Inventor, Founder, President
Barry D. Flagg is the inventor and founder of Veralytic®, Inc., the only patented online publisher of life insurance pricing and performance research and product suitability ratings. Veralytic is the product of his unique background as both the youngest Certified Financial Planner (CFP®) in history schooled in the investment business, as well as a life insurance practitioner consistently ranked in the top 1% of the industry. His experience in both financial product analysis, life insurance sales and marketing, and his success in managing large life insurance portfolios for affluent individuals and growth companies, brings an unparalleled advantage to his presentations.
Barry is a recognized expert in applying Prudent Investor principles to life insurance product selection and portfolio management having addressed the national conferences of HSBC Bank/WTAS, Ernst & Young Annual Family Office Accounting & Tax Education, Fi360, FPA, Grant Thornton, Holland & Knight, the Academy of Financial Services (AFS), and many of the largest independent distributors of life insurance in the U.S. He has also been published by the ABA, AICPA, CCH Group, Fiduciary & Investment Risk Management Association (FIRMA), and Trust & Estates, cited by ALI/ABA reference text, guest lectured at Leadership Bootcamp for Life Insurance Stewards at West Point, Stetson Law, Texas Tech University and the Wall Street Academy and appeared on national internet radio shows for a number of the largest insurers in the U.S.
Barry is also a Chartered Life Underwriter (CLU), Chartered Financial Consultant (ChFC) and Cum Laude graduate of the W. Paul Stillman School of Business at Seton Hall University. Barry has been on the CFP Board's Disciplinary and Ethics Commission, an adjunct faculty member of the College for Financial Planning, and is a member of the Society of Financial Service Professionals (SFSP), the Financial Planning Association (FPA), the National Association of Insurance and Financial Advisors (NAIFA), the Million Dollar Round Table (MDRT), and the Beta Gamma Sigma National Scholastic Honor Society.
BS, Finance, Seton Hall University
Why consumers need a second opinion Steve Savant's Money The Name of the Game
It depends first and foremost on whether or not you have financal obligations (e.g., a mortgage or other debt, income replacement for a surviving spouse, etc.) or desires (e.g., childrens' or grandchildrens' college education, legacy gifts, etc.) that you need or want to fund even if your not around to fund them. If so, then some form of life insurance may be a good idea. If such needs or wants are temporary in nature (e.g., only until a mortgage is paid off or until college students graduate), then term insurance for a term-of-years that coincides with the timing of these needs or wants may be most appropriate with two exceptions.
#1, If the financial obligation or desire is permanent (e.g., to pay estate taxes or make a bequest), or is at least longer than your life expectancy (i.e., term insurance is only available up to your life expectancy), then a cash value life insurance policy may be a good idea.
Or #2, if your are in a high enough tax bracket that tax savings on tax-deffered growth of the cash values could be more than enough to offset the higher internal policy costs in a cash value life insurance policy, then a cash value life insurance policy may be a good idea.
To determine if such tax savings are more than enough to offset these internal policy expenses, make sure your advisor provides you with a schedule of year-by-year costs that the insurer expects to charge you for the cost of insurance and policy expenses (commonly referred to as the "detailed expense pages" of the hypothetical illustration/proposal), and compare those costs to the tax savings you can reasonably expect (i.e., multiply the "interest credited" column also from the "detailed expense pages" by your expected tax bracket in your retirement years). If expected tax savings are higher than these extra internal costs, then a cash value life insurance policy may be a good idea.
Does all that make sense?
It depends on the titling of the policy and the type of tax.
Generally speaking, beneficiaries do not pay either income or estate taxes on the receipt of life insurance proceeds.
However, if a policy was ever transferred to a non-exempt party under the "transfer for value" rule, then a beneficiary could have to pay income taxes on the receipt of life insurance proceeds.
Also, if a policy is owned by an individual with a net worth in excess of ~$5.5M (indexed for inflation over time) or a couple with a net worth in excess of ~$11.0M (again indexed for inflation over time), then the beneficiary could have to pay estate taxes on the receipt of life insurance proceed.
That said, if a policy is owned by the original applicant (as is usually the case) who's net worth is less than the lifetime exemption for estate taxes, or by a properly structured irrevocable life insurance trust (ILIT), then beneficiaries do not pay either income or estate taxes on the receipt of life insurance proceeds.
Hope that helps.
It depends. All cash value life insurance products offer 4 tax-preferences unique to life insurance,namely: 1) tax-deferred accumulation, 2) tax-free withdrawals of basis (i.e., premiums paid) on a first-in/first-out basis, 3) tax-free distributions via policy loans of what would otherwise be taxable gains, and 4) tax-free death benefits that (IF PROPERLY ADMINISTERED) will repay the poilcy loans. Altogether, these 4 tax-preferences can mimick the tax benefits of a Roth IRA without the limits on Roth IRA contributions.
However, unlike a Roth IRA and your company's 401(k), cash value life insurance product charge premium loads, fixed administration expenses (FAEs), and of course cost of insurance charges (COIs). As such, your question is really a math question. If the tax savings inside an IUL poilcy versus investing taxable investments are more than these costs of the IUL policy versus buying 20-year or 30-year term insurance, then IUL can be advantageous.
However, the costs charged inside IUL policies vary by as much as 80%, so be sure to get from your financial advisor 1) the detailed schedule of year-by-year premium loads, FAEs, and COIs, and 2) a measurement of these how these costs compare to industry benchmarks for the universe of peer-group alternatives. At your age, if IUL is appropriate, then the costs in product offering best-available rates and terms (BART) will be approximately 40% less than such benchmarks.
