Permanent Life Insurance

[moda0306]

I've been doing a couple years of continued research now on life insurance.  I figured I'd share some of my discoveries with you fine folks. 

First off, I want to discuss term insurance, because it is, essentially, a HUGE piece of permanent insurance planning, is massively important in and of itself, and has some unintuitive planning opportunities built into it, and absolutely shouldn't be ignored.  So here goes...

Term Life Insurance

Essentially, this stuff can come in various forms, but the easiest split is that of between level term and Yearly Renewable Term (YRT).

Level term, as it sounds, charges you a flat amount over a given period, and is often convertible to permanent coverage. 

- YRT comes in various forms, but the best policies out there start lower than level term but get more expensive over time (not a bait/switch, but simply an accurate reflection of your mortality curve) based on one of several health classes.  You always have the ability to reduce or cancel these policies (as with level term), and they usually will let you convert to permanent coverage all the way out to age 60 or 65, while letting you hold YRT coverage all the way out to age 80 or I've seen as high as 115 (the policy I will be referencing here).  Obviously, at 115 (or even much younger), YRT is very expensive. 

- There is a "projected premium" that you get charged if everything goes as planned.  However, if the insurance company recognizes some unforeseen losses due to the mortality of the people who hold term insurance, they can apply to the state Departments of Commerce (Insurance Commissioner) and have rates raised from the projected rates, as potentially high as the "guaranteed" rates.  However, top mutual life-insurance carriers haven't EVER gone higher than projected rates since their inception in the 1800's.

My initial entry into life insurance left me wondering (and of utmost pertinence to people here), "if I'm going to buy term insurance, which one should I buy?"  This resulted in some spectacular (to a nerd like me) back and forth between me and several life insurance agents and sources.

Essentially, I wanted to know how I could obtain a given amount of life insurance as CHEAPLY as possible and as FLEXIBLE as possible over time. Here's a few options:

1) Buy very short-duration level term (10 year):  Fail.  It's inefficient given the pricing of 10 year term at young ages, and if you're uninsurable at year 11, you can't get coverage.  If you're not healthy, it will be SUPER expensive compared to a policy obtained when at a good health rate.  It's cheaper to just hold a YRT contract for 10 years in many cases.

2) Buy long-duration level term (30 year): Works ok.  You pay a decent chunk for 30 year term over 10 year (especially as you get older).  But you're pre-paying premium for quite some time.  And in many cases, the next option had very appealing break-even numbers.  Something always bugs me about prepaying term insurance with a hard line of elimination of coverage.  For instance, with a 20-year level term policy.  If I truly want $0 of life insurance at year 21, what are the chances I'll still want $1 Million at year 19... why "pre-pay"for it with level term if I'm really barely going to need it?  And vice versa... if I REALLY want $1 Million of life insurance from years 16 to 20 instead of buying a cheaper 15 year term insurance, am I REALLY not going to care if I potentially have ZERO life insurance in year 21.

A plan that more effectively allowed for tapering of coverage seemed to be a better option.

3) Ladder life insurance (Use a chunk of 10, 20 and 30 year term): Pretty cool.  This was my favorite option.  If I wanted $1.5 Million, get $500k of 15 year term, $500k of 20 year term, and $500k of 30 year term.  That way I'm tapering off coverage if I want, but if God-forbid I really want coverage and can't get it, at least I still have a big chunk of remaining life insurance. However, I still thought there might be a better option, since policy fees and short-term policies make insurance less efficient purchased in little chunks.

4) Buy YRT and hold it: as long and to whatever degree you need it Bingo If applied NO TVoM to my premiums, a lot of times YRT policies wouldn't become more cumulatively expensive than 30 year level policies until year 25 or so.  They were WAY less expensive starting out.  This effect is especially true for younger people (25-35) rather than older (45+). 

If I applied a TVoM for the illiquidity of my "overpayment" of term insurance doing 30-year level of 8% or so (not an unfair requirement for ILLIQUID Required Rate of Return), the YRT proved far cheaper.

