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Author: Rayvt Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76079  
Subject: Re: It's Whole Life - not annuities Date: 5/17/2012 8:06 PM
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At the end of the year the company does an accounting based on their activity (income/loss) during the year. If they make money, they pay a dividend to your plan. ...
They'll inform you if they made money, right? Using their own accounting rules, right?
I won't even snark this. It's too obvious what's gonna happen.

Under current tax law, dividends left in the plan are not taxable. Dividends you withdraw are not taxed until they exceed your cast basis.
That's one way of looking at it. Out of the goodness of their hearts, the IRS is declining to tax some of your income. Doesn't pass the laugh test, does it?
Here's another way of looking at it. (It has the added benefit of being accurate.) The IRS doesn't tax your "dividends" because they are not actually dividends. They are just returns of overpayment.

The missing piece (to me) is what the insurance company is investing in over time, to create all of these compounded gains.
There is no magic investment that is accessible to insurance companies but not to individuals. They invest in the same market that you do.

What these policies are is just a variation of whole life insurance. An expensive life insurance policy coupled with a lousy savings account, and they are obfuscating the details so that the marks don't notice what is going on.


You have to fund the plan a certain agreed upon amount every month.
... A portion goes into traditional life insurance, while the other portion goes into the paid up additions rider, which buys a death benefit. Whatever premium you pay in any year is all the premium you’ll ever pay for the death benefit it purchased, which is why its called “paid up”.

Duh! They are describing a standard whole life policy and somehow getting you to believe that it's something special.

Here's what you can do instead of this crappy policy.
I looked up a 20 year guaranteed level term policy for a non-smoking 35 year old male, $500,000 death benefit. $540 per year. That's $45/month.
By way of comparison, Universal Life came in at $2900/year. $2360/yr more.
So, buy a term policy for $540 and put $2360 into a CD. PenFed has a 5 year CD paying 2.00%. Next year do the same thing. Repeat every year.
Now you have a HUGE death benefit ("paid up" each and every year) and an account that you can "borrow" money from at only 2% (plus perhaps a nominal early withdrawal fee).

But, really, this shows how bogus they are and how stupid they think you are. When you go down to your bank and withdraw money from your own account, do you call it "borrowing your own money"?

But they don't give you a $500,000 death benefit, do they? No, it's generally as low as possible, so more of your premium goes into the savings side. Instead of $500K for $540/yr, how about $100K for $108/yr? Now instead of building up the savings account by $2360/yr, it builds up by $2792/yr.

Long story short, you can ALWAYS do better for "setting up retirement plans, or college funding plans, or whatever" by separating the life insurance policy from savings/investment account, instead of smashing them together into one do-it-all policy.
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