If anyone has any opinions on this type of whole life insurance policy for the purpose of setting up retirement plans, or college funding plans, or whatever, please let me know.

Some of the key concepts from the book "Bank On Yourself":

Policy should be from a life insurance company that meets all of these requirements
a) Dividend paying whole life
b) Offers flexible paid up additions rider (PUAR)
c) Non direct recognition, so your policy grows at the same rate when you borrow against your cash value
d) Insurance company must have great long term track record of paying dividends
e) Insurance company must be very strong financially, as determined by independent rating services.

They set you up with a plan that is guaranteed to grow by a contractually minimum amount every year. 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.
The plan is set up to withdraw the money after you retire and is tax free.

You have to fund the plan a certain agreed upon amount every month.
Only a few insurance companies offer the plan. It’s a whole life insurance dividend paying policy. They add a paid-up additions rider (PUAR). This accelerates the growth of the cash value in the plan. Your monthly premium is divided into two parts. 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”.

The paid up additional rider buys a small amount of insurance and even if the insured died soon after the premium was paid, the company has already collected enough premium to cover much of the cost of the death benefit that it purchased. The IRS determines how much of the paid up additional rider premium can go into any given policy, which can’t be exceeded, or you lose the tax benefit that a life insurance policy has.
Under current tax law, dividends left in the plan are not taxable. Dividends you withdraw are not taxed until they exceed your cast basis, at which point you can switch to borrowing your cash value with no taxes due on policy loans.

When you borrow (use) money against the cash value, the money doesn’t actually come out of your policy. It comes out of the company’s general fund. Loans they make to any source will ultimately increase the cash value of all policies, including yours.

The missing piece (to me) is what the insurance company is investing in over time, to create all of these compounded gains.

Does your friend work for Northwestern Lif?

Regards, JAFO

Whole life eats it, period. If you need life insurance, you should purchase term life. If you want to invest, you should use Vanguard or Fidelity. If you want to go broke early in your retirement, you should follow the recommendations of insurance salesman, who frequently pretend to be financial advisors.

About 25 years ago I bought a whole life policy before I became financially educated. Was told that it was a way for high income earners to save tax deferred. IF I could do it over again, I'd buy term insurance and invest the difference.

The only thing that makes me feel OK about buying, my surrender cash value is now more than my total premiums paid. So I tell myself that I'm now getting "free" insurance.

JLC

The only thing that makes me feel OK about buying, my surrender cash value is now more than my total premiums paid. So I tell myself that I'm now getting "free" insurance.

But if you take out the cash, you will get to pay income tax on everything greater than your premium total. Something I expect the insurance sales person glossed over.

Gordon
Atlanta

A couple of things:

Does it seem too good to be true? It probably is. It sounds too gimicky.

For me, a key phrase is: If they make money, they pay a dividend to your plan.

This is almost always a statement made in annuities too. I just don't trust them to overpay themselves or overspend themselves on themselves.

Use Term Life if you feel you need insurance, through a nationally recognized firm. Your money (and return) would be better invested on a mix of index funds/ETF's IMHO, as mentioned Vanguard or Fidelity.

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.

This foolish community is invaluable. Thanks for all the input.

No, I don't need life insurance. I have a $170,000 term life insurance policy through the state where I work that costs me about $100 per year. My wife has a similar policy through the county where she works. We don't need life insurance.

I think the planner's mouth watered while helping me find potential colleges for my oldest son when I told him about the money I had in retirement plans, and in my personal stock fund. He wanted me to withdraw or sell all of my stocks to shield them, so they wouldn't be considered as assets when I filled out my FAFSA form. And of course, he recommended shielding them by putting them in this whole life policy or Bank on Yourself plan (which I didn't realize what it was at the time).

Thanks community, I'm not stupid. I just wanted validation for what I already know I'm planning to do.

No, I don't need life insurance. I have a $170,000 term life insurance policy through the state where I work that costs me about $100 per year. My wife has a similar policy through the county where she works. We don't need life insurance.

You don't need the whole life but you may want to consider new term life. Can you keep your term life insurance if you leave your state job or your wife leaves the county job? If not, you may have a health condition that makes term life expensive if you leave your jobs. With a term policy outside of your employers, you are free to move to other jobs without concerns about losing your life insurance.

I think the planner's mouth watered while helping me find potential colleges for my oldest son when I told him about the money...

Why do you refer to him as a "planner"? Do you refer to your local auto dealership person as your "Transportation Consultant"? Insurance people only care about "planning" or "advising" to the extent it sells their company's products. They are sales reps.

And an easier way to think of whether to give your extra dollars to an insurance company to "invest" for you, is to remember the basic rules of investing in the marketplace that we ALL must follow:

1. No one knows what the markets will do next...NO ONE.
2. Insurance companies invest in the same marketplace we all do. They do so on a larger scale, but there is nothing they can invest in that you or I cannot.
3. Insurers must asset allocate and rebalance just like you and I do
4. Insurers do no have access to taxpayers dollars and they don't print money

So, how can an insurer offer investment value? They really can't. What they can and WILL DO with your extra dollars you send to them is subject it to all manner of fees, expenses and other charges that are impossible for you to see and for which they have no requirement to disclose.

And to the previous poster who commented that after X years, the cash surrender value of the whole life (or other permanent insurance) exceeded premiums and thus you're getting the insurance for free.....this is how the insurance industry wants you to think of permanent insurance....and until all states banned the practice, insurers employed this tactic by showing a 'disappearing premium' in their sales illustrations. What this completely ignores is time value of money. So if you've paid, say, $50,000 in premiums over 20 years into a $200,000 whole life policy, you are 55 years old and the 'cash value' (which may not be the surrender value) of the policy has reached $55,000, your real cost is the (premium - 200,000 20 year level term premium) invested over the same 20 years invested in, say, a broad market index (e.g. SPY) at an averqge annual investment return of 7.5%, which would give you about $95,000 (before tax)...meaning you could have gotten the same coverage from the same insurance company over the same period and today could have almost twice the savings amount...that's the cost of this kind of insurance.

BruceM