But you don't hold insurance in a vacuum.  The possibility of wanting to start tapering off coverage at year 15 or 20, or God-forbid CONTINUE coverage past year 30, made YRT even that much MORE appealing.  The cost of $1 Million of Guardian YRT at TOP health rates at age 50 was $1,360 annually.  That is NOT that much, even if it's more than my disappearing 30 year level term at that time.  I believe I'd have to live to age 91 to pay in MORE premium than the $1 Mil death benefit that would pay out, with this policy.  This is how STRONG of a deal this is.  It was a no-brainer to do YRT.  I pay far-less than 30-year level if I want to ditch it early, but if I want to continue the term insurance, it's a steal of a deal.

Further, if mortality improves, my health stays good, rates drop, etc, I can always get a NEW insurance policy and ditch my old YRT policy that's getting more expensive.  I just have to apply and replace it.  As one gets into upswinging term insurance cost-curve, level term usually tended to make more sense, but

There is nothing MASSIVELY fundamentally different about my net worth the day my insurance falls off from the day before, when I had a ton of coverage.  What an inefficient economic tool to generate

But the next question got begged... What's the "cost of waiting" if I drop a health class?

This one shocked me, but it makes sense if you think about it.  Dropping health classes costs you a TON in future premiums.  Depending which class you're jumping to/from, it can cost you almost 30% more from one to the next close one.

This means that locking in health class when young ($40/month for a 27 year old for $1 Million of Guardian YRT) can have huge dominos going forward in terms of saved premium.  Even if it's 1 or 2 health classes down from that top rate, we're talking 10% to 30% on their premiums over decades (when the spreads are growing).  Once you take the NEXT step down in health class to "non-smoker" rates, you're talking a HUGE jump.  A non-smoker will pay about 70% more than an "Elite" health class from 30-49 in term insurance.




Long-story short, loading up on lots of high quality YRT term life insurance early on is the way to go.  It was literally only $40/mo for Elite coverage for myself a few years ago of $1 Mil.  As you get into your 40's, level term is arguably better, but I still have my qualms about prepaying for life insurance I may not want AND simultaneously creating a hard line of potential uninsurability in my life insurance planning.  Plus another reason I'll get into when talking about permanent insurance.

Further, if you know how life-settlement and critical illness riders work, you can usually get cash out of a cash-less life insurance policy by "selling" it to someone if you're sick and have a low chance of making it more than a few years.  This is another topic I can post more detail on.


Permanent Insurance

So now that I've explained to you my love for YRT term life obtained in high doses at a young age, let me get into permanent coverage.  My curiosity for this stuff came when I was 24 and was sold a $180k Whole Life (WL) policy from a Northwestern Mutual agent.  All-in-all, it was a garbage policy.  Not because of NW Mutual, but because of the policy design by the agent.  I'm going to go into a quick explanation of a few different kinds of permanent coverage.

Whole Life Insurance

WL, generally, is permanent insurance built on the idea that if you pay a guaranteed premium for a guaranteed amount of time, you get a guaranteed permanent death-benefit and a growing guaranteed cash-value.  Since we're talking about "participating" whole life, here, there will be dividends paid back to policy owners in a few available forms.  1) Reduce next-year's premium.  2) Payment via check.  3) Purchase of "Paid Up Additions" (essentially adding a tiny small "paid up" whole life policy to your existing permanent policy).  Paid up Additions are a huge part of WL that I'll talk about later.

The premiums in excess of admin & mortality costs are invested in the firm's general fund.  Basically, this fund is a bunch of bonds and some non-leveraged real estate interests.  Up to $130,000 of MY cash-value is protected by the MN Life & Health Insurance Guarantee Fund.  Keep in mind, these companies have not only survived massive financial crises time and time again, but paid dividends without even blinking in those environments.

These policies are usually very rigid.  You can't increase premium to add to cash-value.  You can't decrease premium unless you use dividends or borrow from the policy to do so, and the early year cash-values are very, very low compared to premiums paid.  It often takes even the best of these policies to break even around 10 years. 

A contract I've had my friend design with a $1,000,000 DB for a good health 30-year-old at Guardian costs $8,660, and when adjusted for a cost of term insurance not-needed for $1 Mil, breaks even in about 10 years (first two years have NO cash value), and has a 2.5% GUARANTEED long-term RoR on Cash Value (age 60).  If he lives out to his life expectancy, he has a guaranteed RoR on the $1 Mil DB of 2.75%.

