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On this episode of Drilling It Down, Liam and Wes explore Indexed Universal Life (IUL) insurance, dissecting its complexities and common misconceptions. They clarify how IULs differ from term life insurance and critique the misleading marketing that positions them as safe investment vehicles. They examine eight key issues associated with IULs, highlighting the risks of embellished growth illustrations and the reality of loan implications against cash values. Emphasizing the need for thorough scrutiny, they advocate for conventional investment options that typically yield better returns. Join us for insights that equip you to make informed financial decisions regarding IULs.
Want to submit a question that will be answered on the next episode? Submit it here or email us at newsletter@mcgillhillgroup.com.
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Listen to our sister show, Next Gen DDS! An all-in-one resource for dental students, residents, and early career doctors, discussing both clinical and business aspects of dentistry, hosted by Wes Lyon and Dr. Scott Menaker.
More dentists than ever are seeking out independent, objective, financial advice. In a world recently flooded with private equity money, lower dental insurance reimbursements, and questionable tax advice, it can be tough to see through the fog and answer the most important question, how can a dentist make more money? Join your host Wes Lyon as he helps you see clearly through the fog of dental office financials, allowing you to concentrate on delivering quality dental care.
Wes prides himself in offering independent, uncensored, objective advice to help dentists increase practice profitability, make better practice management decisions, and improve their personal financial planning. Whether you’re a recent graduate, new owner, in the stride of your career, or considering a transition into retirement, the Drilling It Down Podcast will help you make more money, pay less tax, and reach financial independence earlier.
About Us
McGill and Lyon Dental Advisors is an independently owned one-stop financial services resource for the dental profession, based on their "every step of the way" team approach. Their team offers financial consulting services and continuing education seminars exclusively for dentists nationwide. Throughout the years more than 30,000 doctors nationwide have trusted McGill and Lyon Dental Advisors for objective advice to reach their financial goals.
Aside from their consulting, transition, and continuing education services, the group also publishes The McGill & Lyon Dental Advisory, a dental business newsletter that offers valuable insights for all dentists. The McGill & Lyon Dental Advisory provides strategies and advice to help minimize federal and state income taxes, maximize practice profits, reduce overhead expenses, and create and protect your wealth. Membership includes monthly issues, searchable archives, special reports and bulletins, Q&As, financial calculators, forms, guides, letters, and more! Visit mcgilladvisory.com to subscribe!
Wes and his guests are experienced dental advisors specializing in tax planning, business planning, financial planning, wealth management, and practice transitions, who take pride in providing independent advice that puts the independent dentists’ best interests first.
Host Biography
Wes Lyon:
Wes helps dentists and specialists across the country achieve financial independence by improving practice profitability, slashing income taxes, managing dental insurance exposure, and making better personal financial decisions. Wes serves as President & CEO of Lyon Publishing Inc., President & CEO of McGill and Lyon Dental Advisors, and Managing Partner of Lyon Wealth Advisors Group, LLC. He is a highly sought after speaker making regular appearances at industry events, study clubs, podcasts, and McGill and Lyon seminars. Wes is also published in other editorials periodically and writes a Financial Management column for the Academy of General Dentistry. Before entering the dental consulting world, Wes worked in institutional investment management. Prior to that, Wes was a financial advisor specializing in helping small business owners with their personal finances.
McGill and Lyon Dental Advisors is a consulting firm providing dentists and specialists independent, objective financial advice as it relates to tax planning, business planning, and financial planning. McGill and Lyon Dental Advisors was founded in 1983 by Dr. Charles Blair and John K. McGill. Since then, the company has helped over 1,000 dentists reach their financial goals while paying the least amount of taxes required through their tax, business, and financial planning service.
Wesley Lyon:
Welcome back to another episode of Drilling It Down. This is your host,
Wesley Lyon:
Wes Lyon, co-hosting with me today, Liam Fitzgerald. Liam, welcome to the show.
Liam Fitzgerald:
Wes, thanks so much for having me. Very excited for today.
Wesley Lyon:
Absolutely. So today's topic, we want to talk about indexed universal life.
Wesley Lyon:
Is that what IUL stands for?
Liam Fitzgerald:
It is, it is. And yeah, a pretty big word, and we're really going to dive into it.
Liam Fitzgerald:
I know it's a type of permanent insurance, but it's definitely a special brand.
Wesley Lyon:
It's insurance. So, oh, man, it's weird. I keep seeing it advertised as an investment fund.
Liam Fitzgerald:
There you go. Well, it oftentimes is marketed as such, but we'll learn pretty
Liam Fitzgerald:
soon that, you know, anytime a policy, an insurance policy wants to be made
Liam Fitzgerald:
like an investment policy, they're usually not good at, usually they're one, right?
Wesley Lyon:
Yeah, no, definitely. You know,
Wesley Lyon:
I know we've talked about this quite a few times, but it keeps coming up.
Wesley Lyon:
So, you know, I want to talk about a little bit more in depth here.
Wesley Lyon:
And we came up with about eight quick issues with these policies.
Wesley Lyon:
This only took us about 10 minutes to come up with, if that tells you how easy
Wesley Lyon:
it is to kind of pick some of this stuff apart.
