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Universal life insurance as another form of retirement investment?

Ero 2,861 945 October 6, 2015 at 08:57 AM in Finance (4)
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Would like to get some thoughts from folks that are smarter than me about this.
Currently I am contributing max each year to a ROTH IRA and 401K up to my employer's match. All that still leaves me with some money on the table that I'd like to have grow (rather than sit in a savings account doing nothing).

One thing that was presented to me by a large financial company was universal life insurance, which as they explained is a life insurance policy that you can 'overfill' and invest the excess. Then when you retire, the 'Basis' is withdraw-able tax-free and earnings are regular income taxed. So similar to a traditional IRA I guess? The projections (and past performance) they showed me were astronomical. And of course there's the life insurance portion of it.

Something about this seems "too good to be true" in my gut, so I'm skeptical. Anyone have any experiences with this type of investing?

For what its worth, I did some googling and people seem to have mixed responses, so it's not very useful.

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Joined Sep 2006
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#2
What do the sales people say versus the non-sales people?

Be careful about the assumptions for returns because even a 1% annual difference in assumptions can swing the argument in favor of one investment over the other, and it's not unusual for sales people to make aggressive assumptions in favor of their products.

Google "Forbes universal life" because Forbes is the magazine for people who love money and hate taxes.
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#3
If you want to invest in their funds, just find similar publicly available ETF's and invest in that.
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#4
Quote from Ero View Post :
Would like to get some thoughts from folks that are smarter than me about this.
Currently I am contributing max each year to a ROTH IRA and 401K up to my employer's match. All that still leaves me with some money on the table that I'd like to have grow (rather than sit in a savings account doing nothing).

One thing that was presented to me by a large financial company was universal life insurance, which as they explained is a life insurance policy that you can 'overfill' and invest the excess. Then when you retire, the 'Basis' is withdraw-able tax-free and earnings are regular income taxed. So similar to a traditional IRA I guess? The projections (and past performance) they showed me were astronomical. And of course there's the life insurance portion of it.

Something about this seems "too good to be true" in my gut, so I'm skeptical. Anyone have any experiences with this type of investing?

For what its worth, I did some googling and people seem to have mixed responses, so it's not very useful.
I am in my mid 50's with a teenage son (whom I have full physical and legal custody of from previous marriage) and chose to further diversify my retirement with a Universal Whole Life Policy. I stress 'further diversify' as I already have an IRA, ROTH IRA, 401k and Fine Art; all of which i intend to utilize in my retired years.

In case of my death there is always that benefit for my son, but my intentions were focused on taking a steep 10 year premium payment schedule, where I would no longer be making payments when I am retired. I am pleasantly surprised at the speed and growth of the cash value after a few years. Sure, like most policies the premium is very front loaded, but I find that was mostly in the first year and since then I am seeing real jumps in cash value and the yield has consistently been at 5.50%+ for the past 3 years. The cash value gets put on top of the base death benefit so I am not feeling like I am getting ripped off if I do unexpectedly die; while my real plan for this policy is to tap the non taxable cash value when I do retire.

So, in addition to my ROTH IRA I will also have this non taxable asset waiting for me when i stop working (as the thought of paying taxes on 401k and regular IRA assets irks me).

Everyone's scenario is unique and this is by no means fit for everyone. just sharing my take.

Good luck!
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-Adam
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#5
avoid it the fees will kill you

http://money.usnews.com/money/blo...e-policies
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#6
In short, avoid universal life insurance. The salesmen are not showing you the whole picture. The returns are not astronomical, but the fees are.

Here is a more detailed explanation [clarkhoward.com] as to why universal life (and indexed life insurance policies in general) are a bad deal.

So, if you're looking for life insurance, then stick with level term. But, if you're looking to invest, then do just that - invest.

Instead, have you considered contributing even more to your 401(k) - past your employer's match and on up to the max?
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#7
Quote from tiedyed1 View Post :
... the thought of paying taxes on 401k and regular IRA assets irks me ...
Why? You've already paid taxes on money you invest anywhere else. Are you expecting to be taxed at a higher rate in retirement than you are now?
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#8
I know people that push whole or universal life. They make almost their entire commission (which is their salary) on these policies. That alone should show you how many fees are in these guys.

One of my buddies sells this stuff and without going into how it all works he just told me it is good for people who make a lot of money and already have their retirement and investment accounts fully funded.

At any rate, I've been told by him and numerous other insurance salesmen that a term life policy is best suited for almost all people.

What I've found personally is that very few people understand life insurance. Some people think that all death should be compensated by a plan. If you have good cash assets and cash flow available at the point of death then it is likely an unnecessary plan. You only need life insurance to cover your life while your income is valuable and necessary to the household as it pertains to expenses. This is why term life is quite perfect for most people. By the time the term expires (lets say 30 year life added to a 30 year old), the term will expire at 60 years old when presumably expenses are low (no house payments or car payments) and the necessity of your income is minimal or non-existent.

I hear people all of the time saying they have a million dollars of coverage at which point they think a death equates to a lottery for the survivors. Yes the life insurance should cover the cost of living for the survivors but at what standard of living and for how long? Everyone has their own equation.

The less you depend on an income, the less important life insurance becomes on that individual. As you get older the value of life insurance should be minimal -- of course not everyone handles their finances appropriately and needs to maintain life insurance in their later years at a premium.

