Is an Equity Index Universal Life Insurance Policy a good investment?
July 13, 2007 8:27 PM   Subscribe

Is Equity Index Universal Life Insurance a worthwhile investment? I'm considering opening up a policy with WRL and I'm wondering where the negatives in a policy like this lie? I'm located in northern California if that matters any, and have started to contribute to my employers 401K already. I'm also in my mid 20s.

My agent keeps touting this EIUL policy from Western Reserve Life but it sounds too good to be true.
His claim is that with $250/month (for 30 years) I can have a kick-ass life insurance policy and a nice retirement nest egg. If it grows at the maximum of 12% in 30 years I have something like $890,000 in a retirement plan and a $1.2mil life insurance policy. I've been told to expect closer to 8% (which still turns out to be a good amount) and anything extra being a "bonus".
At anytime I'm supposed to be able to cash out up to 90% of the money in the retirement plan, tax-free.

Somehow this seems to good to be true.

I also know that there is a small physical exam where someone will come to my home, take my height, weight, blood pressure, blood sample and urine sample. Can anyone confirm if they will do a drug test for marijuana and what that might mean for me if I have a medicinal recommendation from my doctor?

posted by TheDude to Work & Money (22 answers total)
Life insurance is not an investment. Ever. You have to DIE to get 100% of the money you supposedly "have."

Keep contributing the max to your 401k. If you can also do an IRA that's good. It is also really a good idea to get in the habit of putting some of your pay into some sort of savings/brokerage account (that you will ideally convert to higher yield investments such as stocks, bonds, mutual funds, ETFs). Otherwise, you need enough term life insurance to bury you, pay any debts you may leave behind, and keep your dependents afloat for a few years (while they transition to life without you). I realize that at your age, that's thinking way ahead.

Of course your agent wants you to think this is a great idea. He gets a hefty commission that may actually be most of your first year's premiums!

I can't confirm that they will test for illegal drugs, but I can confirm that they will test for a variety of things including blood sugars, thyroid, cholesterol, etc.
posted by ilsa at 9:17 PM on July 13, 2007

Talk to a financial adviser who would not be getting a commission (that is, who never gets a commission for anything)
posted by winston at 9:28 PM on July 13, 2007

Universal life if the same thing as Whole Life, and a few other things. It's both an insurance policy and also an investment. The problem is that rolled into it is also massive commissions for the guy selling it. That is money that isn't yours.

Typically you can save/invest more money by separating the two components by buying term life insurance (the death benefit) and then investing the difference in a IRA or even a regular taxable account.

Secondly, you very well might not need any life insurance. Do you have kids? Other dependents who can't work for themselves? Well, then you probably need it, otherwise just invest the whole amount. If you end up needing life insurance, just buy the 20 year term, at which point you'll have enough from investing that you can self-insure.

Whole life can be a useful investment tool, but for a much smaller segment than it is sold to. It can do some tax tricks that I'm not all up on, but in general, if you don't know you need it, you don't.
posted by cschneid at 9:37 PM on July 13, 2007

I was honestly more interested in the retirement portion of the plan. Getting almost $800K tax-free when I'm in my late 50's seems so much nicer than 30-40K from a 401K.
It would also be nice to ensure my future kids futures with a hefty life insurance policy.

But I guess this is too good to be true.

I'm not so worried about the cholesterol and thyroid stuff. I just had a physical with my regular doctor and everything checked out Ok.

thanks for the responses so far!
posted by TheDude at 10:11 PM on July 13, 2007

$800k won't be worth as much as you expect by the time you're in your late 50s.
posted by croutonsupafreak at 10:26 PM on July 13, 2007

Throw the same amount of money towards a 401k as you would this plan, and you'll have better returns due to the company match and the lower fees. Look on various financial blogs like Get Rich Slowly and The Simple Dollar for ideas on how to lay things out and how well compound interest can work for you.

Just buy into index funds and ride them to the top.
posted by cschneid at 11:02 PM on July 13, 2007

If you can contribute $250/month to a stock index fund in an IRA or 401(k) for 30 years, and they go up 12% a year, you'll have $882,000 at the end of that time. Here's a handy calculator for that. If the return is 8% the amount in 30 years is only $375,000.

Where the negatives lie is that your balance is indexed to equities. In other words, you're investing in the stock market with your life insurance nut. That means that if the stock market goes down instead of up, the value of your policy goes down too. Not only is the 12% not guaranteed, *nothing* is guaranteed. You could invest $250 a month for five years (1999-2004, say) and at the end of that time be left with less than 70% of what you contributed.