Wesley Lyon:
But we wanted to go through and kind of get a little more granular on the why
Wesley Lyon:
behind these things, on why they don't work.
Wesley Lyon:
Now, quick overview, for those of you who don't know what an indexed universal life policy is.
Wesley Lyon:
This is a type of permanent insurance policy, meaning by permanent, it's not a term.
Wesley Lyon:
Basically a term life insurance policy.
Wesley Lyon:
You own the life insurance for the term in which you need life insurance,
Wesley Lyon:
and then after you don't need it, you no longer pay for it.
Wesley Lyon:
But there's different types of products that are permanent life insurance policies,
Wesley Lyon:
and they either pay out upon your death, or as we're gonna talk about,
Wesley Lyon:
you can take loans from them, distributions.
Wesley Lyon:
A lot of people really, I don't think sell these as life insurance.
Wesley Lyon:
So we live in a little bit of gray area because,
Wesley Lyon:
Uh, Liam, I believe, uh, you had to take a, did you take the series 65?
Liam Fitzgerald:
It was actually 66, but it was close enough. Pretty deep in the laws there.
Wesley Lyon:
So you had to take the combo.
Liam Fitzgerald:
Exactly.
Wesley Lyon:
So for those of you who don't know what we're talking about,
Wesley Lyon:
there are securities licenses to sell security, and those aren't even to sell
Wesley Lyon:
securities. Those are to give advice.
Wesley Lyon:
Um, so Liam had to take those. You're also a certified financial planner.
Liam Fitzgerald:
Correct.
Wesley Lyon:
Um, I had to take all of those as well. Um, and then you were at Vanguard.
Wesley Lyon:
I was at Dimensional. did you have to take the Series 7?
Liam Fitzgerald:
Series 7 to even talk about trading a stock, right? That was what you did to
Liam Fitzgerald:
be able to both give advice, but then also trade as well.
Wesley Lyon:
Now, that one's a little bit funny
Wesley Lyon:
because technically working on the personal side, you don't need a 7.
Wesley Lyon:
It's something a little more either on people selling, actual selling stocks,
Wesley Lyon:
but you're part of Vanguard, which does both.
Wesley Lyon:
So you're on the personal side, but that is a little technicality.
Wesley Lyon:
Now, in order to sell an indexed universal life policy, you have to take an insurance exam, right?
Liam Fitzgerald:
You do have to take an insurance exam. Now, the term exam, and apologies for
Liam Fitzgerald:
any of our friendly insurance agents watching, but it's not necessarily as in-depth
Liam Fitzgerald:
as some of those other exams we were talking about.
Wesley Lyon:
Right. That's weird. I took that, Liam.
Liam Fitzgerald:
Well, I'm sorry to really offend you there, Wes. I'm not sure,
Liam Fitzgerald:
and I studied for it, but I did take it and pass it. Maybe one weekend, right, all it took?
Wesley Lyon:
Yeah, we used to work for a fee-based RIA, and we didn't have a broker.
Wesley Lyon:
We would directly sell some,
Wesley Lyon:
insurance, disability, term life. We don't do that just because when you're
Wesley Lyon:
only selling the products that are right for people, the commissions are tiny.
Wesley Lyon:
I'm not even doing the paperwork for the tiny commission. We send it out to a broker.
Wesley Lyon:
That broker gets to make all the money. He loves us for that,
Wesley Lyon:
but he just shops the cheapest policies, and that way there's no conflict on
Wesley Lyon:
our part. We don't have to deal with the paperwork. It's just time well spent.
Wesley Lyon:
But as you can see, it's much easier to become licensed to sell an insurance product.
Wesley Lyon:
And it's not regulated in the same manner that you'd get regulated as far as investment world goes.
Wesley Lyon:
And that has to do with performance reporting.
Wesley Lyon:
It also has to do with what you show clients or potential clients and really anything under the sun,
Wesley Lyon:
which is, I guess, kind of funny, but not really, because they rip a lot of
Wesley Lyon:
people off that they can actually market these as a great investment product.
Wesley Lyon:
I mean, half the marketing sees, oh, save for your family, you know,
Wesley Lyon:
get tax free income in retirement.
Wesley Lyon:
And they can do all of these things in which the government is trying to regulate.
Wesley Lyon:
But because they do it behind an insurance wrapper, they don't have to actually follow the rules,
Wesley Lyon:
which leads to I've seen some Some people honest about marketing these things,
Wesley Lyon:
a lot of people dishonest, and I think even sometimes the honest people,
Wesley Lyon:
they just don't understand the investments in the back end or have the true
Wesley Lyon:
deep understanding of what's going on to realize why this might not be the world's greatest idea.
Wesley Lyon:
But Liam, I came up with eight things here. Tell me which one stood out to you. What are you looking at?
Liam Fitzgerald:
You know, a good list right here. I would love because I know your background,
Liam Fitzgerald:
especially being in the investment world, working for Dimensional,
Liam Fitzgerald:
you know a lot about the indices.
Liam Fitzgerald:
And yes, when we look at some of these accounts, we say, okay,
Liam Fitzgerald:
the S&P 500 is there. Maybe the Russell 1000.
