A friend of mine just spoke to me about buying into a "Global Index Universal Life/Health" Insurance policy is the best way to invest money into my retirement plan. I can invest tax-free dollars towards my retirement and still take money out for my kid’s college, new home or any other purpose if I sign up for this.To explain it further, she recommended me to watch on Youtube(Missed Fortune- Douglas Andrew: Lock and Reset vs The Market.)http://www.youtube.com/watch?v=JSi5_qooDZwAny truth to this, or am I better off with an IRA or 401K?????????Thanks
This sounds like an index annuity. Here is a thread on them from the Annuities board--http://boards.fool.com/index-annuities-26001667.aspx?sort=wh...I am not sure about the universal life portion of the contact you describe. It could affect payout or value of the life insurance you receive.Most annuities are costly to own, and few are ever annuitized. Most owners are not pleased with the results they get. Often the "guarantee" applies only when the contract is annuitized. You get something less if you transfer your money to another annuity.If you are seriously considering one, be sure to check out companies like Vanguard and Fidelity who offer annuities that are must less costly than those sold by insurance companies.Most find a no load mutual fund a better investment but annuities do work for some people. But its the immediate fixed annuity that works best for most. So yes a Roth IRA and/or 401K works best for most. At retirement they can be converted in whole or in part to a fixed annuity for those who want steady income and few worries.
re: CEF'sre: compounding the returns every monthSmells like an annunity sold by an Insurance company. What is the name of the insurance company ? Whose to say the insurnance company will go out of business. The Pru almost went out of business several years ago.You will get pounded if you break the contract with heavy fees. Your better off investing in yourself with CEF's (close-end funds) for income coming in for the rest of your life. You take the dividend check and buy more shares at the end of eacn month all automatic until you decide to stop and let the checks come in.ie....O, BLW, CHY, CHI, EOS, ZTR. There are also FED TAX FREE funds where you get to park 2 to 3 percent into your pocket and not the Uncles (Sam that is).the above can be checked out at etfconnect.comQuillnpenn -
As a financial advisor who represents dozens of well-known insurance companies, thousands of mutual funds, and several third-party investment advisors (wrap accounts), I wish to provide a detailed analytical breakdown of the Global Index Universal Life product, which is NOT an annuity; it is a permanent life insurance policy. As a disclaimer, I am neither an accountant nor lawyer, and I am not providing legal, tax or individual financial advice.Before proceeding to the merits of the Global Index feature, please understand that taxation of a life insurance policy is vastly different from that of an annuity. A non-qualified annuity (one that is not owned by an IRA, Roth IRA, or qualified retirement plan like a 401(k), 403(b), 457, TDA, TSA, Keogh, SIMPLE, SEP, etc.) is tax-deferred. Therefore, the gains are subject to ordinary income taxation upon distribution. Also, distributions are treated on a LIFO basis (last in, first out), which means that the gains in the annuity are distributed first, then the principal (this is not preferable). Moreover, unlike stocks, bonds and mutual funds, whose cost basis is stepped up upon death, the gains in an annuity are subject to ordinary income tax upon death with no step up in cost basis. On the other hand, permanent life insurance policies have many tax advantages over annuities, mutual funds, index funds, ETFs, stocks, and bonds, and even have some tax advantages over IRAs, Roth IRAs, and qualified retirement plans like 401(k). First of all, the death benefit of a life insurance policy is income-tax free. Secondly, in permanent life insurance policies, distributions from the cash value are treated as FIFO (first in, first out; this is preferable), which means that the cost basis, or premiums, of the policy are distributed first, then the gains, just as in a Roth IRA. The gains in a life insurance policy cash value would ordinarily be subject to ordinary income tax. However, the IRC (Internal Revenue Code) allows for policy loans against the cash value of a policy to be income tax-free. Therefore, by withdrawing the entire principal and then borrowing the gains, the cash value of a life insurance policy becomes a tax-free asset. However, this applies only if the policy is not funded to be a MEC (modified endowment contract) and the policy stays in force (meaning the policy owner doesn't distribute all the cash value from the policy). Today, many insurance companies offer wash loans on policy gains after a certain holding period so a policyholder effectively borrows at a zero net interest spread.Next, let's discuss Universal Life insurance policies in general before proceeding to the Global Index Universal Life. Universal Life insurance policies allow for a great deal of flexibility with respect to adjusting a policy's death benefit, premiums, etc. A policy that is optimized for cash accumulation and wealth creation would be designed to have a minimal death benefit funded at the maximum premium the policy would allow in any given year (the maximum premium is based on a combination of TAMRA and DEFRA guidelines created by the IRS). The optimal accumulation style in most universal life policies would utilize the Guideline Premium Compliance Test in conjunction with an Increasing Death Benefit Option. Once a policyholder is done accumulating cash value, to continue to maximize the internal rate of return of the policy, the policyholder should change the policy death benefit option to Level and reduce the death benefit to the lowest the insurance company will allow without affecting the risk class rating of the policy. Of course, this assumes that the policy holder no longer needs life insurance coverage.The cash value of a Universal Life policy accrues based on the type of Universal Life policy. This is where selecting the type of Universal Life policy makes all the difference in future cash values and death benefit