Basically these types of insurance instruments are useful to you if you want to invest in stock index funds and you've already maxed out your other tax-advantaged options. That's because the amount of fees and commissions the insurance company charges you means that whatever the S+P is earning, you're earning considerably less and the insurance company is skimming the difference off the top and keeping it.

If you can just put the money into a 401(k) or an IRA, investing it in an S+P index fund within the tax-advantaged vehicle, you get a better return on precisely the same risk. In other words, if you want to see the return on your money that equities can provide, buy equities with the minimum amount of fees, commissions and loads that you can. That's not life insurance.

If you want to buy life insurance, buy life insurance. Don't confuse it with your retirement savings. Don't own life insurance before you need it; when you do need it, pay for the amount you need.
posted by ikkyu2 at 2:54 AM on July 14, 2007 [1 favorite]

Run away from this agent as fast as you can. He is pushing this plan because it is good for him, not for you. He will be collecting at least 5% of each payment from you for the rest of your life. A few of these deals and he is set for life. That 5% off the top each month is money that never goes to work for you in your investment.

Read part 1 and part 2 of this this warning.

Life insurance and investments should be kept separate. Depending on your age and health you can probably get $1 million in term life insurance for about $50 per month. With the $200 you save over universal life you can invest 100% in a better investment vehicle like maxing out your 401k or IRA.

If you need life insurance -- you currently have kids or other dependents -- then buy term life insurance. This is generally a fixed rate for 20 years, until your kids become adults and you no longer need life insurance. If you don't have dependents, you don't need life insurance at all, so wait until you need it.
posted by JackFlash at 11:51 AM on July 14, 2007

JackFlash, I think you're overstating the case a little bit. If you believe that the stock market's long term outlook is bullish, as most do, equity life insurance is probably the best way to buy life insurance that's out there for the end consumer. For people who need life insurance, it can make sense; for people who need life insruance and have maxed out their other tax-advantaged vehicles and still want to invest more money in the stock market, it's probably the best thing going.

The reason I recommended against it is not because life insurance agents are evil or want to screw a person over; it's because the poster doesn't fit either of these categories. He's a twentysomething guy who is thinking about growth of a retirement portfolio, and doesn't seem to realize you can hold a stock index fund inside of a 401(k).
posted by ikkyu2 at 12:27 PM on July 14, 2007

I disagree that equity life is a good deal when you can buy term insurance much cheaper and it directly serves the limited time that you need life insurance. Why pay for lifetime coverage when you only need it for a limited time.

I also disagree that it is the best vehicle for people who have maxed out their tax advantaged accounts. The 5% or more load is unconscionable. On top of that there is probably a 2% annual management fee. You can buy low cost variable annuities at Vanguard that are a much better deal. But I still wouldn't recommend even annuties for someone this young. They are better off just investing in a taxable account than paying the high fees. For example you can buy and hold a no-load Total Stock Market mutual fund for an annual fee of 0.1% and that is very tax efficient, about 0.25% per year. You only pay taxes on gains when you withdrawal, the same as for equity life. Because of the high fees and loads associated with equity life, you will end up with less after-tax money to spend, which is the only thing that counts.

And in this case it seems that the questioner has not yet maxed out his 401k or IRA, which makes it even a worse deal.

Any salesman that starts out by extolling theoretical 12% returns is a shark and can't be trusted. These policies are incredibly complicated and difficult to analyze which works to their advantage. The only reason they are so anxious to sell them is because they make a lot of profit off them at the customer's expense.
posted by JackFlash at 1:51 PM on July 14, 2007

Oh, and one more example of the dishonesty is the claim that you can withdraw 90% of the money tax free. You can withdraw only the amount up to the cost basis of premiums tax-free, much like early withdraws from a Roth IRA. The gains on your investment are taxed at ordinary income tax rates, currently up to 35%. On the other hand, capital gains on a mutual fund in a taxable account are taxed at the much lower 15% rate. You could very well end up paying more taxes in the long run.
posted by JackFlash at 2:09 PM on July 14, 2007

Don't be so quick to dismiss the idea of an EIUL! I have 17 years in this business and hold 11 licenses. 6 years was spent with the "buy term and invest the difference" company. Today things have changed. If you want permanent insurance, you have two good choices - a new type of Universal Life that guarantees insurance forever with no cash buildup and is relatively inexpensive, or an EIUL. The returns on the EIUL will be high enough to pay for the expenses, still accumulate enough money to be an investment that will beat a savings account or a CD, and still have a tax-free death benefit. And the life insurance company pays the commissions! You pay for the services of a Dr., a CPA, and commission for a Real Estate Broker, don't you? Get the idea out of your mind that commissions is a bad thing. And, for life insurance you aren't even paying them out of your own pocket! And I am not in CA, so I have no profit to tell you otherwise.
posted by mrannuity at 2:33 PM on July 14, 2007

So I see we gored someone's ox -- mrannuity (or his sock puppet) joined mefi just today to defend his livelihood.

