After meeting with a financial advisor for a large life insurance/wealth management organization, I am starting to see the benefits of a permanent life insurance policy. I am 35 years old, make over $100,000 annually, max out my 401(k) match at work and max out a Roth IRA. I do not have a need for the death benefit as I already own plenty of term. I was looking at overfunding the whole life policy right up to the point before it becomes a modified endowment contract. Is this a good alternative to save and grow my extra cash, especially as a conservative option within my portfolio? I was starting to get sold on the flexibility because of its tax-deferred growth, the policy loan options, and the ability to use the cash value as collateral. Is this a good idea?
Most of the time when I see questions like this I answer no- but you do sound like the ideal person to look at permanent life insurance. I call this strategy the Rich Person Roth.
If you are looking to build up cash value check out universal life- they typically have better returns/interest rates compared to Whole Life.
Dear Investor,
Take a read at some of these links:
https://www.forbes.com/sites/davidrae/2018/09/20/rich-person-roth/#10ffe4c571fe
https://www.nydailynews.com/life-style/4-reasons-life-insurance-policy-retirement-article-1.3291723
Here is the thing.... It is all based on what is best for you! Its not a matter of opinion, but a matter of facts based on math and science. The truth is a life insruance contract with a GOOD AAA rated carrier, that pays dividends! can be awsome! I own a ton of it myself. There are only 3 places in the current tax code that allow for tacx free growth. Muni's, Roth, and life ins.
Who is the company that the rep you talked to represent? Lets talk happy to help
Best,
Brett
It would not be my recommendation. It does allow you to invest more tax-deferred today, but you will eventually need to pay those taxes should you ever access the funds. More and more I am seeing very successful executives end up with too much money in tax-deferred vehicles in retirement, and they find themselves in just as high of tax brackets as they were in when they were high earning executives. If you put it into taxable investments, your only taxes are capital gains when sell the investments and the same stays true when you retire. For many of my successful clients, they are thrilled to pay capital gains taxes in retirement because it is meaningfully less than they are being forced to pay on IRA and other tax deferred withdrawals.
So glad you asked this question. Run, don't walk, away from this deal.
I think you are being misguided by an insurance product salesperson who is not a fiduciary financial advisor. If they were a fiduciary, they would be obligated to always act in your best interest. Instead, they are motivated by a healthy commission, made more so by overfunding a policy. Additionally, first and foremost, any sale of life insurance must be predicated by the NEED for life insurance. By your own comment, you do not need additional life insurance.
I suggest you work with a fee-only financial advisor who is a fiduciary and explore other investment options that may have tax advantages for you. Without even knowing more about your situation, I can suggest that you might max out your 401(k) contribution beyond the match, look into non-commission deferred annuity products for conservative tax-deferred growth, invest in municipal bonds for tax advantages, and/or simply have tax-efficient active portfolio management on your non-retirement accounts. You don't need policy loan options if you maintain an adequate emergency fund and save judiciously for your future needs (or you can even borrow from your 401(k), or after having a Roth for five years make tax free withdrawals up to the cummulative amount of contributions, although I seldom recommend either), and you can always use your investments as collateral no matter how it is invested.
Full disclosure, I am insurance licensed, but this is simply an inappropriate use of what might otherwise be a viable solution to someone else's needs. I wish you well.
I don't think the math works in your case for overfunding a whole life (WL) policy as a conservative option within your portfolio. Insurers are required by regulation to invest assets underlying WL policy cash values predominantly into high-grade bonds and government-backed mortgages. While such asset classes certainly meet your criteria for a a conservative option within my portfolio, the rate of return that's reasonable to expect from such conservative asset classes is 5% +/- over the long-term based on historical performance. The income tax rate on earnings over $100,000 is 24% so the tax benefit of tax-deferred growth in a WL policy would be the 1.2% of the rate of return that you would otherwise have to pay in taxes (i.e., tax friction). However, cost of insurance charges and policy expenses in a WL policy (i.e., product friction) will likely be close to 2.0% on average over the long-term and usually much more over the short-term because costs are typically front-loaded. In other words, the after tax-friction rate of return from an investment in a taxable mutual fund would be 3.8% or more if a portion of your return were in the form of capital gains, whereas the after product-friction rate of return from a WL policy would be only 3.0%. Of course, if costs in the life insurance poilcy are lower than 2.0%, then using an overfunded life insurance policy could be good alternative for conservative option within your portfolio. Ask your financial advisor for a Veralytic report on their product recommendation. Veralytic reports reveal actual internal policy costs so you can determine if the product-friction is less than the tax-friction in your case.