Using Whole Life (Permanent) Insurance to Supplement Retirement

[LGilmore]

So I read all this last night after a few drinks.... thought maybe I had too many... just read all that stone cold sober.... now I need a drink.

God help anyone this joker convinces to be a client.

I thought it was just me and wasn't going to comment. Definitely a language barrier and no real understanding of these options.

Reminds me of somebody who has not read anything about these things but is going off of the opinion of a trainer or sales manager. So often I was scratching my head after reading and thinking has this person ever done any continuing education on retirement plans?

 

[scagnt83]

I thought it was just me and wasn't going to comment. Definitely a language barrier and no real understanding of these options.

Reminds me of somebody who has not read anything about these things but is going off of the opinion of a trainer or sales manager. So often I was scratching my head after reading and thinking has this person ever done any continuing education on retirement plans?

DHK made a good point, correct terminology is very important in financial matters. Mixing up terminology can cost clients money.

I have a client who did an IRA-CD at the bank... the bank misunderstood what the client told them and it was classified as a ROTH instead of Traditional. Client of course did not realize this. So they filed their taxes as if it was a deductible contribution. If the mistake was not caught, the client could have faced fines from the IRS. All over a miscommunication... and correct terminology was even used, so imagine what could happen with incorrect terminology!


The agent also has to be able to communicate with other financial professionals servicing the Plan.... and if you dont know the right term then things are going to get messed up very quickly.

 

[pfg1]

So I read all this last night after a few drinks.... thought maybe I had too many... just read all that stone cold sober.... now I need a drink.

God help anyone this joker convinces to be a client.

LOL! I hear ya SC...

 

[safemoneyman42]

You did. Im not going to argue over the value of WL with you. But what I stated about comp is a cold hard fact.

Take Mass Mutual for example since its a common policy sold (but all participating WLs work like this):

55% commission on Base Premium
4% commission on Excess Premium (amount over Base)

Base Premium is based 100% on the Death Benefit. It is the minimum amount required to keep the policy in-force.

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Bob,
The issue is that if a customer comes to an agent and says "I have $10,000 to put in a WL policy". One of two things can happen:

1. That agent could put them into a policy with a Base Premium of $10k, and make $5,500. That policy will grow at a marginal increase.

2. The agent could put them into a policy with a base Premium of $3,000, and let the rest of the Premium go into the excess (PUAs). That policy will grow at a strong conservative rate. As a consumer, its obvious this is the option you would likely want.
But the agent only makes $1,900 with this better performing option.

#2 is how an honest and competent agent sells Cash Value WL. Unfortunately not all agents design WL this way, or know how to design it this way.

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No matter what your thoughts are on the value of WL. The Commissions are based on the "Base Premium", which is dictated by Death Benefit.

For UL, Commission is based on "Target Premium", which just like WL Base Premium, is based on the Death Benefit.

Scagnt83, correct me if I'm wrong, but in order to put that much excess into PUA's, don't you need to blend the total face amount with term insurance? Again, I could be wrong but I believe this would subject the client to a additional premium load for the term rider, and the cost of the rider is not guaranteed. If the one year term increases in the future it would require additional premium outlay from the client. You may be correct that the agent is making less on such a design, but I'm not sure it is best for the client by adding these additional variables to the policy.

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When it comes to life insurance, the public is, for the most part, woefully ignorant. The reason you need a license to sell it, apart from the need for the government to collect some money, is to ensure that the public gets competent advice about a product that we all know is far too complicated for most people to comprehend. And that's not to mention that most people cannot easily quantify the financial value of a human life, so that if that life is suddenly gone, to be able to deliver to their dependents a financial benefit that will replace the loss of that life.

Fire insurance is simple. Your house burns down and you want enough money to put the house back.

Car insurance is more difficult to understand, not because you can't figure out what it costs to replace your vehicle, but because the potential damage you can cause to others, using that hurtling hunk of steal, can give rise to all kinds of financial liabilities that a lot of people don't understand.