Liam Fitzgerald:
I recognize those as indexes.
Liam Fitzgerald:
It sounds like they might be backtested. How are these indexes truly implemented
Liam Fitzgerald:
into some of these policies?
Wesley Lyon:
Yeah, so every one's going to be quite a bit different.
Wesley Lyon:
But generally speaking, what we're referring to in these indices is when you
Wesley Lyon:
put money into this policy, it kind of grows in this investment account and
Wesley Lyon:
you get to participate with the market.
Wesley Lyon:
I think that's the word they love to use. You get to participate in market growth
Wesley Lyon:
and they put a 0% floor on it. And what they're really talking about is you
Wesley Lyon:
have participation in an index based off their rules.
Wesley Lyon:
So sometimes the indexes are very straightforward. Like you see the S&P 500 index.
Wesley Lyon:
Everybody knows what the S&P 500 is. Well, maybe not knows. They've heard of the S&P 500.
Wesley Lyon:
I don't know how many people know exactly how it gets constituted,
Wesley Lyon:
details, but everybody's heard of it and can generally talk about it.
Wesley Lyon:
So you can latch on to that one. Sometimes, though, they show policies,
Wesley Lyon:
and they'll show policies with some sort of index.
Wesley Lyon:
Sometimes an index creator created it.
Wesley Lyon:
Other times didn't. And sometimes you have to dig into the details if it's too good to be true.
Wesley Lyon:
Like, oh, look, this index universal life policy would have performed at 16.5%
Wesley Lyon:
annualized over the last 25 years.
Wesley Lyon:
And this actually happened where somebody showed me this.
Wesley Lyon:
So I looked at the index, and I went to the index provider's website.
Wesley Lyon:
By the way, for those of you that don't exactly understand what indexes are,
Wesley Lyon:
probably a whole conversation for another day.
Wesley Lyon:
But some entity is doing portfolio construction rules in a theoretical space,
Wesley Lyon:
and they're creating these are the rules, and this is what gets included.
Wesley Lyon:
And those are the rules. So the S&P 500 is what, the largest 500 in the US?
Wesley Lyon:
So that reconstitutes on a certain day in the largest 500 companies in the US
Wesley Lyon:
by total outstanding share price. So number of shares multiplied by the share price.
Wesley Lyon:
That is going to be your metric to get into that index. So sometimes you look
Wesley Lyon:
at these and you look at the methodology and you go, what in the world?
Wesley Lyon:
Somebody did rocket science to get here. And then you look back and I'm looking
Wesley Lyon:
at this illustration showing, hey, look at what this policy would have done over 20 years.
Wesley Lyon:
Well, the index was created two years ago. Somebody went and looked backwards
Wesley Lyon:
and they were like, hey, this is fantastic.
Wesley Lyon:
Look, if I did this much S&P 500, you know, they just over-engineered this thing
Wesley Lyon:
to be the perfect index for the last 20 years, which clearly ain't going to
Wesley Lyon:
be the perfect index for the next 20.
Wesley Lyon:
But yeah, it's just a back-tested index.
Wesley Lyon:
And, you know, when I was working at Dimensional, I had a colleague of mine
Wesley Lyon:
and we were always selling against some of this stuff because some of these
Wesley Lyon:
indices, they use them in life insurance.
Wesley Lyon:
But some investment companies, they take this garbage data and they actually
Wesley Lyon:
put it to work and they invest this way.
Wesley Lyon:
And I remember sitting there and some knucklehead advisor is showing us this
Wesley Lyon:
great thing and I was going to invest in it.
Wesley Lyon:
And this guy, we're young, we're doing all the math behind it.
Wesley Lyon:
This guy was older and wise and he just turned with a smile on his face and
Wesley Lyon:
looked and goes, I've never seen a back test I didn't like.
Wesley Lyon:
And to his point, what he was subtly saying is, yeah, they probably came up
Wesley Lyon:
with 50 iterations of this that didn't work and they threw out the garbage.
Wesley Lyon:
And then number 51, you know, that was the one that worked.
Wesley Lyon:
So, you know, when you're looking at something that hasn't been existed,
Wesley Lyon:
it has been back tested or, you know, look, if I would have done X,
Wesley Lyon:
Y, and Z, well, it's like, yeah, if I would have bought Sears when it was $2
Wesley Lyon:
a share, sold at the top and traded it all in for Apple, I might have more money
Wesley Lyon:
than, you know, Bill Gates, but I didn't do that.
Wesley Lyon:
So, you know, you have to be careful if they just really back-tested,
Wesley Lyon:
created an index just to make their illustration look good.
Liam Fitzgerald:
Makes sense. Yeah, I'm going to jump on your list because I noticed one point
Liam Fitzgerald:
we had was some really bad enforced illustrations.
Liam Fitzgerald:
And I think about a mutual client that we have that thought they were secure for retirement.
Liam Fitzgerald:
They were getting ready to go off and travel and sell their practice and enjoy.
Liam Fitzgerald:
And they really put most of their eggs in this basket of, hey, I have X amount,
Liam Fitzgerald:
a guaranteed basis for life, right? And almost an annuity type.
