Information on index universal life insurance for retirement
Suwanee, GA · Member since 2016 · 10 posts · 9 votes
Does anyone have any idea where to go to get set up with an IUL? Do you think using an IUL is a good part of a retirement strategy? Thank you for your input.
@Kevin Stearns Any permanent life insurance product is a great part of your retirement strategy: IUL or Whole Life. Anybody who fully understands how these products work know that "buy term and invest the difference" is a myth.
Make sure your IUL is overfunded. It needs to be funded right up to the MEC limit and solved for the lowest amount of death benefit for the premium you are paying. This will maximize your cash accumulation.
1. Historically, the returns on cash value have outperformed the "average" mutual fund. I'd be happy to share my research showing this.
2. Dollar for dollar, the cash value will provide 2-3 times the income in retirement than a 401k or IRA invested in traditional assets. And its tax-free.
But for real estate investors, the real magic is the fact that...
3. You can leverage your cash value to literally put your money to work in two places at one time. If your cash value is growing safely at ~7% and you can borrow against it at 4.4% (current rates), then anything you put that loan into that makes more than 4.4% is a return ON TOP OF the 7% your cash value is earning.
You'll need to find an insurance expert to make sure the policy is designed for the highest possible cash value and that it includes the ability to take a variable loan immediately. Not every product in the market allows for this.
This blog post explains the leverage strategy for real estate investors:
https://www.biggerpockets.com/blogs/7595/47651-are...
This blog post deals with all of the myths surrounding life insurance:
https://www.biggerpockets.com/blogs/7595/49878-are...
Good Luck!
Tom Rutkowsi
@Kevin Stearns I included a link that discusses IUL below, which I found informative.
My answer is no, I do not think IUL is a good investment compared to real estate. You are on a real estate forum, so expect answers from a real estate investor perspective. I would recommend getting good term insurance and investing the extra money in rental properties.
There are lots of paths to success and each comes with its own risk and rewards.
@Kevin Stearns Any permanent life insurance product is a great part of your retirement strategy: IUL or Whole Life. Anybody who fully understands how these products work know that "buy term and invest the difference" is a myth.
Make sure your IUL is overfunded. It needs to be funded right up to the MEC limit and solved for the lowest amount of death benefit for the premium you are paying. This will maximize your cash accumulation.
1. Historically, the returns on cash value have outperformed the "average" mutual fund. I'd be happy to share my research showing this.
2. Dollar for dollar, the cash value will provide 2-3 times the income in retirement than a 401k or IRA invested in traditional assets. And its tax-free.
But for real estate investors, the real magic is the fact that...
3. You can leverage your cash value to literally put your money to work in two places at one time. If your cash value is growing safely at ~7% and you can borrow against it at 4.4% (current rates), then anything you put that loan into that makes more than 4.4% is a return ON TOP OF the 7% your cash value is earning.
You'll need to find an insurance expert to make sure the policy is designed for the highest possible cash value and that it includes the ability to take a variable loan immediately. Not every product in the market allows for this.
This blog post explains the leverage strategy for real estate investors:
https://www.biggerpockets.com/blogs/7595/47651-are...
This blog post deals with all of the myths surrounding life insurance:
https://www.biggerpockets.com/blogs/7595/49878-are...
Good Luck!
Tom Rutkowsi
Thanks for this post. I've been wondering about an IUL policy and it never occurred to me to ask on here for opinions. I found one that lets me borrow against it immediately, and I'm seriously thinking about using it for more RE interesting... I had reservations because it seems like I always hear people talking about whole life being a waste of money. It's nice to see knowledgeable opinions that have a different take on the matter.
I don't think using IUL as part of your retirement strategy is a good ideal. If you are willing to do what it takes to be a successful real estate investor then I totally agree with recommendation of @Joe Splitrock, by protecting your loved once with inexpensive term life insurance now (which is a short term need) in being in control of your own investments you will be much better compared if you dumped your money into one of those cash value products where increasing cost of the insurance, high commissions and other policy fees take a bite into your mediocre returns.
@Kevin Stearns be very careful at advice you get from insurance agents such as @Thomas Rutkowski. @Dean Weltman - what makes you believe Thomas is knowledgeable? I agree he is articulate and has well written arguments, but how do you know he is not distorting facts to advance his business? Would you buy a new car just because a car salesman told you the cost of owning new is less than used? I have seen a convincing argument made on paper. On paper it looks true, but this really comes down to how data is used to prove something. Distorting data is something the life insurance and mutual fund industry is great at doing.