If dividends are paid based on the current scale, he will see a DB RoR of 4.8% @ life expectancy, and a CV RoR @ age 60 of 4.3%.


This is a decent policy, but it get's MUCH better than this from a flexibility standpoint, and from an early-year CV standpoint.... I'll get to that in a moment.

Universal Life Insurance

Universal Life (UL) is a product that apparently came out as a result of the in-flexibility of Whole Life.  Essentially, it has fewer guarantees, but more flexibility with payments, as it's essentially built on term insurance chassis.  There are payment options where if you make some minimum required payment, you're guarantee a death benefit, but that's basically because it covers the cost of mortality over time.

With a UL, you have more investment options, too.  Instead of participating in the insurance company's general fund, you can invest in mutual funds.  I haven't looked nearly as closely at these, mainly because of what I can do with a whole life policy now (see below).  But there's definitely more exploring worth doing.  From what I've seen, though, you can get more attractive terms out of essentially "building" your own UL with a blended whole-life policy.

You can "under-fund" them and just pay for term.  Or you can "over-fund" them and get a bunch more cash-value.  They still often have very low accessible cash-values early on.

Blended Whole Life

This stuff is cool.  It's essentially a few things wrapped into one package:

1) A standard Whole Life Policy (like the one I detailed above).

2) A YRT policy (my favorite kind of term), but when wrapped in a blended policy it's often even cheaper than the YRT rates at a given health class.

3) "Paid Up Additions"

The first two are already explained... except the fact that if you LOOK at the YRT rates in a "blended" whole life policy, they're even CHEAPER than YRT term insurance.  Depending on your health class, YRT premiums outside a blended policy can be anywhere from 15%-40% higher for the SAME health class if those premiums were instead built into a blended WL contract.

So now for what a "Paid Up Addition" is.  It's what is referred to as a "Paid Up Life Insurance Policy," essentially.  This is a TYPE of whole life policy where I just give the insurance company ONE payment, of, say $100,000, and I would then have a life insurance contract with a death benefit of about $500,000. (in the case of Guardian, anyway, at the age of 30).

That policy will have a 5% "load" on the cash-value, so I'll have $95,000 in cash-value that will grow at a nice guaranteed clip (guaranteed around 3.5% I think, long-term), and once you throw dividends in at current rates you're looking in the mid 5% range.

So the way you design these is instead of being a guy who buys $1,000,000 of Whole Life (like the policy I showed above), if you really want $1,000,000 of death benefit, and can afford to put in $8,660 per year, you would fund a policy to that $8,660 level, but it would look like this:

$200,000 of standard WL Policy @ $1,812 of premium
$800,000 of YRT @ $427 of premium
Paid-Up Additions (PUA's) of $6,421

A few things about this:

1) The policy's death benefit doesn't grow overall, because paid-up additions simply "buy-out" the $800,000 of term insurance over time.

2) If you needed to, you could completely eliminate the PUAs.  This would mean you're only paying $2,239 per year.

3) If you wanted to, you could put a ton more cash into the policy than just $6,421 of PUA.  You could put up to about $20,000 per year into it in total.

4) If you want to, you can get rid of as much of that YRT term insurance within the contract as you wish, though it will affect how much cash you can put in the policy.

5) The early year cash-values are FAR better.  Instead of no cash in year 2, you have $12,662.  However, breakeven point is only brought one year sooner to year 9.

6) Long-term RoR is about the same @ 4.3%.

7) You can borrow from the policy or surrendor PUA's.  I could get into policy loans but that's a bear of a conversation in and of itself.



The reason I like this policy is:

1) It locks me into cheaper long-term term rates for the same health class, if I want to fund it sparsely.

2) It gives me amazing opportunities to fund it richly, if I so choose.

3) It locks in the long-term RoR of not just dollars I invest today but dollars I invest tomorrow.  This is a leveraged way, of sorts, for me to apply my deflationist predictions (well not "deflation."  Low inflation and low interest rates)

4) This is all tax-free and semi-liquid if you do it right.

5) Backed by state of MN

6) If mortality rates continue to improve, but my health goes, I've locked in a permanent policy that reflects those improvements.  If mortality rates go to shit... I've got attractive guarantees.

