Need Opinion, advice on Getting Life Insurance

I'd like to get some opinion on how good of an option life insurance is for me, what kind of setup I would benefit the most from.

I'm considering life insurance for 2 reasons:

#1) As an investment vehicle: I'm in my mid 20s, I've been maxing out my 401K & IRA (and will continue to do so) but I'd like to have invested funds I can access prior to age 59 (somewhere between my 30s to 59). Given the tax benefit, life insurance is looking very attractive to serve this need.

#2) As a future protection: I have mortgage debt but since I'm single and have no dependents, there's really not a need for a life insurance now. However I do plan on having family & kids in the future when an insurance protection would be good, and my vague understanding is it's easier, better, or cheaper to get it while I'm younger (more insurable?)

From my little understanding, I believe life insurance to be a great idea for my needs (can anyone confirm that?) If so, what kind of setup would benefit me the most? And what are the drawbacks and things to watch out for? Who are some recommended places to buy the insurance with?

I need to understand more before I commit to throwing $x into it every month:
* From an investment stand point, how does the return compare to, say a mutual fund? (factoring the cost of the insurance and all fees associated with it, the tax advantage and all the factors associated with mutual funds?)
* If I decide that this is a good vehicle and would like to put into it as much as I can every month, while some months might be more and some months less, is it better to commit to a higher amount and fall short or to a lower amount and contribute extra some months?

Any advice is appreciated. Thanks.

genne, this is an excellent question and posed extremely well. at the outset, you also seem to have a very nice grasp of your entire situation now and as best you can predict in the future.

life insurance can be leveraged as an extremely effective investment and even outpacing investments of the same returns. this means that it can have higher returns than a comparable investment even after the fees and expenses. as such, congress enacted legislation to reign in insurance being used tooooo much as an investment vehicle. in other words, using insurance as an investment under pre-80's law was "too good to be true ... but true nonetheless". because of the law, essentially the government realized that they were in jeopardy of losing far too much from the tax base. this resulted in new legislation and now, the use of life insurance as you are considering is still spectacular, but it can only be funded up to certain limits. if you violate these limits, you will trigger your life insurance policy to operate as a modified endowment contract and it will no longer carry the tax favored status of insurance but rather be treated as an investment.

YOU DO NOT WANT A MODIFIED ENDOWMENT CONTRACT!!!

so, you should try to have the lowest face amount possible and over-fund it to just UNDER the point it would become a MEC.

based ONLY on what you wrote, you appear to be an excellent candidate for this type of program. while you may invest your money in a mutual fund, you will have capital gains and dividends (or even normal income taxes) with which to contend. the internal cash value of a life policy can be "borrowed" against. this is essentially tax deferred accumulation and distributed as non-IRS reportable income.

here is an example. assume you are withdrawing $200K per year from both your 401K and your life insurance. additionally you are in the 35% income tax bracket. in your 401K distribution, you pay the $70K in taxes and retain $140K for your use. with the life insurance you "borrow" against the cash value and you get the whole $200K - no taxes!!! And if your distribution plan is done correctly (and it must be) then you never have to repay the loans you take!!!

if both your 401K and your life insurance returned 12% returns on average, then in reality because of the tax savings your life insurance while in actuality only returning the same 12% would be a taxable equivalent of perhaps 17% and ... drum roll please ... all with the exact same level of risk of the 12% account!!!

as for my recommendations, i only recommend three companies whenever i am asked for a recommendation. they are NY Life, Northwest Mutual, and Raymond James. there are other smaller independent shops around but that is driven by your geographic location. in the end, if you operate via Raymond James, you should INSIST on a mutual insurance company for the contract. I would also insist on the absolute top ratings for the insurance company … this is known as “investment grade” since you are relying on the viability of an insurance company for your investments.

finally, if you wanna go lower risk you could use some versions of Whole Life where your taxable equivalent may be about 8-9% or you could use a Variable Universal Life and have an internal portfolio of equities designed for a 12% return.

hope this was helpful and i wish you luck in your decision-making.

1MO -

I knew we could count on you for the answer Genne was looking for, much more succinctly than I could have stated it.

I've got a follow-up for you, regarding a situation that I haven't had to deal with in the past:

Do you have a "short list" of companies that are favorable to work with for a proposed insured who has diabetes? Or does the disease just take this individual out of the running for affordable usage of whole/ul products?

Thanks for your insights...

Genne;

In my mid-20's I was sold a life insuance policy by an agent who went on and on about a "cash accumulation program" as though it was some magical money making machine. He barely even mentioned the fact that is was a whole life insurance policy, which was an absurd product for me to buy as I was single with no dependents. What I found I had was a policy that had zero cash value after the first year and would have taken 10-12 years just to break even in terms of the premiums I was paying. And that included "dividends" (which are in reality just partial refunds of premiums paid on old fashion whole life policy) and interest on those dividends. After three years or so my situation had changed (got married). I transferred what little cash value I had to a variable universal life (VUL) policy which, now many years later, I have been satisfied -- but not enthusiastic -- with in terms of the return on my cash value and the insurance coverage.

Having said all of that, I think you should deliberate long and hard in considering any type of life insurance as a long-term investment vehicle. You will no doubt see presentations or illustrations that imply monthly premiums contributed to a VUL policy are just like investing in a mutual fund. It is not. I can use my own situation as an example. If I send a $100 monthly premium to my VUL policy, the first thing to come off the top is a state premium sales tax of about 2.15% (this varies by state and may not even apply to your situation). Within the policy itself, there is an ongoing monthly dedecution for insurance (currently about $25) and "administration" ($6.00). At this point my "net" premium applied is $66.85 or so. In contrast I also invest in a number of noload mutual funds (Vanguard, Fidelity, American Century) in which my $100 investment is $100 applied. Conequently I would contend that the cash value in an insurance policy -- to overcome all the deductions and charges that are assessed against it -- has to earn a return exceptionally better than that of outside mutual fund to be equivalent. To equal 12%, a life insurance cash value may in fact have to earn 15% to 16% -- quite a tall order.

