I bought a life insurance product from Fidelity & Guarantee that invest 50% in gold and 50% in S&P Index. What are the pros and cons of life insurance?
I would say that it's NOT. But you should meet with an advisor (not and insurance agent) to see what is right for you.
The problem with most "cash value" life insurance are the fees attached to them. Any rate of return that is made will be reduced by those fees. Universal Life insurance not only has a number of fees but is an Annual Renewable product. Which means that every year you have it the COI (cost of insurance) will go up. Your monthly cost will stay the same but your "cash value" will get eaten alive. It may not cost a lot to insure you today but by the time you are 50 or 60 the cost could be more than you can afford and the policy may cancel do to lack of payment.
You maybe better off buying a Term Life Insurance policy for 20 or 30 years. You can invest the difference and become "self-insured" in that time.
And there are other issues to consider. I will almost never recommend to a client to have a "cash value" policy.
Please feel free to call me and I will be happy to talk more about this.
Your best retirement plan option is almost always your company retirement plan or an IRA. Once you have maxed out contributions to those plans, then you should have investments in a taxable brokerage account that can be earmarked for retirement or other goals. THEN, if you have additional capital or high discretionary income, life insurance can be an effective investment. But you need to be careful.
Life insurance is illiquid. You should never invest in a life insurance policy if you might need to withdraw money within the first ten years. If the policy implodes in future years, for any reason, your withdrawals that would normally be taken as a tax-free loan would become taxable. Also, as Joe stated, the insurance costs can eat up your return. It's critical that if you invest in life insurance, you want the death benefit to be as low as possible for the amount you are investing. The lower the death benefit, the lower the insurance cost. That allows more of your cash value to grow.
It sounds like the product you own is an indexed universal policy, where your return is based on the index you select. Most of these policies have limited index options and limit the return. With most indexed policies that I'm aware of, there is a cap on how much you can earn in exchange for the fact that if the indexes lose money, you don't. For example, if gold or the S&P 500 return 50% in a given year, you may only get 5%, 10% or 20%, depending on the policy. But if they lose 50%, you cash value does not decrease. With an indexed policy, you money is not actually invested in the market. Your money is in an interst-bearing account and the interest paid is based on the return on the index. An indexed life policy can be appropriate for a conservative investor who has maxed out his retirement plan contributions, has liquid investments such as stocks, bonds or mutual funds, and still has a lot of excess capital or discretionary income that he would like to shelter from taxation.
A variable universal life policy would give you more investment options and greater growth potential. But, because your money is actually invested in the financial markets, you would have more risk if your investment selections do not perform well. In other words, you could actually lose money. Also, with life insurance, you run the risk that if your investment options perform poorly, you may have to put more money into the policy than you planned to keep the policy in force. If the policy does not stay in force, any distributions would become taxable.
Final word, life insurance can be an effective retirement investment vehicle for wealthy or high income individuals. But it should only be used after you've maxed out your contributions to a traditional retirement plan and have liquid investments elsewhere.
Raul, there are a lot of insurance agents out there that think this is the best thing since sliced bread, or at least sell it that way. The truth is one of the reasons they push these insurance products as retirement vehicles is because they make enormous commissions off them. Yes, I mean it, Enormous commissions!They are seldom a good fit for most people, and usually only are to be considered for the rich. If by chance you bought this policy in the last 30 days, then you should be in the "free look" period, which means you can cancel it without penalty. If this is the case and since you are on brightscope asking this question about the pros and cons of it, then you should cancel it today; Notify the insurance company immediately (or Monday if they have no phones operating today) that it is your intent to cancel it and send in the required paperwork. You should not get into an expensive contract like this that can lock up your money for years if you don't fully understand it. If it is however, after 30 days, seek out a Certified Financial Planner to assist you on your options of surrendering it or if the policy was sold to you in a dishonest manner. It has been my experience that those salesmen who sell this as an investment to middle class people often do so in either a less than honest manner, or they are so new to the business that they have no idea what they are talking about or a combination of both.
Raul, it sounds like you have an indexed life insurance policy. . It can build cash value over time, and you can, under certain circumstances, take withdrawals for retirement with tax-free growth. But first, it is a very expensive way to pay for retirement because the fees for the life insurance is expensive and that cost will get larger over time. Second, if your policy is not funded properly, or becomes underfunded because of your withdrawals, or the policy lapses for any reason, then your withdrawals will no longer be tax-free. You get your tax-free advantage because your life insurance policy is meant as a policy on your life, and Uncle Sam says that is non-taxable. As soon as it no longer becomes a life insurance policy, the tax advantage goes away retroactively.
