cash value based life insurance--is it ever a good idea

[radslooking]

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if you are looking at a variable life insurance policy (that has mutual funds) that has averaged 8.8% over many years, with the cash value TAX-FREE when you withdraw....and assuming taxes are as low now as they'll probably ever be...(which i don't think is a terrible assumption to make, they are not that high right now compared to where they likely will be)

this money would not be touched for years mind you, it makes no sense to withdraw cash from this account before 15 yrs.

still a bad idea?

 

[radslooking]

also, while we're at it, i have a broker, and we put in some cash in a CD as a safe haven for a short period of time---9 mo b/c stocks were doing so crappy. I doubt i'll ever do this again, i don't care much for CD's. in any case, the best rate for a CD right now is around 4.1%, or a little better. i got a rate of 3% and my broker got almost .5% (meaning the total would have been about 3.5%). Basically, he ends up with about $170 worth of commission for doing nothing other than signing me up for a CD i could have done myself for 4% if I had just withdrawn the cash.

Basically the swing is essentially 400 bucks over a nine month period if I'd done it myself. What do you think about that? Normal cost of business or a crappy broker?

 

[mgdsh]

if you are looking at a variable life insurance policy (that has mutual funds) that has averaged 8.8% over many years, with the cash value TAX-FREE when you withdraw....and assuming taxes are as low now as they'll probably ever be...(which i don't think is a terrible assumption to make, they are not that high right now compared to where they likely will be)

this money would not be touched for years mind you, it makes no sense to withdraw cash from this account before 15 yrs.

still a bad idea?

Don't really understand your question here.

also, while we're at it, i have a broker, and we put in some cash in a CD as a safe haven for a short period of time---9 mo b/c stocks were doing so crappy. I doubt i'll ever do this again, i don't care much for CD's. in any case, the best rate for a CD right now is around 4.1%, or a little better. i got a rate of 3% and my broker got almost .5% (meaning the total would have been about 3.5%). Basically, he ends up with about $170 worth of commission for doing nothing other than signing me up for a CD i could have done myself for 4% if I had just withdrawn the cash.

Basically the swing is essentially 400 bucks over a nine month period if I'd done it myself. What do you think about that? Normal cost of business or a crappy broker?

Brokers of all sorts (including real estate) are just about useless middlemen, especially when they are taking fees on a CD. I'm not really sure why you'd let a broker even do that for you, when you can do it yourself.

 

[radslooking]

In answer to your question...I didnt' know my broker was getting a .45% fee on it, otherwise I wouldnt have done it. I'm not pleased about it, and will ask about it and be scrutinitizing such things more carefully in the future.

As for the first question...my point is would you invest in such a vehicle. After you've maxed out retirement accounts each year, would you invest in such a policy, or just put it into stocks. You can have a tax free withdrawal at the back end, but the return isn't generally as high as stocks.

 

[mgdsh]

In answer to your question...I didnt' know my broker was getting a .45% fee on it, otherwise I wouldnt have done it. I'm not pleased about it, and will ask about it and be scrutinitizing such things more carefully in the future.

As for the first question...my point is would you invest in such a vehicle. After you've maxed out retirement accounts each year, would you invest in such a policy, or just put it into stocks. You can have a tax free withdrawal at the back end, but the return isn't generally as high as stocks.

I see. Personally I'm really not sure what the advantage of having a broker at all in this day and age is. But thats JMHO.

In regards to life insurance, yes it is an asset class and yes it can be an investment.

 

[radslooking]

I see. Personally I'm really not sure what the advantage of having a broker at all in this day and age is. But thats JMHO.

In regards to life insurance, yes it is an asset class and yes it can be an investment.

well, the broker is because we're too busy or uncomfortable handling it on our own. I have no training in this area and am learning as i go.

My question is if you think its a reasonable investment vehicle or a poor one over the long term. I am inclined not to do it, but was curious what the consensus would be.

 

[mgdsh]

well, the broker is because we're too busy or uncomfortable handling it on our own. I have no training in this area and am learning as i go.

My question is if you think its a reasonable investment vehicle or a poor one over the long term. I am inclined not to do it, but was curious what the consensus would be.

I'm not an expert at life insurance by any means, but I do understand that a lot of life insurance companies will take the premiums they collect and actually invest them. Some of them invest those premiums in risky asset classes like CDOs, ABS, etc (See AIG, lol). So what I'm saying is just make sure you have an idea how each life insurance company grows the value of your assets.

In addition, depending on your age, life insurance can also make sense as a means to take care of your family in case of the worst possible scenario.

As you've kind of hinted at, I would look into other investments first and life insurance wouldn't be at the top of my list, but it definitely would be something I would consider.