Now in most cases the public is forced into the above forms of insurance. You can't get tags for a car unless you buy car insurance. You want a mortgage for your house, you must have fire insurance.

NOTHING compels anyone to buy life insurance.

Combine that with the fact that the "insured" can never benefit from a life insurance death benefit. It is a product you buy only for the benefit of those that are left behind, and you're dead.

Therefore, the life insurance consumer is COMPLETELY at the mercy of the knowledge and expertise of the individual selling them the life insurance. I have seen enough in the years that I sold life insurance, and in the years since, to be quite certain that many agents (not all) care more about their pocket books than what is best for the consumer.

Once again, that is all fine, until I uncover an agent that has knowingly left a consumer under insured so the agent can make a buck. If the buyer dies, and the agent's actions leave the survivors in a mess, my hope is those survivors can sue that agent into oblivion. Of course that's complicated by the fact that the key witness for the plaintiffs is now dead. It's a he said / he said fight, and one of those two is no longer among us.

I've heard all the excuses, but it was a funny thing when I sold insurance. The vast majority of consumers I dealt with, agreed with me. Of course they do. What I am saying is dead on. Shame on anyone who sells too little coverage.

Bob, I assume you think it's best to sell the client more term coverage than a smaller permanent policy. Am I correct in that assumption? Any idea the % of term insurance that carriers actually pay death claims on? Wouldn't you agree that the best type of insurance is the one that's in force the day that you die? Something is better than nothing, IMO.

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How do you know she doesn't have a Roth that she is maxing out?

How do you know if she qualified for a Roth, or if she wanted to put in more money than a Roth would allow?

 

[regularAgent]

You see, even when they are treated more or less the same when talking about taxes and penalties, they are two different vehicles, for different uses. Let see:

One of the biggest benefits of being self-employed is that there are more (and better) retirement plan options available to you than are available to most taxpayers. In addition to the standard traditional IRA/Roth IRA options that everybody has, you have three more noteworthy options:

Simplified Employee Pension (SEP IRA),
Savings Incentive Match Plan for Employees (SIMPLE IRA), and
Individual 401(k) — sometimes called a solo 401(k) or a self-employed 401(k).

SEP IRA
SEP IRAs work in almost the exact same way as a traditional IRA. That is, you are allowed an above the line deduction for any contributions you make, and distributions from the account are taxable as income. The only really important difference is the contribution limit. For 2016, if you have a SEP, you are allowed to contribute the lesser of:

25% of your net earnings from self-employment, or
$53,000.


Individual 401(k) Plans
An individual 401(k) plan functions very much like a 401(k) plan with a person’s employer. The difference is that you are allowed to make a contribution in the role of employee and a contribution in the role of employer. You are allowed to make:
1. An employee contribution of $18,000 for 2016 ($24,000 if you are 50 or over), plus
2. An employer contribution of 20% x (your business’s profit, minus the deduction for one-half of your self-employment tax).

Notice the word Plans in the 401K.
1. Individual 401(k): Roth Option

Is an Individual 401(k) Always Best?
Given the dual advantages of Roth contribution capability and (usually) higher contribution limits, one might wonder why anybody would choose a SEP or SIMPLE IRA over an individual 401(k).

Previously, a significant disadvantage to individual 401(k) plans was that they came with higher administrative costs. In the last few years though, price competition has brought costs down considerably at some brokerage firms. For example, Fidelity’s individual 401(k) has no set-up or administrative costs at all. Similarly, Vanguard’s individual 401(k) has no set-up fees and only a modest administrative fee: $20 per year for each mutual fund in the plan — and this fee is waived if you have at least $50,000 of assets with Vanguard.

