The Life Retirement Debate – Whole Life, Indexed Universal Life or Don’t Bother

Welcome, chances are you landed here because you are already aware of Life Retirement strategies – OR – you are curious to learn what the life retirement conversation is all about.

Truth be told, life retirement is a term a made-up term (yes, I made it up) to describe retirement income planning utilizing life insurance policies that exploit and stretch insurance policies to the boundaries of IRS Sections 7702 and 7702A. The tax codes provide very favorable tax treatment, more specifically TAX-FREE gains on cash value accumulation in an insurance policy.

These concepts are NOT new, they have been around a long time. Savvy and disciplined people have historically used these concepts to build unbelievable generational wealth.

So, let’s start this discussion with one very important assumption – life insurance cash accumulation products and policies are – LIFE INSURANCE POLICIES FIRST AND WEALTH BUILDING TOOLS SECONDARILY.

For any person that is looking to build wealth using a life insurance vehicle, there absolutely must be an underlying need for a death benefit, or at the very least someone that is willing to commit to the expense of life insurance in exchange for wealth building benefits.

In some (many) cases, people that commit to a legacy (paying for life retirement without a death benefit need) in which they will never see the fortunes amassed and fruits of their labor. These fortunes are simply passed along at death to a beneficiary. This type of generational wealth-building strategy requires a special character, someone with the commitment and mental discipline to follow through on investing in future generations.

Life Insurance Wealth Building Policies

I am an avid student of financial planning, my specialty is life retirement policies, concepts, and analysis. The two types of policies specifically discussed and then analyzed in this article are;

• Participating Whole Life for Asset Protection & Wealth Building
• IUL, Indexed Universal Life (or EIUL, Equity-Indexed Universal Life)

Just like other competing wealth-building strategies like IRA’s, Roth IRA’s, 401K’s, Annuities, Mutual Funds and so on – every person and each case needs to be individually assessed and a solution tailored specifically for that individual at that point in their life. There is no one-size-fits-all solution for wealth building and there is no one-size-fits-all life insurance wealth-building strategy.

The Argument Against Life Retirement

Okay, herein lies one of my pet peeves – websites and social media content that promote ANY one-size-fits-all wealth-building strategy, whether it’s an IRA, Roth IRA, Mutual Funds, Annuities, Life Retirement or anything else.

Inevitably, when you run into one of these websites or some rogue piece of social media content, it’s a hot stove of emotionally charges responses, retaliation, finger-pointing, and name-calling. I find these emotionally charged debates to be GREAT learning experiences, especially to help me understand the competing strategies from multiple angles, and the emotions attached to people with strong beliefs.

That said, the argument against life retirement wealth-building strategies is the same thing over and over again;

Life insurance wealth-building is not effective because the combination of costs associated with insurance, the moving parts (i.e. index crediting rates and loan rates) and agent commissions makes life insurance a lousy choice for wealth building.

If you ever listened to Dave Ramsey or Suze Orman, you know this argument VERY well!

After reading (studying) dozens of these hotly debated conversations on websites and social media, I have concluded the fuel for;

• The Argument FOR LIFE RETIREMENT – Conversations that advocate for life retirement wealth building, should be qualified with; “If you have a need for BOTH death benefit coverage and wealth-building (or retirement income planning) then life retirement options are certainly something you should consider.”
• The Argument AGAINST LIFE RETIREMENT – My opinion is that this argument is fueled by fear of the unknown (fear of competition) and a general lack of understanding or disinformation about Life Retirement products.

Let’s ALL (please) agree that if someone has NO need for a death benefit then a life retirement product is likely NOT the best strategy for that person. It makes NO sense at all to incur the cost of insurance, when in fact insurance is not required to begin with.

IF WE ALL CAN AGREE ON THIS, WE SHOULD ALL BE ABLE TO SEE EYE-TO-EYE ON THE REMAINDER OF THIS CONVERSATION.

The Argument For (Participating) Whole Life Retirement

Time for some brutal honesty – this part of the conversation is what has prompted me to write this article.

While searching the internet looking for content and stories on the topic of;

Wealthy people that have built their fortune with life retirement.

I found an article written by Pamela Yellin; Famous people who use the bank on yourself method. With names like Walt Disney, J.C. Penney, John McCain, Pampered Chef, and others, this was the read I was yearning for!

NOTE: I highly recommend you read the linked article above, it’s a fascinating read – especially – when you take the time to read the comments and the responses. Those comments and responses will help clarify what I mean about hot stove conversations, there are many examples of the heated emotional debates of life retirement vs. more conventional retirement planning!

Coincidentally, about 2 weeks ago, I ran some comparative illustrations for different types of policies for healthy average middle-class Americans 45-60 years old to identify the BEST-BANG-FOR-YOUR-BUCK life insurance product for healthy 45-60-year-old people.

