Objective information about financial planning, investments, and retirement plans

Comments

  1. I worked in the life insurance industry for five years and would always cringe when I would see reps sell these as retirement vehicles when that’s really not what they’re meant for. There are so many other options available out there, but I think many times (not always though) the rep is just selling something to someone that is not as informed as they should be.

    • Roger Wohlner says:

      John thanks for the comment. I am a fan of life insurance, but like most other products it has a core usage and that is to provide a death benefit. When reps start to invent “new and better” ways to sell more of it often this is not in the best interests of those being sold to.

  2. Good post, I thinking sharing examples like yours will help people understand that there is a dark side to what the sales people are saying! I have a life “rule” to not combine financial products that serve completely different purposes, because typically one if not both of them do a poor job. So I avoid permanent insurances in favor of a separate term policy and a separate investment. This way I can pick the best policy and best investment to suit my needs and then not have to change both when my life changes!

    • Roger Wohlner says:

      Thanks Andrea well said. I totally agree about not combining financial products. Many folks need life insurance for a death benefit, but I’ve rarely seen an example of life insurance being a good investment.

  3. Mohit Thakur says:

    Yes agree with you guys. I also find the post very valuable. It will really help people to understand the value of insurance. Well its not all about some particular insurance I think all insurance is plays very important role in our life. People should know about the major and important parts of insurance. It is the one of the must thing to buy life insurance.

  4. Ryan says:

    I agree with you that life insurance should not be used as a retirement savings vehicle in most situations. But with high income earners who aren’t eligible for Roth IRA’s and are already maxing out their employers retirement plan I think life insurance can be a solid addition to their retirement savings. I too have seen the “familiar song” you mentioned above, as a matter of fact, I see it all too often but that doesn’t mean it cannot be a good “investment” in certain situations. In general I am a buy term and invest the difference type but I would encourage all planners to look at over-funding(up to the MEC limits) Univeral Life Insurance for high-income clients.

    • Roger Wohlner says:

      Ryan thanks for your comment, I agree. No solution or product is right or wrong all of the time, that’s where a qualified advisor can add value.

  5. this is a great article. i wish more people would talk the truth about this type of life insurance. always best to buy term insurance and invest the rest in a tax sheltered vehicle.

  6. Mr. Wohlner attempted to answer the question: “Is life insurance a good idea as a retirement saving vehicle?” I was very excited to read this article, but was equally disappointed by the was roger prove his point. I am relative new to this industry and do respect anyone who has a CFP designation. However, the case study he used to prove his case was bad, and more a reflection of a bad advisor not a bad strategy.

    For example, anyone who is using insurance as a retirement plan should not focus on the death benefit. A DB of 2 million was the wrong place to start. Also this client is in his late 40s, probably 49, so the mortality cost would be very high and therefore consume premium needed for cash accumulation. If that client needed that level of protection he should have taken a policy designed for that.

    The fact that the policy did not deliver should not be a reason to disparage the strategy. Insurance agents use suitability standards and so like any other investment, the product has to be suitable.

    One of the basic questions a financial advisor should ask a client is ” what are you trying to achieve?”

    • Roger Wohlner says:

      Thank you for your comment Orland. In my opinion the client (who as I indicated purchased this policy before he was a client) would have been far better served in trying to meet his objectives by looking at other retirement savings vehicles as opposed to the life insurance policy. While the level of the death benefit was appropriate given his situation, there are better vehicles to have provided for this. As a financial advisor, life and other types of insurance are valid planning tools, I am just opposed to life insurance sales people who feel that selling a policy is the solution for all financial problems. Sadly In encounter this situation far too often.

  7. Bobby says:

    Roger (and everyone else),

    What do you think about using Index Universal Life for retirement. From my understanding it is a great product. Not for everyone but great for some. From what I’ve read the biggest benefit is maintaining control of the retirement funds. The idea being that all access to the policy would be through loans (wash, or cost near .1 percent) with no penalties or taxes. Apparently the product uses options on an index so the client either gets nothing, or they get what the index produces, up to a cap.

    • Roger Wohlner says:

      Bobby thanks for your comment. In general my answer would be that I’m not a fan of this approach, but as with anything I’d have to take a look at the particular policy and the situation to which it is being applied. In general I’ve found that using life insurance as a retirement savings vehicle is not a sound approach.

  8. Steve says:

    A very good article with a very interesting heading- Life insurance as a retirement saving vehicle- a good idea ? Well, pretty good. When one is in service he/she should plan his financial planning, investments and retirement plans. And its a wise decision indeed. These policies provide very optimistic investment assumptions.