Where to start?

If you want permanent insurance, you have two good choices
First off, why would anyone need life insurance forever. If you are 55 years old, your kids are out of college, your mortgage is nearly paid off and you have a healthy retirement account, you have no need for life insurance so why pay for it? With term insurance, on the other hand, you only pay for it while you need it.

The returns on the EIUL will be high enough to pay for the expenses
That is the most absurd statement ever. Where do these magical returns to cover fees come from? Why wouldn't I just invest in a low-cost mutual fund, save the fees and commissions and keep those magical returns for myself?

... still accumulate enough money to be an investment that will beat a savings account or a CD
Now that has to be the record for setting a low bar for achievement. I can invest in 100% guaranteed riskless treasury bonds and do better than that. With low-cost equity mutual funds I can do much, much better.

And the life insurance company pays the commissions!
Sheesh! The life insurance company takes the money out of the premiums you pay them and gives it to the salesman. We should feel so much better since we don't have to pay the salesman directly. The insurance company conveniently reaches into our pockets and transfers the money to the salesman so we don't get our own hands dirty.

You pay for the services of a Dr., a CPA, and commission for a Real Estate Broker, don't you? Get the idea out of your mind that commissions is a bad thing.
Why would I pay a commission for an investment that I can make absolutely free that outperforms what you are selling? You go to a doctor, CPA or real estate broker when you need help or assistance. How many people go to insurance salesman begging for investment help. Just the opposite, the life insurance salesmen aggressively seek out suckers so that they lift their wallets. (Oh, wait a minute, just a second ago you claimed we didn't have to pay commissions. Tough to keep the story straight.)

And I am not in CA, so I have no profit to tell you otherwise.
A non sequitur.
posted by JackFlash at 3:26 PM on July 14, 2007

I'm just guessing that JackFlash is not a 55 year old widow that has never worked, living off of her husbands 75K per year income, without a clue how to survive now that her husband has died without life insurance or other savings. (67% of baby boomers will not be able to afford to retire at age 70!) "She" doesn't know that statistics now show she has a 40% chance of living until age 90! Oh, and if you have never delivered a death claim to someone in this example - remember that the widow would have been destitute - which I have by the way - your arguments are reasonable at best, though shallow. If you have delivered that death claim, you are a sick heartless human being trying to make sure no one else is taken care of in the event of the untimely death of their supporting mate; or God forbid if they live too long and run out of money and need to access some other source of savings.

Anyone with a computer can find that the two top EIUL products in the U.S. have averaged returns over 8% per year for the past 5 years, and are structured to return the same in the future.

Pull up Yahoo Finance and see that returns for the S&P 500 index have averaged only 5.000% per year since July 3, 1997. And, it's a fact that 97% of mutual funds DON'T outperform mutual funds! Oh, and I was a Compliance Officer for AIG that examined OSJ's all over the country, and was happy to report all the misuse of fee structures in mutual funds that people were getting ripped off from!

You pay for the services of a Dr., a CPA, and commission for a Real Estate Broker, don't you? (Oh, I guess you missed that point!) Hmm... and I was misdiagnosed for 8 months before getting surgery for cancer, but I didn't get the $35,000 back that the Dr. milked me out of. (attorneys said it would waste my life fighting it)Or is malpractice insurance just a myth?

Oh, and with 11 licenses and being a Securities Principal for several B/D's across the country, I DO NOT derive my livelihood from selling these insurance products!
posted by mrannuity at 6:03 PM on July 14, 2007

Oh, so you are selling inferior investment products because you have the widow's welfare at heart! Wrong, you are selling inferior investment products because you want to take advantage of the poor widow's investment ignorance.

Let's work through the original poster's example.

He pays $250 per month in premiums for 30 years. Let's also assume that he get an unusually high market return of 12% as his salesman claimed. Of the $250, 5% or 12.50 goes for commissions leaving only $237.50 for investment. The annual expenses are 2% leaving a 10% compounded return. We plug the numbers ($237.50 @ 10%) into ikkyu2's handy little calculator and get a total of $541,340 at the end of 30 years.

