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Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. The show is an extension of the book, How to Retire on Time, which you can grab exclusively on Amazon or by going to www.how to retire on time.com. My name is Mike Decker. I'm the author of the book, How to Retire on Time, but I'm also a licensed financial advisor, insurance agent, and tax professional, which means when it comes to financial topics, we can pretty much cover it all. Now that said, please remember this is just a show.
Mike:Everything you hear should be considered informational as a not financial advice. If you want personalized financial advice, then request your wealth analysis from my team today by going to www.yourwealthanalysis.com. With me in the studio today is mister David Fransen. David, thanks for being here.
David:Yes. Hello.
Mike:David's gonna be reading your questions that you've submitted, and I'm gonna do my best to answer them. You can send your questions in anytime this week by texting them to 913-363-1234. Again, that's 913-363-1234, or you can email them to hey mike@howtoretyme.com. Let's begin.
David:Hey, Mike. I just heard that indexed universal life insurance is basically the perfect investment for a retiree. You say there's no such thing as a perfect investment. So what are the downsides of these IULs?
Mike:Hello. Here we go. Here we go. So
David:Lay it all out here.
Mike:I think the best way to approach this is to talk about how they're sold.
David:Okay. Yeah.
Mike:And it's so sneaky how convincing they make it. So everyone listening in right now, I'm gonna put on that IUL sales hat for a moment. Let's have a little bit of fun. Okay. Just know that the detriments are gonna come later in this conversation.
Mike:Alright. K. So first off, what's an IUL? An IUL is an indexed universal life insurance policy. This falls under the category of permanent life insurance.
Mike:K? What's permanent life insurance? It means you can fund you can take your your after tax dollars, your nonqualified, get your brokerage account, your checking account. You've already paid taxes on this. Okay.
Mike:And you can put it into as much as you want, you can put it into a life insurance policy that can grow tax free. You can take income from it or borrow against the policy tax free. And when you pass, there's a death benefit that will give to your kids tax free.
David:This almost sounds too good to be true.
Mike:Or or the surviving spouse.
David:Yeah.
Mike:But wait, there's more.
David:Oh, wow.
Mike:So this is that's been nicknamed by some as the rich man's Roth because there are no limitations. You can put as much money in there as you want.
David:Because a Roth has, like, a a yearly cap. Right?
Mike:Yeah. You've got the contribution limit each year, and some people that make enough money can't even contribute to a Roth. Mhmm. But this is the rich man's Roth. So if you're dealing with the value, well, you're really you're you're in good hands.
David:Alright.
Mike:I don't know if I can I say that? You're in good hands. Oh, well. That's an Allstate thing, isn't it?
David:It is. Yeah. We better strike it from there.
Mike:You're in rich guy tax free hands
David:Okay. Or something
Mike:like that. Anyway Yeah. So, okay, you can put cash into there, and it can grow tax free and all that, which is great. And then, you need to understand too that the growth is indexed. So whole life is more of a like fixed account.
Mike:It has the steady Eddie. It just kind of grows. So the cash value can grow, but it's really intended to put enough cash in there that the life insurance policy and the costs associated with it are self sustaining. Whole life, the fees are kind of spread out over the entire entirety of the policy. With index universal life.
Mike:The fees are are just put in the front of it. So once you're done funding it, you just let the cash grow, and it's great. Right? Okay. And index means that if the market goes up or the index it is associated with increases in value, you can have some great growth.
Mike:They the the policy will get a bunch of cash every time it goes up. K? And these are through participation rates, for example. So the S and P goes up. Let's do a pretend rate.
Mike:Let's say the S and P goes up by 10%, Maybe you got 8% or something like that. These are always changing. So if you wanna go down this rabbit hole, check the rates. Yeah. Now with indexed universal life, if the market goes down, you don't lose money because it's indexed.
David:Mhmm.
Mike:Sounds pretty good. Right?
David:It's so far I'm I'm where do I sign up?
Mike:Yeah. And then this is one of my favorites. So they they'll also make claims like I say they, just the person that would sell something like this says, well, look, you've got a stock bond fund portfolio. You're invested in the market. Right?