7) Early year CV is FAR more attractive than most policies, and this is the Achilles Heel of most life insurance policies... the early years suck.

It offers a bit of a bond market arbitrage to my portfolio, long-term.  A policy's cash-value can NOT go down, once established.  This mimics short-term bonds.  However, existing cash-values, via the base policy, paid up additions, and death-benefits wrapped around them, offer a rich guaranteed & higher-even projected long-term Rate of Return.  This allows me to get long-term bond (or higher) rates, have them be guaranteed or very likely going forward, but maintain my CV as a cash-position, not having to get crappy short-term yields.



Of course, this is all flawed in the sense that these are NOT treasury bonds, and have risks involved.  This is why this is a VP play for me.  I'm sure there's tons of questions.  Sorry I've probably left out a ton, but as you can see, there's lots to cover.

[D1984]

Moda,

Can you please post an illustration of that second Guardian policy you mentioned (the one with the term blend and the premium of $8,660 per year with the base whole life set at $1,812 per year and the rest in term and PUAs). The reason/s I ask is/are severalfold.

One, it is true that the PUAs will have available an immediate 95% of what was paid in (say you put in $6,421 of premium as PUA so you would immediately have $6,100 of CV from that....which would grow the next policy anniversary--in one year--to roughly $6340 or so assuming 4% growth). However, the base WL that you paid $1812 for would have NO cash value (or almost no cash value) the first year or so unless this is a blended 10-pay (which given the $1,812 premium for $200K of DB it doesn't look like...I'm thinking it's either an L65, L95, L99, or L121....blended with term and PUAs). See, IIRC, with Guardian the most efficient thing to do is pick from one of the extremes...either do a 10-pay max blended which won't have so much term and PUAs vs base WL but will still do well because with the 10-pay even the base WL builds CV pretty quickly...or at the other extreme take an L99 or L121--go with the L99 for smaller policies since the minimum base face on that one is $25K but go with the L121 for larger ones--and then do the maximum 10/1 blend allowed (out of the total policy face value one tenth is base and nine tenths are term/PUAs). The L99 or L121 should be chosen because for a given DB--say $200K--they will have a smaller premium than an L65 or a 10-pay (which makes sense since they aren't designed to be paid up quickly but are basically designed to be paid for one's entire life) so if the case isn't just for a huge face value then you can cram more into PUAs/term and less into base. So while the blended policy you have shown here does offer plenty of flexibility to add premium in later years (which is an advantage if low interest rates and low inflation persist since you will have basically locked in the right to invest in something that guarantees 3% or 4% per year) it is far from the most efficient policy for building cash value (more on that in point 3 below). With all that said, I would be remiss if I didn't point out that Guardian does in fact have two policies that even if not blended are good for high early cash value and for CV growth...but the downside is that unless you can afford at least $50K of base premium per year, then forget about it; these policies were designed for the SERP/BOLI/COLI market and while they will gladly sell them to individuals, most of us can't afford a $50K per year premium.

2. Doesn't Guardian carry a fairly high policy loan rate in the early years? IIRC it was 8% until you turn 65 or until the policy has been in effect for twenty years (whichever comes later). On the other hand, the rate was 4% after that which is VERY competitive for a policy loan. Finally, I do recall as well that Guardian actually pays a HIGHER dividend on loaned policy values (or at least on ones that have the 8% loan rate) as of right now; since we are in such a low rate environment the 8% Guardian earns on a policy loan is more than they can earn on the open market so they riase the dividend on loaned policy values accordingly. Needless to say, if rates in the bond market rise to 7 or 8% again I doubt Guardian will continue this policy but it does take the somewhat take the sting out of that % policy loan rate as of right now.

