these term policies are costing me a total of $45 a month. Then of course you have to plan for access to IRA/401k money in any years after policies finish and my wife or I aren’t 59 1/2. SEPP (section 72T) recurring withdraws fill this gap very nicely and allow for >4% penalty free withdraws from IRA before 59 1/2.

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David Shafer November 13, 2013 at 7:13 pm

I would never say someone is going to get wealthy from a life insurance policy just as I would never say someone is going to get wealthy from mutual funds.

My only assertions are:

Folks should have several “buckets” for retirement funds

and

EIULs are superior to all mutual fun based strategies

These assertions are based on the facts derived from data

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lucas November 14, 2013 at 5:23 am

Agree on diversification, but that can be accomplished many ways (varius funds/REITs over 401l/ROTH/HSA/&potentially life insurance). The claim that EIULs are superior to all mutual fund based strategies is littered with assumptions that I think are not completely accurate (and certainly not applicable to everyone) but are up for debate!

- anyway, walking away from the computer. Best wishes.

David Shafer November 14, 2013 at 7:10 am

Lucas, my final post as I am behind in work.
My assumptions are these:
1. Human will behave the same way they always do
2. The market will behave the same way it has always done
3. Taxes will always be progressive with the more financially successful being taxed at higher rates.
4. Institutional investors have advantages over individual investors.
and
5. Most of the people will do what they are told even in the face of obvious problems

And my last comment:
Most of my clients are in the top 15% of wealth. They trend to professional occupations; physicians [and other health care professionals], attorneys, engineers [lots of computer engineers], business owners, etc. They tend to be good with numbers, skeptical of government plans [both conservative and liberal], planners, and independent thinkers. Very few of them have only one bucket [EIUL] and if they do I constantly tell them to find another bucket. I own an EIUL and have owned it for 7 years now. I was a customer before I was a salesman of EIUL. I also engage in ownership of dividend producing stock with the aim of producing 100% of my retirement income via dividends. I also own real estate. And I am looking at notes as another bucket. So I live what I preach.

My personal EIUL has worked exactly as it is suppose to. I am working hard at increasing my dividends, but am a long way from having my retirement covered [but I got some time!]. I use to write regularly for this site, but don’t anymore. I still read it for the RE investing.

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