Mike:Well, what have stocks done over the last 10 years? Pretty good. But what about since 2000? You know, stocks are really averaging around 6 to 7%, which is true. Mhmm.
Mike:And then if you look at bond funds on the average, maybe they're averaging 3 a half percent. They're skewing the numbers in their favor. You know, they're they're preparing for this. And they'll say, does that sound reasonable? Do you guys remember what bond funds were making in 2,000, 2001, you know, 2008 or so?
Mike:Interest rates drop, bond funds weren't that competitive. And they're going, yeah. I guess that's kind of true. And they say, okay. So let's assume that the average portfolio realistically because we don't want, like, to be the dumb investor that only looks at when the markets were good.
Mike:We have we're gonna be holistic here. We're gonna look at all the markets. K. And they'll even throw out the Goldman Sachs, which I've even said this. Goldman Sachs is saying there could be a flat market cycle.
Mike:So maybe our stocks won't grow as much. So DCL, they're laying it on pretty thick, and they'll say, well, the portfolio average is, let's say, 5.56%. But our IUL, which has a very conservative illustration, is averaging a little over 6%, which is true. And these are very conservative illustrations here, which are true. Because of this regulation.
Mike:I think it was, like, AG 89 or something like that. They had to be more conservative on their illustrations.
David:Okay.
Mike:The conservative illustration looks better than an oversimplified cliche conservative stock bond fund portfolio. So simply by the math, you'd be an idiot to not put all of your money. I'm being very sarcastic here. Please pick up on this. Do not actually do this.
Mike:Just we're just playing around with this. But you'd be an idiot to not put all of your money in who now you will. Okay. Hold on. Hold on.
David:Okay. Alright.
Mike:Let's pump the brakes.
David:Okay.
Mike:Technically, a lot of those claims were true.
David:Alright.
Mike:Though cherry picked data, technically, many of them are true. The average DIY investor, if you look back at the typical portfolio, it includes since 2000 until today, probably is gonna average around 5, 6%. I would just argue that it's not the market's fault. It's just maybe some mismanagement. But, hey, that's why you pay a professional or you dive deep into the research yourself.
Mike:It's just you don't default into these cliche portfolios. But, anyway, I digress. Now, David, there's one last thing I need to talk about the benefits.
David:Okay.
Mike:They're then gonna take the average 5.5 or whatever percent of this 5050 portfolio that allegedly everyone would be averaging. And they're gonna back in the numbers and say if you took income and let's say you go to age 100, how much income did you take without running out of money? But with an IUL, they're gonna include the income that you're pulling from the policy, plus the extra cash because it they're using a higher rate of return to illustrate it, plus the death benefit. And magically, the death benefit gives you more money. And so now it's like, oh my gosh.
Mike:You could you could take this much money or you could take more income, David. Oh. And have a death benefit. It's a no brainer. Yeah.
Mike:Okay. Pump the brakes, Skippy. Let's Yeah. Let's change Skippy. Pump the brakes insurance salesperson.
Mike:Let's let's slow down.
David:Yeah.
Mike:Here's what you really need to know about what's really going on. There's no way that insurance companies are just printing money and magically this death benefit upon the time you die is just magically, oh, you're just gonna get that. It makes sense. It's not term life insurance. They're investing to prepare to pay that out.
Mike:Insurance companies aren't charities. They're very smart about how they manage money. Oh, and by the way, I forgot. That's important to mention is they'll they'll also do deceptive things like compare your tax bill. If you were to fund your IUL with IRA funds, they'll say you could put it into the Roth.
Mike:But you could also put your IRA into an IUL and have the IUL pay taxes, which is true and may make sense sometimes. But what they'll do is they'll say, well, instead of growing your IRA to some large amount and then RMDs come out and you've got to pay tax on this and they'd stack up this tax bill and they say, or you could just convert to an IUL and you'll pay less in taxes, which is true. It's just all these sales tactics. They scare people into buying IULs. Insurance companies don't print money.
Mike:There's no magic formula. They're just better at investing money than your average DIY investor that's putting blindfolds on or getting manipulated by an insurance agent's sales pitch. So first and foremost, when people say they wanna pay the least amount of taxes possible, I'm gonna tell you right now, you're wrong. It's about keeping the most amount of money possible. This is one of the deceptive parts about the IUL pitch.
