Cashing Matured Whole Life Policy, on Grown Son

[pfg1]

I think WL AND ROTH, not either / or. Both are excellent vehicles that offer good tax advantaged income opportunities down the road. Personally I think everyone should have both if they can.
The main difference is, with a Roth you have no guarantees and you are limited to how much you can contribute. Plus there is no leveraging. Owner dies, beneficiary gets the Roth account balance vs a likely much higher death benefit from the life policy.

The key with perm life covg... with most companies the product will perform about like a bond fund, or better. Its not uncommon to see IRR on max funded products at close to 5% long term - even now with low interest rates/dividends we have today. Couple that type of growth with the liquidity, use, and control that perm life coverage provides, along with an ever increasing death benefit - to me, it is better than a bond fund.

The other thing is, many companies offer loan rates in the mid to upper 4's. So if you are paying interest at say 4.5, and if the policy is earning 4.5, well you get the picture. The policy continues to grow and compound year after year, both cash and death benefit, even if you have a loan against it.

 

[DHK]

1st - a Roth is simply a tax account. I have no idea what is IN the Roth to compare it to. And I'm sure you know that Charles Roth designed his "Roth IRA" after the benefits of permanent life insurance. Of course, to have a roth, you have to qualify income-wise, or do a "back door Roth IRA conversion" of a traditional IRA.

2nd - Every account has charges. I don't care if it's an FDIC insured account, a money market fund, or life insurance...everything has a charge. With FDIC insured accounts, the charges are baked and included in the current returns. With money market funds, because there is a RISK of loss (although it's very rare that any will "break the buck"), there is a charge disclosed. Life insurance, of course has charges, either within the premium, or separate (UL).

At least with life insurance, you have a death benefit in exchange for the charges. (Kind of a weak argument - I admit that - but it is a benefit.) In fact, let's get real: life insurance has INCREASING charges based on the amount of death benefit... so the only way to reduce the net charges, is to reduce the face amount of the life insurance policy. That can be done with whole life (reduced paid up) or UL (just reduce the face). Of course whole life has level premiums while UL may have increasing premiums, depending on policy design.

Whenever we compare various accumulation vehicles (not just securities), there are at least three factors to consider:
- Risk: What is the risk to your capital?
- Return: What is the anticipated returns we can expect for the level of risk?
- Cost: What is the cost to make and maintain the investment?


Bank on Yourself or any of the other "banking programs" out there are way too complicated. They need to simplify the concept. This is probably why MassMutual doesn't allow their career agents to talk about "banking".

Let's assume that I have a policy with $100,000 of cash value in it earning about 5% per year (the kind of policy really doesn't matter - whether premium paying or paid up doesn't matter for our discussion).

$100,000 x 5% = $5,000

Let's assume that I want to take out a $50,000 loan against my policy with a loan cost of also 5% or $2,500. (Notice I didn't use ALL the available cash values.)

$100,000 x -5% = -$2,500.

Now, if we do nothing, the earnings of the policy will absorb the costs and slow down the total performance of the policy.

$5,000 - $2,500 loan cost = $2,500 net gain.

If we pay the policy interest out of pocket, then it restores the policy growth as promised in the illustration (perhaps with a slight cost still).

$5,000 - $2,500 loan cost + $2,500 interest paid = $5,000 original earnings.


Why would someone use life insurance loans?
1) Never any collection calls in the event you are unemployed and can't make monthly payments with other lenders.
2) This preserves your credit scores.
3) You can "hide" these loans from your credit profile and it won't affect debt-to-income ratios.
4) You can preserve the compound interest curve that is guaranteed in your life insurance contract.
5) Never any margin calls against pledged securities for margin loans or bank credit qualification for a bank loan.
6) Even in retirement, it won't be about the rates, but about the volume of interest being charged. Assume you have $1,000,000 in cash values earning 5%. That's $50,000. Maybe you only take out $40,000/year (4% distribution rate) at a cost of 5% or $2,000/year. The $50,000 gains will FAR outpace the $2,000/year cost of the initial distribution. Both will grow over time as more loans are taken out. (And a great reason to ensure you have overloan protection on policies designed for retirement income.)
7) Don't forget that these loans are tax-free sources of retirement capital... and also won't cause your social security retirement benefits to be included in your taxable income. Other sources of retirement capital WILL cause social security benefits to be included in taxable income - either at 50% or 85%... and these limits haven't changed since 1993. I think we've had some inflation since then.
http://www.socialsecurity.gov/planners/taxes.htm
https://www.ssa.gov/history/taxationofbenefits.html
8) The asset itself doesn't have market risk where you could lose your money due to no fault of your own.
9) The vast majority of middle income America self-sabotage their savings plans by raiding their retirement savings because of credit card debt and other expenses that come up. By showing them how they can save money and have liquidity, they can have their cake and eat it too.

Just a few reasons I really like this concept.

