My thoughts about Universal Life Insurance policies differ somewhat from yours based my own experience with the policy we purchased in 2015. First of all, the current versions of these policies are quite different from earlier versions. (And, the biggest problems with the earlier versions, as you site, were the sales practices - exaggerated results, inappropriate clients, unclear explanations, etc.) The policy we purchased, a "second-to-die" policy, was and continues to be very easy to understand. It is a guaranteed, no-lapse policy as long as the annual premium is paid on time and in full. The beneficiaries, our 4 children, will receive the benefit (approximately $820,000 per child) when the second of us dies.
We took out the policy for a very specific purpose - we wanted to leave a guaranteed legacy to our children rather than the uncertain values of our investments upon our deaths. We didn't want to have the constant worries about how much we could spend on ourselves and still leave them something. The Second-to-Die policy, in our opinion, achieves this purpose. And, if you do the math, you'd probably agree that it is a pretty good investment for this purpose. The following calculations support my conclusion.
The benefit to premium ratio changes as premiums are paid. In the first year, it was 77.4:1. After 5 years is was 15.47:1. After 10 years, it will be 7.74:1. And, even after 25 years, it will still be 3.10:1.
I used a compound interest calculator to determine how long it would take to accumulate the value of the policy's benefit if we invested the amount of the premium annually in a 60/40 combination of stock and bond mutual funds earning an annualized return, after taxes, of 7%. After 25 years, the value of this portfolio would be $2,884,411, or approximately $721,103 per child - which is $98,897 less than the benefit from the policy. And again, the returns and value from the 60/40 mutual fund portfolio would not be guaranteed.
Our children will pay no taxes on the benefit they receive because it is from an insurance policy, unlike the taxable nature of qualified investments they might otherwise receive. We prefer to pay the taxes on the income we receive from our qualified investment instruments rather than passing these taxes on to our kids.
I am not suggesting that this approach is right for everyone, nor am I encouraging anyone to use this strategy. We can afford the fairly hefty premiums without putting a crimp on our lifestyle, and we are doing this solely as the legacy component of our estate plan. I am suggesting that life insurance, if chosen for a purpose and used strategically, can be a valuable component of one's estate plan. We hope our children will use their inheritance wisely in order to enhance their own lives and those of our 9 Grandkids.
Like Adam, I don't remember receiving explicit "money advice" from my parents at any time in my life. And, unfortunately, I don't remember asking for any advice, and this was my mistake. However, by modeling and unspoken expectations, my parents taught me to save. I remember opening my first savings account when I was 7 or 8 years old. I wasn't told but I knew that I was expected to save the money I earned from snow shoveling and lawn jobs, from birthday and Christmas gifts, and from my reward for good grades on my school report cards. I enjoyed the weekly trips with my father to the bank to deposit any money I had earned the previous week. I also remember my satisfaction at seeing the amount in my account increase every month when the interest was credited. I have been a saver to this day, some 68 years later. Even now, I save and invest a substantial percentage of the money that comes into our household each month from pension payments, Social Security, and annuities. Don't get me wrong... I also enjoy spending money, primarily on travel and vacation experiences, gifts to our children and grandchildren, and charities. But, I automatically deposit money into a number of savings vehicle - Money Market Accounts, CD's and a self-directed portfolio of Mutual Funds and ETF's - every month. I get real satisfaction from seeing the value of these accounts grow, and I take comfort in knowing that we are highly unlikely of ever running out of the money we need to live the life we desire. For this I thank my parents for their expectations of me as a child and the silent modeling they provided.
Enjoyed the article. We had to make similar decisions with investment properties. One point of correction - mortgage “interest” payments, not mortgage principal payments, are deductible against the rental income.
There are those who strongly reject the use of annuities as an integral component of a comprehensive retirement plan, such as Fischer Investments, which may do so for self-serving purposes. Fischer has actually published booklets condemning the use of annuities.
I’d like to share my personal experience to counter such “advice.”