Indexed life insurance products have either caps on participation, or fees, but typically caps. So, you will get the assurance in most indexed policies that if the markets you are invested in goes down, you will not participate in the loss. But the price you pay is having a limit on the upside. Together with the insurance fees, it is just not an efficient way to save for retirement. It is not what I would consider a good growth vehicle. With that said, if you were in a situation where you were maxing out your qualified retirement plans, had some taxable accounts, and still had excess dollars, it could be appropriate to have a cash value life insurance policy for the purpose of funding a future need. There could be a number of situations where I might consider it suitable; from what I know, yours is not one of them.
The best way to save for retirement is typically a tax-advantaged retirement plan, either a company sponsored plan where you can take advantage of a possible employer match, or an individual IRA. Your money will be more portable as far as investment choice, and the fee structure will lend itself to better growth.
The marketing of this type of life insurance is often referred to as a 7702 retirement plan, referring to IRS Code 7702. IRS Code 7702 merely describes treatment of cash value life insurance policies. It is not inferring that this is a type of retirement plan
As a financial advisor, I would not be recommending 50% gold as an investment choice to any of my clients under any circumstances. I would really re-assess where you are getting your financial advice from. Get a second opinion from a trusted financial planner in your area, preferably a CFP. Seek referrals from trusted friends, neighbors, and co-workers
Pros - 1) tax deferred interest/investment returns 2) when you withdraw money from a life insurance policy you use FIFO first in, first out so your basis comes out before any of the deferred earnings and a 1099 is generated. First withdrawals are thus just taking out the money you paid in that you had already paid taxes on so are tax free. 3) you can borrow against life insurance policy cash values and in theory thus access the deferred earnings without paying tax on the loan. 4) the death benefit on the life insurance policy is tax free upon death. 5) in many States you receive creditor protection for assets you own inside a life insurance policy. 6) assets passing at death by beneficiary designation generally avoid probate and are thus private.
Cons - 1) heavy expenses inside a life insurance policy make it inefficient as a pure savings vehicle. 2) limited investment options are something to be considered. 3) most times when people use life policies for saving, they make the mistake of not maxing out the possible contributions and thus most of their premiums are eaten up in fees and expenses. 4) expenses are heaviest in first 10-15 years so liquidity is lower than most other investment options. 5) if you build up large policy loans and later in life the policy doesn't have enough money in it to cover the insurance costs and the interest on the policy loan, then the policy can lapse and you'll receive a 1099 for the entire amount of the loan that was inside the policy. ouch!
Generally, my opinion is only use life insurance for serious retirement or other savings if you have first maxed out your other retirement plan options such as 401k, 403b, IRA, ROTH, etc... The higher your income and net-worth, the more attractive life insurance might be as an investment vehicle.
There are many things to consider to determine if universal life is your most efficient way to save for retirement. Four types of accounts have tax advantages for saving for retirement (401k, Roth, non qualified annuity, and life insurance). If you have already maxed out your 401k, and maxed out your Roth IRA contribution then a universal life plan is the next best thing to allow you to stash away more money for retirement (with tax advantages). The cash value grows tax deferred and when you withdrawal money at retirement it is tax free (as long as you withdrawal the cost basis as partial withdrawals then switch to loans). In the 80 's interest rates were 10-12% so these plans made a lot of sense because the cash value grew at market interest rates. In the 90's as rates came down and the stock market took off, variable universal life became popular because the cash value is invested in sub accounts/investment options. In the 2000s rates remain low and the stock market is unpredictable, so guaranteed universal life has become very popular. This type of plan can be used for a pension maximization strategy. For example, by choosing a higher pension option and using the additional income to fund a GUL you can maximize your pension by insuring you have the maximum income in retirement and your surviving spouse is taken care of. Some of these plans have accelerated benefit riders, which would pay out part of the death benefit early for chronic or terminal illness (long term care situation ). Many things need to be taken into account but these plans could fulfill multiple needs and minimize future taxes to you and your beneficiaries if you are the right candidate.
Utilizing life insurance cash value for retirement is really a last resort option if you are maxing out 401k, IRA, or if you are a S-Corp business owner it can be used to set aside money for retirement on a tax-advantaged basis... it works much like a ROTH. Generally, it's those instances that I find it to be a true benefit. If you have a business owner/high income earner their troubles are not being able to set enough aside for retirement. This is a good solution, but make sure it's with a company and product that is designed for cash value growth/retirement income. There are even product offerings that have a return of the Cost of Insurance on them to make them even more attractive for these investors.
I take a different view on cash value life insurance. It can be a very effective place to build retirement assets which can be accessed tax free by borrowing against the policy. In my opinion a retirement strategy should include tax exempt and tax deferred savings. Not every employer offers a Roth option and many individuals don't have the knowledge to get returns in a Roth IRA that can match an insurance company even with a cap on the indexing. So my answer is - Cash value life insurance can be an effective part of a retirement plan if it is done properly.