Overfunded Life Insurance as a Savings/Financing Vehicle

I've read a lot of posts on this site that mention overfunded life insurance and PUA, so I know I'm in the right place.

My question: Is this a practical, smart way to save for big ticket items?

I (regrettably?) purchased a whole life insurance policy 2 years ago specifically for this purpose. I abhor financing things unless it's a house or a life&death emergency so the thought of saving money this way and then paying back to the policy seemed attractive. Of course I didn't know jack about insurance and didn't look closely enough at the cash value growth projections until just recently. Turns out, the optimistic/non-guar projection has the cash value catching up to what I've paid in at around year 9. The policy is projected to be self-supporting at around year 5. After 7 years, the IRS removes the restriction on withdrawing cash value, which according to the sales pitch is when the fun begins.

I'll have $60-$70K to borrow/withdraw for fixing up the house or whatever. Then I pay it back with some interest. The interest goes to buy additional PUA which is converted to full-cash value insurance and grows at 3% plus the dividend (3.5% right now).

Was this dumb luck
...or just dumb?

bdunk, in the long run this may work out for you. however, it is probably not a venue i would have recommended. that said, you need to go in and speak to your agent you got this from or another agent and have them run the numbers on your policy. 99% of the time, life insurance should be used for life insurance. the other 1% of the time it can be leveraged quite economically and successfully as an investment vehicle. both of these uses should be long term as insurance works best when used long term. short term stuff is kinda problematic.

dumb? no. but you may have some other options that are EASIER and CHEAPER in the long run.

1MO, when you say "run the numbers", are you talking about cash value growth and death benefit growth projections? If so, I do have several illustrations already.

What would be some other things to look into? I don't want something where my money is locked up till 59 1/2; I need a way to save for things like cars, or a child's wedding or home improvement - big ticket stuff.

Also you said 1% of the time, it can be economical/successful. Can you describe such a situation (in the remote chance I'm in it).

Finally, one last thing I think is worth mentioning. I am self-employed and own a c-corp. (I'm the only employee.) My accountant has told me that I can deduct the life insurance premiums (that the company can reimburse me personally for the policy even though I personally own and control it). This one aspect alone makes my policy attractive because money is going from a corporate account where it hasn't been taxed yet right into a life insurance policy, where it won't be taxed. On my W2, I have to declare a tiny amount of compensation because I'm receiving this policy as a form of compensation from my company. But what I have to declare on my W2 is nowhere near what the premiums are. It's so small as to be insignificant.

If I were to take my premiums as salary instead and invest it, I of course would have to take income tax out of that. I'd have about 70% left to invest. I figure that 70% would have to grow at 9-10% for 9 years to catch up to what my policy is projecting. Some people would say 9-10% is easy to achieve and more is definitely possible, but right now I'm thinking I can get there the safe/conservative way with my policy. Plus there's no taxes, which I really like.

I'm not sure that I would have steered you towards a whole life policy for what you are looking to do, but all is not lost! As 1MO mentioned, life insurance is best used for longer term savings and there is nothing to say that the policy may not work for you! If the child's wedding or the home improvement isn't for a few years off, don't sweat it; allow the cash value to grow and then use it to pay for those things. By that time, your policy dividends may be enough to even pay the interest on policy loans. What company is your insurance with? Also understand that now your family has a death benefit that they wouldn't have if you were invested in a mutual fund.

There is a local grocery store here that is more expensive than the other local stores. I was a bit surprised as to the difference of prices when I went in (I had a gift card) but when I left I knew WHY the prices were slightly more expensive. The service that I got was wonderful; the other supermarkets didn't come close to comparing in service. It's similar with the insurance; maybe in the short term you are getting less of a return, but keep in mind that all the while your family has a guaranteed income if you die, and that's a big thing.

Right now I am working with a guy that has never even heard of whole life insurance but is looking at alternative ways of saving. He doesn't own ANY insurance (except some through work) and is single and not with anyone. He's about thirty and makes a pretty decent income. He said that he could see himself getting married within five years and I am going to guide him partially into a whole life policy for longer term savings, and for shorter, more immediate cash needs, into a high yield savings account we offer. Once he reaches about $10,000 we may roll it over into a mutual fund, but all the while the money is accessible to him. If he chooses to go with my recommendations, he will have a death benefit for his future family at a lower premium (since he is purchasing now rather than later), a long term, tax deferred savings vehicle, and a short term savings vehicle.

What's the point? None really, just to say that life insurance can be used in many instances for longer term savings and the benefit is that it isn't locked up until 59 1/2.