Liam Fitzgerald:
Talk to me about some of these illustrations. Seems to me borderline illegal
Liam Fitzgerald:
to make it seem like this.
Wesley Lyon:
Definitely. And by the way, if you're listening to this, because I remember
Wesley Lyon:
we jumped on the phone and said, oh, that was me. And I was like, it was you and 18 others.
Wesley Lyon:
So if you have done any of this stuff, don't feel bad. Give us a call.
Wesley Lyon:
You know, we'll try to work with you. Get it worked out. So don't feel horrible.
Wesley Lyon:
Most dentists have been wrapped up into one of these. but it is fairly common.
Wesley Lyon:
You know, it's unfortunate that conversation I've had to have over and over
Wesley Lyon:
again through the years of, hey, you're not, but enforced illustrations are
Wesley Lyon:
hypothetical performances.
Wesley Lyon:
It would be the same as, well, now we're not allowed to do this and we would
Wesley Lyon:
never do this, but we would show somebody, you know, hey, if you invest in this,
Wesley Lyon:
look how much money you're going to have and showing them that,
Wesley Lyon:
you know, it's going to earn like 12% a year, which is absolutely insane.
Wesley Lyon:
I can't imagine doing that.
Wesley Lyon:
So we obviously don't do that. We're not allowed to, but somehow you're allowed
Wesley Lyon:
to do this with insurances.
Wesley Lyon:
Now, some funny things we've seen in some of these illustrations,
Wesley Lyon:
like when you dive into it,
Wesley Lyon:
one in particular, I know we were looking at and, you know, you're doing very
Wesley Lyon:
simple math and the math is the money in times the crediting rate used.
Wesley Lyon:
You know, you can sit there, oh, these are the deposits. Here's the interest
Wesley Lyon:
rate that the product is going to hypothetically earn.
Wesley Lyon:
And you calculate out what the value of the policy should be.
Wesley Lyon:
Now, this is not that uncommon where the policy value exceeds the stated interest crediting rate.
Wesley Lyon:
So we've got a huge problem there that indicates there's negative mortality
Wesley Lyon:
charges, mortality and expenses, because the insurance company is going to charge fees on top of that cap.
Wesley Lyon:
So, I mean, it's just mind-blowing to sit there and look at something where
Wesley Lyon:
you know you're going to have to pay fees to the insurance company,
Wesley Lyon:
but they're modeling out that they're going to actually pay you.
Wesley Lyon:
And it's not every single one of them. some we look at and whether or not we
Wesley Lyon:
agree with the fact they're going to get there, they're at least done correctly.
Wesley Lyon:
But that stuff is just staggering. And then showing somebody that,
Wesley Lyon:
you know, the S&P, or you do this, and this is the cap rate,
Wesley Lyon:
the participation rate, which kind of dives into a couple other issues on the list.
Wesley Lyon:
They're in the illustration, but you say, well, why or how did they come up
Wesley Lyon:
with that? Or what's wrong with the illustration?
Wesley Lyon:
And one of the big things, you know, other than it just being completely wrong,
Wesley Lyon:
like 100% just wrong, something I like to call cap rate integrity.
Wesley Lyon:
Now, when you sign this universal indexed universal life, IUL.
Liam Fitzgerald:
Yep, you got it.
Wesley Lyon:
Okay, we don't sell these, so we don't know the jargon as well. Little rusty.
Wesley Lyon:
When you sell this, it's a contract with an insurance company.
Wesley Lyon:
Right? you don't have your own account of money.
Wesley Lyon:
It's a contract with an insurance company, and they're providing you some guarantee in return.
Wesley Lyon:
When you read the fine print of most of these insurance contracts,
Wesley Lyon:
they have the right to change the cap and the participation rate at their free
Wesley Lyon:
will, which sometimes can be the same thing.
Wesley Lyon:
Sometimes you'll get 70% of the index. Sometimes you'll get the index return
Wesley Lyon:
less or something, but other times you just get, hey, you can get the S&P 500
Wesley Lyon:
capped at 9%. So if it does 30, you get 9%. Well.
Wesley Lyon:
That contract usually states that the insurance company can lower the cap rate,
Wesley Lyon:
lower the participation rate at their own doing.
Wesley Lyon:
So it's a unilateral contract. It's no guarantee.
Wesley Lyon:
So, you know, it might start with a very high participation rate or cap rate.
Wesley Lyon:
You know, you might get, I think, like 13%. You know, we've got a 13% cap rate.
Wesley Lyon:
The S&P 500 is 15. and you get 13 of it. That sounds phenomenal.
Wesley Lyon:
But then you go back five years later and the cap's only nine, it's eight.
Wesley Lyon:
So the cap rate going down can be a huge problem.
Wesley Lyon:
And they're illustrating one thing, but in the background, they're going to change something else.
Wesley Lyon:
So that can be a huge one. And same with the participation rates.
Wesley Lyon:
There's no guarantee on those participation rates.
Wesley Lyon:
So they're illustrating something that just ain't going to come true.
Liam Fitzgerald:
That's fair. And I especially saw the cap rates can be very dangerous because,
Liam Fitzgerald:
okay, it seems like a win-win.
