My wife and I have been making monthly payments of $500 to this universal life/retirement plan for about 1.5yrs. Our advisor sold it to us under what he called an "executive retirement plan" for business owners. I thought I had done enough research on the company to justify us starting a plan but after more research I'm beginning to wonder about our decision. The policy states its a "Equity-Indexed Flexible Premium Adjustable Benefit Life Insurance" plan. There is a surrender charge that goes down every year for 10 years. I'm under the impression that this is just a Equity Index Annuity product and the research i've done on this product doesn't make me feel very comfortable about sticking to it. I would greatly appreciate your input on this company/product and any advice that may be helpful for us right now. I feel really stupid about just getting involved with this w/o obviously doing enough research. Thanks for all of your help in advanced.
Danny, you asked a great question. Section 7702 of the tax code provides certain tax-advantaged benefits for life insurance contracts. Effectively earnings can be distributed without any taxation if done correctly. So in that sense, it can act like a Roth and is especially beneficial for those that don't qualify for a Roth due to income restriction. The downside is that unlike a Roth, there is an insurance expense for the mortality risk that the insurance carrier takes. If structured correctly the investment account will grow quickly towards the death benefit reducing the mortality expenses as the insurance company has less exposure. When this happens a detailed analysis can show that the mortality expense becomes far less than the tax alternative that would be suffered in a regular investment account. Most often these accounts are established with variable universal life products that have a myriad of mutual fund investment choices inside them. However inequity index product can be just as effective. The key to success in utilizing these products as a tax-advantaged investment vehicle is a key learning as much cash inside the product is you can without violating the codes that define life insurance.
As Evan stated, equity index products can be complex, but even more complex is the subject of using life insurance is a tax-advantaged investment. I recently was asked to teach a workshop to my peers at an industry conference in Las Vegas on this very subject (http://www.seniormarketexpo.com/conference/education-sessions/ 2:45 p.m). I had developed a PowerPoint and sample illustrations tell my peers determine when the tax advantages are worthwhile, and when they are not and how to articulate that to their clients. I would be glad to share that information with you. At this time, I would not give up on the contract, until you have an opportunity to fully understand both the pros and cons of the concept employed, and determine if the contract is being used in the most effective manner. Please feel free to reach out to me at 847-426-1077 and the glad to spend a little time with you to try to help you determine the benefits and the downside.
All of us agree you have an equity index life insurance product not an annuity. When purcahsing insurance the first question is do you need the death benifit protection that is provided by a life insurance policy? If yes it may be a good product for you. If no you may have to reassess. Like David said there may be some extra added tax benefits if your policy was designed to fall within certain codes. Have a conversation with your agent and get the real poop on the policy.
Equity-indexed Life insurance is a very complex product and not very transparent. It may or may not be smart for you to continue at this juncture; a more thorough analysis is needed. Our office has considerable experience in this niche area. Feel free to reach me at 516-240-6161 or firstname.lastname@example.org to discuss further. Evan Levine
All of the advisors have given you good advice and I will add my two cents. I sold cash value life insurance for years. A while back after educating myself I had a serious change of heart. The insurance companies I represented back then would only teach you how and why to sell more life insurance. They would call it Executive Retirement Plans, Supplemental Retirement Plans, Non-Qualified Retirement Plans and etc. It is just another way to put the lipstick on the hog. They would never show you a real viable alternative to reach the same goal with other products or services. I think it can possibly be a good product if structured correctly like David was alluding to for someone making big bucks that has already exhausted their other retirement options i.e. 401(k), Roth, etc. However there are a lot of people that have bought these types of policies that would have been much better off buying term life insurance and setting up Roth IRA's. Always ask for the internal rate of return and cost analysis page of the life insurance illustration and compare that with buying a 20 year term policy and putting the difference in good index funds as a Roth IRA over the last 15 to 20 years. Then see if you would still buy the cash value life insurance. Two other reasons for buying permanent life insurance could be estate planning or taking care of a special needs dependent. For most people though the Term and Roth is a better idea. I can hear my old sales pitch rolling around in my head talking about section 7702 and the cost recovery rules, taking withdrawals down to your cost basis and then converting the rest to tax-free loans. One problem is the market never returns a steady 6, 8 or 10% like these life insurance illustrations show. Returns are random (with variable or equity index products) and yet your withdrawals will be fixed or increasing and there is the rub. Not to mention if you bought a variable universal life policy did your agent show you an 8 or 10% rate of return illustration, then do a risk tolerance questionnaire and find out you are a conservative to moderate investor. Did he then say I will have to run another illustration and show you a return that is more likely to take place based on your conservative choice of investments? Also, even if your cash value grows towards the death benefit and the net amount at risk to the insurance company decreases, you are still getting older therefore the internal cost of less insurance on an older person still goes up. Also there is what is called “the corridor rule”. You can only have so much cash value in a policy in relationship to the death benefit to avoid it becoming a Modified Endowment Contract (MEC) and losing some of its tax benefits.
Please do your retirement planning with a Registered Investment Advisor and not a life insurance salesman. I don’t mean to sound so rude but this is a subject that I am passionate about. I met some good people in the insurance industry that I worked with for years but I differ from them now quite a bit when it comes to my beliefs about the role of life insurance in the over all financial plan. Good luck.