-Joe

The company is Lafayette Life. They're a mutual ins co. and they've been around since 1905. They've paid dividends every year and they're rated way up there by Moody's and Fitch.

Also, I know you've encountered this question a lot so forgive me, but how do you (or I in this case) handle the Suze Orman's of the world... "That was stupid. You should have bought term and invested the difference."

Thanks

Another thing you can do to have fairly liquid funds with okay growth is to go with a money market mutual fund or bank account. The fund isn't going to be FDIC insured; the bank account is. The main downside is the fact that you often have high minimum balances. And you'll have mutual fund fees on the money market fund. But the returns right now aren't too bad for "safe" investments.

bdunk,

How do I handle the Suze Orman's? I ignore them and confidently rest on the fact that with permanent insurance, the cash value is growing tax-deferred, and that the insurance is cheaper. Ask any veteran insurance agent which is cheaper, term or permanent? In the short run, the term is cheaper, but in the long run the permanent is cheaper. The only time that term insurance is cheaper is if you are covering a small gap (maybe a mortgage) or you die within your term (just as an FYI, only about 2% of term policies pay out).

Rather than beat a dead horse, here is a quote from another thread from a while back. It will give you some idea of why purchasing term is not the only option.


In short, the answer to your question about "everything but term being a ripoff" is no.

Don't get me wrong, term insurance is great, but it is not "the end all, beat all" so to speak. Judging by your wording, I am going to guess that you haven't any children yet, but please correct me if I am wrong. Now many people may advise you to purchase 20 year term insurance and invest the difference, but should you do that? Purchasing life insurance is managing a risk. The risk is that you are going to die before you are ready and financially unable. People generally buy life insurance to cover debts or final expenses, provide a nest egg for a college education for their children, and/or provide a steady stream of income for the surviving spouse. There are obviously other reasons (such as charities, inheritances, etc.) but these are the main ones.

So let's say, Aggie, you are 27 and your wife is 26 (just guessing here) and you purchase 20 year term insurance on yourself and your wife. Meanwhile, you have 3 children at your age of 29, 31, and 34. If that insurance is to provide for your family in the event of your death that's great, but what happens if you don't die before the term is up? (Remember, we are talking about risks, this is the risk). You still have a family of 18, 16, and 14, your wife has been out of the work force for about 20 years, and you had a heart attack from worry about investing the difference every month for the past twenty years. Was this a smart choice? Even if you DID have the discipline to invest the difference EVERY month, month after month, your investment is not just growing idly in an account somewhere relatively unforgotten just waiting on you to die. You must record the interest and pay taxes on that interest as it grows. You must also always remember that inflation doesn't care about your investment, and will eat away at the purchasing power of your dollar while Uncle Sam is getting his cut. (so if your goal was a million dollars to have invested in 2007 dollars, in 2027 dollars this is really roughly $553,000--based on a conservative 3% interest rate) I'm not even going to mention that you are assuming the risks associated with investing and that there's a chance you may not have invested as well as you would have hoped. Also we will pretend that your wife is up-to-date on where your investments are and what to do with them after you die, because we know that's commonplace. And since we are talking about risks, what happens if you threw a little 7lb bundle of joy in at your age 36? Now you also have an 11 year old.
At the end of your term, you find you still need life insurance for the aforementioned reasons, but (as we are still talking risks) you really DID have a heart attack and you are now uninsurable! Whole life does sound to start good at this point.
But if you did die?
So here you are, dead, with a wife that has not been in the workforce for 20+ years, dealing with your death, 4 kids, 2 still young, trying to pull your investments out of some mutual fund or account to pay for your oldest child's college education but trying to figure out if she needs to pay an estate tax on that money she's pulling, all the while dealing with her beloved husband's death (did I mention that?). Now she realizes (thanks to your investing) she isn't going to have to go to work right away, but she see's it looming on the horizon but she is first going to try to pay your doctor's expenses and your funeral off.

Your children just lost one parent, do you want them to lose another?

Amazingly I am a very happy person

What I would recommend my clients is to buy a certain amount of insurance (I'm not going to give a number because I am unaware of your financial situation and goals) and make part of that whole life and part term. Over the course of the next few years, I would gradually convert that term into whole life. Did I mention that a good whole life policy can generally keep up and even surpass inflation? (Depending on your health, smoker/non, etc.). The beneficiary of your policy doesn't have to pay taxes on your proceeds, either. Cash value increases are also growing tax-deferred (unlike your investment).

Thanks - you guys are doing a real service on this board.

I really appreciate it.

Thanks - you guys are doing a real service on this board.

I really appreciate it.

yup...i have been learning a lot from this forum! :)