In October 2015, my wife and I purchased a joint variable annuity contract, investing $453,000 and selecting investments from various sub-accounts. We benefitted from a strong market and over 3 1/2 years saw the value of the account grow to $558,000, even with a substantial market decline in 2018. In February 2019, we started taking lifetime income payments. To date, we have received a total of $145,857, which averages to $2472/month for the past 59 months. As of 12/31/2023, the value of our account was $447,120, essentially what we invested back in 2015. We are guaranteed an income of $23,567 annually, or $1965 monthly for the rest of our lives (supplemented, but not guaranteed, by Earnings Sensitive Adjustments, which increase the annual payments based upon market returns). Since we are now beyond the early withdrawal penalty period, we plan to use a 1035 Exchange to withdraw the funds and purchase a Joint Single Premium Immediate Annuity (SPIA) that has an annual payout rate in excess of 7.0%. The annual income will be approximately $10,000 more than the guaranteed income from the variable annuity (around $33,000 per year until the second of us passes away). We are aged 75 and 73. If one of us lives for 20 years longer, using the combine annuities, we will have received approximately $805,857 from our initial premium payment of $453,000. Some might say that we could have done better by investing our money in a balanced portfolio of mutual funds, but we would have been seriously hurt by the sequence of withdrawals in 2022. I have run a calculation, using our original account value of $558,000 from which we started withdrawing income, an annual withdrawal of $26,000, or $2167 monthly, and a conservative annual return of 4%. (I acknowledge that the withdrawal rate is somewhat arbitrary.) Starting withdrawals in 2019 and after 25 years, we would have withdrawn $650,000 from such an account, and the balance in the account would be $220,093. It would continue to pay $26,000 annually for 8.5 more years, when the younger of us would be 101. The Annuity, on the other hand, would continue to pay $33,000/year for as long as either one of us might live. In my opinion, the annuities are a better financial investment. More importantly, they are a much better emotional investment because we sleep much more comfortably knowing that the income from the annuity is guaranteed for the rest of our lives. (One note of caution. Annuities are used primarily to generate guaranteed income. They are not the best vehicle for bequeathing money to others.)
Save aggressively; invest consistently in index funds (primarily); secure retirement income with annuities; enjoy spending on experiences for my family and myself.
You may not realize it, but you sound rather ungrateful. Your parents left you $1,000,000, and it will “likely have zero impact on your life”? There’s also a touch of cynicism here. You seem to be saying that those without substantial assets are there because they have “mismanaged” their finances and will likely do,so,again with a generous inheritance. Ungrateful, cynical, and, yes, rather pompous. I think I’m probably like many Humble Dollar readers: Retired; quite comfortable; able to do things we want to do with our lives. But I still worry somewhat. In my case, when I die (hopefully not too soon), my spouse will lose approximately
$100,000 in annual income from my pension and Social Security. So, I’m still saving and investing diligently to provide her with the buffer she might need to generate that income should my demise comes sooner rather than later. Had my parents left me $1,000,000, my worries would more than likely be non-existent. When my mom passed at age 99, she left me $125K, and I was shocked. She and my father raised 9 kids, and we never seemed to experience any of the luxuries that many in my community experienced (country club memberships, exciting vacations, cars purchased for us when we were teenagers). The fact that my folks were somehow able to leave a $1,000,000 legacy to their 9 children just blew my mind. I was extremely grateful, proud of what they had accomplished, and humbled that they cared enough for their children to sacrifice their own pleasures during their lifetimes in order to leave us something. And the first thing I did with a portion of that money was to gift it to my 9 grandchildren for their future educational pursuits. I believe your $1,000,000 inheritance would have served society better had your parents left it to some worthwhile charities rather than to you. Unfortunately, they didn’t fully realize the kind of person you were when they made their legacy decisions. Hopefully, others reading this comment thread will be a little more thoughtful in making their own legacy decisions.
Started in 1975. Having secured a position in public education (New York), I was eligible for a 403b plan. My first year I contributed $10 per pay period. I casually mentioned this to a couple colleagues who ridiculed me for the minuscule amount of money I was saving. They said, “You can by 2 six-packs for that!” Didn’t let them discourage me. Every year, with every salary increase, I would increase the contribution. Eventually (some 35 years later), I was saving over 20% of my six-figure salary as an education administrator. Over the same period of time, I maxed out my traditional IRA every year with money from summer employment or coaching jobs. Can’t say that my investments were superior, but compounding produced a substantial nest-egg. I am now retired and receiving a Teacher Retirement System pension (as is my wife). We also have 6 annuities, valued at $1.7 million and a self-directed portfolio currently valued at $700K. For our legacy goal, we have purchased a second-to-die insurance policy that will provide our 4 children and their children with a sizable tax-free inheritance. We can spend our retirement nest-egg on ourselves doing what we want to do rather than worrying about leaving any of it to our children. My advice to others: Start early (even with a small amount of money), save regularly, automate it, never stop, and increase the amount every year. This approach has worked extremely well in my personal experience.
As educators, we accumulated a reasonably large retirement fund in TSA’s before retiring in 2006. At that time we converted the TSA’s to IRA’s managed by financial advisors with brokerage firms. We did quite well initially, growing our funds to around $1M, but got clobbered in the Great Recession, losing about 45% of our savings. We remained invested (somewhat more conservatively) and recovered our losses over the next 6+years. We realized at that time that our retirement account had grown by about 1% over a 9-10 year period, and that the only ones making money were the brokerages.