Liam Fitzgerald:
You have a floor, maybe it's zero. You're never, quote unquote,
Liam Fitzgerald:
never going to lose anything.
Liam Fitzgerald:
Your cap is eight. But if you look at the, let's take the S&P 500,
Liam Fitzgerald:
the history of that, most of the market growth usually comes in bunches, right?
Liam Fitzgerald:
So, hey, the S&P was up 20% a couple of years ago. Well, someone was stuck over here at eight.
Liam Fitzgerald:
Yes, you didn't lose anything, but you're really, after fees,
Liam Fitzgerald:
you're not getting 8% average annual return a year. Is that right?
Wesley Lyon:
No, that's right. And a lot of times too, people don't realize that most of
Wesley Lyon:
these are done like point to point.
Wesley Lyon:
So if you're doing, okay, I've got,
Wesley Lyon:
one year. Yours usually isn't January 1st to December 31st. It's usually your date to your next date.
Wesley Lyon:
So it's kind of funny just based off of these caps that you could have two policies
Wesley Lyon:
sold within a week of each other with wildly different returns if there was
Wesley Lyon:
extreme market volatility within those couple weeks that there's overlap one way or the other.
Wesley Lyon:
So yeah, you don't necessarily get that, but that's the biggest thing there
Wesley Lyon:
is if you're capped at eight and the return is at 30, 20.
Wesley Lyon:
And these aren't that absurd of returns.
Wesley Lyon:
You're not going to get that return annualized. I mean, it's not going to be
Wesley Lyon:
your average or what you expect over time, but a lot of your return is going
Wesley Lyon:
to come from big, big years and you're stuck at eight. Yeah.
Liam Fitzgerald:
No, that's big opportunity costs there and uncomfortable.
Liam Fitzgerald:
And we talked earlier, we both took the series seven.
Liam Fitzgerald:
We're both pretty heavy into the investments. we're talking a lot about rates
Liam Fitzgerald:
of return and percentages, but I know that dividends are certainly a part of
Liam Fitzgerald:
investments. And a lot of our investors and clients will count on dividends
Liam Fitzgerald:
at the end of the year, quarterly.
Liam Fitzgerald:
Sometimes retirees will count on that for their income. Are dividends a part of this at all?
Wesley Lyon:
They can be. Usually not. Usually you're going to do a price to price.
Wesley Lyon:
So you're looking at the percentage increase of the S&P 500,
Wesley Lyon:
not what the dividends are paying out.
Wesley Lyon:
And I think historically, the S&P 500 has done roughly 10% with dividends.
Wesley Lyon:
A little bit over. And without dividends, Liam, do you know what the number is?
Liam Fitzgerald:
Oh, you're putting me on the spot. I don't know exactly, but it could be close to half that, right?
Wesley Lyon:
It is more than half. I'll give you that. Give me your best guess.
Liam Fitzgerald:
I'll say seven.
Wesley Lyon:
It's just a little over seven. You lose about 3% not having a dividends.
Wesley Lyon:
Now that fluctuates sometimes up, sometimes down.
Wesley Lyon:
A lot of dividends really have to do with the tax law and what the best way
Wesley Lyon:
to return money to shareholders is.
Wesley Lyon:
But yeah, I mean, you're already losing 3% there. So, that's not great.
Wesley Lyon:
You've got a cap on it. That's not great.
Wesley Lyon:
And then, gosh, we're just going to pick apart these illustrations.
Wesley Lyon:
So, then we already know that we've got cap rate integrity. We've got participation rate integrity.
Wesley Lyon:
We're not including dividends. We do have cap rates. So, these are all bad things.
Wesley Lyon:
And then they're going to show us getting our money out tax-free.
Wesley Lyon:
But Liam, how do you get money out of a permanent life insurance policy completely tax-free?
Liam Fitzgerald:
Oh, man. Unfortunately, someone has to die for it, right?
Wesley Lyon:
Yeah. Or how do they promote it?
Liam Fitzgerald:
Oh, well, let me just tell you about this loan that you can take.
Liam Fitzgerald:
Borrow from yourself, man. Go ahead. Oh, yeah.
Wesley Lyon:
Infinite banking, right? Yeah. So it's a loan. and when they illustrate the
Wesley Lyon:
loans, they illustrate an interest rate on the loans.
Wesley Lyon:
Loan rate integrity is a thing too. You read that contract, that loan rate is
Wesley Lyon:
not guaranteed. The insurance company is going to set it.
Wesley Lyon:
So, yikes. So you're looking at it, then all of a sudden the loan rate goes
Wesley Lyon:
up and now this is always the funny thing because we see the illustrations on
Wesley Lyon:
the front end that show them, oh my gosh, this is amazing.
Wesley Lyon:
And then we see the real results on the back end of people that come in here
Wesley Lyon:
15, 20 years into a policy.
Wesley Lyon:
And all of a sudden, all these rates and everything have changed.
Wesley Lyon:
And yikes, I even had a client in a few weeks ago that we've got big issues
Wesley Lyon:
because they thought these policies were going to be enforced forever.