Mike:Let me explain that. If you were to let's say there's a 20% tax bracket. Let's say the IRS simplifies everything. K? And you can convert everything over on 20% tax bracket.
Mike:So you have a $1,000,000 convert it all over to 800,000. You paid your tax bill. Right? And I'm being hypothetical on purpose, but you pay 200,000 in taxes. 800,000 can grow tax free and distribute tax free.
Mike:Or you could pay 15% for life. Which would you choose? And I'm being very simple. I know this isn't actually how the tax code works, but I need to illustrate a point. If you paid all your taxes a little bit more upfront, a higher percentage, you pay the $200,000 bill, that's 200,000 taxes.
Mike:Or if you did, all things being equal, the 15% for life, you'd pay 412,000 in taxes in this example. So why would you pay 412,000? Why would you pay twice the amount of money in taxes?
David:Doesn't make sense.
Mike:When you could pay 200,000 and that's it. Yeah. And pay the government less. Well, usually, when people are going down these rabbit holes of manipulating people into buying insurance products, what they don't show is the balance of the comparative analysis. So the person in my situation that paid 412,000 in taxes had 690,000 more dollars at the end of their retirement.
David:Oh, boy.
Mike:So it's it's not about paying the least amount of dollars in taxes. It's about the best way to effectively preserve your assets and target a lower effective tax rate overall. This is often missed and just glossed over in the sales pitch of an IUL. K. So it's not about paying the spouse tax bill.
Mike:It's about preserving the maximum amount of assets for you to enjoy, whether it's you or future beneficiaries. K. It's it's a manipulation tactic that drives me crazy. The insurance companies don't make money. Let let me rephrase that one a little bit.
Mike:This idea that death benefits gonna give you extra cash. No. It just means that maybe they're comparing to a poorly managed portfolio that's underperforming what you should be getting. And so it's just it's like comparing apples to oranges. Because if you have a properly designed portfolio, you should, in my opinion, be getting more than 5.5% year over year.
Mike:I mean, for goodness sake, if if that's what you're getting, check your strategy, check your portfolio. If that's what you're getting year over year, there's a huge opportunity cost that you're experiencing. And that doesn't mean the IUL is the answer. It means you probably need a different portfolio. And if you get one bad year or a couple of that's worse than over the long term period of time.
Mike:Do I need to kick that dead horse anymore? That makes sense. Just you can
David:I get
Mike:it? You could put all your money into a CD and say, well, that's protected. Let's compare a CD rate versus the IUL rate. And obviously, the AOL is gonna come out and play, but they're just different investments. They're different insurance products.
Mike:They're different cash products. Now here's the next one. And I'd again, I'm just going down the list of things that in my mind are popping up that you need to understand. When you take money from an indexed universal life insurance policy, there's a loan against it. Now if the markets continue to go up and up and up, you could make money in theory off of the money you've already spent.
Mike:So if the cash value and this is complicated. Look up my Kiplinger article, retirement planning with life insurance. But if the IUL grows at, let's say, 8% year over year. Okay? And the loan against the policy, what you've spent is, let's say, 3 or 4% year over year.
Mike:I'm making up numbers here. Then in theory, you're gonna make a 4% positive arbitrage. You're making 4% on money you've already spent. Sounds good. Right?
David:Mhmm.
Mike:Well, if the markets don't keep going up and up or don't go up enough, the insurance company can demand premiums and say, hey. To keep this policy afloat, you've gotta pay up. So people that overstress the policy, take too much income for the policy, you can run-in some some problems. They need to be properly managed. But too often, it's sold and then they just never talk to you again.
Mike:There are mechanisms in there to help prevent you from drawing too much income, but it's not a all the cash is available to you play. That's just not exactly true. Because you have to keep the policy alive or else it could create a tax bomb situation. And this is according to I believe it's code 7702 of the IRS code. The tax law on how you have to maintain life insurance policies to keep them tax favored.
Mike:And I could go on and on about this, but there are there are other things that are often not mentioned that people need to know. I can't tell you how many people have come to the offices. Well, I've got this life insurance policy. I kinda regret it. Well, yeah.