3. If you just want to see a policy designed for maximum cash value growth and/or early cash value, I have two examples I can post. One is from MTL (Mutual Trust Life) and is a policy designed for a coworker of mine who wanted as much early CV as possible since he was immediately going to borrow it to invest in real estate. This policy is actually a little weird since it's structured as essentially a "2-pay" (well actually two big payments in the early years as PUAs and then only paying the base and term for the next seven years until the policy is RPU'd) yet doesn't violate the 7-pay Rule (hint: it involves a BIG term rider in the early years...more term than would be necessary in a blended 7-pay like the one mentioned next). This policy has approximately 93% CV the first year and according to the "non-guaranteed" side would be paid up in around three years (it comes within a few hundred dollars of breakeven in year three and is cash value positive by year 4); on the non-guaranteed side it .is cash value positive by year 7...but that assumes the maximum CSO table mortality charges--i.e. the assumed death rate per 10,000 policyholders being about 2.5x worse than it typically actually is--and that NO dividends are ever paid which is ridiculous since MTL has paid dividends every year for the last hundred years. The other policy specimen contract I have is for a 7-pay from Penn Mutual; it isn't actually a true 7-pay since Penn Mutual doesn't do those but is rather a blend of term and PUAs designed to create a 7-pay (the term is fully replaced by PUAs by the seventh year and then the policy is RPU'd). This policy has around 86% first year cash value but over the long term will be slightly more cash value growth efficient than the other policy I mentioned above (since the 7-pay doesn't waste money buying extra term for the first seven years in order to allow a big PUA stuff-in in the first two years). This policy is cash-value positive by year 4 (non-guaranteed) or year 6 (guaranteed). I can post copies of both policies if you'd like (although the MTL policy will be huge in file size--upwards of 8MB--since I had to use a black marker to censor the insured name's and then scan the whole thing in as a PDF page by page; this wasn't an issue with the Penn policy since the example illustration only said "Valued Client" as the insured's name). Finally, do note that the MTL policy was illustrated at "standard non-tobacco" and was on a male whereas the Penn policy was illustrated at "Preferred non-tobacco" and was on a female;  both of those factors (a higher rating class and having a female insured) result in slightly better performance for the Penn policy; if the MTL policy was issued on the same client as the Penn policy it would easily be cash value positive by year three on the non-guaranteed side.

I can post these two policies if you'd like and you can let me know what you think of them.

[coinstar]

Thanks for the post, Moda! Question regarding ANY of these plans:

Suppose your single, no children, no dependants, and don't expect to ever have any. I know things in life change but for purposes of this question let us assume there's a 0% chance of ever really needing a death payment to benefit someone.

Does it ever make sense to get life insurance in this instance for some kind of asset protection or tax sheltering? If so, how does that work? Even if it takes 10 years to break even, that's fine as long as there's some point where relative to opportunity costs, you're at least breaking even but also getting a nice tax shelter and asset protection.

[bedraggled]

Moda, please,

I was just quoted a 10 year term life policy.

I am 59.

Coverage: $600,000

Monthly premium: $333

I just read your post.  Should I be doing something different?

Thanks,
Bedraggled

[MachineGhost]

Excellent, moda (and D1984)!  This should be made a sticky.

I have the exact same question as coinstar.

Also, I'm wondering, what would be the optimal approach for someone who is actually 65+?  We're all living longer and taking care of aged elderly parents even older than that, so a DB could really come in handy for those specific support reasons rather than the traditional young, growing family.  Long Term Care is unaffordable at those ages, sort of a scam anyway and is a literal death sentence in terms of being sent to a nursing home to die, so it really isn't a realistic or humane option.

And what do you mean by "if mortality gets better"?  Is the implication that people living longer normally results in higher future premiums unless you're grandfathered in?  I'm pretty sure insurance companies aren't counting on people like me living to 120+ yet, so I wonder how do I take maximum advantage of this arbitrage opportunity?

[moda0306]

Moda, please,

I was just quoted a 10 year term life policy.

I am 59.

Coverage: $600,000

Monthly premium: $333

I just read your post.  Should I be doing something different?

Thanks,
Bedraggled

Do you know about what health class?  If you want to do this a little less publicly, you can private-message me.



I'll get back to these other things soon.  Sorry guys, busy at work.

[moda0306]

I'll get back to these other things soon.  Sorry guys, busy at work.

Well you need to get your priorities straight! 

Ha!  Well one last thing.... I've compared "Level Term Ladders" to YRT and YRT just works out better.  I tried doing a ladder with the YRT as the short-portion, but it leaves so many options on the table going forward that it was never something I wanted to get rid of.  Level term just sucks if you want something that efficiently works with wanting the options of slowly reducing coverage over time, and/or keeping coverage beyond a certain time period.