 

[DHK]

I am not trying to be cynical but I could never believe in the concept. I have a short term Putnam bond fund with a checkbook that I use as a bank. Also I bought a $500,000 whole life policy when my first daughter was born in 1988 which I believe has an 8% loan rate so if I borrow $50,000 it would cost me $3,000 per year which is insane especially if I never paid back the principal. Even though I no longer qualify for a Roth IRA I do have a solo Roth 401k.

Can't blame you there. I was toying with the idea of joining Guardian Life around my area. (I know, it's kinda nuts to consider joining a captive agency, but the DOL ruling made me open my mind to it a bit. Gotta wait until that ruling is finalized or thrown out before making a move like that.)

But I was looking at Guardian Life's product brochure, and while the information it about 1-2 years old, it stated that every policy had an 8% fixed interest cost. And, if I remember correctly, they are direct recognition in respect to dividends. This means the original balance won't grow as though there wasn't any money borrowed against it. So, there's two strikes against Guardian for using this strategy.

Guardian would probably be best used with their Living Balance Sheet for leveraging the death benefit through other assets to maximize retirement income that way.

So, I agree with you. With that policy, I would only use it if I absolutely HAD to - which means an emergency situation.

This doesn't work with every policy out there, but it can work with some good ones.

My favorite right now is ANICO's Signature IUL because they have a low loan rate, living ABRs (rare in CA), and overloan protection rider in retirement (policy must be 16 years old and the insured over 75).

Other policies are good for this as well: MassMutual with a variable loan option, Ohio National, and others.

 

[Golfnut2112]

Thanks for all the info but I still don't see the advantage, except for the death benefit which could be covered by cheap term over using a conservative mutual fund as your bank. I think I will make the trip to Cincinnati to watch the money trax presentation.

I think what worries me now about that approach is the constant monitoring of the account even if you retire because to many things can go wrong. Also paying the loan interest just does not mean make sense to me, and finally the liability of the whole concept.

 

[DHK]

Thanks for all the info but I still don't see the advantage, except for the death benefit which could be covered by cheap term over using a conservative mutual fund as your bank. I think I will make the trip to Cincinnati to watch the money trax presentation.

I think what worries me now about that approach is the constant monitoring of the account even if you retire because to many things can go wrong. Also paying the loan interest just does not mean make sense to me, and finally the liability of the whole concept.

You're right - many things can go wrong. This is a strategy best used with the agent and policyholder working together. This is not a "sell and dash" financial strategy.

The monitoring is simple: Annual reviews. Annual reviews are the best ways to spend your time because you are:
1) giving good service,
2) may make additional sales, and
3) can obtain professional introductions.

But the monitoring isn't as constant like watching stock market performance or anything like that, but it does take some effort after the sale.

I don't know if you're using an app for your access to the forums, but I did attach a PDF attachment from the Tools and Techniques of Life Insurance Planning related to life insurance loan interest. That may be helpful for you.

I think the liability of the concept comes if the concept is "over-sold" too high of a premium (or sold an under-funded policy) and the client can't keep making premium payments to keep the policy continually funded. Of course, life happens. Like any other sale, you'll have to keep good records of the conversation, etc. Plus, if you're really doing a good job of over-funding the policy, there should be SOMETHING to help keep the policy afloat for a little while, even if you have to suspend payments for a bit.



That risk is inherent in any life sale for the first few years. Just like buying a home and then you get laid off. There's no equity there to borrow from (and no job to qualify for borrowing whatever could be there anyway), and if there aren't other reserves, they end up losing the home. It's similar for life insurance too.

Could you be blamed for someone getting laid off? I don't see how, but they could try. If you have good documentation, and structured the policy correctly, you'll prevail in a complaint.

 

[Golfnut2112]

It's not so much the annual reviews since I meet with my clients at a minimum of once a year. My biggest fear is years down the road when they start loaning out the money and getting huge loan interest bills or they decide to drop the insurance or it lapses after taking a lot of loans. The idea may make sense for someone that is high income and does not qualify for a Roth but for the average person that would qualify for a Roth I would not use the concept. I really believe it would be hard to justify in the court of law as to why you sold someone life insurance as a retirement plan with all the inherent risk and cost of loaning out the policy instead of a simple Roth. Also if it was such a great idea it would not need to be sold, people would be calling you to buy like they do with Roth IRA's. I still may be missing something because a lot of companies seem to endorse the concept. Like I said I won a trip to a home office to attend a money trax meeting which I may attend.

 

[pfg1]

Golfnut, PLI is just a piece of the puzzle, albeit (I believe) a very important one. I don't ever sell it as their "retirement plan", but as a vehicle to park $, earn all the benefits associated with it, and have a tool that can provide supplemental tax advantaged retirement income.

 

[DHK]

Just some more thoughts for you. I'm glad you're opening up your mind AND that you're being cautious with this. That's good.

