Last week I seemed to cause a bit of a kerfuffle when I wrote about which life insurance may or may not be appropriate for the general consumer. For the readers that sent in emails and comments – thank you! It’s much appreciated and we enjoy the feedback.
Twitter was also flitting and chirping with the commotion. In particular, the discussion really narrowed down to, and most of the comments we received were regarding the comment I made on life insurance not being an investment.
And that’s still true. It’s not. Now there are plenty of people that will argue with me that it is an investment for this reason or that. For this writing I am hoping to explain and to clarify what I meant as an investment.
From a pure investment standpoint – meaning saving and investing one’s money for retirement and or college or just saving and investing for capital growth; life insurance is not this type of an investment. Accounting for the actual costs of insurance, policy fees, expense ratios of the underlying funds (as seen in variable life and variable universal life), surrender charges (lack of liquidity) and agent commissions life insurance will almost always underperform an outside, well diversified, low-cost investing strategy like indexing or a passive approach in mutual funds or ETFs.
The reason why is in variable policies, a person has access to the markets as well, but pays a much higher cost for that access.
Another consideration is whether or not a person actually needs life insurance. If there is a life insurance need, term is generally the best bet. If there is no life insurance need – meaning there is no need to protect against a premature death – then no life insurance is needed. None.
Finally, I heard more and more about the “investment” in one’s family and the “investment” in one’s peace of mind. This is usually the dogma of a slick salesperson, trained to use key words and emotional triggers to induce an unknowing client to buy their more expensive product. And yes, one could argue those are excellent investments – but it wasn’t what I meant and I’m certain most readers, if not all understood that.
It would be like me saying food is an investment for my retirement. I need it to live to retirement and to survive throughout retirement. It sounds good, makes sense, but is a complete misuse of the word.
Food is food.
Life insurance is life insurance…
…not an investment.
Sterling Raskie, MSFS, CFP®, ChFC®
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And if you’ve come here to learn about queuing waterfowl, I apologize for the confusion. You may want to discuss your question with Lester, my loyal watchduck and self-proclaimed “advisor’s advisor”.
I don’t need life insurance but having recently heard a fascinating pitch from a TIAA-CREF Wealth Management Advisor for their “Intelligent Life” Modified Endowment Contract (MEC), I’d be very interested in what you think.
Michael Kitces discusses it here: http://www.kitces.com/blog/things-are-heating-up-with-the-next-generation-of-no-load-life-insurance/
It is totally liquid with no surrender charges and no sales load, no commission on the single premium upfront investment. The only “load” is the state insurance tax, which is 70 basis points in NY, but I understand it may be higher in some other places. Their fixed income option currently pays 4.25% on the cash value and although that rate can be adjusted annually in the future it is guaranteed not to go below 3%.
Yes, withdrawals are considered earnings first rather than contributions, but leaving the funds inside the account defers taxes indefinitely and there is total escape from income tax if left until death. For an investor with a lot of funds to spare who has exhausted other tax-advantaged space for fixed income investments, this looks very hard to beat.
It seems like a powerful testimony to the lobbying power of the life insurance industry for preferred tax treatment that such a policy can exist. It seems like a wolf in sheep’s clothing. The life insurance aspect is just a cosmetic wrapper to give favorable tax treatment to a highly liquid high interest rate investment as near as I can tell.
This is an interesting product. Purely by definition, since it’s a MEC, it does not meet the IRS definition of life insurance and therefor loses life insurance’s tax favored status. TIAA-CREF is an excellent company and I would imagine they may have a similar interest rate product outside of pure life insurance. Also, since this product is still an endowment per se, there are still mortality and expense charges which will lower returns.
Life insurance is much more than Life insurance when used in Medicaid/estate planning. A passive approach like Mutual funds or ETF’s can not reduce LTC liability or Tax liability on retirement accounts.
Life insurance is STILL life insurance in those types of strategies. A LTC policy will reduce LTC liability and tax-free accounts like the Roth will help with tax liability. Call it what you want, if the underlying vehicle is life insurance, then it’s life insurance – no matter how it’s packaged or sold.
I agree with that, and should probably be done that way. Reason for my comment was I’ve been reading of a strategy that uses trusts and a large over funded SUL to right before the point when it becomes a MEC. For exempting assets completely to qualify for medicaid (because LTC policies are so expensive & insure a shrinking nest egg) and leaving a tax free benefit. Cash value can be gifted irrevocably to the trustee then back to the survivorship. Can this be done or is it a high commission scheme to sell large life policies.
That’s a great question. Generally, there are limitations to gifting the life insurance policy for Medicaid eligibility. It will be state specific. Here the question comes down to “Is there a need for life insurance?” If the answer is yes, then one could possibly proceed further. If the answer is no, then we’ll want to go another route. In both cases, working with a qualified estate planning attorney will be well-advised.
My late husband and I had a term insurance policy for both of us. I became a widow at the age of 51. “Google” the average age of a widow and you may be surprised that is is younger than you think. The insurance helps because it is very difficult to work a 40 hour week after the death of a spouse and even harder for those that have small children at home. The insurance provides for living expenses without having to use the nest egg or retirement accounts.
Hi Teri,
Agreed. I’m very sorry for your loss and I hope that insurance was able to help you.
sr