If your financial advisor is a fiduciary, then they'll already have this info. On the other hand, if all you've been presented is comparison of hypothetical projections, then your financial advisor may not acutally be a fiduciary. Fiduciaries have a non-delegable duty to exercise reasonable care, skill, and caution in their recommendations, which is NOT consistent with guidance from financial, insurance, and banking industry authorities all warning that hypothetical comparisons are "misleading", "fundamentally inappropriate", and unreliable.
Hope this helps.
I don’t agree that purchasing life insurance at a young age is a good idea just because it may be “cheaper”. Paying a lower price now for something that will never be needed is a waste of money!
However, if you're planning for a family within the next few years, and plan to continue working while raising a family, then it could be prudent to purchase life insurance now to lock in lower, younger age rates. Unless you expect to have financial responsibility for loved ones for your whole life, then term life insurance (i.e., life insurance for a term of years) is most often the most prudent type of life insurance for family protection (i.e., because term insurance covers at most half of an insureds life, the cost of term insurance is typically half the cost or less for any coverage duration less than life expectancy). The factors to consider when researching term life insurance to protect future loved-ones against the loss of your earning power are:
- the duration of coverage (e.g., typically 20 or 30 years when children should have graduated from college and/or the mortgage should be paid off or at least substantially paid down),
- the financial strength and claims-paying ability of the insurer that gives you comfort your family will be provided for (e.g., ratings from AM Best, Fitch, Moody’s, Standard & Poor’s, and/or Weiss that rank in the top decile since it is unlikely the government will allow a top-10% insurer to fail – think AIG), and
- the premium (see www.policygenius.com/life-insurance, www.quickquote.com, www.selectquote.com, and/or www.term4sale.com to research term insurance premiums online for free).
If you are considering life insurance as a long-term (e.g., retirement) savings vehicle, then only do so AFTER you’ve maxed out contributions to either a 401(k) Plan if your employer provides one or an Individual Retirement Account (IRA) or Roth IRA if not, and perhapseven a Health Savings Account (HSA) and/or Section 529 College Savings Plan. All these tax-favored savings vehicles provide the same or at least similar tax benefits as life insurance without the cost of insurance that can erode 2.00% on average or more of the interest/earnings you would otherwise receive. So, after maxing out available tax-favored savings vehicles, it could be prudent to consider purchasing some form of cash value life insurance (e.g., universal life, variable life, or whole life) IF your income is both steady and high enough to be subject to higher than average income tax rates AND the earnings you expect from any long-term savings vehicle is also on the high-end of what is typically reasonable to expect.
For instance, if you expect to earn 5.00% on your long term savings, then a life insurance account would only grow by 3.00% on average after deduction of cost of insurance charges and policy expenses averaging 2.00% over time, whereas a taxable investment like a mutual fund would grow by 3.75% (i.e., 25% faster) even if all account earnings were taxed as ordinary income at the 25% rate applicable to individual tax-payers earning up to $91,900. On the other hand, if you expect to earn 10.00% on your long term savings, then a life insurance account would grow by 8.00% on average, whereas a taxable investment would grow by between 7.00% - 8.00% assuming account earnings are a mixture of capital gains taxed at 15% and ordinary income taxed at a 33% rate applicable to individual tax-payers earning up to $191,650. In other words, life insurance can be an effective long-term savings vehicle for those making ~$200,000 or more, who invest in asset classes that have historically produced 10% or greater rate of return over the long term, and when invested assets are taxed as ordinary income more that capital gains.
The type of cash value life insurance policy is mostly a function of your risk tolerance. If you are risk averse, then universal life and whole life products are most appropriate due to their conservative allocation of invested assets underling cash values to predominantly high-grade bonds and government-backed mortgages. If you have a high(er) tolerance for fluctuations in the value of your account, then variable life products could be appropriate since they allow you to direct the allocation if invested assets underling policy cash values among a family of mutual-fund-like Separate Accounts to include more aggressive-type funds like stock funds, international funds, and emerging market funds which have historically produced higher rates of return over the long term albeit with greater volatility along the way. If you have a more moderate investor temperament, then indexed universal life could be appropriate where invested assets underling cash values are still allocated predominantly to high-grade bonds and government-backed mortgages but where interest from those assets can be used to buy options on an equity index like the S&P500 that can enhance the rate of return credited to the policy.
The factors to consider when researching cash value life insurance as a long-term savings vehicle are:
- the financial strength and claims-paying ability of the insurer,
- the competitiveness of internal policy costs, namely cost of insurance charges (COIs), fixed administration charges (FAEs), cash-value-based “wrap fees” (e.g., M&Es in variable life), and premium loads,
- the stability of the insurers pricing representations (i.e., are COIs based on actual mortality experience or assumed mortality improvements, are policy expenses based on actual operating experience or assumed operating improvements, and is expected interest/earnings consistent with the insurers actual historical performance and the historical performance of relevant asset class benchmarks),
- the accessibility to/restrictions on policy account values, and
- the actual historical performance of invested assets underlying policy cash values.
Sort of. While you don't have a right as beneficiary to borrow from the policy, your mother certainly can borrow from the policy as policyowner (unless the policy is owned by a trust ). Your mother can then in turn lend you that same amount. Doing so would (at the risk of stating the obvious) reduce the amount of the death benefit you would otherwise receive on her passing.
I would also consider executing a Promissory Note to document the loan as a loan and not a gift that could be subject to gift taxes and perhaps penalties if the amount of the loan is greater than the $14,000 annual gift tax exclusion. In harmonious family situations, the Promissory Note need not be complicated. Simply address the terms of the note (e.g., amount of the loan, interest rate, period of the loan, repayment terms, etc.). I've seen just a single page Promissory Notes work in harmonious family situations.
The biggest pitfall could be that the loan and/or a majority of the death benefit becomes taxable if your mother lives to age 100.