Wesley Lyon:
The problem is the fees and mortality expenses have gone up And the policies
Wesley Lyon:
are in jeopardy of not being enforced anymore because there's not going to be enough payment on it.
Wesley Lyon:
What is the word when a policy is no longer in force?
Liam Fitzgerald:
Oh, man, that's a good policy lapses. There you go.
Wesley Lyon:
The policy can lapse and this can be dangerous if you fortunately this client
Wesley Lyon:
didn't have a loan on it. So we don't really have any tax issues.
Wesley Lyon:
But a lot of people get caught in this trap. They don't realize,
Wesley Lyon:
you know, okay, they put the money in.
Wesley Lyon:
So let's just be realistic here. They put a million in over 20 years and it's worth about a million.
Wesley Lyon:
That's say that's about normal.
Liam Fitzgerald:
I'd say that's generous. It's probably generous. I've seen some that have made money.
Wesley Lyon:
80% of them are worth less than what the people put into them, I'd say.
Wesley Lyon:
But now, okay, you got that million. So you take a loan against the cash value
Wesley Lyon:
to get your money out tax-free.
Wesley Lyon:
Now, all of a sudden, the fee, the interest, and the mortality and insurance
Wesley Lyon:
expenses start going up on you.
Wesley Lyon:
And there's no cash value because you took it all out as a loan.
Wesley Lyon:
So what ends up happening is you either have to pay additional premiums in,
Wesley Lyon:
which can be hefty, or the policy lapses.
Wesley Lyon:
Now, if the policy lapses, it had a million in cash value, you took it out as
Wesley Lyon:
a loan, and you already spent the money, and now the policy lapses.
Wesley Lyon:
You're going to have a big tax bill. It's going to be an ugly day,
Wesley Lyon:
and people don't talk about the fact that these policies can lapse,
Wesley Lyon:
but they absolutely can. and these illustrations should not be trusted.
Liam Fitzgerald:
Right. No, that's fair. And I always love when, all right, you meet this person
Liam Fitzgerald:
and they're an insurance agent and a financial advisor and apparently a tax
Liam Fitzgerald:
expert too, because, oh, we can tax deferred growth and all of that.
Liam Fitzgerald:
But when that comes out, when it lapses, when you surrender it,
Liam Fitzgerald:
if there's a gain, that's not tax or capital gains rates, right?
Liam Fitzgerald:
You're going to pay pretty much your top rate at that.
Wesley Lyon:
You are going to pay ordinary income taxes on that, which can be devastating.
Wesley Lyon:
Yeah, I don't know how much worse it can get when that happens.
Wesley Lyon:
And people don't really price that in that it could happen, but it absolutely could happen.
Wesley Lyon:
No doubt in my mind, especially if you're taking big loans against a policy.
Wesley Lyon:
But yeah, you've turned a capital gain into ordinary income.
Wesley Lyon:
People say, well, if I put a million in, I got a million out.
Wesley Lyon:
You know, I didn't have a gain. Wrong.
Wesley Lyon:
The insurance company, you have a tax basis and a policy.
Wesley Lyon:
And some of your premium goes towards the tax basis. but a lot of your premium goes towards expenses.
Wesley Lyon:
So this is how you can have a million dollar policy that you put a million dollars into.
Wesley Lyon:
They're telling you that it's returned 7% a year because they're calculating
Wesley Lyon:
the return after the mortality charges, which that's basically the cost of insurance
Wesley Lyon:
plus the administrative charges in there.
Wesley Lyon:
So if 400,000 of your money went into expenses,
Wesley Lyon:
which wouldn't be absurd in some of these policies, then in this case,
Wesley Lyon:
you would have a $600,000 tax basis, you'd owe ordinary income tax on $400,000 immediately.
Liam Fitzgerald:
Look at this.
Liam Fitzgerald:
Scary, scary day. And that's the other concern I have is that when I talk to
Liam Fitzgerald:
a lot of these clients who have these policies like this,
Liam Fitzgerald:
they do it or they're bought into it because they're scared of the market and
Liam Fitzgerald:
they're sold that this is a conservative way to invest.
Liam Fitzgerald:
This is a way that you can save your money and not risk it in the market.
Liam Fitzgerald:
It sounds like one of the riskiest ventures is putting your money in and maybe
Liam Fitzgerald:
not having the same amount to come out after years and years and years,
Liam Fitzgerald:
probably much more aggressive than a traditional investment would be.
Wesley Lyon:
Yeah, you'd be better off in cash probably half the time. I mean,
Wesley Lyon:
it's just, it's kind of sad that this stuff still goes on.
Wesley Lyon:
People put a whole bunch, like I've seen a whole bunch of people argue on this
Wesley Lyon:
guy on LinkedIn. He's hilarious.
Wesley Lyon:
He argues with all the insurance salespeople in his free time.
Wesley Lyon:
He needs to spend some more time getting some new clients, but maybe he gets some out of this.
Wesley Lyon:
Maybe it's actually, I never thought of that. Maybe all the people looking at
Wesley Lyon:
that, read him tearing this guy apart and they call him like,
Wesley Lyon:
Hey, I clearly need to talk to you. It could be his whole marketing.