[D1984]

Moda (and anyone else who is following this thread):

I have uploaded the two policy illustrations I mentioned in my previous post. They are PDF files and are located at:

http://s000.tinyupload.com/index.php?fi ... 5025332999

For the MTL policy


http://s000.tinyupload.com/index.php?fi ... 1367415063

For the Penn Mutual policy


Moda, I would would be interested to see how they compare to the blended policy from Guardian (if you are comfortable with posting it).



Coinstar,

I suppose if you have no need for a DB as you have no dependents and  never plan on having any (never getting married and never having kids.....which would put you in the same boat I am, so to speak) then you could always either plan to someday in the distant future (assuming one got some advance warning of one's impending death and it wasn't immediate...like , say, cancer, instead, of, say...getting hit by a bus) either A. run up your credit cards in the weeks/months/years you have left, knowing that the death benefit will pay them off once you are gone, or B. plan to sell the policy outright for cash in the secondary market (which is a whole other topic in itself) should your health take a turn for the worse and your lifespan not be as long as hoped for.

Realistically, though, with a properly designed policy built from the get-go for cash value growth and where the death benefit is minimized as much as possible vs the cash value right up to the point of almost being a MEC, the death benefit is just a  bonus....the COI you will pay--assuming you are not table rated--will likely be less than the taxes you would've paid had the equivalent investment been made outside the policy and outside of a tax-sheltered account (again, this is assuming you have maxed out your Roth IRA--or backdoor Roth IRA--for the year and have at least contributed to your 401K or Roth 401K up to the point of maximizing employer matching even if you don't max out the contribution limit for the year). A 2nd to die survivorship policy can also be used in certain situations if you really want to minimize COI. Finally, Minnesota Life has an IUL/UL that uses an annuitized death benefit (at an assumed very low 1% rate) to really reduce COI (we're talking "standard smoker" rates as low as "standard nonsmoker", bringing Table 5s and 6's down to "Standard" COI costs, and "Standard" to nearly "Preferred Plus" ) but as far as I know it's not available on their WL and no other carriers have licensed it from them (so far) but I expect eventually other carriers may (or may come up with their own version that doesn't violate Minn Life's patent). The disadvantage is that the death benefit is paid out over up to 30 years rather than being available all at once but with no dependents to actually need the DB in the first place, at that point who cares?


MG,

Assuming on is in good health, most of the big mutual insures will issue WL policies up to age 75, 80, or 85 (varies by insurer). COI will be high due to age but on the good side, the corridor of cash value vs death benefit will be a lot smaller for a (for example) 70 year old than for a 30 or 40 year old, so that high COI will be paid on a lot smaller net amount at risk above and beyond the cash value. The same approach (as close as possible to the 7-pay MEC line, using PUAs and term as needed) would be used for a 65 or 70 year old as would be used for a 25 or 30 year old in most cases, presuming CV growth and IRR were the purposes of the policy and death benefit was a distant second.

[ahhrunforthehills]

.

[ahhrunforthehills]

.

[D1984]

You guys know who Peter Schiff is right?  I always think about that guy whenever this topic comes up.

He was (regrettably) my broker years ago.  Anyways, I shot him over an email when I was shopping for an insurance policy back in 2008...

----------------

Me:

Hi Peter, my financial planners have setup a [Indexed Universal} Life Insurance Policy for me.  They offer a choice of only 11 investment options [which one do you think would be the best fit for the rest of my portfoilo]... blah blah blah


Peter:

Why do you need whole life?  If you actually need life insurance, why not a term policy?

--------------

I thought to myself, "this guy don't know his *** from his ***hole, doesn't he realize that I can get deferred growth, I can loan against it without penalty tax-free, it will track the S&P, great asset protection, a guaranteed minimum 3% return, a "no lapse" guarantee, blah blah blah.  And because I was relatively young and because most my investment $$ was in fully taxable investments, the UL Life Policy made me giddier than a little boy looking at the bra section of a JCPenny catalog.