We also learned about “sequence of returns risks” and resolved to secure our retirement income by investing in Variable Annuities. We chose highly reputable companies, and purchased 5 annuities, each guaranteeing 5-6% returns on the Income Base and market returns after fees. We purchased riders to guarantee lifetime income for both of us. (Yes, we’re we’re fully aware of the fees, but the guarantees were worth it to us.) The bull market increased the values of our accounts and locked in the Income Base (from which lifetime payments are determined) in each account. Over 4 years the growth was approximately 45%, at which time we started taking income, which we will continue to receive until we die - hopefully many years from now. The comfort that secured income provides is palpable.
For those who may be interested, we advise due diligence. We probably spent 3 months working with an advisor to fully understand the intricacies of the contracts we purchased. We purchased policies from some of the very best Insurance companies. And, we felt that we really knew what we were getting into. We watch and sympathize with friends and relatives who are stressed over current market volatility, the losses they have incurred, and the negative impact it is having on their anticipated retirement income. We feel quite satisfied with our decision to go with annuities when we did.
Comments
My thoughts about Universal Life Insurance policies differ somewhat from yours based my own experience with the policy we purchased in 2015. First of all, the current versions of these policies are quite different from earlier versions. (And, the biggest problems with the earlier versions, as you site, were the sales practices - exaggerated results, inappropriate clients, unclear explanations, etc.) The policy we purchased, a "second-to-die" policy, was and continues to be very easy to understand. It is a guaranteed, no-lapse policy as long as the annual premium is paid on time and in full. The beneficiaries, our 4 children, will receive the benefit (approximately $820,000 per child) when the second of us dies. We took out the policy for a very specific purpose - we wanted to leave a guaranteed legacy to our children rather than the uncertain values of our investments upon our deaths. We didn't want to have the constant worries about how much we could spend on ourselves and still leave them something. The Second-to-Die policy, in our opinion, achieves this purpose. And, if you do the math, you'd probably agree that it is a pretty good investment for this purpose. The following calculations support my conclusion.
- The benefit to premium ratio changes as premiums are paid. In the first year, it was 77.4:1. After 5 years is was 15.47:1. After 10 years, it will be 7.74:1. And, even after 25 years, it will still be 3.10:1.
- I used a compound interest calculator to determine how long it would take to accumulate the value of the policy's benefit if we invested the amount of the premium annually in a 60/40 combination of stock and bond mutual funds earning an annualized return, after taxes, of 7%. After 25 years, the value of this portfolio would be $2,884,411, or approximately $721,103 per child - which is $98,897 less than the benefit from the policy. And again, the returns and value from the 60/40 mutual fund portfolio would not be guaranteed.
- Our children will pay no taxes on the benefit they receive because it is from an insurance policy, unlike the taxable nature of qualified investments they might otherwise receive. We prefer to pay the taxes on the income we receive from our qualified investment instruments rather than passing these taxes on to our kids.
I am not suggesting that this approach is right for everyone, nor am I encouraging anyone to use this strategy. We can afford the fairly hefty premiums without putting a crimp on our lifestyle, and we are doing this solely as the legacy component of our estate plan. I am suggesting that life insurance, if chosen for a purpose and used strategically, can be a valuable component of one's estate plan. We hope our children will use their inheritance wisely in order to enhance their own lives and those of our 9 Grandkids.Post: Your Results May Vary
Link to comment from June 13, 2024
Like Adam, I don't remember receiving explicit "money advice" from my parents at any time in my life. And, unfortunately, I don't remember asking for any advice, and this was my mistake. However, by modeling and unspoken expectations, my parents taught me to save. I remember opening my first savings account when I was 7 or 8 years old. I wasn't told but I knew that I was expected to save the money I earned from snow shoveling and lawn jobs, from birthday and Christmas gifts, and from my reward for good grades on my school report cards. I enjoyed the weekly trips with my father to the bank to deposit any money I had earned the previous week. I also remember my satisfaction at seeing the amount in my account increase every month when the interest was credited. I have been a saver to this day, some 68 years later. Even now, I save and invest a substantial percentage of the money that comes into our household each month from pension payments, Social Security, and annuities. Don't get me wrong... I also enjoy spending money, primarily on travel and vacation experiences, gifts to our children and grandchildren, and charities. But, I automatically deposit money into a number of savings vehicle - Money Market Accounts, CD's and a self-directed portfolio of Mutual Funds and ETF's - every month. I get real satisfaction from seeing the value of these accounts grow, and I take comfort in knowing that we are highly unlikely of ever running out of the money we need to live the life we desire. For this I thank my parents for their expectations of me as a child and the silent modeling they provided.
Post: What money advice do you recall hearing from your parents?
Link to comment from February 24, 2024
Enjoyed the article. We had to make similar decisions with investment properties. One point of correction - mortgage “interest” payments, not mortgage principal payments, are deductible against the rental income.
