Is it a wise decision to invest in an Index Universal Life Policy?
I'm considering an IUL policy. I am 27 years old and want to use it not only as a retirement plan, but as an investment. What is your take on IULs? Do you have one?
First, do you have a need for life insurance? If so, and you can afford it, a IUL can be a good choice. I personally have an IUL because I have a need to provide life insurance, and I like the cash value build up for retirement. With that said, it is not the only thing I have for retirement. The IUL is the fixed income portion of my portfolio and the equity and bond portions are in my 401(k) and Roth IRA. I'm sharing this with you to suggest that the IUL should be only a part of your retirement plan, not your only retirement plan. Also, shop the insurance companies. You want one with easy to understand index accounts, financially sound with "A" ratings or better from A.M. Bests, and with an experienced agent who has been in the insurance business for a while. Good Luck, at your age, if you stick with it, you will experience some substantial compounding and have a nice nest egg in your later years.
This will be a great investment IF you:
- Are in the 33% federal tax bracket
- have maxed out your 401(k) contributions
- can NOT contribute to a Roth IRA because of your high tax bracket
- Minimize the amount of insurance in the policy
- Maximize the amount of investment (but don't go over the MEC limit)
- Have an extremely long time horizon
I'm assuming that is not the case at 27?
There is an order of operations in that list if you were paying attention.
Don't listen to Dave Ramsey or Suzzie Orman about life insurance, they are trying to sell books to that masses earning under the 28% federal marginal tax bracket. The tax benefits of the life policy are very valuable. The Indexing strategy are outstanding on the inside of the IUL products. The participation rates and caps in the life products are outstanding. Check out Tony Robbin's book, "Money, mastering the game" (chapter 5.5, I think). He has a great section in there about how IUL works and what the benefits are to the policies.
Here is what you need to watch out for:the life insurance agent with "commission breath!" He will try to get you to push up the face amount as high as possible to get more commission out of the sale which will minimize the investment instead of maximize the investment. He needs to feed his family next month, and you're his meal ticket! Look for someone that is a Fiduciary and has your best interests at heart to advise you.
The moral of the story is to buy some term insurance that is convertible, if you even have a reason to insure yourself, and convert that policy to an IUL later in life when you've met the 6 conditions listed above. Statistically speaking, it won't happen and you'll end up with a great portfolio of investments to retire on in your 401(k) and Roth IRA.
I wouldn't do it, but it's hard to say if it's suitable for you without knowing more information. Here are some basic economics you should consider when analyzing this:
1) The most attractive feature of life insurance as an investment is the tax-deferred growth potential within the product. Without being required to pay dividend and capital gains tax, the idea is that there will be a less drag on compounding potential. However, this also means that the portion of your future withdrawals that represents investment gains will ultimately be taxed at your ordinary income tax rates.
2) Because of #1 above, life insurance is more appropriate as an investment if the individual has already exhausted each of their other tax deferral methods (like investing in IRAs and other workplace retirement plans, 529s for college planning, Health Savings Accounts, etc.). These other methods are more attractive than investing in life insurance because they typically have lower costs, greater flexibility of investments, and better withdrawal flexibility.
3) Finally, the combination of 1 and 2 above leads me to this; if you've maxed out the tax deferral resources you have and you have enough assets in taxable accounts that you actually think to yourself, "capital gains tax and dividend income taxes are killing me", then it might make some sense to use IUL or an annuity in your financial plan. If you don't say that to yourself, then I'd shift your focus elsewhere.
Of course, these are just general comments for informational purposes only. If you'd like to get into the specifics, feel free to shoot me a message and I'll be happy to provide what I can.
Adam Harding, CFP
No, it's not wise to use this policy as an investment. Don't use any form of life insurance as an investment. Life insurance is not an investment. It happens to be the most economical way to provide money to your heirs. This is because each dollar of death benefit costs literally pennies in premium. But you have to die in order for your beneficiaries to realize that value. What kind of investment calls for you to die?!
If you need life insurance to take care of your family or business, go get the best deal possible on a policy. Then, if you want to save for you kids’ college, or retirement, or to capitalize a business, find the best product to do that. But don't start treating life insurance as the product that will do everything.
Now, there are very wealthy business owners and executives who make great use of cash value life insurance. They are sophisticated financial consumers who have complex portfolios with well-paid professional advisors guiding their moves. But they got to this advanced position only after they kept things simple initially. That's what I think you should do. Let life insurance be life insurance, and investments be investments, while you get your feet wet in financial management. Then you can build up from that.
Good question. Many people ask about life insurance as an investment, and you stated you wanted to "use it not only as a retirement plan, but as an investment." My personal rule, and the advice I give all my clients, is to only buy term life insurance. In my opinion, life insurance is neither a retirement plan nor an investment. Look at the cost of a term life insurance with the same death benefit amount, and then take the difference you were going to spend on the IUL and invest that in a low cost index mutual fund. I think you will find your long term outlook will be much better on the investment side, and the protection that is provided by the life insurance will come at a much lower cost.
Happy to help, and good luck with your investing.
Wyatt A. Moerdyk, AIF®