Index Universal Life Insurance

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Tortoise
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Index Universal Life Insurance

Post by Tortoise » Mon May 02, 2011 2:56 am

I have a question about Index Universal Life Insurance as a tax-advantaged way to save for retirement, and I'm hoping some of you might share your thoughts on it.

My wife works for a small company that does not offer a 401(k) plan or any other tax-advantaged retirement savings plan.  She maxes out her IRA contributions each year but would like to invest more for retirement, in a tax-advantaged way if possible.

One of her relatives is an insurance salesman.  She told him about her situation, and he now wants to sell us Index Universal Life Insurance from his company.  Here's what I know so far about the plan he's selling:
  • Policyholder contributes to a cash account
  • Cash account earns a return based on investments the insurance company makes on the policyholder's behalf
  • Insurance company's investments are ~85% corporate and government bonds and ~15% options (unclear what the options are, but I assume they're something like leveraged stock market indexes).
  • Cash account's return has an upper cap of 12-15% and a lower cap of 1-2%
  • Payments that go into the plan are after-tax dollars, but the distributions are "tax-free" because, instead of income, they are technically loans against the cash account that are not repaid with interest until the policyholder passes away.
  • Cash account is not drawn down (in the usual sense) during retirement.  Nothing is removed from the cash account until the policyholder passes away; at that point, the loans and interest are subtracted from the cash account.
  • Any funds remaining in the cash account after the policyholder passes away and the loans & interest are repaid goes to the beneficiaries tax-free, without having to go through probate.
Are plans like the one above generally considered reasonable ways to save for retirement in a tax-advantaged way after IRA contributions are maxed out and no 401(k) is available?  Or do they suffer from a fatal flaw (e.g., prohibitively high costs)?

Would the tax benefits of an Index Universal Life Plan like the one above make it superior to, say, simply implementing a PP in a fully-taxable account?
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MediumTex
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Re: Index Universal Life Insurance

Post by MediumTex » Mon May 02, 2011 9:26 am

You left out the last step in the process, which is where the life insurance agent takes his wife on a cruise in the Bahamas with the commissions on the policy he sold you.

If you have maxed out your IRAs and still want some tax-advantaged retirement savings options in a PP-like configuration, look at Ibonds.  They are sort of like a Roth IRA (after tax money goes in and builds up tax free until redemption).  You do have to pay tax on redemption, but that can be as long as 30 years from when you buy them.

When it comes to life insurance, don't buy anything except term coverage.  There are virtually always better options for your money.
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moda0306
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Re: Index Universal Life Insurance

Post by moda0306 » Mon May 02, 2011 9:41 am

MT,

Where were you when I signed up for a NW Mutual Whole policy 3 years ago?  The guy was the typical used car salesman, but like you said, he could tell a really good story.

Eff.

Though I chalk the measly $2,000 per year annual contribution and high (this was before the crash) fixed dividend rate as a relatively cheap form of financial "lesson learned" that drove me into the PP.  Could have done a lot worse with my money.
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Re: Index Universal Life Insurance

Post by Tortoise » Tue May 03, 2011 1:46 am

MediumTex wrote: You left out the last step in the process, which is where the life insurance agent takes his wife on a cruise in the Bahamas with the commissions on the policy he sold you.
And here I was, thinking the life insurance agent and I were just embarking on a "mutual value discovery" journey together!

Thanks for sharing your thoughts, MT.  I didn't realize I-bonds were such a good option for tax-advantaged savings.  This forum is definitely worth 25% of its weight in gold.
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