Creating a Living Legacy with an EIUL

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Part of the joy of doing what I do is talking to interesting and smart people.  I got a call from a man who as he put it “just spent time with his tax attorney that was worse than going to the dentist.”  He was a little put off about the loss of control of his money required in creating a trust that was tax efficient and his 401K rules and regulations.  

He had sold his business and created an estate plan that would take care of his 3 kids and his wife at his and her death.  But he wanted to create a living legacy and so he called with an idea.  He had read my blog on EIULs and he wanted to know if he could use it to leave money to a charity his wife was heavily involved in and to help out the grandkids [6] when they got older. So we started to talk.  And then he got excited, and got his wife on the phone too.

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Planning for the Future

He wanted to gift his kids and his grand kids the maximum under the gift tax rules down the road.  His wife, however, had different ideas.  She thought about an exotic vacation for the entire family once the grand kids were old enough to appreciate it. The whole family together in some foreign land creating once-in-a-lifetime memories.  He thought about a college graduation reward program for the grandkids where he would give them a choice of an around-the-world trip or a new car.  And the ideas just kept flowing.  Needless to say I just sat there on the phone allowing them to dream and create a living legacy for their family.

And then there was the charity.  Why not name them as the beneficiary?

At the end of the day, they would remain in control of this policy.  They could control how much and for what use the money would go to.  And how much would be left in the policy for the charity.  It could be a huge endowment or a smaller one depending upon how much they used as a living legacy for their family.

They chose a second-to-die EIUL which kept the insurance costs low despite some small health issues.

Here is what they accomplished with this EIUL:

  • A living legacy created on their terms;
  • Control of their money [not a trustee nor government rules and regulations];
  • Tax efficient; and
  • Charitable Donation.

What living legacy would you create?  Let me know in the comments below! Let’s dream……
Photo: Schristia

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15 Comments

  1. Chris Clothier

    David – Great blog and thanks for sharing. I did some research on Equity Indexed Universal Life policies and, as usual, upon first learning of them I thought there was no way I would ever invest in myself through insurance. Your blog led me to do even more research and found another great post by Jeff Brown on EIUL’s and you guys both have convinced me that this is something to look into to further protect my assets and wealth for future generations. If you want to have an impact, EIUL’s are a great planning tool.

    Thanks – Chris

  2. I’ve always found that when making financial plans there are several keys questions to ask, to the planner, the the product salesperson and to oneself.

    “Is this the best that I can do?”

    “What are the tradeoffs that I make with this approach or product? Am I sacrificing safety for higher returns? Am I sacrificing returns for guarantees?”

    “Could a combination of products accomplish my goals any better?”

    “What is this salesperson NOT telling me?”

    Just food for thought.

    • Kevin, great questions. I always cover the negative and positives of owning an EIUL with my clients. Ask them about alternatives they are using or are considering and give them complete illustrations with both expenses and internal rate of return included and made explicit. Basically you are advising to be as informed as you can be before making a decision and I try to help folks to a complete understanding of EIULs so they can make an informed decision. Saves me a lot of headaches in the long run and makes my clients happy!

    • No there wasn’t Jeff. So far there hasn’t really been any interest in gaining revenues from life insurance from the government. It wouldn’t be a really big revenue generator and would hurt the folks with small policies more than the wealthy so some political costs with no real benefits.

  3. David
    Will you provide specifics to show how you’re proposing we use this kind of policy as it relates to real estate? I’m not clear what actionable step you’re wanting us take?

    • Sure, Mike.
      One idea is to fund an EIUL with cash flow from your real estate for a period of time leading up to your retirement. During this process you will be able to access money in this policy for reserves in case of an emergency need on your real estate like a roof or lack of tenants,etc. On reaching retirement you have a source of tax free income that can be turned on and off as needed, or as an addition to your real estate income. For those that manage their own portfolios it can provide a source of income if something were to happen to incapacitate you temporarily or even buy some time so your real estate can be liquidated in an orderly manner. Ultimately you can take advantage of tax protected real estate cash flow to create a pool of funds locked away from the tax man. What you ultimately use this money for is left up to your imagination and needs.

  4. Hey David –

    You Would borrowing that money against the policy correct? I use to do this many years ago in another business I had which was at the time I thought a great way to save & still have access to the money with out getting penalized. Is split dollar life insurance a similar concept?
    Thanks for sharing another strategy for savings.

  5. David,
    I read your e-book. Nice job on that. I understand where you’re coming from as an approach to wealth building as it pertains to real estate as a wealth building engine and EIUL as a protection/savings tool.

