I have a 401K at work and I also purchased whole life variable universal insurance (VUL) recently.
How do you feel about using life insurance as an investment? My finance guy believes in it because you don’t get taxed on it when you take money out. But I don’t feel comfortable with this since it’s not that popular. I’m also thinking of opening a ROTH IRA to diversify my investments/savings. Is there anything else you would recommend investing my money into?
I sincerely hope that your “finance guy” isn’t an insurance agent making massive commissions off his clients who purchase these insurance policies through him. As a general rule of thumb, insurance policies are insurances (like warranties), not investments.
What I mean is that in a pure financial perspective, the earlier the policy holder dies, the bigger the advantage of having a policy. As the payout is essentially funded by everybody else who are still paying premiums, someone loses in the math. Then there are the commissions involved, as well as the need for the insurance company to make a profit, pay its employees etc. From this, one can only conclude that on average, every policy holder wouldn’t get a positive return on the payments made.
In a way, you can compare this to roulette, where you can only bet on odds or even. Sometimes you win, and sometimes you lose, but everyone loses when 0 or 00 show up (aka the fees that are imposed).
Of course, comparing gambling with insurance is a stretch. Life insurance is not about making a positive return, but about protection against accidents. Think of that instead when you buy insurance policies, as it is ultimately what it provides.
VUL’s main advantage is the tax advantage of the possible gains from your investment, but note that it only offers tax deferred benefits, like a Roth IRA or 401k. Furthermore, VUL carries high up front charges on your premiums (think of it like a front end load of a mutual fund) which will immediately cut into your potential return. In addition, there are numerous fees such as administrative costs that are deducted from your account regularly, not to mention surrender fees if you don’t hold the policy for a great many years.
Therefore, the longer you hold a VUL policy (and thus have made more premiums), the less benefit a VUL would give you. Again, insurance offer protection against accidents. Try to compare it to retirement vehicles like 401ks and IRAs and you are comparing apples to oranges.
The Bottom Line
Take advantage of the employer match from your 401k, then max out your Roth if you still qualify. For those who have very high income, it’s best to consult a tax specialist to see if there are ways to legally shelter your taxes. Never trust anyone’s advice about your taxes other than a tax professional.
Insurance policies are best thought of as warranties instead of wealth accumulation techniques.
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{ 4 comments… read them below or add one }
For any investment keep in mind, no one is working for free. So all advice should be kept in that perspective. Hopefully, any “adviser” always has your best interests in mind and not their pocket book.
Even Tax professionals can be making money with referrals. There is nothing wrong with people earning a living. Just make sure you are comfortable and seek lots of input as was done here.
I do have a small policy for my wife that is structured similarly. But again, its main purpose was to protect against the horrible. I have a much larger Term policy on myself. Frankly, I haven’t been too impressed with the “gains” on the whole life policy so don’t do it as an investment.
I’m appreciative that you make a point to distinguish between insurance policies and investments. There is definitely a difference and I’m glad I was reminded of this.
My in-laws had Adjust Complife policy with NW Mutual on my husband when he was a kid, so a couple of years ago they sent their insurance officer to us to sign us up for life insurance. Being very financially unsavvy, we ended up getting a half mil Adjust Complife policy, which the insurance agent said would help with our retirement. Now we’re stuck paying almost $600 a month on a life insurance policy. We have to pay for 21 years before the guaranteed cash surrender value equals the amount we put in. The estimated (non-guaranteed) value in 21 years is at a return of 4%.
Right now we max out our Roth IRA’s and pay for this policy. I am continuously torn between just keeping it in this account because it forces us to save (regardless of the low percentage rate), or stopping payment and losing the front loaded $6000 (yes, that’s how much the front load fees were). I had no idea of any of this, and am sort of grumpy about it all. My dad is pretty savvy in the market (unfortunately we didn’t consult him before we signed) and used to be an insurance agent, and both he and his stockbroker are shocked that we have a policy like this. He’s worried because we’re forcing so much of our money into a subpar investment vehicle at the same time that we’re trying to start a family.
Anyway, there’s my sad life insurance story.
Kris, Yikes, unless the $600 a month is something that you can easily afford to live without right now it sounds like the agent did not take into consideration what your real needs are.
I for one see the value of the investment is VUL for the right person and the right circumstances (I’ve seen it work), but I wouldn’t use it as a priority for retirement for sure.
Saving as much as we can for retirement shouldn’t put us in the poor house at the same time, regardless of who helps us make our financial decisions.