I don't know if attending a moneytrax presentation will help you or not. They'll talk about 3 kinds of money: accumulated money, lifestyle money, and transferred money... and the idea of recapturing transferred dollars to fund your lifestyle and accumulated money goals. We've already talked about most of that in this thread, but I won't discourage you from attending.


I think what may help you is to ask ourselves "compared to what?".

Car Loan Comparison
Let's look at financing a car - via a car loan or via life insurance loan.

If you borrow $25,000 at 0% interest for a 5 year loan, your payments would be $416.66/month. ($25,000 / 60). One year's worth of payments would be $5,000/year. Of course, you have to have great credit to qualify for 0%, otherwise the payments would be more.

If we borrow $25,000 from a life insurance policy at 5%, the absolute minimum interest payments would be $1,250/year. However, they really should be treating this like a regular bank loan with regular payments. Let's not forget that the policy will have its own values and earnings, but we're ignoring that for now.

Trouble can come in if they don't make any premium &/or loan payments. If they stop doing both, the policy is in trouble. Our job (and protection) would come in to document that we discussed the policy performance and the importance of repaying policy loans so the capital is there again to borrow for other needs as they arise. We can also talk about the danger of letting a policy implode with outstanding loans (phantom income) and what it can do to their tax situation.

Will clients actually 'think' like a banker?
That's the trouble with the concept. Will clients practice restraint with their cash flow should they want to borrow to spend and if they can't afford to? That is a possibility. But if they are making regular premium payments as well, I think that risk is greatly reduced. If they stopped making payments and started spending the money without plans or capacity to maintain or repay the loan, then yes, they are in a great danger of having the policy lapse and having a phantom income scenario. The tax advantages are only good for as long as the policy stays in force. Otherwise, they could be in trouble.

I ain't their papa.
Some people will simply self-destruct their situation. Some people have gambling problems. I've seen that happen were someone liquidated their $250k variable annuity rollover over a 2 year period due to a suspected gambling problem. That doesn't mean we can't and shouldn't recommend rollovers to annuities or any other solid financial strategy, but it does mean that we need to document our conversations with the client, especially if and when they begin to blame the advisor and not their personal problems.

Generally speaking, by working primarily with homeowners, you tend to avoid such problems. Why? Because it takes the same discipline to save to get the down payment on the home and the credit discipline to qualify for the mortgage. As long as nothing major happened (job loss, major medical issues, divorce, etc.), they'll generally keep to the same financial disciplines.

If they are NOT a homeowner, generally, if I touch on this concept, it would end up being a blended policy so they can get something going... but it wouldn't be large enough to cause any real financial harm in the event of a lapse.

If they get divorced... it could be a problem. Of course, two policies funded on an equitable basis would help in the beginning and probably a very good idea.

If they become chronically unemployed... well, the cash values could sustain the policy for a while, but not indefinitely. You could do a reduced paid up option on the death benefits so no new additional premiums are due. But the same problems with traditional bank or credit would be a problem much sooner, along with collection calls, repossession of cars, etc. Plus, because these loans and payments aren't being reported to credit bureaus, their scores and employment eligibility remain high. They are much better off in this situation for the short-term using life insurance compared to traditional financing.

In the event of disability, disability waiver of premium will help at least with the base policy, if not the entire stipulated premium, depending on the policy and design. Of course, they need to keep paying policy premiums for at least 6 months before the companies will make the payments for them.

In the event of death, the net amount at risk + cash values - any outstanding loans are paid out to beneficiaries.


As far as why people aren't beating down our doors and asking for this... is primarily because the public doesn't know. And their favorite financial entertainers don't know about it either. And that's perfectly fine by me.

The perception out there is that permanent life insurance is "expensive". Well, so is buying a home, compared to renting an apartment. However, we need to show how they are right, but how they are also wrong.

I created an excel spreadsheet based on American National's term, base whole life, and a max-funded IUL. Most entertainers think that all permanent life insurance is like the base whole life. No cash values in the 1st year and almost nothing in the 2nd year.

But when you can show the difference in the maximum funded policy with reduced death benefit... people will see something they'd want to have and would gladly refer you to others they know, love, and care about. Plus, if you have a separate term policy or a term rider, they can convert more to these plans over time.

I hope this helps.

 

[DHK]

Just a side note about financial entertainers - the very first person I heard of "buy term and invest the difference" was John Cummuta in his course in the 90's "Debt Free and Prosperous Living" course.

Today, he's doing the same thing I'm doing. In fact, he communicates it very, very well.

 

[Golfnut2112]

The only advantage I see using life insurance is the waiver of premium. I currently use a bond fund with a checkbook which is a lot simpler and more cost effective, the loan interest is a unnecessary expense.

I will still probably go to Cincinnati for the meeting but I think I am going to stick to buy sell agreements and wealth transfer cases. Lol