Now compare that to the person who goes to a flat fee, honest financial advisor who has him buy $1 million of term life for $50 a month and puts the remaining $200 in a low cost Total Stock Market mutual fund. The fees are only 0.1% per year. The dividends are 1.5% per year but fully qualified at the 15% rate, so taxes are (1.5 * 15%) or 0.225% per year. Add this to the fees and it costs only 0.3225% per year for this investment. So his annual return after taxes is 11.67%, much better than the insurance fund. So we plug in the numbers ($200 @ 11.67%) and we get $656,038 which is $115,000 more than the insurance fund. Those commissions and annual fees overwhelm the savings of tax deferral. As John Bogle always says, costs really matter.

But wait, we aren't done yet. At the end of the 30 years your client withdraws his money and has to pay ordinary income taxes on the gain. Let's be generous and say he withdraws slowly and only pays a 25% marginal tax rate. His gain after premiums is $455,840 and after paying $113,960 taxes on the gain he is only left with $427,380 ($541,340 - $113,960) to spend of his total.

The client from the honest advisor only pays 15% taxes on his capital gains. His gain is $584,038 after subtracting all his investments, so his tax is only $87,605, leaving him $568,432 ($656,038 - $87,605) to spend. This is $140,000 more than your client.

So the two big drawbacks of your product are 1)high fees reduce the gross return and 2) it's an investment vehicle that at withdrawal converts capital gains taxed at 15% into ordinary income that is taxed at 25% or worse.

Keep in mind that we used the overly generous market return of 12% per year. 2% fees mean the insurance company is skimming off 17% of your gain every year. Change that to a more reasonable 8% return and 2% fees means they are skimming 25% of your gains every year. That's one of the reasons they always you those big numbers for total return -- it conceals the percentage they are skimming.

And we could mention one more factor. Every 10 years or so the market tanks by 20% or so. In the taxable account I can harvest my losses and use them as a tax deduction. In the insurance account, you can't harvest losses.

So don't feed me your bull about helping the widows. An honest flat-fee advisor could save that widow an extra $140,000 to spend -- money that instead goes into the pockets of the salesman and the insurance company.

It's pure snake oil and those salesmen spend days in seminars learning how to bamboozle unsuspecting customers.
posted by JackFlash at 7:25 PM on July 14, 2007

Jack Flash is absolutely right. Of course he has said the long version of "life insurance is not an investment because you have to die to get all the money."

The only thing Mr. Annuity says that you should remember (his username tells you what his bias is) is that most funds do not outperform the S&P 500. Your takeaway should be invest to in a nice index fund, or even the SPY (that's an Exchange Traded Fund --ETF-- that is indexed to the S&P 500 but trades like a stock so the only fees are your brokerage fees).

Really. 55 year old widows? 70 year old baby boomers that won't exist for another 9 years who have suspected Social Security would be bankrupt before they could collect for 30 years? What the heck does that have to do with our twentysomething original poster? How dare you assume that 55 year old widows don't know a damn thing about money, when chances are she "hasn't worked a day in her life" because she's been doing unpaid work for her husband's company. And I truly fail to see what your misdiagnosed cancer has to do with this, but I hope you are well now.
posted by ilsa at 9:37 PM on July 14, 2007

You play the numbers anyway you want Jack Flash. The bottom line with your scenario is if the client was paying $50 per month for $1M in coverage, it would have been long lapsed at age 55 at that price, by the time the widow needed it. Term Life insurance disappears - sometimes when it's needed most. You find me an honest Financial Advisor that can take $200 per month at a 1% flat fee without an initial deposit, making $2 per year from it. Yeah right! You can't even find a product for it! And if you do, it is the poorest performing vehicle out there. If these are your clients, I'm sure you were probably one who used to put people in mutual funds with 8.5% loads when they were legal!

Look at the statistics ilsa..... if you are a baby boomer that knows what to do with your money - cudos to you! Sadly then you are far into the minority; part of the reason this country is bankrupt into personal debt.
posted by mrannuity at 7:45 AM on July 15, 2007

mrannuity, you certainly have a point; term life for $1 million sure isn't going to be costing $50 a month by the time that you come close to using it (i.e., passing away.)

But you're wrong about this: You find me an honest Financial Advisor that can take $200 per month at a 1% flat fee without an initial deposit, making $2 per year from it.

Fidelity SimpleStart IRA. No initial deposit, $200 a month automatic contribution, put it all into Fidelity's mutual fund FSMKX, and you're tracking the S+P 500, with 0.10% in fees per annum, and dividends reinvested. No advisor, no nonsense, just tracking the S+P, which is what your average EIUL attempts to do too.

