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Author: KBecks Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 17931  
Subject: Let's talk Equity Indexed Universal Life Date: 9/28/2013 1:09 PM
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Hi Insurance Board Friends,

I have been listening to the advice of a real estate investor who recommends Equity Indexed Universal Life. I would like to learn more about these products.

Here's how I understand some of the benefits:

--Returns are linked to the S*P 500 but there is a cap on max return

--There is also a guarantee, if the S&P goes negative, you do not, your value does not decrease

--The money is tax-free for withdrawals in retirement

--You can take a loan, and you don't have to pay the loan back.


Here's also what I am thinking
-- I would want to fund a ROTH IRA first -- you withdraw from ROTH tax free

--after that the EIUL might be good.

--or you could invest in a taxable account.

The downside to EIUL sounds like the payments are high and you have to make payments consistently, there may not be much flexibility.

Here are some articles:
http://www.biggerpockets.com/renewsblog/2012/12/20/interest-...

http://www.biggerpockets.com/renewsblog/2012/12/06/why-purch...


The main benefit of EIUL sounds like the tax advantage.

Any comments? I would appreciate knowing more about how much these policies cost. I am also starting to learn about SOLO 401k

Thanks!
Karen
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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17811 of 17931
Subject: Re: Let's talk Equity Indexed Universal Life Date: 9/28/2013 11:30 PM
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The main benefit of EIUL sounds like the tax advantage.

I would disagree.

The main benefit of an EIUL is the commission to the seller.

Insurance is not an investment. Buy an S&P 500 index fund instead.

--Peter

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17812 of 17931
Subject: Re: Let's talk Equity Indexed Universal Life Date: 9/30/2013 2:46 PM
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Hi Karen,

I have been listening to the advice of a real estate investor who recommends Equity Indexed Universal Life. I would like to learn more about these products.

I've studied these probably in more depth than anyone here at TMF (at least so far.) If we leave aside the positive sales bromides and outdated negative fallacies (mostly assumed from behaviours of old whole life type contracts,) the facts are different from what most here will tell you.

I'm a former hedge fund trader, so I know a little bit about securities, derivatives, and risk management. I am also a real estate investor with a portfolio of 9 doors (at present.) I also have my own family money in managed securities accounts (which is the anti-christ for many folks here,) and yes, I own IUL contracts (which is *WORSE* than the anti-christ among many here ;~)

I *LOVE* the stock market....
I *DO NOT TRUST IT* with passive account money.
(You may feel differently... but what follows is my perspective from my own direct experience of how the markets work when money is left unprotected.)

The design of principal-guaranteed accounts is nothing new. Principal guarantees are simply accounts where the provider guarantees you will not lose your money (principal,) and they make good on it by a combination of safely held cash reserves, and/or additional insurance they carry on their accounts to fulfill on the guarantees. Banks offer principal guarantees on certificates of deposit, and insurance companies offer it on certain types of annuities and permanent life contracts. Securities firms can offer it, but rarely do.

The IUL contract design was created about 15 years ago, so relative to many other investing strategies far fewer people know about them. (In contrast, the 401k plan was enacted into the IRS code in 1978, and didn't begin to be widely accepted until the mid-to-late 1980's.)

There are *MANY* around TMF who very aggressively misunderstand them (with apparent intent. There is little capacity to understand how they actually work among some of the most vociferous here. Weigh your responses to your questions about this very carefully... are the responders pushing risk for the sake of risk (i.e. 'you can't make profits unless you are willing to lose money'), or are they responding with relativity to the actual safe performance features of alternative principal guaranteed strategies.

A few notes;
--The money is tax-free for withdrawals in retirement
--You can take a loan, and you don't have to pay the loan back.


Technically, withdrawals and loans are different things (though functionally, they are both ways to access your accumulated cash value.)

Withdrawals actually reduce the internal principal balance, which permanently reduces the permitted tax sheltering feature of the life contract (per the IRS rules.) Once cash is withdrawn, it cannot be re-deposited to the contract without the insured person being required to requalify physically (which is often not a great idea after years of life have passed.)

Loans do not reduce the internal principal balance, since you are not borrowing your own money, but rather using your own principal as the collateral to back the amount of the loan (again, just a bookkeeping difference, really.) By using a loan instead of a withdrawal to access your values, you maintain the potential to either repay the loan if desired, or keep the originally structured death benefit if desired.

The downside to EIUL sounds like the payments are high and you have to make payments consistently, there may not be much flexibility.
Actually, IULs are incredibly flexible *RELATIVE* to similarly safe alternatives... principal guaranteed accounts offered by banks or securities firms. You need to always compare apples to apples.