    I still have skepticism about EIUL. If insurance companies can provide such a fail-safe interest-crediting scheme to policyholders, allowing them to capture much of the upside in stock market and avoid all the downside, why then do they not utilize the same method in how they manage their own reserves? If they can lock in all of the gains of stocks and throw out all the losses, why do all of them have their billions in reserves invested not primarily in bonds earning 4-5%?

    • Mike, I’m not sure I can answer you question as to insurance investing strategy, since that is not my job. However, I can say that there are regulatory requirements on insurance companies with their reserves that will dictate how they invest. I can also say that insurance companies have been some of the most successful institutional investors out there. They certainty invest in a wide array of assets and strategies around the globe. Remember that institutions can and do invest very differently than individuals because they never intend upon living on their investments or using their investments for living expenses instead assume a never ending time line for investing. I would also assume that their overall returns average a good deal better than what is given to an EIUL. Warren Buffett for example, who essentially runs a large public insurance company [oversimplification of course] has averaged 20% over the last 45 years or so. I’m sure that if you could examine the overall investing returns for these large insurance companies you would see significant average returns [maybe not 20% but still double digit returns].
      But ultimately, seeing is believing and since EIULs are around 17-18 years old now, they seem to have been able to do what they said they were going to do over some pretty choppy investing markets. If this was 1999 and EIULs were new and we hadn’t had the bad markets of the 2000s then I would be skeptical too. But, it is not and the insurance companies have kept their promises on EIULs.

  6. If you go to Vital Signs, the insurance companies 5 year average – Net Yield on Mean Invested Assets, is as follows

    New York Life – 5.21%
    Mass Mutual – 5.78%
    Northwestern – 5.72%
    Ohio National – 5.90%

    So if I understand what you’re saying is that the insurance companies are crediting policyholders 13% last year. But they themselves, with all their investment expertise, are earning only in the 5% range on the reserves they use to pay claims. That’s unsustainable.

  7. Mike, I get it you don’t like EIULs. That’s fine. You have a right to not like any product.
    But, you are way off base with your latest comment. You offer up data from a 5 year return on reserves from mutual companies that don’t have an EIUL product and try to compare it to a 1 year return on an index. That’s apples and oranges.
    Try this one, Securian [parent company of Minnesota Life] published their return on investment for 2011. It was 6.53%. If you had an Minn Life policy and an anniversary date of January 1, you would have received a 0% index return for the year 2011. Sustainable for ML? Company makes 6.53% and index returns 0%. But all this is really silly because it is simply data that has no connection to reality. Overall profitability of a company encompasses much more than investment return in any given year or return on reserves for 5 years from a mutual company.

    The bottom line is still that more and more companies [now more than 40] offer EIULs. They haven’t done that to lose money and they haven’t done that because other companies have created an unsustainable product which they now want to emulate. Honestly, does your logic make any sense?

    Do you really think that life insurers are so bad that they will knowingly sell a unsustainable product for decades just so they can take your money away from you in the long run? Think of the legal fees down the line for that bit of fraud.

    Mike I think you have taken this line of questioning about as far afield as possible. I feel like Alice down in the rabbit hole. Nothing I can say or do would satisfy this increasing bizarre world you are constructing.

  8. Wow, Dave you went a little off the hook on me there. I’m just asking questions, just like you did. How did you get from that that I don’t like EIUL. That’s your conclusion. You’re coming on a forum for fairly sophisticated investors; you don’t think we’ll have questions? Do you think people should position their wealth into something they can’t understand? To just take a leap of faith that in 50 years the money will be there? That doesn’t sound prudent to me.

    • Mike, sorry if that was a little heavy handed. I really don’t know where you are going with this statement.
      “So if I understand what you’re saying is that the insurance companies are crediting policyholders 13% last year. But they themselves, with all their investment expertise, are earning only in the 5% range on the reserves they use to pay claims. That’s unsustainable.”

      I’ll try to be less defensive next time. But if you could please explain to me the logic of life insurers selling a “unsustainable” product for over a decade and for many more trying to emulate that product.

    • Mike, maybe by examining our basic assumptions here we can further the discussion?
      For me, we have a product that has been around for 17-18 years in its current form.
      It has worked exactly as it was structured to work and has provided average rates of return superior to market indexes.
      It is gaining popularity from both consumers and insurers.
      It provides tax benefits from the capital placed into the policies.
      I assume insurers would not continue to offer a product that was unsustainable or not profitable.
      I assume that insurers would not try to emulate a product that was unsustainable or not profitable for other insurers.
      The history of this product provides us with a guide for what to expect down the line.

      For you, what are your basic assumptions?

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