So I got a $5 Million dollar Indexed Universal Life policy from a reputable company. My premiums were $48,000 year (my plan was to invest $48k/year for 15 years).  I think I was 29 when I purchased it.  When I compared it to other policies it seemed great.  Asset protection, investment vehicle, and some life insurance,

Here is what I soon realized:

1. Serious conflict of interest.  Agents who sell Universal Life policies get to keep the first years premium as a commission... which is probably why they recommend them instead of Term. 

2. Do you know how much the fees and expenses are for the investment portion (including the investment dividends)?  Do you understand the fees and expenses for the life insurance portion?  Have a copy of the policy?  Understand EVERYTHING in it without any doubts whatsoever?  I "thought" I understood the fees and expenses well enough.  I was kidding myself.  Most expensive lesson of my investing life.

My policy was insanely cryptic.  It used words/phrases that you think might mean one thing, but only after you read the "definitions page" for those words/phrases do you really start to understand the policy and begin unlocking the mysteries.  I felt like I was on the hunt for frickin' Chester Copperpot.

I spent a solid 2 weeks really figuring my policy out, decrypting the fees and expenses, the real cost of the insurance (current and future), speaking to my attorney who used to peddle these "vehicles", etc.

Bottom line... IMHO these complex policies are so loaded with hidden fees and fine print that they still underperform a regular investment (despite any tax savings you will allegedly get).... just like MangoMan said. 

After 6 years I decided to cut my losses and get out.  I took a 30% hit because I wanted to stop the bleeding.  And keep in mind that my policy was one of the better ones out there.

I chalked it up to a lesson learned in "never invest in something you don’t understand". 

I should've listened to Peter Schiff and just bought a term policy if I needed insurance.

A few things to keep in mind.

One, the first year's commission on a UL (or VUL or IUL) policy will actually be anywhere from 50 or 55% to upwards of 100% (once you count "expense allowances" and "overrides" and (if applicable) commissions paid to the general agent or agency...and when I say upwards of 100%, that does in fact mean that not only does your first year's premium go all to pay the commission but some of your second year's does as well).


HOWEVER.....

When I say that the commission will be from 55% to 100% (or more) of the premium, that ONLY applies if you are only paying the "target premium" which is basically a recommended level annual premium amount that, if paid by the policyowner, may be sufficient to keep the policy in force throughout its lifetime provided credited interest rates on the policy don't fall and COI doesn't increase beyond what was originally projected (obviously COI will increase each year as you get older but if the policy is designed right the actual amount at risk--the amount of money payable as a death benefit above and beyond the actual cash in the policy--will be decreasing each year once you get past age 40 or so until when you get to age 95 the amount at risk will be either $1 or nothing in a well-designed policy). On any amounts above the target premium, the agent only gets a few % of the premium as commission (at most). Now a few carriers do have higher than usual target premium levels (ING/Voya comes immediately to mind) so you will pay more in commissions on such a policy, but (for instance) Penn Mutual, Midland, Pac Life, and (IIRC) Life of the Southwest have fairly typical target premiums and on IULs from those carriers you will only pay a few % commission on any premium amount above the target premium.

With that said, your policy was (from what I can see in your post) NOT a well designed policy, at least from a cash accumulation and investment growth standpoint. The death benefit should have (assuming you were using a growing death benefit for 15 years you were paying premiums and then after that the death benefit would be lowered to whatever minimum amount it could be lowered to without MECing the policy and the death benefit would only grow as the actual cash in the policy grew (the death benefit on a GPT-tested UL or IUL has to grow if the cash value grows beyond a certain point; this is in order to preserve a certain minimum "corridor" between the death benefit and the cash value, otherwise the policy will no longer qualify as insurance and the gains inside it will be fully taxable. This corridor starts at around 2.5X at age 40--so for instance if the cash value was $100K the death benefit would have to be at least $250K--or below and decreases to nothing by age 95...i.e. by age 95 the death benefit and cash value can be equal).

The death benefit on your policy was far too high for the amount of premium you were putting in. I'm not an agent so I don't have access to any illustration software but just offhand I'd say the DB (death benefit) should have been no more than 1.5 or 2 million $ at first at most (and might well have been less) and if you needed any more DB on top of that you should have bought a separate term policy. Of course, by setting it up with a $5 million DB the agent increased the target premium vs what it would have been on a policy with a much smaller DB and thus increased his commission (at your expense, I might add).