  9. If you are a corporate employee in mid to upper management you might have access to supplement non-qualified plans. These allow you to defer extra amounts over and above the limits of the 401(k).

    • Roger Wohlner says:

      Thanks for your comment. Non-qualified plans can be a viable option but employees must be careful not to over do it due to the fact that these plans can be subject to the claims of creditors should the company experience financial trouble.

  10. Florida Investor says:

    I’m getting invitations to buy a “Retirement Insurance Contract” The selling point is you never lose principal – if the S&P goes up, your investment grows with it. If the S&P goes down, your investment does not go down at all. It is presented as a safer retirement alternative than an IRA or 401K. Is this just a new “gotcha” scheme?

    • Roger Wohlner says:

      Thanks for your comment. Sounds like some sort of cash value policy or perhaps even an Equity Indexed Annuity where you receive a portion of the gain of the S&P 500. These can seem attractive and are often sold by agents playing the “fear card.” I can’t say they are all bad or scams, but suffice it to say there are no free lunches and the agent likely makes a bundle selling them. A qualified financial advisor could likely help you set things up to get the income stream you are looking for with an appropriate amount of risk. ALWAYS dig into any financial product pitch. Frankly planning should be the first concern long before implementation via any financial or investment product is discussed.

  11. Florida Investor says:

    In your article, you suggested a “LOW COST, NO SURRENDER variable annuity such as those offered by Vanguard” Would that be an immediate variable annuity or a deferred variable annuity?

    • Roger Wohlner says:

      I don’t do much with annuities, typically I get involved if a client has an annuity that I feel should moved to a lower cost vehicle. I have not really investigated what Vanguard offers in terms of their immediate annuities so by default my comment was directed to their deferred VAs. If you are not working with any advisor take a look at their site and if you have questions call their 800 number I’ve generally found the folks on the other end of the phone at Vanguard to be knowledgeable and helpful. Good luck.

  12. John Lawrence says:

    Roger,

    While Life Insurance is a “Great Evil” amount financial planners, I believe the critique of the article is not totally unfounded. I am in the life insurance industry and have seen many people with poor life insurance planning. However; these were not all caused by bad agents. Many were not working based upon a number of issues, one being the clients saw cash value in their policies and stopped paying premium as scheduled and thus the policy got into the trouble. Not all fault with the the Life Insurance or Life Insurance planning.

    You are correct, there are a lot of way one can save money for retirement, however there is a large segment of the population that do not have access to all the available tools due to IRS guidelines. Also, a lot of these current options do nothing but create a bigger tax bill in the future.

    Life Insurance is a tool much like the other options you mentioned, but beyond the death benefit, life insurance offers unique tax advantages and when done properly can help client reach their retirement goals.

    John

    • Roger Wohlner says:

      John thanks for your comment. First of all I don’t at all view life insurance as evil, quite the contrary I view it as an essential part of the financial planning process for many clients. The death benefit can be used to cover the financial loss when a client dies before being able to accumulate sufficient resources for college, to allow for the continuation of a family’s lifestyle, to facilitate the orderly transition and continuation of a business, to cover estate taxes, and many other uses.

      There are even a few cases where the tax benefits can be useful as you describe.

      However, in my experience, all too many life insurance agents and registered reps try to sell cash value policies of various stripes for a variety of uses that might be better served with a different and far cheaper vehicle. In the case that inspired this post it was the fault of both the agent and my client that this didn’t work. This occurred prior to my involvement. However, in reality, life insurance was not the best vehicle to fund this client’s need for additional retirement income.

      Life insurance is a often useful financial planning tool. Quite often all that is needed is a term policy with a sufficient death benefit. What irks me is when a less than professional agent tries to use life insurance where it really doesn’t belong as a means to enrich their bottom line at the expense of a client who doesn’t really understand the full implications of what they are buying.

  13. Thomas says:

    Permanent insurance is needed in more places than it isn’t. People are living longer now than ever before, more and more term policies are coming due with people unable to renew for financial reasons. Now, this is ok in the scenario where it comes due and the family has met or exceeded their financial goals and are now in ideal financial condition. the problem, however, is that scenario has not in my experience been the most common. Its impossible to predict exactly what our future is going to look like. For this reason, I believe it is important to always have at least a small base of permanent insurance (so final expenses will always be covered) and supplement that with enough term to cover “economic loss” which should also include loss of income.

    I’m am an insurance broker, and I have seen an increasing amount of requests to insure 70-80 years who are insurance-less and have medical problems. Trust me, that is not the time to be buying life insurance.

    • Roger Wohlner says:

      Thomas thanks for your comment. As you noticed from the reading the post my issue was not with the potential need for some insurance as you describe, but rather with over zealous agents who sell policies to high earning professionals as a supplemental retirement savings vehicle. Rarely in my experience is the best way to go here.