Insurance agents are HIGHLY compensated to sell whole life plans because they are very profitable for insurance companies. Who is getting the good deal? It is not a myth that buying inexpensive term and investing the difference will give you a better return. Of course it depends on how you invest the difference. For example buying mutual funds is also a bad investment that is loaded with heavy commission fees. Heck, my life insurance agent also sells mutual funds. I have a whole life policy and it is performing nowhere near the projections my agent gave me. Those projections deceived me. Of course there is a disclaimer that nothing is guaranteed, so the industry escapes liability. Thomas cites two references in his post which were both written by him. Does that lend credibility to the claims?
This is not a slam on insurance agents, but some of the most successful sales people are out selling whole life insurance. They can be very aggressive and they play off emotions. Fear of death, caring for loved ones after you are gone and having money in your golden years. These are very emotional topics and if they create enough fear and doubt, they can sell you on anything.
I have no vested interest here beyond warning people to research beyond what your agent wants you to know. My real estate investments have given me the best returns and there is a physical asset tied to it. Around the same time I purchased the whole life insurance, I invested in stocks that are now paying a dividend that returns 8% annually on my original investment plus the stocks have increased 25%. Had I purchased the same stocks a year earlier, my return would have been lower and my stocks would be break-even. Timing is everything in any market.
How can Thomas offer a 7% annual return without disclaimers? Talk to anyone who has had whole life for five or ten years and ask them how much money they put in and what their true annual return is. Keep in mind you are adding money every year and you are paying fees, so you need to account for that when calculating returns. It is also important to look at Annual Returns instead of Average Returns. This article describes the difference:
http://www.forbes.com/sites/financialfinesse/2012/...
Here is an article which discusses why whole life is a bad investment:
https://momanddadmoney.com/why-whole-life-insurance-is-a-bad-investment/
You should consider Dave Ramsey's method. Buy term and invest the rest. Our office is a Dave Ramsey ELP office. Most people will not need life insurance for their entire life, especially if you follow Dave Ramsey's methods. At some point your investments will have much higher values than the life policy you took out. At that point, do you still need life, or will your investments cover that need? Keep in mind that there is no one size that fits all, but if your doing research, look into Ramsey's methods and programs.
As far as tax free income, set up a self directed Roth 401K or a standard Roth IRA. if you hold them for 5 years or more and are age 59 1/2 then all withdrawals are tax free from that point on. A Roth can also borrow money and hold hard assets.
@Kevin Stearns be very careful at advice you get from insurance agents such as . ..
There really is no "trick" to it. I'm not trying to deceive anyone. If you really understand how life insurance works, you will realize that much of what you state just doesn't matter.
1. Commissions - In a properly designed and overfunded IUL, the commissions are drastically reduced. We get paid on the "insurance", not the overfunding. Overfunded policies have the smallest amount of insurance allowed by law. But why do you care what I make as long as you get to make more? Every sales person gets a commission. The 6-pack of beer you bought at the store generated a commission for a sales rep for some distributor.
2. The returns on your real estate are great. But what if you could earn just a few percent more by leveraging the cash value in a life insurance policy? The math is very simple, if you can earn 7% on your cash value and you can borrow against it at 5%, then anything you make on your real estate over 5% is on top of the return on the cash value. The only question should be how can we design a policy with enough cash value accessible up front, right? I'm not trying to trick anybody with fancy math. This simple sentence describes how life insurance works and you should "know" it makes sense subject to a few easily provable assumptions.
Your cash may be reduced by the commissions and fees, but that remaining cash is now collateral for a loan from the insurance company or bank. Get past your bias against life insurance and simply focus on the mechanics of how it works. Its no different from borrowing against a portfolio of securities or taking a home loan. I would do this even if there was no death benefit. The numbers work. The Insurance and asset protection aspect of this is just the icing on the cake.
I'm always amazed at how people just stick to their biases about life insurance rather than actually try and put the numbers in a spreadsheet and prove or disprove it. Most claims, like yours, that life insurance is a bad investment, are based on an incorrect understanding of how life insurance works.
3. An IUL is a contract. There are no guaranteed rates, per se. The returns will match an underlying stock market index with a cap on the max you can earn and a floor at zero. Historically, this approach has yielded about 8.2%. I am not "offering" 7%. 7% is simply what Mass Mutual is paying right now. It could be zero or it could be into the upper teens in any given year. The returns in an IUL are linked to the movement of the index. You know exactly how it works, just not what you are going to get.