proceeds. I will assume that a higher return is preferable to a lower return in the long run while risk also plays a factor in determining the appropriate policy type. There are 3 types of cash value options (for lack of a better word) available in a universal life platform: fixed, index, and variable. A fixed account allows a policyholder to participate in the insurance company's general investment policy (mostly fixed income but also some hedge funds, private equity and publicly traded equities). Because the general account is run by the insurance company, its viability is subject to the credit-worthiness of the insurance company. Variable sub-accounts allow policyholders to select from a menu of investment options managed by professional fund managers. Much like in a 401(k), a policyholder can choose to allocate to any number of equity, fixed income, and money market investment options. And just like in a 401(k), a policyholder's cash value is potentially subject to the market risk, credit risk, interest rate risk, currency risk, etc of the underlying investment options. However, unlike a fixed account, variable sub-accounts are held separately outside of the insurance company and therefore, not subject to the credit-worthiness of the insurance company. Should the insurance company go out of business, the variable sub-accounts will still be in existence, unless the investment managers also go out of business, in which case, the underlying securities that they’ve purchased will still be in existence, unless those underlying portfolio companies also vanquish. An index account is a hybrid equity-linked savings option. At a high level, it allows a policyholder to participate in the capital appreciation of selected stock market indices using pre-defined formulae but with a guaranteed floor and either a cap or participation rate, or both. Technically, it is constructed using a portfolio of Treasury bonds where some or all of the interest, but not the principal, is used to purchase bull option spreads on the selected stock market indices. Because of this construct, policyholders do not participate in dividend gains of those indices. However, they also do not participate in market loss. In essence, a policyholder is giving up large upside potential and dividends in exchange for a guarantee against loss on the index account. An index account is not subject to the creditworthiness of the insurance company, but rather to the creditworthiness of the US government and to derivatives counterparties (aka Wall Street). A plain vanilla index account would typically credit interest based on the annual percentage change in the S&P 500 index subject to the guaranteed floor and either current cap or participation rate or both. As an example, let’s look at an index account with a floor of 1%, a cap of 15% and a participation rate of 80%. If the annual percentage change of the S&P 500 is below 1%, the policyholder receives 1%. If the change is 10%, then the policyholder receives 80% of the 10% change, or 8%. If the change is 20%, the policyholder receives 80% of 20%, or 16%, but also subject to the 15% cap, so the policyholder would receive 15%, in this case. A global index account acts similarly to a plain vanilla index account except that it tracks several stock market indices around the world, giving the policyholder upside appreciation exposure to many stock markets. Moreover, because it is not an actual investment in the stock market, there are no investment management or fund fees that a mutual fund, index fund, ETF, 401(k), etc. would normally have.Out of all the index universal life policies I have personally examined, there is a company (whose identity will remain concealed) that offers a global index universal life (heretofore referred to as GIUL) that allows the policyholder the greatest advantage to date relative to the stock market. By comparing a buy term (assuming extremely low term rates and only retaining term coverage until age 64) and invest the difference approach to this GIUL, this Global Index Account outperforms its underlying indices by 2.18% during the period of 1987 – 2010. The all-in insurance cost of this GIUL for someone who starts this policy in his/her 20s and lives until he/she’s 90 years old is 0.35% per year relative to the buy term and invest the difference approach. This erodes the GIUL performance advantage to 1.83%. Now let’s examine the alternative investment approach. Assuming that someone makes an actual investment in multiple stock market indices mirroring the indices tracked by the GIUL via ETFs or index funds, that person would also be subject to the fund operating expenses of these investments but would also participate in gains. The average dividend yield during the period of 1987-2010 for these indices was about 2.3%. Assuming average index fund fees of 0.5% (I know there are companies that have much lower domestic index fund fees but also remember that international index funds are more expensive to manage), this brings down the actual dividend payout to 1.8%. This is obviously less than the 1.83% GIUL advantage. Furthermore, should these index fund investments not be shielded by a IRA, Roth IRA, or qualified plan, the dividends and realized capital gains will be taxed (index funds/ETFs do make changes from time to time and these changes generate tax consequences). Therefore, for directly held index funds, the performance advantage of this GIUL is even greater. Even if these index funds are held inside an IRA, Roth IRA or qualified plan, this GIUL still has a performance advantage. Furthermore, a GIUL can be owned by an irrevocable trust to avoid estate taxes where qualified plans, IRAs and Roth IRAs cannot (at least not to my knowledge). Finally, GIUL has no market risk. An index investing approach would be subject to market volatility.
A correction to the above post. The index account of an index universal life insurance policy is subject to the creditworthiness of the insurance company as the index account is primarily invested in the insurance company's general account, composed mainly of high quality bonds. The interest generated from the general account is used to purchase derivative bull spreads on various stock market indices.
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