SEP vs. SIMPLE vs. Solo 401(k)

How much can you contribute to a Roth IRA in 2017?
$5,500 for those age 49 and under
$6,500 for those age 50 and older (use age at end of the calendar year)

but One have to use also this rule
Do You Have Too Much Income to Make a Roth Contribution?
For single filers - your ability to contribute to a Roth IRA in 2017 is phased out as your modified adjusted gross income (MAGI) reaches the range of $118,000 - $133,000.

https://www.thebalance.com/roth-ira-contribution-income-limits-2388896

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Bob, those 10,000 could also be use to setup a PDA account and feed the whole life from the PDA, as regular premium, but you ussually do this with Gift for a child or with money from the grandpa for tuition.
Like this the full commision is going to be paid, and is not charge back garanty,

I don't know the term PUA's, but when you put money over the regular premium or use it as a PAID UP ADDITION, yes the policy is going to grow as fast it can, but you won get any commision on the paid-up. I will use this just for WL in college funding.
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A paid up whole life policy is a great asset to use and abuse, to have and to hold.
The policy is "paid up" because it's built up enough value that it's self-funding - borrowing from the right pocket to pay the left pocket - and you can set it and forget it.
https://www.quora.com/Can-you-receive-cash-from-a-paid-up-whole-life-policy
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I;m sorry but I couldn't get that part of blending the whole amount to........ with a Term Insurance.

But if you are talking about commision, why mix it, WL is going to paid the max. structure it well and off you go.

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Sorry.
PUA's you mean it as a Paid Up Addition?
Itn's it?

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This is the explanation of implementing the PDA, even if you are thinking the policy is going to or not to MEC. or avoiding the age.
Your client is going to have a discoutn and interest crediting to the PDA
But for the agent as I said before...

Commissions
The Premium Deposit Account is non-commissionable.
Normal product commissions will be
paid on the premiums when they are withdrawn
from the PDA to pay the amount due. No advance
payment of commissions will be allowed.

http://www.theinsgroup.net/images/stories/LSW/Life/LSW_PDA_WholeLife_Term.pdf

 

[rousemark]

Scagnt83, correct me if I'm wrong, but in order to put that much excess into PUA's, don't you need to blend the total face amount with term insurance? Again, I could be wrong but I believe this would subject the client to a additional premium load for the term rider, and the cost of the rider is not guaranteed. If the one year term increases in the future it would require additional premium outlay from the client. You may be correct that the agent is making less on such a design, but I'm not sure it is best for the client by adding these additional variables to the policy.

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Bob, I assume you think it's best to sell the client more term coverage than a smaller permanent policy. Am I correct in that assumption? Any idea the % of term insurance that carriers actually pay death claims on? Wouldn't you agree that the best type of insurance is the one that's in force the day that you die? Something is better than nothing, IMO.

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How do you know if she qualified for a Roth, or if she wanted to put in more money than a Roth would allow?

I don't and that is my point. There is no basis in the facts presented by the OP to make any assumption about a Roth.

 

[regularAgent]

As a agent, we have to relay on the CPA calculus about any money that is going to set aside to fund a IRA.
But the same amount allowed for IRA is also the same amount inicially to ROTH until some extend. Example:
You may only contribute to a Roth IRA if you make less than a certain amount of money: $132,000 for single filers and $194,000 for married couples.
The maximum annual direct contribution to a Roth IRA is $5,500 unless you are age 50 or over in which case it is $6,500.

Are You Eligible?
Two things determine whether you can open a new Roth IRA or continuing to invest in an existing account:
Your current-year income
Your tax filing status.
First, you have to have “earned” income; that’s income you make from working, typically in the form of salary, hourly wages, or profits from a small business.
If you have earned income, you then need to make sure you aren’t going to make more than the federal government allows for Roth IRA account holders. The amounts differ depending on your tax status.

2016 Roth IRA Rules - Income, Contributions & More | RothIRA.com
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If the client is having money to pay to the IRS as tax in any given year, he better used it to fund a retirement plan, if still having more money he can set up a ROTH. or open a plan and them Roll the money in exces to the ROTH.

A Roth conversion allows you to convert money from a traditional IRA into a Roth IRA. A Roth IRA offers tax-free growth and tax-free withdrawals in retirement.

I recomend, not to tell any amount of money to any client, this is a only responsability of the CPA. So there are many strategies to used, but that is better to leave that to the advisor point of view at that particular moment.