But you can take "tax free" loans the agent will say. Well it's just that -- a loan -- not income. The principal and interest accumulate -- forever -- and are dedcuted from your final death benefit. If as you say, you expect to have a real need for life insurance, this is indeed a dubious benefit.

As an alternative, why not consider investing in some of Vanguard's (or other companies -- I have no agenda here) tax-managed funds that seek to minimize taxable dividends and capital gains distributions, but are held outside of tax-deferred accounts so that they are accessible. When the day comes that you get married and begin raising a family, you will probably already have a sizable pool of assets, which you can then supplement with a term life insurance policy if needed. Yes the rates might be higher, but you probably won't need as much coverage at that point.

The only thing to consider in favor of investment-oriented life insuracne policies might be expectations regarding your health. It is true that you could "lock in" a policy now which could never be taken away from you (as long as premiums are paid of course) regardless of any long-term diseases you might succumb to. This is a bet you will have to make, considering your family health history as a guide.

Best of luck in sorting out this one.

jim, i sent you the short list via private message. that said, diseases of this nature will make the insurance quite pricey. not too pricey to have as insurance but too pricey to leverage insurance as an investment vehicle. if your diabetic client is looking for life insurance and has the dollars available you may then want to consider an annuity of some type to capture the dollars and pass them external to the estate (depending, of course on the whole variety of factors that just flashed through your mind).

one thing i was unclear about in your post was were you looking for insurance protection for the client or were you looking at leveraging insurance for the investment considerations. if only the death benefit perhaps a NLG ul policy.

hope this was helpful.

Thanks, 1MO - I was actually looking for the advanced investing considerations. And, your answer was pretty much what I expected... The annuity option may be the most effective route to go in the long run. I'll have to do some more analysis on the situation and talk to the companies.

Thanks for your insights.

gaken, you make several good points and i hope to add my own distictive flair to a few of them.

i agree that tax efficient investments (primarily ETFs) can be a valid choice. but, i also know that tax efficient doesnt mean tax perfect. the tax drag remains, but it could be lessened (based on TODAY's tax code which is no GUARANTEE of future tax codes).

gaken SHOULD (as you recommend) think long and hard about this concept. while i advocated that it MIGHT be appropriate i think you also read in my post that i recommended the same. this is not in dispute between you and i ... i just wanted you to understand that there are many of us that offset your perceived experience with your "original" life insurance agent. he may have said GO GO GO while i said YEHAW but lets make sure the bull wont kill you either.

gaken, you said "To equal 12%, a life insurance cash value may in fact have to earn 15% to 16% -- quite a tall order." this is totally incorrect. a life insurance contract need only earn about 9% to beat a standard large cap growth mutual fund that returns 12% returns in a standard account. and, that is including the fees that get charged. now, this is all fact dependent (age, health, income of applicant, insurance company, insurance contract, tax rate today, tax rate at distribution, and a whole lot of unfun things to try to get a handle on). but, the numbers are what the numbers are and unless you have something up your sleeve to explain your point better, or something i havent thought of, i am SUPREMELY confident in my numbers (give me 50Bp either way).

finally, and this is my personal opinion based ONLY on your single post and it could be totally off the mark. i am also not commenting on the specific life contract you had then or you have now. i am only commenting on the best considered use of these TYPES of contracts.

from my reading of your post, it sounds like you are an excellent candidate for a (good) whole life policy but you are a terrible candidate for a VUL policy. remember that internal to the VUL is a TERM policy which will increase in cost along the way. the ONLY way to offset this is to have a decreasing amount of term. in order to do this you must make a GOB (that is a technical financial term meaning lots and lots) of internal accumulation. you will only have the best opportunity of accomplishing this if you overfund the VUL policy. it doesnt sound as if you are doing this.

anyway, just some thoughts i had.

genne, i read on another thread where you are starting your own business ... or at least are considering it. if that is going to add a volatility to your income below where you are at presently, then you SHOULD NOT consider using insurance as an investment. it would be wholly contraindicated!

1MO -

Regarding the annuity you mentioned: are those fixed annuities, or are they the "overfed swine with cosmetics applied" variety?

(I resisted for a total of four days, which was superhuman on my part, I think!)

jim, unless a client is looking to liquidate the entire annuity contract or has every intention of annuitizing a contract (i would do my best to keep from annuitizing) then i would always prefer the dreaded blood sucking variable. while a fixed may offer a nice little 4% fixed (taxable equivalent of about 6ish), a portfolio could easily be devised for 6% giving you almost 8%. in addition you would have more options on riders with the variable. finally, the cost structure of the variable can be extremely small if the correct product is selected. all of this and you could still use a fixed account in your variable if you so chose. i just like the all around flexibility.

in the end, the little old lady that we all came to be familiar with rejected the nasty old fixed annuity in favour of the fixed sub accounts in her variable annuity. i like that kind of flexibility.

Great reply to the initial question, I would also recommend the VUL and watch as the VUL haters flock to the post to say don't do it. I understand your recommendations for the companies you recommend but also being employed by American Family Insurance highly recommend them as a viable option if they are in your state (in 18 states) then you can have the same agent that does your home and auto take care of your life. Our VUL subaccounts are managed by Fidelity, Federated and Vanguard. So yeah if you want a ROTH on steriods then VUL is a great option for the initial post.