Mike:You bought the wrong life insurance policy based on your financial objectives. It was set up in a way that there was a higher death benefit than you may realize, which means higher fees, which means the cash value is not gonna grow as much. Maybe the funding schedule wasn't set up right. So it's slowing. I mean, there are so many ways you could set this up wrong that many people regret it, and that's why you go on Reddit and see all of these negative case studies.
David:Right.
Mike:Oh, I've got sold this. It was blah blah. I get why people get upset. But you know what? Doesn't make the tool good or bad.
Mike:It just means that the tool is misused. I mean, you take a hammer and you smash your thumb because you missed the nail. Does that mean the hammer's bad? No. It means you don't know how to use a hammer.
Mike:Right? You take a saw and you cut yourself off. I mean, how many people have cut themselves chopping tomatoes?
David:Right. Yeah. All the time.
Mike:You just need to learn how to use a knife better. An IUL is just a tool, and I've ragged on it. I've playfully made fun of the sales pitch. It doesn't make it good or bad. It just is.
Mike:And here's my point. There's no such thing as a perfect investment product or strategy, but a small IUL within an overall plan may make sense. Here's why. What if you're gonna hire at 55 or 60 years old? Okay.
Mike:And maybe you're kind of on the edge of could you afford to retire? But if a spouse were to pass, then you're in the single tax bracket that might be too much stress on the overall plan and could hurt. What if you're delaying your Social Security until 70 years old? And what if one spouse passes and now when you hit 7, you're gonna get 1 and not 2 Social Security income streams. Maybe a small IUL for each spouse might make sense.
Mike:Maybe it doesn't make sense. Maybe a small IUL makes sense to help protect assets in the down years. So if the markets go down, you don't wanna draw income and accentuate the losses. Maybe you take a loan against the policy to help float you through the market crash while your other accounts can recover. So there is a a feature there that you have cash value associated with a policy that you can borrow against tax free, which is a benefit.
Mike:You're able to draw income while your other accounts recover. I mean, this can make sense. If you're healthy and can qualify for them, they may offer you more growth potential than a CD treasury fixed or fixed index annuity could over the long term period of time.
David:Then how healthy do you have to be to qualify for them?
Mike:You know, I I see people that have medical issues. They take medicine. Maybe their heart blood pressure is not ideal. I I see people that still qualify. You wanna be standard rated or preferred or higher up?
Mike:I mean, if you're smoking, probably don't even wanna try. If you've got diabetes, I mean, it might not even be worth it. But even then, there's some nuance in there. It just kinda depends. I mean, a lot of people have high blood pressure now, but if they if there's a a consistency or long duration of it's under control and stable, you may still get a great rating.
Mike:Most Americans are on medication. Most Americans are diabetic or prediabetic. I don't know if I could say most. I don't know statistically the actual number. I just know that there is no obesity issue in America.
Mike:Mhmm. And people still rate well regardless. If you have a major surgery, there's a heart issue, things like that probably won't qualify. As a general rule, if you qualify but it's a lower table, you may get pushed into saying, hey. You should really do this.
Mike:The commissions, as I've seen, are higher the sicker you are as long as they can get you through a lower table. It's not in your best interest, in my opinion, to do that. It's just you gotta work with someone that's honest enough to admit something like that. Yeah. If you want a high death benefit, it's going to slow down the cash value.
Mike:There's a higher commission to be made if you have a higher death benefit. But is that really in your best interest? What's the goal that we're trying to accomplish here? All these things matter. But a small IUL may make sense as a bond fund alternative or a reservoir, a part of your reservoir, a part of your protection to help get you through the down markets.
Mike:You just got to understand that it takes 10 years to really fund these things properly. It's a long term play. It's not as perfect as people would suggest. You got to dive into the details and really understand the return on investment from a cash standpoint and from a death benefit standpoint and how it fits into an overall comprehensive plan. That's all the time we've got for the show today.
Mike:If you enjoyed the show, consider subscribing to it wherever you get your podcast. Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis.
David:Learn more about Your Wealth Analysis and what
Mike:it could do for you regardless of your age, asset, or target retirement date. Go to www.yourwealthanalysis.com today to learn more and get started.