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Is an indexed life insurance policy a viable option for a high income earner who is a wage earner?

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!

Daniel

Dec 11, 2014 by Daniel from Carlsbad, CA in  |  Flag
7 Answers  |  8 Followers
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John A. White Level 7

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.

Comment   |  Flag   |  Dec 13, 2014 from Blue Ridge, GA

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John Essigman Level 17

Hi Daniel,

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.

Best wishes.

3 Comments   |  Flag   |  Dec 11, 2014 from Cleveland, GA
Daniel

Yeah. I am in Mortgage Banking, and we went through a shift a couple of years ago requiring all originators (at that point self employed) to be wage earners through a banking institution... So I don't pay myself a salary. Wish I could again... I am a true employee, making 100% commission and a large earning potential... Thanks so much for your help!

Flag |  Dec 11, 2014 near Carlsbad, CA
Brett Eric Gottlieb

Daniel,

Flag |  Dec 11, 2014 near Carlsbad, CA
Brett Eric Gottlieb

The biggest concern with these products is the projections. I would question what is the illustrated rate under current, midpoint, and guaranteed assumptions. These are very important to understand and should be illustrated under various scenarios to show the difference. The other component that would be significant is the current cap rates, what index options you have available, are their any minimum guarantees and does the product allow for a waiver of surrender. There are several carriers that have better options across the board than Voya and you would want to consider all options if this was determined as a best case for you.

Flag |  Dec 11, 2014 near Carlsbad, CA

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Daniel,

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.

2 Comments   |  Flag   |  Dec 11, 2014 from Fort Washington, PA
Daniel

I probably do need more insurance than I have now... I am 33 and have a million on a 20 year term, so I probably need more, but am not sure if this is the best option... In the documentation, it does talk about this product as an employee benefit, BUT, this isn't the case for my situation. My employer isn't funding this for me, its my funds, and therefore I was told that I could either take the loan to pay my own taxes, or leave it in the plan to grow, which would help the numbers. The projection that we were doing was 35K (plus another 15K) per month for 10 years, leaving it to grow until retirement, and then starting to withdraw (loan) at retirement in the amount of about 10K per month. It SEEMED like that projection looked better than the taxable account, but I am not really comfortable with the product yet, so I havent pulled the trigger...

Flag |  Dec 11, 2014 near Carlsbad, CA
John R. Myers, CFP®

You need more life insurance if you have dependents who would be relying on the income and assets you can accumulate throughout your working life...term life is the most cost efficient way to provide coverage for that need. My guess is that if you are such an aggressive saver, after any debts are retired and any children are educated, you will have accumulated enough assets to provide for a lifetime income to anyone who depends on you. At that point, you would not necessarily need life insurance although you may want a permanent life insurance policy to help pay estate taxes efficiently or simply to leave a legacy. As for socking away $50K for the next 10 years and letting it compound for an additional 22 ('til age 65), here's an oversimplified look at what would happen assuming an average 8% return in a buy and hold non-tax qualified investment account: You would accumulate $4,252,864, with unrealized capital gains of $3,752,864. Taxed at a 15% long term cap gains rate nets out to $3.7mm after tax. In reality however you would probably make partial withdrawals each year and the account could simply continue to build (if it continues to earn 8%, it could support withdrawals of over $300k a year without going down...a very nice legacy in and of itself).

Flag |  Dec 11, 2014 near Fort Washington, PA

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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.

1 Comment   |  Flag   |  Dec 11, 2014 from Overland Park, KS
Daniel

Hey Anthony, thanks so much... Yeah, I have done that in the past. So, I do have a Roth IRA that has been contributed to for the past few years as a traditional, and then reclassified. But, since then, I have moved to a new company, and have rolled my old 401K over to a managed IRA (with the rolled-over funds). So, I don't know if that keeps me from doing the same in the future... Also, 5,500 dollars is such a small limit. 17,500 I will definitely save in a 401K. I may or may not do the 5,500 depending on if I still can, but after that, what do I do? Thats where the insurance option came in...

Flag |  Dec 11, 2014 near Carlsbad, CA

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A.J. Blackstone Level 14

Daniel-

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.

1 Comment   |  Flag   |  Dec 11, 2014 from Tampa, FL
Daniel

Thanks a lot, A.J. Super helpful...

Flag |  Dec 11, 2014 near Carlsbad, CA

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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.

Brett

brett@comprehensiveadvisor.com

2 Comments   |  Flag   |  Dec 11, 2014 from Carlsbad, CA
Daniel

Hey Brett, thanks man... Yeah, my head is spinning with this insurance stuff... I have never been a fan, but am not sure if I fit into a box where it could be advantageous... In theory it sounds good... Just not sure how much i trust the numbers and projections...

Flag |  Dec 11, 2014 near Carlsbad, CA
Brett Eric Gottlieb

You hit it right on, the projections are just that and there are in fact some article out right now about the over estimated assumptions on these products. In the 90s Variable Life Insurance was a similar product that got a lot of hype for your type of situation but if the advisor wasn't diligent about following the market and making adjustments as needed the product didn't perform as intended in the illustrations. The difference is these index products have minimum guarantees many times that the variable products did not have. Still though these products in my opinion are illustrated with to high an interest rate given the insurance companies ability to change the caps over time. Many times the best approach is to even consider doing a little of what each advisor has suggested. Maybe you do some index life and some traditional after tax investing.

Flag |  Dec 11, 2014 near Carlsbad, CA

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Tunc Tanin Level 10

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.

Comment   |  Flag   |  Dec 12, 2014 from Somerville, MA

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