Wesley Lyon:
Um, his name's Andy Penko. I don't know him. I just find him hilarious.
Wesley Lyon:
Um, but yeah, you know, he, he goes and argues with them all and you know,
Wesley Lyon:
they're, they're just selling it and selling it.
Wesley Lyon:
And like, if you talk to these guys, they'll call us like, oh let me explain
Wesley Lyon:
the benefits of it to you i'm like dude i'm a cpa that's well known for my tax
Wesley Lyon:
knowledge and they're just like well you don't know about this really i've.
Liam Fitzgerald:
Heard it yeah.
Wesley Lyon:
Like really you don't think i know about this like no i do know about it it's
Wesley Lyon:
an absolute scam here but if instead you put your money in the stock market
Wesley Lyon:
of that 20 years you know your million probably goes to like four and sure you
Wesley Lyon:
can risk losing 30 of it but you're gonna risk losing like 30,
Wesley Lyon:
40% of your millions, not your million.
Liam Fitzgerald:
Exactly.
Wesley Lyon:
You know, there's no fear of losing money when you don't have any,
Wesley Lyon:
but a lot of times too, they always talk and they argue.
Wesley Lyon:
This is where I was going with that story. They argue about how the money gets
Wesley Lyon:
invested and the strategies behind it.
Wesley Lyon:
I think, I don't know this for certain, but I think if you oftentimes found
Wesley Lyon:
that most of this money is just invested in the general account of the insurance
Wesley Lyon:
company and the insurance company just kind of sets what the spreads are, all that.
Wesley Lyon:
They know what the policy is going to end up paying out and they're taking the
Wesley Lyon:
administrative expenses, the mortality charges on it. I mean, they know.
Wesley Lyon:
So, it's not, I don't know, there's not rocket science.
Wesley Lyon:
I think people have this view in the background that there's these really,
Wesley Lyon:
really smart investment guys trading option strategies to make this happen. It's like,
Wesley Lyon:
Nah, it's probably in the general account of the insurance company. Sure.
Wesley Lyon:
You never worked on the institutional side. Are you aware of how basically insurance companies function?
Liam Fitzgerald:
I don't know. Share a little more.
Wesley Lyon:
They keep premiums with expected payouts, right?
Wesley Lyon:
Whether or not it'd be a life insurance policy, whether or not it would be disability
Wesley Lyon:
policy, whether or not it's going to be flood insurance. Whatever it is that
Wesley Lyon:
they're insuring, they've got really smart actuaries in the background.
Wesley Lyon:
And the actuaries are calculating out, based off the risk, how much they expect to pay out.
Wesley Lyon:
Now, they're collecting the premiums, but they're not paying out big events every single year.
Wesley Lyon:
So they're investing the premiums. And they're typically going to be in really safe investments.
Wesley Lyon:
They're probably the biggest buyer of corporate bonds is insurance companies.
Wesley Lyon:
They're very, very bond heavy. We would look at it for a client if they came
Wesley Lyon:
in with that portfolio and be like, are you scared of your own shadow?
Wesley Lyon:
And it's not that they're scared of their own shadow. It's that this money is
Wesley Lyon:
being invested to pay out claims.
Wesley Lyon:
It's not being invested to beat the market. It's being invested to pay out claims.
Wesley Lyon:
So it's going to be a lower investment return. And it's not a knock on insurance
Wesley Lyon:
companies. It's just a business model.
Wesley Lyon:
That's where your money is being invested. it's like this, this isn't it.
Wesley Lyon:
This isn't it. Your money needs to be growing faster.
Liam Fitzgerald:
And if you take on that risk, you're paid for that. And to be able to say,
Liam Fitzgerald:
hey, I'm going to put it into a traditional investment.
Liam Fitzgerald:
That's right for me. And that doesn't mean you have to put all of the heat on,
Liam Fitzgerald:
be very, very aggressive.
Liam Fitzgerald:
No, you can have a conservative portfolio with traditional investments,
Liam Fitzgerald:
just like those companies do.
Liam Fitzgerald:
And I always laugh because when I look at the biggest skyscrapers around and
Liam Fitzgerald:
I look at the stadiums, like the New York Giants and New York Jets,
Liam Fitzgerald:
they play in MetLife Stadium and the Texas Rangers playing Globe Life Park.
Liam Fitzgerald:
These insurance companies are huge entities. They're not losing money on you.
Liam Fitzgerald:
They are not doing you a favor. They are not your best friend.
Wesley Lyon:
No, they're definitely making money off of you. And they're investing conservatively.
Wesley Lyon:
They just don't have a way to return this, money to you with a 10% annualized return.
Wesley Lyon:
There's just no way for them to do it.
Liam Fitzgerald:
Sure.
Wesley Lyon:
So again, not necessarily knocking
Wesley Lyon:
the insurance companies and not to say permanent life has zero place,
Wesley Lyon:
Maybe, though. We don't want to say zero, but we're in the decimal places there.
Wesley Lyon:
I've seen some people use it for taxation purposes, or sometimes people can't
Wesley Lyon:
get insured due to a health issue, and a permanent life insurance policy is kind of our only option.