  14. Well, I would say that most accounts invested in stocks didn’t perform like they were illustrated. However, a VUL invested with the same allocation as a diversified investment portfolio undoubtedly did worse than the average managed account even if the managed account had a 1-2% ongoing commission levied against it that a fee based advisor charges. VUL fees are much higher. VUL’s place the risk management burden that insurance companies would other wise retain in a traditional cash value policy back onto the owner. That is to say the “assurance” portion of an insurance policy is removed with a Variable Life Insurance Product.

    Life Insurance should be treated as fixed income investment that needs to be funded correctly over time in order for the owner to receive the benefit. There isn’t a reason for an investor to pay an ongoing commission (fee based) to have bonds added to a portfolio in order to reduce volatility if steps are put in place through the proper funding of a fixed cash value life policy.

    As for the opportunity cost of tying up a large portion of ones money in the slow growth of a fixed life insurance policy – buy call options on the market. They cost $5 each in commissions and the eanings of the fixed income in life insurance pays for the “time premium” the options have. Now an investor get maximum value from the fees they are charged (through risk management), have maximum upside potential and an absolute worse case scenario spelled out if the market goes to hell (both if interest rates rise and if the market plummets) because of the way options and life insurance work together, while having liquidity to buy assets that fully committed investors wouldn’t have.

    Of course, there isn’t much money to be made by fee based advisors using this strategy when an insurance company invests 85-95% of a person’s portfolio. There isn’t any “alpha” in this strategy…then again, is there anywhere?

  15. Max Rooney says:

    I am a CFP practitioner. As part of my personal financial security plan I use carefully designed (and over-funded to the MEC limit) dividend paying whole life insurance from a top rated mutual company. I use this as a unique asset on my balance sheet to provide supplemental retirement benefits and other living benefits (access to capital) along the way. Carefully designed permanent life insurance can be an excellent addition to a person’s retirement (and overall financial security) plan. The common problem, which you have described in your article, is that most policies (such as variable life, variable universal life, equity indexed universal life) illustrate overly optimistic assumptions based upon hypothetical scenarios that are not grounded or backed-up by a real track record. Furthermore, many of those policies have high expenses and are sold by stock companies who solely exist to turn a profit for stockholders, not the policyowner. A carefully designed (and potentially over-funded) whole life insurance policy from a top-rated and dividend paying mutual company is completely different. The policyowner is a direct owner of the company (versus a stock company) and as a result the expenses are lower and the policyowner directly shares in the gains of the company (via dividends). The assumptions and illustrations of these policies are based on actual (current) performance which includes expense, mortality, and investment experience. They are not overly optimistic, rather, they are reasonable. Manyof these policies, with the best carriers, have lived up to their expectations and illustrated values. Your framework does not apply to the right type of policy from the right company. Unfortunately, much of the life insurance industry (and many companies) are not up to snuff and most of the carriers exist as stock companies versus a client-owned entity which exists preeminently for the benefit of the policyowners (versus stockholders). I partly agree with your comment, “In general I’ve found that using life insurance as a retirement savings vehicle is not a sound approach,” however there are some serious exceptions to this statement. Insurance expert James H. Hunt, CFA (former insurance commissioner of VT, http://www.evaluatelifeinsurance.org/) also knows the value of carefully designed whole life insurance from a top carrier as I have described. Properly structured life insurance is a niche and unfortunately many substandard carriers and products give life insurance a bad reputation.

    • Roger Wohlner says:

      Max thanks for your comment. Your usage for both retirement and living benefits seems sound and well-executed and certainly in your case this seems appropriate. As you mentioned too often the wrong type of policy is used and the agent may not be as knowledgeable as you are and this solution may not applied and/or executed properly.

  16. Great, in-depth article Roger. You make great alternative recommendations that are likely much more favorable than using life insurance as a savings vehicle. Would you recommend term life insurance for the 38-year old dentist to protect his family, business etc and invest his money separately in annuities and IRA’S? Anything else for someone who is that young and has extra money that wants to be aggressive with their investments? If interest rates start to inch back up again, would you then recommend whole life?

    • Roger Wohlner says:

      Thank you for your comment. Obviously every case and situation is different but term life would likely be a great alternative to provide a robust death benefit for the cost to protect his family. Ideally the dentist would have access to a 401(k) or other workplace retirement plan, including perhaps a pension if the business was throwing off enough cash. Whole life can have its uses in certain situations again I wouldn’t say yes or no on a blanket basis. Overall I will admit I’m not a fan of cash value life insurance as an investment vehicle.

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