Bottom line: That policy was designed to make somebody money, but it wasn't you. It was your agent, who was either: crooked (designed the policy that way knowing it would screw you out of money but would increase his commission), incompetent (designed it that way because he was too shit stupid and/or bone lazy to know any better), or both.

Two, a properly designed policy for cash accumulation should have NEVER leave you with a 30% hit after six years of investment growth. Ever. Period. End of Story. At worst, you should have been about at breakeven. At best, you should have been up about 20% or 25% (or more, if the agent had had the IUL set up properly and you got a run of good market years like 2009 through 2014) instead of down 30%. I should also point out that the surrender charge (and also the "per 1000" charges) would be a heck of a lot lower on a well-designed policy with a smaller DB relative to cash value than it would've been on your $5 million policy (and that's not even getting into the unnecessary COI you paid from having too big of a death benefit relative to cash value.

Three, for an example of a well designed policy, download and study the two illustrations I posted. They are whole life and not IUL or UL, but honestly, UL or IUL should actually have MORE value early on vs whole life, since their mortality costs/COI aren't as heavily frontloaded as whole life's are. For an IUL purchased for cash value accumulation to leave you with a 30% loss after six years is horrible and inexcusable on the part of the agent greedy asshole who sold it to you. For a look at some truly properly designed IULs, check out Brandon Robert's and Brantly Whitley's website ( http://theinsuranceproblog.com ).

Fourth, any honest agent worth his/her salt would have also asked you to max out your Roths, your IRAs, and your 401K before even considering cash value life insurance (more so since you mentioned most of your investments were in taxable and thus maybe you weren't already maxing out your tax-sheltered options). Did your agent do this, or did he try to tell you funding the IUL was more important than funding your tax-sheltered options like 401Ks and Roths?

Fifth, why would the agent put a no-lapse guarantee on a policy that was supposedly designed for cash accumulation? No-lapse ULs/no-lapse IULs are for when you want to minimum-fund a policy (get the most permanent death benefit for the least amount of premium outlay) and yet not have it lapse (in other words, basically level term to age 121) and you do so with the understanding that you will have basically no cash value in the policy's later years and the only thing that is keeping it from lapsing at that point is that annual premium and the no-lapse guarantee. A no-lapse guarantee on an IUL that you will later take withdrawals or policy loans from is next to useless since the loans/withdrawals (if not paid back promptly...like between 30 days and one year depending on the insurance company) will on most no-lapse policies void the no-lapse guarantee in the first place!

Finally, Peter Schiff is (IMO) a blowhard and an idiot that's about on the same level of deserving being taken seriously as Jim Cramer or Harry Dent is. He made one major correct call (predicting the housing bubble and bust) and has been mostly wrong ever since (I won't even get into how despite his being right about the housing bubble/housing crash and market crash of 2008, he utterly failed to protect his clients' capital during said crash and due to his inherent inflationary bias ignored the one asset--Long Term Treasuries--that would've saved his clients' financial asses in 2008). If you followed his advice about investing heavily in gold mining stocks, gold (which was supposed to go to $5000 an ounce by now according to Schiff), commodities, commodity producers, energy producers, foreign stocks, and emerging markets, and also followed his advice to basically stay out of US stocks and out of government bonds (which would get killed in the hyperinflation Peter Schiff has been quite confidently--and quite wrongly--predicting for the last six or seven years), then the years from 2011 to 2014 kind of sucked for your portfolio, to put it mildly. Since you mentioned that it was "regrettable" that Peter Schiff was your broker, what type of losses (or as the case may be, gains) did you have from following his (and EuroPacific Capital's) advice?

EDIT: On re-reading my post, I apologize if I come across as a jerk, or snarky, or a know-it-all who was trying to criticize you personally for buying the policy that was set up the way it was....I'm not angry at you or calling you stupid so I hope it doesn't come across that way. I AM pissed off at your agent (and come to think of it, at Peter Schiff) for their bad advice that caused you (and likely plenty of other investors) to lose money for no good reason....so if my tone comes across as a little miffed in my post, that's why.

[ahhrunforthehills]

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