I am looking at a VOYA Indexed SOLAR life plan. In essence, putting about 35K per year, and having 15K supplemented by VOYA in the form of a loan that increases my compounding interest in the plan (is how it was explained to me). I make around 500K per year, max out my 401K, cant contribute to a Roth, or a SEP, or anything like that.
I have always believed that you "get term and invest the difference" but I am wondering if I am in the small percentage of people who this may make sense for... I am wondering if the cost of the plan (which I know is high) is going to be more expensive than the taxes that I will pay over time on assets in a taxable account?
Any help would be greatly appreciated... Thanks!
In my personal opinion, you should get a copy of Nelson Nash's book, "Becoming You Own Banker". Understanding the tax treatment of permanent life insurance can be a great opportunity for you. I design plans for my clients using this method (I don't like Indexed Universal Life plans for this approach) and by using a good quality Whole Life plan with the new "Paid Up Additions Riders" that are available today can make this process work. As I like to say, "These new plans are not what your Daddy and Granddaddy owned". If you would like a copy of the book, I would be pleased to mail it to you, no obligation. The best way to read the book is to read completely through and then go back and concentrate on the first 40 pages (what is where the meat is). One of my clients, upon grasping the process stated, "Why did someone not tell me this when I was 25?" My response was, "You would not have listened". He now puts in six figures a year and will be his own banker. After 35+ years in this business, I have seen it all and this concept works if you will utilize it. Visit my website - www.financialguideposts.com for more info. You can contact me via the website. The best to you in your journey.
Life insurance does indeed provide a flexible alternative or supplement to maxed out retirement plans. You have made an astute observation “how does my cost compare to a taxable account”. Absolutely explore other tax efficient alternatives such as annuities or real estate.
My recommendation is that you get a second opinion from a fee-only advisor given that your insurance agent may not be telling you the complete story. Insurance contracts are very complex and have a variety of moving parts, so seek out a fee-only advisor who has a background or experience with insurance plans as this is a highly specialized field. You may want to consider a similar plan offered by a fee-only advisor using a no-load insurance contract. I will also add that you consult with a tax attorney as you may need to have this insurance contract inside of an Irrevocable Life Insurance Trust to keep it out of your taxable estate.
Finally, when you say wage earner, my assumption is that you work for someone else. Many “wage earners” earn wages from a company that they own. If this is the case, then captive insurance far outweighs the benefits of all the 401(k) and IRA options that are available given that it allows a maximum annual $1.2m in income to pass tax free.
If you need some permanent life insurance, this plan may be a good alternative for you that provides that benefit while also offering the potential for some accumulation. But be careful if you are looking at it solely as an "investment".
I believe the Voya loan you speak of is not left in the policy to add to growth but is borrowed to cover the cost of the taxes owed on the bonus which the employer uses to pay the premiums. Review the illustrations carefully including the various tables which are typically presented and consider whether the various assumptions which underlie those presentations are reasonable or not. Also don't forget that if you were to invest $35K per year for, say 15 years in a buy and hold index portfolio earning an average of 8%, your taxes would also be deferred (no recognition of capital gains until you sell), you'd accumulate $950,324 of which only $425,324 would be taxable at just 15%, for a net after tax value of $886,525. The other thing to consider when evaluating an investment vs. life insurance is the added flexibility in terms of funding and control you have with an investment account. Think about possible scenarios that might occur to disrupt your ability to fund this plan over your remaining working years and what that would mean to your take away at various points along the way. And give strong consideration to John' suggestion above that you get a qualified professional second opinion.
Daniel, I am not a big fan of the type of life insurance you referenced, and the clients of mine who have purchased it (separate from me) over the years have not been satisfied with the results.
That being said, you may want to see if you qualify for a a back door Roth IRA. This only works if you have no IRA, SEP-IRA or Simple IRA accounts outside of your 401(k). If you have no IRAs outside of your 401(k), you can go directly to opening and funding non-deductible IRAs and converting them to Roth IRAs. Otherwise, see the following.
First, let's assume you do have IRA accounts outside of your 401(k). See if you 401(k) plan will allow you to roll your IRAs into the plan. By doing so, you are consolidating your IRAs into your 401(k) and you no longer have IRAs outside of your (qualified 401(k) plan). You could then open up and contribute to a non-deductible IRA for $5,500 if you are under age 50 or for $6,500 if you are 50 or older, your spouse as well, if you are married. Keep the funds in cash and then just wait a couple of days and convert the non-deductible IRA to a Roth IRA. This is a Roth IRA conversion, and since you did not take a tax deduction and have no investment gains, you will owe no income on this conversion. Thereafter, for each yearly conversion, you must not access the funds for at least five years to avoid taxes and penalties on your contributions. Any earnings withdrawn prior to age 59 1/2 would be subject to income taxes and a 10% penalty.
I would check with your tax professional and see if this is something for you to consider. I do this myself, have several clients who do as well.
The fees you deem high now will only get worse. In any Universal Life product insurance costs are not fixed, and they will increase each year. So if you are lucky enough to see an old age, you will never see the money you put into the product because it will all be eaten away with insurance expense. If you close the policy before the insurance expense is too high that becomes a taxable event which defies the reason you want the product.
Furthermore, indexed life insurance is capped on the bottom and the top. So if you have $100,000 in the account and it is capped at 8%, but the market is up 30% how much money did you lose? Paying Uncle Sam hurts, but missing out on extreme gains because you are capped at 8% hurts more. Max out your retirement accounts, and then put the rest in a taxable account managed by someone who knows how to invest with tax efficiency in mind. If you want permanent insurance buy a whole life policy. The insurance costs are fixed, and you will most likely see a 3%-5% return over a 30 year period.
Good Morning Daniel!
Each of the advisors above has done a great job pointing out some key considerations (both positive and negative) when it comes to Index Life Insurance and making decisions for your overall financial plan. You have a rather unique situation and would suggest you do sit and visit with an advisor that understands the market and your fee only option for investing as well as has a strong background in insurance and understands how insurance works as a protection tool, whether for Estate Planning, alternative investment, or just for general life protection.
I noticed you are in the same local area as my office and wanted to extend an offer for further discussion if I can ever be of assistance.
Wish you the best during this holiday season.
I have been selling life insurance for 10 years and I learn something new all the time. There are pros and cons to your approach. You should talk to an experienced advisor who has been selling life insurance and other investment products for a while. I would generally avoid fee only crowd, very few of them can understand life insurance and give you balanced advice. The product you are shown is popular with advisors who push that product. I know several of them in Boston. I have to tell you there are several other options to consider. In the life insurance industry we call this over funding of Cash Value of Indexed Universal Life Insurance and there are several other companies who have better products then what they are showing you. You should also talk to advisors who only use whole life insurance and/or Variable Life insurance. In my practice, with someone your age I spend a lot of time trying to figure out how certain your income cashflow is. I have to look at the what will happen if you were to become disabled and cant make the 35k a year payments anymore( This where your plan Voyar is weak). You are incorrect on your belief that you can not contribute to a Roth IRA. Please research back door Roth Ira contributions online. I have clients making much more than you making Roth Contributions every year. Since this is near the year end, I would be careful into rushing into anything. take your time and get several opinions.