The assumption during my comparative illustrations was that these 45-60-year-old people had an interest and/or a need for a death benefit (REMEMBER – WE AGREED THAT LIFE RETIREMENT STRATEGIES ARE BEST SUITED FOR PEOPLE THAT HAVE A NEED FOR A DEATH BENEFIT). The goal of that article was to help guide and advise those people with ideas, suggestions, and recommendations for the best options.

My findings were;

• Healthy Smokers 45-60 Years Old – Participating whole life was by far the best option. The reason is that the increasing cost of annually renewable term insurance for an IUL based approach was prohibitive for smokers at these ages, the combination of old age (for insurance purposes) and smoking drives up the cost to unsustainable levels for the “average” person.
• Healthy Non-Smoking 45-55 (up to 57 for women) Years Old – If you are looking for greater cash accumulation and a lower death benefit earlier in the policy, an IUL was the clear-cut winner. A larger death benefit requirement at these ages greatly complicated the comps, but once again I was looking at comps for “average” citizens with average needs so that complexity was not part of my study.
• Healthy Non-Smoking 55-60 Years Old – Now the pendulum shifted back to participating whole life. The reason for this was, once again, the cost of the renewable term insurance is now a limiting factor for the IUL, there is just not enough early policy cash accumulation to overcome the cost of term insurance. On the other hand, the case could be made for people to leverage participating whole life up to the age of 69, assuming the person was extremely healthy.

I must also mention that the Participating Whole Life policies mentioned above only work when you are confident the insurance policy will pay a consistent and reliable dividend, otherwise all assumptions are thrown out the window. For this reason, my illustrations were run with companies that have a substantial history (30+ years) of returning a consistent dividend – even through the 2001/2002 and the 2008 Financial Crisis – IN FACT, the dividends on these actually went UP during those down years (think about that for a minute).

NOTE: My favorite participating whole life policy is Foresters Advantage Plus, see image below and please note that Forester’s dividend interest rate made a BIG comeback in 2018 to the extent that it is widely considered a top (the top) participating whole life policy in the industry for 2019. Mass Mutual and Foresters are consensus #1 and #2 choices for 2019.

So, in Pamela’s article, I left a comment and mentioned all the above. For the most part, I agreed with Pamela on all her points – EXCEPT – for the cases where the IUL was a winner.

Pamela responds to all comments (FYI, the article was written in 2010) and I genuinely expected Pamela to respond with an engaging and supportive response. Much to my surprise, I received a link to an article she wrote about titled; “7 Reasons to Be Wary of Indexed Universal Life Insurance” where she calls an IUL a “ticking time-bomb.”

Coincidentally, if I had a $1 for every article I read that mentioned an IUL’s being a ticking time-bomb, I would be a very wealthy person – which supports the argument there is a LOT of copy/paste plagiarism on the internet (right???)

As previously mentioned, I was genuinely expecting a supportive and agreeable response, because after all Pamela and I fight for the common cause of Life Retirement, right? Obviously, I was wrong!

So, as I read Pamela’s article about the 7 Reasons to Be Wary of Indexed Universal Life Insurance, she makes the same arguments against IUL’s that people make against Life Retirement —> WHICH, ONCE AGAIN —> We concluded that these reactions are a function from fear of the unknown and/or being misinformed about the products (policies).

The Argument Against Indexed Universal Life

Okay, allow us to backtrack for one minute – and – this may sound a little contradictory, but there is some merit to Pamela’s 7 Reasons to be Wary of Indexed Universal Life. The merit is that, while IUL’s on the surface and in theory can be superior products, agents and companies are notorious for “cooking illustrations” (creating illustrations and forecasts that make IUL’s compare more favorably than a realistic illustration for purposes of winning business).

The top thought-leaders and most highly respected IUL professionals agree that a well-designed IUL illustration should;

• Be conservative in nature -> UNDER PROMISE
• Factor as best you can for events that you can average over time (i.e. down years in the market)
• Assume THE LEAST AMOUNT OF DEATH BENEFIT COVERAGE needed IF indeed the policy will be used for cash accumulation
• Tactical best practices (i.e. other death benefits considerations)
• Use realistic index and loan interest illustration rates

So, Pam is right because there is a universe of abusive tactics employed by agents (and companies) that insert hidden surprises in an IUL policy to unsuspecting or uninformed clients. Years later, many policies with these hidden surprises ultimately end up in lawsuits. So, this universe of abusive illustrations is a function of many things that need to be fixed;

• Proper Training (this is a KNOWN shortcoming)
• Lack of Specialized Licenses or Certifications for IUL’s
• Lack of Client Fiduciary Responsibility or Duty
• … Lack of Ethics and Greed

Beyond the abusive universe, there is another universe of highly skilled, ethical and responsible agents and companies that are committed to client fiduciary responsibilities. The problem becomes how to discern the two universes.

Well, regulators are (and have been) actively working to fix some of these known flaws. Tighter and more controlled illustration requirements, chatter within the industry to enforce stricter requirements of who can service and sell IUL’s and requiring full and transparent disclosure of fees and costs associated with IUL’s.

