Whole life insurance

[anon_mlxxvlbug9dpa]

Does anybody have any experience with whole life insurance as a post-tax savings/investment vehicle? My advisor describes it as a way to maximize post tax savings since he and I both believe that our tax rates will buck conventional thinking and be higher - not lower than they are now due to the current state of entitlements and the debt. He describes it as being able to save as much as I want in there and limit the death benefit since I don’t care about that part.

I don’t need the insurance part - I have a good term life policy but would love to be able to invest more than the $6k per year in the backdoor Roth.

Any experience?

 

[37Hoosier]

Does anybody have any experience with whole life insurance as a post-tax savings/investment vehicle? My advisor describes it as a way to maximize post tax savings since he and I both believe that our tax rates will buck conventional thinking and be higher - not lower than they are now due to the current state of entitlements and the debt. He describes it as being able to save as much as I want in there and limit the death benefit since I don’t care about that part.

I don’t need the insurance part - I have a good term life policy but would love to be able to invest more than the $6k per year in the backdoor Roth.

Any experience?

If you want permanent insurance with some internal growth potential get an indexed product, not a straight whole life.

 

[anon_mlxxvlbug9dpa]

If you want permanent insurance with some internal growth potential get an indexed product, not a straight whole life.

Just to be clear, I have term life for a long time and don’t care about the death benefit of whole life. I’d really just like to use it as a vehicle to save/invest post-tax money in.

 

[JamieDimonsBalls]

Does anybody have any experience with whole life insurance as a post-tax savings/investment vehicle? My advisor describes it as a way to maximize post tax savings since he and I both believe that our tax rates will buck conventional thinking and be higher - not lower than they are now due to the current state of entitlements and the debt. He describes it as being able to save as much as I want in there and limit the death benefit since I don’t care about that part.

I don’t need the insurance part - I have a good term life policy but would love to be able to invest more than the $6k per year in the backdoor Roth.

Any experience?

Not an expert but one of the few things I remember from personal finance class at IU is whole life is lesser option and to use term and invest the rest.

Also I doubt know anyone that thinks tax rates are going lower long term.

 

[anon_mlxxvlbug9dpa]

Also I doubt know anyone that thinks tax rates are going lower long term.

I agree - but the majority of American retirement savings are in tax deferred accounts (eg IRAs and 401k).

So given that we agree that we’ll be taxed at least as much as we are now when we are retired (and likely more), what is the best way to invest in post-tax? Roth 401ks? But if I put too many eggs in that basket, aren’t I too tied to the capital markets for growth and success?

 

[Noodle]

I agree - but the majority of American retirement savings are in tax deferred accounts (eg IRAs and 401k).

So given that we agree that we’ll be taxed at least as much as we are now when we are retired (and likely more), what is the best way to invest in post-tax? Roth 401ks? But if I put too many eggs in that basket, aren’t I too tied to the capital markets for growth and success?

The income generated by a whole life policy is also tied to those same capital markets. In other words, I'm not sure you are diversifying risk all that much by putting some money into whole life vehicles--and you are losing out on some of the gains you would otherwise have from another investment vehicle since a portion of what you pay towards the whole life policy is used to fund the life insurance component (along with the agent's commission).
No idea if whole life provides some tax benefit that you would not otherwise be able to take advantage of in some other way.

 

[JamieDimonsBalls]

So given that we agree that we’ll be taxed at least as much as we are now when we are retired (and likely more), what is the best way to invest in post-tax? Roth 401ks? But if I put too many eggs in that basket, aren’t I too tied to the capital markets for growth and success?

What is your time horizon for withdrawals?

 

[anon_mlxxvlbug9dpa]

What is your time horizon for withdrawals?

I’d use it as a retirement account. So, late in life. The way he describes it I’d just take loans against the death benefit until it’s essentially null.

 

[UncleMark]

FWIW, Dave Ramsey says whole life is a ripoff from an investment standpoint. High fees, commissions, and low returns. Some other drawbacks I can't think of off the top of my head.

Link added:

https://www.daveramsey.com/blog/term-life-vs-whole-life-insurance

 

[anon_mlxxvlbug9dpa]

FWIW, Dave Ramsey says whole life is a ripoff from an investment standpoint. High fees, commissions, and low returns. Some other drawbacks I can't think of off the top of my head.

Link added:

https://www.daveramsey.com/blog/term-life-vs-whole-life-insurance

I don’t dispute that. But that’s not the comparison. I already have term life. The comparison is whole life vs maxing out a Roth 401k.

 

[Marvin the Martian]

I don’t dispute that. But that’s not the comparison. I already have term life. The comparison is whole life vs maxing out a Roth 401k.