4. I read your article. It was written by someone who clearly doesn't fully understand how life insurance works. He complains about the interest on policy loans. He incorrectly states that you are borrowing "From" the cash value. That is one of the biggest misconceptions about life insurance. Once you understand that the cash value is still there and still earning dividends even while you have a policy loan outstanding, you start to see the beauty of life insurance. Sure the loans are accruing interest. But the cash value is also earning interest. Usually, the worst case is that you have a "Wash Loan" where the earnings cancel out the loan interest. Ideally, as in the case of many carriers, you will have a variable interest rate that is currently much lower than the rate you are earning.
This is why life insurance can provide 2-3 times the income in retirement in retirement. A retiree can get by on half the retirement savings of someone with a traditional retirement account.
I'd have to write a book to address each fallacy individually. That's why I wrote this blog post:.
I do not think it is a good strategy. You are paying higher commissions and fees for funds with less options. Why not just invest in mutual funds and keep the wasted money for yourself?
@Thomas Rutkowski I assume you sell insurance. Are you stating that your fees and commissions are lower than Vanguard?
I do not think it is a good strategy. You are paying higher commissions and fees for funds with less options. Why not just invest in mutual funds and keep the wasted money for yourself?
Unless you are investing in index funds, Mutual funds will cost you far more than life insurance over the long run. And again, its all about the income. If I can get 2-3 times the income from the same amount of money, I don't care if my cash value kept up with a mutual fund dollar for dollar. Stay focused on the prize at the end of the race.
Also, after reading the link to an article you wrote regarding the myth "the insurance company keeps my cash value if I die" you wrote that should the holder live to normal life expectancy. What happens if one does before a normal life expectancy? Do my beneficiaries get the cash value?
Hi Marcus - The cash value is part of the death benefit. You are essentially saving up your death benefit with a portion of every premium. That's a bit of an over simplification but close enough. If you have $1M of death benefit and have $500K of cash value when you die, your beneficiary will get $1M which is made up of $500K from your CV and $500K from the insurance company. On day 1 of the policy the $1M risk is all on the insurance company. As you accumulate cash value, the carrier has to purchase less and less insurance to make up the balance of the death benefit.
My wife and I invest in Vanguard admiral index funds, along with rental property, but there's no way your insurance product's fees and commissions could beat my 11% average returns since we've started investing and it's expense ratio of .05%. Can't be beaten by an insurance product. My advice to all is to keep your insurance and investing separate.
Thanks for your explanation, but I'll stick with my Term Life Insurance that is very inexpensive and my large portfolio of low expense investment portfolio.
I do not think it is a good strategy. You are paying higher commissions and fees for funds with less options. Why not just invest in mutual funds and keep the wasted money for yourself?
Unless you are investing in index funds, Mutual funds will cost you far more than life insurance over the long run. And again, its all about the income. If I can get 2-3 times the income from the same amount of money, I don't care if my cash value kept up with a mutual fund dollar for dollar. Stay focused on the prize at the end of the race.
Maybe I am confused and hopefully you can explain it to me: If you and I both invest the same amount into the same funds with the only difference is that I put mine into an IRA and you put yours into a component of a life insurance policy (but the investment component is the identical amount), your fees are ~5% and mine are much less than 1%, how do you earn 2-3x more than I will? Where does that extra income come from? We both have the same investment in the same index funds for the same time period, only my fees are lower and I don't have a growth cap limiting me on terrific years. How is that possible? I haven't even touched the fact that I have actively managed funds that consistently outperform the S&P in addition to investments in index funds.
I am not trying to belabor the point or seem argumentative, I am honestly curious. If you can outperform my same monies in the same funds with higher fees and a growth cap, I would ask that you email me some literature.
My wife and I invest in Vanguard admiral index funds, along with rental property, but there's no way your insurance product's fees and commissions could beat my 11% average returns since we've started investing and it's expense ratio of .05%. Can't be beaten by an insurance product. My advice to all is to keep your insurance and investing separate.
I used to invest in Vanguard index funds. I stopped once I realized I could protect my principal from market fluctuation and get twice the income from my savings. I think you are still missing the point of what I am stating. For one thing, historical returns on the S&P 500 have averaged about 9.2% so don't count on 11% for too long. At some point you have to stop saving and start taking income from your savings. You essentially have to annuitize your life savings over your remaining lifetime. The common rule of thumb is the "4% Rule". Just google it.