The Argument For Indexed Universal Life

A gentle reminder of what was mentioned in the section above about what the top thought-leaders and most highly respected IUL professionals agree upon for a well-designed IUL illustration;

• Conservative in nature -> UNDER PROMISE
• Factor as best you can for events that you can average over time (i.e. down years in the market)
• Assume THE LEAST AMOUNT OF DEATH BENEFIT COVERAGE needed IF indeed the policy will be used for cash accumulation
• Tactical best practices (i.e. increasing vs. level death benefits)
• Use realistic index and loan interest illustration rates

There are additional illustration standards and best practices but the list above is a great starting point for eliminating abusive illustration practices that result in policy misrepresentations.

Remember, a life retirement policy in the form of an IUL requires that the client has an absolute need for a death benefit and has a need for wealth-building or retirement income planning.

NOW, we must factor in the client’s age and health class – IF the client is under the age of 55, is in good-to-great health and has a reasonable amount of disposable income (i.e. at least $100 per month, or better yet enough monthly premium to pay for the minimum death benefit in any given IUL policy) then there is an argument for an IUL vs. a participating whole life policy.

Now a case study for the IUL vs. participating whole life for a 45-60-year-old person. Using one of the agreed-upon top IUL’s with a $25,000K minimum death benefit vs. an agreed-upon leading participating whole life policy (NOT Foresters, another whole life that has consistently returned 5-6% dividends year-over-year), here are the case study assumptions (attempting to keep the comp as apples-to-apples as possible);

• 50-year-old healthy non-smoking female
• $500 monthly disposable income for premiums
• We assumed standard non-smoker health class
• No distributions (loans or withdrawals
• Participating whole life policy dividends distributed as PUA (paid-up additions)
• IUL Illustrated index credit rate is a conservative 5.08% average

I acknowledge and leading IUL experts acknowledge that using average credited rates in an IUL illustration is flawed. For example, there are going to be down years when the market loses, the IUL has a floor of 0% – BUT – a 0% year very early in policy can have a large negative impact on later years’ cash accumulation – and – back-to-back 0% years can have a devastating impact. Please Note: Even in cases of back-to-back 0% years, a well-designed illustration and policy will include security to protect against these risks.

A straight apples-to-apples death benefit and cash accumulation comp. Here are the results;

The story that this case study tells us is that participating whole life policy completely loads the first year with expenses (including agent commissions), there is no cash accumulation at year one but a higher death benefit. Over time, the IUL accumulates cash value faster and the death benefit slowly starts to catch up to the participating whole life policy. Also, the initial IUL costs are spread out over the first 10 years of the policy which helps accelerate the cash accumulation in the IUL.

NOTE: This IUL illustration is a simple design applying standards and best practices to minimize both initial death benefits and the front-end premium loads associated with those death benefits. This is where consumers need to be informed and educated about IUL designs, agents and companies will shift death benefits towards the front-end of a policy (increasing the costs at year one, subsequently greatly reducing the cash accumulation acceleration) to increase their commissions.

Consistent with these findings and other comparisons, the younger and healthier a person is the more advantageous an IUL vs. a participating whole life policy. At ages 20-35, the margin between the benefits and cash value of an IUL vs. participating whole life makes the IUL a CLEAR CUT WINNER (not even close).

Summary – Life Retirement or NOT Life Retirement

Anyone peddling a one-size-fits-all wealth building and retirement planning solution is not operating in your best interest. Every strategy, tool, vehicle, and instrument has pros and cons.

Life Insurance Retirement Plans are – LIFE INSURANCE POLICIES FIRST AND WEALTH BUILDING TOOLS SECONDARILY.

If you have no (ZERO) need for life insurance, assuming the costs associated with life insurance to take advantage of the tax benefits is probably not your best choice of retirement income planning.

When you have a need for both a death benefit (life insurance) and retirement income planning, life retirement plans are a solid option, you can kill two birds with one stone and get some additional benefits.

When you do have a need for life insurance AND would like to take advantage of the tax benefits of a life insurance’s cash value and accumulation benefits, here are some handy general rules of engagement;

• Start early at younger ages, this will reduce the premium over time and allow for lower premiums, accelerated cash accumulation – AND – much more future flexibility with your policy.
• IUL’s win vs. participating whole life for people under the age of 45
• Whole life wins for healthy smoker’s above the age of 45
• IUL wins for healthy non-smokers ages 45-55
• Whole life wins for healthy non-smoker’s above the age of 55

IUL’s are powerful wealth-building tools, they are also way more complex than traditional whole life wealth-building tools. The complexity can turn into a shell game of excess costs, but the upside is well worth it IF you are informed and work with a trusted advisor.

Participating whole life policies are more safe and conservative in nature. There are no (few) moving parts, it’s easy to understand and much of the uncertainty and risk is removed, at the expense of less early cash value accumulation due to front-end policy costs and premium loads.

For both of these policy types, it’s imperative that you find a trusted, knowledgeable and experienced advisor that can fine-tune and optimize the policy for you, your family and your needs.