I almost always see more value in a Vanguard account than a whole life/universal life account. But to each their own.
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#9
If you need life insurance, buy term.

If you need tax advantage investments, buy tax advantaged investments.

Max out contributions to your employer plans, yes even exceeding matching contributions. Max out your Roth IRA's, Max out any spousal contribution limits to Roth IRA's, Look at Municipal bond offerings, REIT's and a host of other tax advantaged security offerings.

Only when all other options are fully explored and funded should you consider cash value insurance or annuities.
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#10
Quote from Brian1 View Post :
In short, avoid universal life insurance. The salesmen are not showing you the whole picture. The returns are not astronomical, but the fees are.

Here is a more detailed explanation [clarkhoward.com] as to why universal life (and indexed life insurance policies in general) are a bad deal.

So, if you're looking for life insurance, then stick with level term. But, if you're looking to invest, then do just that - invest.

Instead, have you considered contributing even more to your 401(k) - past your employer's match and on up to the max?
What a useless article from Clark Howard! As a holder of a large Universal policy (sold me by my own mother) I was interested in possible downsides. The article has no actual info, just the same thoughtless, unsubstantiated crap I always hear. Yes these policies are complex, yes the salespeople get good commissions (so do car salespeople, and TV salespeople, and...). But as with any product there are benefits and costs that will weigh differently for everyone.

Do your homework, have an emergency fund, invest in 401k and ROTH first, etc but these policies vary A LOT so any over-arching sentiment is going to be wrong.
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#11
I was on the fence when obtaining life insurance a few years ago. I ended up splitting the insurance value I wanted between term and cash-value and while I hated to look at what the value was worth in the year/2 after it was taken out, I am happy to see it gaining much more quickly now. With the market this year I don't know if the gain will be as good.

I will make the annual payments on the cash value for a few more years but once it becomes a financial burden I will opt to stop (maybe sooner than later if I decide to move out of Northern VA to live a more rural, slower paced life with my new daughters down south).

I choose to diversify my saving allocations with the thinking that I may want to take a tax-free, fee-free loan out in my mid/late 50s to get an early start on my retirement house. I wanted a source of income that wouldn't affect my retirement money but would limit the tax implications. Who knows, maybe at that point I won't want/need it but it will be nice to have it. I also plan to keep that policy in place (I realize taking a loan will reduce the insurance value) long after my term policy is cancelled/up which will provide a little benefit to my wife.

There is a lot of negative thinking/information out there in regards to CashValue insurance that is probably more true than not, but for my situation I'm happy with it.
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#12
Quote from eekthecat View Post :
One of my buddies sells this stuff and without going into how it all works he just told me it is good for people who make a lot of money and already have their retirement and investment accounts fully funded.
Thank you everyone for your input. I think this really sums it up for my situation. I'm maxing out my IRA contributions, but certainly I could stand to contribute more to my 401k (right now I'm maxing out the match, but not more). At that point if my income can hopefully support it, I'd look at this as a last resort.

Quote from mr3putt View Post :
If you need tax advantage investments, buy tax advantaged investments.

Max out contributions to your employer plans, yes even exceeding matching contributions. Max out your Roth IRA's, Max out any spousal contribution limits to Roth IRA's, Look at Municipal bond offerings, REIT's and a host of other tax advantaged security offerings.
Definitely sounds like I also need to research other tax advantage investment options. I honestly did not realize there were that many options!
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Last edited by Ero October 26, 2015 at 05:48 PM
#13
Personally, I would go term life insurance and invest more into your 401k.
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#14
Can one of you guys/girls suggesting term life explain the benefit to me? You're putting $ away, paying a policy for 20,30,40 years, and then if you don't use it, lose all of that money you've been paying. Why get Term over whole life at that point?
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#15
Quote from Ero View Post :
Can one of you guys/girls suggesting term life explain the benefit to me? You're putting $ away, paying a policy for 20,30,40 years, and then if you don't use it, lose all of that money you've been paying. Why get Term over whole life at that point?
Because the only benefit that salespeople tout on whole life is the investment benefit of cash value for the policy. But there are better investment choices IMO.

Most people get very very confused about what life insurance is and how to apply it for their lives. You don't need life insurance your entire life. You really don't need it pre-family and you shouldn't need it later in life. Most people get term life (30 years very common) at around 25-30 years of age. I purchased it when I had kids as that's the first time people without the ability to provide income RELY on my income.

So let's just use 30 years of age to start. A plan lasts 30 years at reasonable prices. In this example term life expires at 60 years. At this point in one's life the insurance should be not useful. This is around retirement and normal circumstances would say you don't have dependents to take care of. Your cash from investing should be high and if you were to perish, what does life insurance do for your estate at the time? Now, if you live life without making great strides life insurance could help family later in life but on a reasonable course of action it should not.

The cost comparison alone is justification enough. Don't look at it as money lost versus a cash value -- That's the salespeople's ENTIRE plan to get you to think about whole life. Remember they make a lot of commission on these plans. You are BUYING protection, that is the value and it has tremendous value if you have family that depends on your wages. I think the one thing that the salespeople neglect to mention is that the same thing occurs within whole life. They take out costs to cover the plan coverage so you are still paying for the life insurance but are also "investing" on top of it. I almost see it as a mask to cover what it actually costs. But do remember, it is expensive.

Hope that helps.
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