I think you are relatively young, think how worthless that money will be after 20 years of inflation. So I guess the question is, how high do you think taxes will be in 20 years compared to 20 years of inflation.

 

[UncleMark]

I don’t dispute that. But that’s not the comparison. I already have term life. The comparison is whole life vs maxing out a Roth 401k.

Everything I've been led to believe tells me that whole life is a lousy investment vehicle.

 

[twenty02]

Does anybody have any experience with whole life insurance as a post-tax savings/investment vehicle? My advisor describes it as a way to maximize post tax savings since he and I both believe that our tax rates will buck conventional thinking and be higher - not lower than they are now due to the current state of entitlements and the debt. He describes it as being able to save as much as I want in there and limit the death benefit since I don’t care about that part.

I don’t need the insurance part - I have a good term life policy but would love to be able to invest more than the $6k per year in the backdoor Roth.

Any experience?

I would NEVER use an insurance product as an investment.

DO NOT DO THIS.

 

[anon_mlxxvlbug9dpa]

I would NEVER use an insurance product as an investment.

DO NOT DO THIS.

Ok. Thanks.

 

[twenty02]

Ok. Thanks.

If you are maxed out on tax preferred vehicles, just open a regular taxable account and buy equities. I'd rather pay LTCG rates on a good return....than using an insurance policy that will give you crap returns. And have big commissions.

 

[JamieDimonsBalls]

I’d use it as a retirement account. So, late in life. The way he describes it I’d just take loans against the death benefit until it’s essentially null.

Again, I'm a novice and I am not going to claim I know enough to provide advice, but after reading this: https://www.nerdwallet.com/blog/insurance/difference-term-life-insuranc/ and looking at some of the data, if you actually invest the difference, you will make out ahead. I'm not sure of your discipline, but insurance products are risk averse products. If you have a long time horizon, there is no reason to pay 10x the price of your term policy when you can ride it out in a diversified portfolio, likely slanted hard towards equities.

Fundamental laws of finance just don't allow whole life, annuities, etc. to be competitive with riskier assets. That risk diminishes over the long-run and is really for short and possibly medium-term decisions.

So, if I was you, I would backdoor Roth. It also allows you to have some control and your account is backstopped by some level by SIPC, etc.

 

[anon_mlxxvlbug9dpa]

Again, I'm a novice and I am not going to claim I know enough to provide advice, but after reading this: https://www.nerdwallet.com/blog/insurance/difference-term-life-insuranc/ and looking at some of the data, if you actually invest the difference, you will make out ahead. I'm not sure of your discipline, but insurance products are risk averse products. If you have a long time horizon, there is no reason to pay 10x the price of your term policy when you can ride it out in a diversified portfolio, likely slanted hard towards equities.

Fundamental laws of finance just don't allow whole life, annuities, etc. to be competitive with riskier assets. That risk diminishes over the long-run and is really for short and possibly medium-term decisions.

So, if I was you, I would backdoor Roth. It also allows you to have some control and your account is backstopped by some level by SIPC, etc.

I already max out backdoor Roth every year. Currently i have;

1. Roth IRA (maxes each year)
2. Traditional IRA (rollover from previous 401k and used as the backdoor entry (giggity))
3. 401k (I exceed employer match by 3%)
4. 529 plans for the kids
5. 30 yr term life with death benefit

My company offers (as of this month) a Roth 401k, which I might start preferring over existing 401k so that it’s after tax.

I was only curious about the whole life cash value method because:

1. I don’t care about the death benefit of it
2. It seems a solid (less volatile but with less growth) way to grow money after tax

 

[JamieDimonsBalls]

I already max out backdoor Roth every year. Currently i have;

1. Roth IRA (maxes each year)
2. Traditional IRA (rollover from previous 401k and used as the backdoor entry (giggity))
3. 401k (I exceed employer match by 3%)
4. 529 plans for the kids
5. 30 yr term life with death benefit

My company offers (as of this month) a Roth 401k, which I might start preferring over existing 401k so that it’s after tax.

I was only curious about the whole life cash value method because:

1. I don’t care about the death benefit of it
2. It seems a solid (less volatile but with less growth) way to grow money after tax

There's a cap for backdoor Roth? I just dump into traditional with post-tax money and convert. I didn't think there was a limit to that (hence the drama around Romney).

 

[twenty02]

I already max out backdoor Roth every year. Currently i have;

1. Roth IRA (maxes each year)
2. Traditional IRA (rollover from previous 401k and used as the backdoor entry (giggity))
3. 401k (I exceed employer match by 3%)
4. 529 plans for the kids
5. 30 yr term life with death benefit

My company offers (as of this month) a Roth 401k, which I might start preferring over existing 401k so that it’s after tax.