Depending on whether or not your money is trapped in a Traditional retirement plan or not, life insurance cash value will support about 8% income to cash value rate. You may have accumulated more money, but I'll be living on a more income.
Look at it this way: if you work for a company that will pay you a pension of $50,000 per year, you didn't have to save a cent toward your retirement. You would have as much income as someone who saved $1.25M (4% Rule) or someone who had $600K of cash value in their life insurance. At the end of the day it is all about the income.
@brad taylor The reason for this is that you are not actually withdrawing your money from a life insurance policy. Again, the magic of life insurance is that you borrow against the cash value. Your savings (cash value) continues to grow even after you start taking income. If I begin retirement with $1M of cash value, by my 10th year of retirement my cash value will have grown to ~$2M at 7% growth (Rule of 72). As I take loans, I am using up collateral and I am collateralizing the accrued interest. But the loans and accrued interest will be outpaced by the growth of the cash value. The worst case scenario is that the accrued interest keeps base with the growth of the collateral. Loans are tax free so don't forget about the tax advantage.
And again, if I can leverage this cash value every day between now and the time I retire to invest in real estate, I can effectively build up a sizable "side fund" to augment my retirement income.
I hate to correct you about the S&P500, but here is a good chart for you to reference in regards to the returns historically. http://politicalcalculations.blogspot.com/2006/12/...
If you take 1950 to the present for example with reinvested dividends, you had made 11.11%. Imagine the compound interest if you invested for 30 years, maxing out Roth IRA's from Vanguard with low expense ratios, you'd have 1.4 million that doesn't have RMD's or taxes at the time of distribution.
I'm not the type of person that is going to take the risk of loaning money from my cash value to invest in something that may or may not work out. To much risk.
I hate to correct you about the S&P500, but here is a good chart for you to reference in regards to the returns historically. http://politicalcalculations.blogspot.com/2006/12/...
If you take 1950 to the present for example with reinvested dividends, you had made 11.11%. Imagine the compound interest if you invested for 30 years, maxing out Roth IRA's from Vanguard with low expense ratios, you'd have 1.4 million that doesn't have RMD's or taxes at the time of distribution.
I'm not the type of person that is going to take the risk of loaning money from my cash value to invest in something that may or may not work out. To much risk.
Try the last 25 or 30 years. You're hunting for a time period to justify your assumption. You should also look at the standard deviation around that 11.11% average. In 2000-2002 the markets dropped 35%. In 2007-2008 the markets lost 40%. How are you going to feel when you are approaching retirement age and your savings take a hit like this?
If it doesn't work out, you are no worse off. In fact, you are better off. What's the worse case? If you invested your own money and lost everything, the money is gone. If you put the money into cash value life insurance and levered it to make the same investment, that loan could sit on the books forever and as long as you continued to make your premium payments, you would have life insurance. Your death benefit would be reduced by the amount of the loan and accrued interest.
Yes if you take January 1976 too January 2016 which is a 30 year period, the return was 10.11%. Remember when you invest in the stock market, it's for the long haul. Yes the market has it's ups and downs just like Real Estate, but I'm not trying to time the market, I'm just using good indicators. As for how I'd feel if the market took a 40% loss in 2008 and I was retiring? Personally, it wouldn't matter because my Roth IRA isn't my only investment. There's my pension that available, my rental income and social security. Because we've made our portfolio diversified, we'll be able to decide at retirement where to pull the money out based on the taxes at the time and the value. When a person focuses their portfolio in only one asset class they are spreading their risk 10 fold.
@Kevin Stearns be very careful at advice you get from insurance agents such as @Thomas Rutkowski. @Dean Weltman - what makes you believe Thomas is knowledgeable? I agree he is articulate and has well written arguments, but how do you know he is not distorting facts to advance his business? Would you buy a new car just because a car salesman told you the cost of owning new is less than used? I have seen a convincing argument made on paper. On paper it looks true, but this really comes down to how data is used to prove something. Distorting data is something the life insurance and mutual fund industry is great at doing.
Insurance agents are HIGHLY compensated to sell whole life plans because they are very profitable for insurance companies. Who is getting the good deal? It is not a myth that buying inexpensive term and investing the difference will give you a better return. Of course it depends on how you invest the difference. For example buying mutual funds is also a bad investment that is loaded with heavy commission fees. Heck, my life insurance agent also sells mutual funds. I have a whole life policy and it is performing nowhere near the projections my agent gave me. Those projections deceived me. Of course there is a disclaimer that nothing is guaranteed, so the industry escapes liability. Thomas cites two references in his post which were both written by him. Does that lend credibility to the claims?