If a person needs life insurance, they need life insurance. It's not automatically evil.
posted by ikkyu2 at 10:24 AM on July 15, 2007

I agree with you completely ikkyu2! If someone invested in the fund you have listed, at 25 years old without enough money for diversification, and no saavy for analyzing markets, economic trends, and especially with 40 years to go until age 65, that idea is a good one. And back to the original question - and my backtracking a bit - if the 25 year old did need insurance, I would put him in Term and wouldn't help him decide if he needed any permanent life insurance until his children were out of college. Then we would take a look at everything, i.e. investment and savings to that point, net worth, projected SSI and pension if any, spouse contributions and career history, beneficiary needs and contribution to the family support, and all other proper planning already in place. I got off track with the argument of the product - EIUL; which would be my ONLY choice entertaining any kind of investment associated with life insurance. (by the way, the tax deferral benefits and compound interest associated with the 140K Jack Flash said the client would be missing out on, would almost make that up - plus they would have life insurance to boot!) And back to the 25 year old; this product would be a viable one after he has max-ed out his Roth IRA and 401K, and accumulated emergency funds and looking at his immediate goals; i.e. a family, home purchase, travel goals etc. I spent years watching people get hurt from nearly every kind of cash value life insurance. Every aspect of a person's financial life must be taken into consideration in recommending any type of insurance and investment.
posted by mrannuity at 10:51 AM on July 15, 2007

The bottom line with your scenario is if the client was paying $50 per month for $1M in coverage, it would have been long lapsed at age 55 at that price, by the time the widow needed it.
With the extra $140,000 that you skim off the top, one could buy term life for a long as necessary.

You find me an honest Financial Advisor that can take $200 per month at a 1% flat fee without an initial deposit, making $2 per year from it.
Anyone can put $200 per month in a no-load life-cycle mutual fund without any advisor at all.

Look, I rarely get personal on the internets, but this is an exceptional case that really ticks me off. This guy invokes his concern for the widows when he knows that he is ripping them off with inappropriate investment products. For someone who is mid-20s, no dependents, and just started contributing to his 401k this product is a license to steal for the salesman. (Maybe that is one of mrannuity's 11 licenses he keeps talking about). Anyone who tries to sell this product to a customer in that position is just a crook. Not to speak of the flat lie that "I'm supposed to be able to cash out up to 90% of the money in the retirement plan, tax-free." Insurance salesmen are not qualified to be financial advisors and have an inherent conflict of interest in selling this product that encourages them to sell it to the wrong people and that should be illegal.

You know mrannuity is a liar from his very first statement, and I quote, "the life insurance company pays the commissions!" -- with exclamation point. That is a flat lie straight out of the training seminars and he knows it.

And then he talks about the good widow who is relieved as he hands over the death claim although he neglects to tell her he deducted $140,000 for his "advice" which consisted of two hours over coffee in her kitchen 30 years ago while flipping over Powerpoint charts showing 12% returns.

There may be a very few for which this product makes sense. ikkyu2 seems to think so and I respect his opinion although I have my doubts that the numbers work out so well in the long run. But ikkyu2 is a sophisticated investor and probably has financial circumstances that do not apply to the other 95% of investors. For most people they can do much better by maxing out their tax advantaged accounts, using no-load mutual funds, and buying term life insurance if they need it.
posted by JackFlash at 10:56 AM on July 15, 2007

JackFlash - you talk big, but what are your credentials? What are your licenses? How about your designations? How many people - widows and others have you "helped" with your biased advice? How many people are you going to write a paycheck to when your personal schemes don't work out? I have not seen your qualifications yet through all your bs. You constantly misquoted me and put other peoples' comments in your paragraphs. Can you spell Morningstar? I told you 95% if mutual funds don't keep up with even the indexes. Mr. Fee Advisor, how many 1 or 2% fees do you "skim" from customers when their funds are down 35% already in one year? How many 62 year old persons did you see have to work 8 more years because they lost 40% of their investment in 2001 to the "honest" Fee Advisor? In 17 years, I've never even come close to a complaint, after having sold $35 million in mutual funds, $30 million in variable annuities, $30 million in fixed annuities, $20 million in stocks and bonds, and enough life insurance to qualify for MDRT 4 times. I've Managed single-handedly (ever seen that word in print!) $150 million per year in annuity sales for AIG. Statement: There isn't one product out there that is good 100% of the time for every customer. There isn't one product out there that is bad 100% of the time for every customer. If you think I said either of these things, you are only being a troublemaker. And troublemakers bring negativity. And winners don't entertain negativity. So, you've sucked me in this far, but blab on all you want because you know you're full of it and I'm done wasting my energy on it!
posted by mrannuity at 6:20 PM on July 16, 2007

Wow...thanks for all the replies all. This gives me a lot to think about.

Maybe I can dig this post up in 20-30 years and give a nice update :)
posted by TheDude at 6:29 PM on July 16, 2007

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