I was only curious about the whole life cash value method because:

1. I don’t care about the death benefit of it
2. It seems a solid (less volatile but with less growth) way to grow money after tax

Are you maxxing your traditional 401k? Surely you'd do that before moving on to anything else.

Regardless.....

https://momanddadmoney.com/why-whole-life-insurance-is-a-bad-investment/

 

[anon_mlxxvlbug9dpa]

There's a cap for backdoor Roth? I just dump into traditional with post-tax money and convert. I didn't think there was a limit to that (hence the drama around Romney).

Yes there’s a cap. Same as a traditional. There is just not an income limit to the backdoor.

 

[anon_mlxxvlbug9dpa]

Are you maxxing your traditional 401k? Surely you'd do that before moving on to anything else.

Regardless.....

https://momanddadmoney.com/why-whole-life-insurance-is-a-bad-investment/

I haven’t quite maxed the 401k as I’ve been consciously trying to move free cash to post tax vehicles. If I were to max, I’d probably do it in the Roth 401k.

 

[anon_mlxxvlbug9dpa]

Are you maxxing your traditional 401k? Surely you'd do that before moving on to anything else.

Regardless.....

https://momanddadmoney.com/why-whole-life-insurance-is-a-bad-investment/

That’s a good link. I see the issues with it.

 

[JamieDimonsBalls]

Yes there’s a cap. Same as a traditional. There is just not an income limit to the backdoor.

At first, I thought...

Then I realized Fidelity won't let you contribute more than the cap.

 

[6th&Dunn]

Does anybody have any experience with whole life insurance as a post-tax savings/investment vehicle? My advisor describes it as a way to maximize post tax savings since he and I both believe that our tax rates will buck conventional thinking and be higher - not lower than they are now due to the current state of entitlements and the debt. He describes it as being able to save as much as I want in there and limit the death benefit since I don’t care about that part.

I don’t need the insurance part - I have a good term life policy but would love to be able to invest more than the $6k per year in the backdoor Roth.

Any experience?

Ya, your advisor doesn't know what he's talking about. Something *like* this was once a thing, many years ago, back when disbursements from a life insurance contract were always tax-exempt, interest rates were higher, and estate taxes were higher.

The game worked by buying a flexible premium universal life contract. The mortality and expense charges were based on the death benefit, so you could get a small death benefit, say something like 50k with a target premium of $1k per year with expense/mortality charges of $200, and instead pump in like $20k per year. Back in the 80s, when interest rates were high, you could get 7+% guaranteed interest, which would balloon the cash value portion of the contract, which you could access without any capital gains or income taxes after a surrender charge period. It could also transfer to your beneficiary outside of probate in the event of your death, avoiding estate tax. It was a hedge against estate taxes and higher future cap gains / income tax - put in the lower taxed money, have it grow, take it out later without taxes when tax rates have risen. The insurance company didn't care as they were earning a 100-200 bps spread on your contributions and getting the small expenses on the life insurance portion of the contract.

But then enough high-wealth individuals starting playing this game that Congress took notice (note: do not try and **** with the government's tax revenue) and the IRS passed sections 7702 and 7702A of the IRC, which essentially nixed this practice. Now, if you pump in too much money, it becomes taxable.

I hope your advisor told you all this.... otherwise, it may be time to look for a new advisor.

 

[anon_mlxxvlbug9dpa]

Ya, your advisor doesn't know what he's talking about. Something *like* this was once a thing, many years ago, back when disbursements from a life insurance contract were always tax-exempt, interest rates were higher, and estate taxes were higher.

The game worked by buying a flexible premium universal life contract. The mortality and expense charges were based on the death benefit, so you could get a small death benefit, say something like 50k with a target premium of $1k per year with expense/mortality charges of $200, and instead pump in like $20k per year. Back in the 80s, when interest rates were high, you could get 7+% guaranteed interest, which would balloon the cash value portion of the contract, which you could access without any capital gains or income taxes after a surrender charge period. It could also transfer to your beneficiary outside of probate in the event of your death, avoiding estate tax. It was a hedge against estate taxes and higher future cap gains / income tax - put in the lower taxed money, have it grow, take it out later without taxes when tax rates have risen. The insurance company didn't care as they were earning a 100-200 bps spread on your contributions and getting the small expenses on the life insurance portion of the contract.

But then enough high-wealth individuals starting playing this game that Congress took notice (note: do not try and **** with the government's tax revenue) and the IRS passed sections 7702 and 7702A of the IRC, which essentially nixed this practice. Now, if you pump in too much money, it becomes taxable.

I hope your advisor told you all this.... otherwise, it may be time to look for a new advisor.

This is what I was looking for. Thanks.