If you don't mind some part, or all, of your growth capital at risk of loss to the markets, there is much greater flexibility available. If you want market participation without market loss risks, you have to compare the account strategies that offer that.

The main benefit of EIUL sounds like the tax advantage.
Its one advantage... but not the most powerful advantage, IMO.

More powerful advantages (compared to equally safe alternative strategies) are;
1. Periodic Resets; The ability to have your principal guaranteed against loss, *AND* have your gains recharacterized as principal (and thereby added to the guaranteed-against-loss balance) each given period. This creates an 'upward gain ratcheting' effect.
2. The life insurance companies that offer these have a 3-5% advantage in their general accounts (where they hold their guarantee-backing reserves.) This tends to give them a huge advantage over banks that offer index-linked CDs, and securities firms that offer index-linked, principal guaranteed products (called 'structured products' and variable life & annuity contracts with guarantee riders... the latter of which are exhorbitantly expensive.)

TWO REAL DISADVANTAGES;
1. You (or someone you have appropriate insurable interest in) must physically qualify to be covered. IUL companies can't give you their internal cash value performance features unless someone is covered by the minimum amount of life insurance required by the IRS code,
2. Although your growth compounds without periodic losses, you also have periodic market gain caps. This is analogous to playing a game of baseball where you can never strike out at bat, but any time the market flies over the outfield fence your batter is required to stop at 3rd base. In this IUL account you'll never get the thrill of the homeruns, but you'll always have undefeated seasons. Some people can't (or don't want to) let go of the hope for home runs, even if it means they can never lose.

I would appreciate knowing more about how much these policies cost.
IULs costs are front loaded, and decline steeply over time, which is one of the reasons why they make the most sense for plans that extend for at least 10-15 years forward. Since the actual costs drop steeply over time, the average of the annual costs drop as well. At around the 20th to 25th year, the average annual costs drop to about 1% or less.

In contrast, principal guaranteed securities account generally have no front-loded costs, but average 2%-4.5% every year, forevermore. Principal guaranteed banking products fees are usually lower, *only* in the 1.5-3% range, every year. Of course, both are fully taxable, unless held in a ROTH (which is not impossible.)

Hope that's helpful.

===================

Hi Peter,

The main benefit of an EIUL is the commission to the seller.
If that were true, then the sellers of principal protected securities products benefit 2-5 times more than IUL sellers (at the client's expense, of course.)

Insurance is not an investment. Buy an S&P 500 index fund instead.
Insurance is insurance... and cash growth sheltered by insurance is cash growth. Banks offer it (insured,) securities firms offer it (generally uninsured,) and life insurance companies offer it (insured.)

By definition, an "investment" is exposed to market loss, so technically the phrase "insurance is not an investment" is accurate... It equally applies as 'CDs are not an investment' and 'Principal-guaranteed wrap funds are not an investment.' But as an attempt to discourage the use of principal guaranteed accounts specifically offered by insurance companies, its just misleading.
If the argument is that protecting some or all principal against market losses is a bad idea, that's a different point. It has nothing to do with insurance (regardless government provided FDIC, or life company provided reserves insurance.)

The apples-to-apples alternatives for principal protected strategies just don't match up for performance, at present.

Cheers,
Dave Donhoff
Leverage Planner

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17813 of 17931
Subject: Re: Let's talk Equity Indexed Universal Life Date: 9/30/2013 5:47 PM
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Karen: You may wish to (and probably should) read the long thread at the Retirment Investing board that began at post 72004:

http://boards.fool.com/hi-gang-wow-30635088.aspx

And some related threads that followed.

Regards, JAFO

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17814 of 17931
Subject: Re: Let's talk Equity Indexed Universal Life Date: 9/30/2013 7:17 PM
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Karen: You may wish to (and probably should) read the long thread at the Retirment Investing board that began at post 72004:
http://boards.fool.com/hi-gang-wow-30635088.aspx


ABSOLUTELY agree with JAFO... and that particular community is the perfect case in point. That particular board is *heavy* with people who love market risk like hardcore gamblers, and can't comprehend structuring to avoid it.

As I warned, watch the opinion biases, and watch when the argument tries to sell the benefits of risk, rather than standardizing to compare for principal protection against market losses.

Remember my suggestions to screen for bias in regards to market risk as you research commentary. Some folks will go to incredible contortions to avoid straight comparison of market safe strategies.

Dave Donhoff
Leverage Planner

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