Wesley Lyon:
So, I've certainly seen that, too. A client straightforward tells us when I
Wesley Lyon:
went and looked at it, he goes, I know you're going to be mad about it. I got it when I was 30.
Wesley Lyon:
I had two kids, and we had nothing else to fall back on and my health didn't
Wesley Lyon:
allow me to get insurance other than this. So he was like, I know it was a bad idea.
Wesley Lyon:
I was like, oh, well, you know, it served a great purpose for a long time for him.
Wesley Lyon:
So not to completely bash him, but just like 99.7% bashed.
Liam Fitzgerald:
That's a pretty good guarantee. So that's fair. Did anything else on the list
Liam Fitzgerald:
that you're thinking of?
Liam Fitzgerald:
We don't want to beat it to death, but I think it's pretty much dead now,
Liam Fitzgerald:
but anything else we haven't covered yet?
Wesley Lyon:
You know, my last one is just the value of compound interest.
Wesley Lyon:
And like we kind of went through and we talked about where you're losing money, different spots here.
Wesley Lyon:
So kind of to recap, where are we losing money? Right. We've got a cap rate
Wesley Lyon:
or participation rate. We're not going to fully participate.
Wesley Lyon:
We're unlikely to be capturing dividends. Right. So there's if we're S&P 500,
Wesley Lyon:
we're about 3% lower right there.
Wesley Lyon:
So we're just sitting there. We're just going down and down and down.
Wesley Lyon:
Oh, then we're going to have administrative fees and expenses on the policy.
Wesley Lyon:
Then, we're going to have the mortality expense on the policy,
Wesley Lyon:
and we just kind of want to overall look and remember the value of compound interest.
Wesley Lyon:
What, even at 3%, 3.5%, your money doubles every 20 years.
Wesley Lyon:
It's 7%, it doubles every 10 years, and what, at 10%, it doubles every seven years. You got it.
Wesley Lyon:
All right, so let's just do some quick math with a million here.
Wesley Lyon:
I'm going to be 40 years old and put a million dollars into this policy.
Wesley Lyon:
I'll be lucky if it doubles in 30 years. It's probably not going to move anything.
Wesley Lyon:
Now, at 7%, I'm going to double every 10 years.
Wesley Lyon:
So at 50, it's going to be 2. At 60, it's going to be 4. At 70, it's going to be 8.
Wesley Lyon:
Compound interest is your friend. Now, if we're 40, though, and we're doing
Wesley Lyon:
this, okay, we can probably afford to be more aggressive.
Wesley Lyon:
We're going to get somewhere in the ballpark of 9 to 10. It's every seven years.
Wesley Lyon:
So 47 we got to, 54 we have four, and then, what, 61 we have eight, 68 we have 16.
Wesley Lyon:
Like these percentage points matter.
Wesley Lyon:
They matter a lot. And there's nowhere where it's just exaggerated more than
Wesley Lyon:
getting into one of these policies versus just having it invested in simple
Wesley Lyon:
things. And this is true.
Wesley Lyon:
We'll probably have to start doing a bash that series. I like to be positive.
Wesley Lyon:
So we'll end on our positive. Well, diversified, low cost, be in good shape.
Wesley Lyon:
Yeah, absolutely. The name of the game.
Wesley Lyon:
But, you know, not that we want to beat something up, but we do want to prevent
Wesley Lyon:
people from getting into these. A ton of people sell them.
Wesley Lyon:
So I'll kind of end on, Liam, do you know the average commission that gets paid
Wesley Lyon:
for selling a permanent life insurance policy?
Liam Fitzgerald:
Oh, my goodness. You're going to tempt me to join the industry after I hear
Liam Fitzgerald:
how much they make on some of these, right?
Liam Fitzgerald:
But let me say 3%. That would be nice.
Wesley Lyon:
No, typically it's going to be more like 6% to 8% in an indexed universal life.
Wesley Lyon:
I mean, some are only 3%, some can be higher, but yeah, typically it's going to be 7-ish percent.
Liam Fitzgerald:
So the agents are pretty incentivized to, I wouldn't necessarily call them fiduciaries,
Liam Fitzgerald:
right? They're given a reward to sell these.
Wesley Lyon:
Yeah, I mean, it's almost cheaper to just look at the guy and go,
Wesley Lyon:
hey, look, if I go to the boat store right now and I buy you a boat,
Wesley Lyon:
will you never call me again? Because that'll be cheaper.
Liam Fitzgerald:
Right. That makes a lot of sense. So, no.
Wesley Lyon:
But no, that's it. So, just want to end, you know, is an indexed universal life
Wesley Lyon:
insurance policy an investment product, a permanent insurance or a life insurance product, or a scam?
Liam Fitzgerald:
Borderline a scam right that is it's a legal scam but it is a scam nonetheless i would say.
Wesley Lyon:
Yeah the actual product itself isn't the scam but the sales agents what they
Wesley Lyon:
promise that's the scam on it so do yourself a favor buy term life invest in
Wesley Lyon:
low cost well diversified and get on your road to financial freedom perfect.
Liam Fitzgerald:
Advice thanks wes.
Wesley Lyon:
Well liam thanks for joining us everyone out there we'll see you next time.