This is not a slam on insurance agents, but some of the most successful sales people are out selling whole life insurance. They can be very aggressive and they play off emotions. Fear of death, caring for loved ones after you are gone and having money in your golden years. These are very emotional topics and if they create enough fear and doubt, they can sell you on anything.
I have no vested interest here beyond warning people to research beyond what your agent wants you to know. My real estate investments have given me the best returns and there is a physical asset tied to it. Around the same time I purchased the whole life insurance, I invested in stocks that are now paying a dividend that returns 8% annually on my original investment plus the stocks have increased 25%. Had I purchased the same stocks a year earlier, my return would have been lower and my stocks would be break-even. Timing is everything in any market.
How can Thomas offer a 7% annual return without disclaimers? Talk to anyone who has had whole life for five or ten years and ask them how much money they put in and what their true annual return is. Keep in mind you are adding money every year and you are paying fees, so you need to account for that when calculating returns. It is also important to look at Annual Returns instead of Average Returns. This article describes the difference:
http://www.forbes.com/sites/financialfinesse/2012/...
Here is an article which discusses why whole life is a bad investment:
Thanks for your long comment on this topic. That's one of the things that makes this such a great place - people will go out of their way to explain things for the benefit of others.
I don't know much more than before regarding these IUL's, but I would certainly say @Thomas Rutkowski is knowledgeable, but that doesn't mean he isn't biased. I'm glad that he's bringing another viewpoint to this discussion since most of what I hear is 'Don't do it!' This was something I was considering, but I wasn't able to get both sides of the issue to help me develop an informed opinion.
@Dean Weltman another way to look at this is that life insurance companies take your money and invest it to give you a return. @Brad Taylor asked the valid question. Why not just invest the money yourself and avoid fees? They are buying mostly bonds, which are fairly secure and have lower average return over time. You could follow an investment strategy where you invest in all bonds and get similar returns without the insurance company taking their cut in the middle. How could it be possible for whole life to outperform the market when they are investing in the market? This is why I questioned @Thomas Rutkowski assertions that his product is somehow superior. Insurance companies don't have some secret investment that is not available to the rest of the world.
@Marcus Johnson I totally agree that a good index fund combined with rental property and good term insurance is the way to go. This is just logic. Take the sales fluff out of it and follow the numbers. Unfortunately the average investor gets a fancy chart put in front of them and some MBA investment adviser twists numbers to make them think it is better.
From above: (try reading the posts)
3. An IUL is a contract. There are no guaranteed rates, per se. The returns will match an underlying stock market index with a cap on the max you can earn and a floor at zero. Historically, this approach has yielded about 8.2%. I am not "offering" 7%. 7% is simply what Mass Mutual is paying right now. It could be zero or it could be into the upper teens in any given year. The returns in an IUL are linked to the movement of the index. You know exactly how it works, just not what you are going to get.
I've explained repeatedly why you can get more income from life insurance cash value than traditional investments. You apparently still don't get it.
Buy Term and Invest the difference is a myth. It only makes sense to those who don't understand the mechanics of a life insurance policy. Nobody is twisting anything!!! You just don't understand it or are unwilling to look into it because it might shake up your preconceived notions.
From above: (try reading the posts)
3. An IUL is a contract. There are no guaranteed rates, per se. The returns will match an underlying stock market index with a cap on the max you can earn and a floor at zero. Historically, this approach has yielded about 8.2%. I am not "offering" 7%. 7% is simply what Mass Mutual is paying right now. It could be zero or it could be into the upper teens in any given year. The returns in an IUL are linked to the movement of the index. You know exactly how it works, just not what you are going to get.
I've explained repeatedly why you can get more income from life insurance cash value than traditional investments. You apparently still don't get it.
Buy Term and Invest the difference is a myth. It only makes sense to those who don't understand the mechanics of a life insurance policy. Nobody is twisting anything!!! You just don't understand it or are unwilling to look into it because it might shake up your preconceived notions.
I have read all your posts looking for the benefit (magic as you referred to it). It just appears to me that the carrier bundles an insurance policy together with some index fund that is lower risk such as bonds. Money goes to the insurance portion until the investment portion is funded to the policy level. I have explained repeatedly that you can get more income keeping your insurance as term and pursuing other higher yielding investments. You choose to call it a myth. Then fine, we agree to disagree.