I myself have a life insurance policy FWIW. Well 2 actually if you include the one given to us by the residency program.

 

[radslooking]

great thanks. do you have term or permanent?

 

[LADoc00]

if you are looking at a variable life insurance policy (that has mutual funds) that has averaged 8.8% over many years, with the cash value TAX-FREE when you withdraw....and assuming taxes are as low now as they'll probably ever be...(which i don't think is a terrible assumption to make, they are not that high right now compared to where they likely will be)

this money would not be touched for years mind you, it makes no sense to withdraw cash from this account before 15 yrs.

still a bad idea?

Im doing a very comprehensive analysis of VUL, variable universal life VS. Mutual Fund/Whole Life policy as a capital gains tax free investment strategy as well.

Im meeting with my wealth manager tommorrow to debate this as both have numerous pros and cons.

I will report back.

 

[radslooking]

Im doing a very comprehensive analysis of VUL, variable universal life VS. Mutual Fund/Whole Life policy as a capital gains tax free investment strategy as well.

Im meeting with my wealth manager tommorrow to debate this as both have numerous pros and cons.

I will report back.

great, thanks, let me know what you found out. I think the life insurance salesman tried to trick me a bit by telling me you can withdraw tax-free, but that's not true, the interest is taxed i believe. Also, if you don't withdraw any money before you die, all you get is the death benefit. Let me know what you find out.

 

[The White Coat Investor]

Several brief comments:

1) Almost no one, including highly compensated radiologists, benefits from cash-value life insurance (like variable life) or variable annuities.

2) Don't buy investments based on past performance.

3) Watch fees like a hawk.

4) No, the withdrawals from a VUL policy are NOT tax-free. They are loans that are theoretically paid back using the proceeds of the insurance portion upon your death. If done right, tax-free to you, but not to your estate.

Here's a thread I think you'll find illuminating:

http://www.bogleheads.org/forum/viewtopic.php?t=21436&highlight=variable+life

http://www.bogleheads.org/forum/viewtopic.php?t=21867&highlight=variable+life

Good luck.

 

[LADoc00]

great, thanks, let me know what you found out. I think the life insurance salesman tried to trick me a bit by telling me you can withdraw tax-free, but that's not true, the interest is taxed i believe. Also, if you don't withdraw any money before you die, all you get is the death benefit. Let me know what you find out.

okay...ActiveMilitaryMD is absolutely correct.

VUL and Whole Life products with tax deferred cash values are essentially a scam.

I went personally to meet with Cal Berkeley economists on how this scam works and it is fairly straight forward: even with the supposed cash deferred mechanism you are FAR better off buying term life for a small amount your spouse might need and putting the rest in muni bond funds, which are completely tax free.

 

[HRantz]

LADoc, while I agree that term life policies are the way to go for most people and use them myself, my understanding was that the value of whole life policies to highly compensated physicians is that they are a way to protect your money should you be sued for malpractice. In contrast, money you put into muni bond funds (unless within a retirement account) would be vulnerable. Is this something you discussed with your people, and if so can you comment?

 

[The White Coat Investor]

LADoc, while I agree that term life policies are the way to go for most people and use them myself, my understanding was that the value of whole life policies to highly compensated physicians is that they are a way to protect your money should you be sued for malpractice. In contrast, money you put into muni bond funds (unless within a retirement account) would be vulnerable. Is this something you discussed with your people, and if so can you comment?

This is true. Whether that is worth the costs is only a question you can answer. There are other ways to combat lawsuits, such as adequate malpractice insurance AND a personal liability policy. I sleep well at night despite practicing a frequently sued specialty and wouldn't dream of using cash value insurance in an attempt to protect my assets more.

 

[ethat001]

Several brief comments:

1) Almost no one, including highly compensated radiologists, benefits from cash-value life insurance (like variable life) or variable annuities.

2) Don't buy investments based on past performance.

3) Watch fees like a hawk.

4) No, the withdrawals from a VUL policy are NOT tax-free. They are loans that are theoretically paid back using the proceeds of the insurance portion upon your death. If done right, tax-free to you, but not to your estate.

Here's a thread I think you'll find illuminating:

http://www.bogleheads.org/forum/viewtopic.php?t=21436&highlight=variable+life

http://www.bogleheads.org/forum/viewtopic.php?t=21867&highlight=variable+life

Good luck.

This is a great thread, and great links. I had the exact same question -- specifically as a physician whether whole life was potentially better for:

(1) estate planning (tax free to kids)
(2) protection against inevitable malpractice lawsuits

But I guess the common sentiment is to make it simple & go with term policies.

Thanks again for the posts!