Post: Making Our Move
Link to comment from January 18, 2024
There are those who strongly reject the use of annuities as an integral component of a comprehensive retirement plan, such as Fischer Investments, which may do so for self-serving purposes. Fischer has actually published booklets condemning the use of annuities. I’d like to share my personal experience to counter such “advice.” In October 2015, my wife and I purchased a joint variable annuity contract, investing $453,000 and selecting investments from various sub-accounts. We benefitted from a strong market and over 3 1/2 years saw the value of the account grow to $558,000, even with a substantial market decline in 2018. In February 2019, we started taking lifetime income payments. To date, we have received a total of $145,857, which averages to $2472/month for the past 59 months. As of 12/31/2023, the value of our account was $447,120, essentially what we invested back in 2015. We are guaranteed an income of $23,567 annually, or $1965 monthly for the rest of our lives (supplemented, but not guaranteed, by Earnings Sensitive Adjustments, which increase the annual payments based upon market returns). Since we are now beyond the early withdrawal penalty period, we plan to use a 1035 Exchange to withdraw the funds and purchase a Joint Single Premium Immediate Annuity (SPIA) that has an annual payout rate in excess of 7.0%. The annual income will be approximately $10,000 more than the guaranteed income from the variable annuity (around $33,000 per year until the second of us passes away). We are aged 75 and 73. If one of us lives for 20 years longer, using the combine annuities, we will have received approximately $805,857 from our initial premium payment of $453,000. Some might say that we could have done better by investing our money in a balanced portfolio of mutual funds, but we would have been seriously hurt by the sequence of withdrawals in 2022. I have run a calculation, using our original account value of $558,000 from which we started withdrawing income, an annual withdrawal of $26,000, or $2167 monthly, and a conservative annual return of 4%. (I acknowledge that the withdrawal rate is somewhat arbitrary.) Starting withdrawals in 2019 and after 25 years, we would have withdrawn $650,000 from such an account, and the balance in the account would be $220,093. It would continue to pay $26,000 annually for 8.5 more years, when the younger of us would be 101. The Annuity, on the other hand, would continue to pay $33,000/year for as long as either one of us might live. In my opinion, the annuities are a better financial investment. More importantly, they are a much better emotional investment because we sleep much more comfortably knowing that the income from the annuity is guaranteed for the rest of our lives. (One note of caution. Annuities are used primarily to generate guaranteed income. They are not the best vehicle for bequeathing money to others.)
Post: Are annuities ever worth buying—and, if so, which type?
Link to comment from January 10, 2024
Save aggressively; invest consistently in index funds (primarily); secure retirement income with annuities; enjoy spending on experiences for my family and myself.
Post: How would you summarize your financial philosophy in one sentence?
Link to comment from August 9, 2023
You may not realize it, but you sound rather ungrateful. Your parents left you $1,000,000, and it will “likely have zero impact on your life”? There’s also a touch of cynicism here. You seem to be saying that those without substantial assets are there because they have “mismanaged” their finances and will likely do,so,again with a generous inheritance. Ungrateful, cynical, and, yes, rather pompous. I think I’m probably like many Humble Dollar readers: Retired; quite comfortable; able to do things we want to do with our lives. But I still worry somewhat. In my case, when I die (hopefully not too soon), my spouse will lose approximately $100,000 in annual income from my pension and Social Security. So, I’m still saving and investing diligently to provide her with the buffer she might need to generate that income should my demise comes sooner rather than later. Had my parents left me $1,000,000, my worries would more than likely be non-existent. When my mom passed at age 99, she left me $125K, and I was shocked. She and my father raised 9 kids, and we never seemed to experience any of the luxuries that many in my community experienced (country club memberships, exciting vacations, cars purchased for us when we were teenagers). The fact that my folks were somehow able to leave a $1,000,000 legacy to their 9 children just blew my mind. I was extremely grateful, proud of what they had accomplished, and humbled that they cared enough for their children to sacrifice their own pleasures during their lifetimes in order to leave us something. And the first thing I did with a portion of that money was to gift it to my 9 grandchildren for their future educational pursuits. I believe your $1,000,000 inheritance would have served society better had your parents left it to some worthwhile charities rather than to you. Unfortunately, they didn’t fully realize the kind of person you were when they made their legacy decisions. Hopefully, others reading this comment thread will be a little more thoughtful in making their own legacy decisions.
Post: Eyeing the Future
Link to comment from May 27, 2023
Started in 1975. Having secured a position in public education (New York), I was eligible for a 403b plan. My first year I contributed $10 per pay period. I casually mentioned this to a couple colleagues who ridiculed me for the minuscule amount of money I was saving. They said, “You can by 2 six-packs for that!” Didn’t let them discourage me. Every year, with every salary increase, I would increase the contribution. Eventually (some 35 years later), I was saving over 20% of my six-figure salary as an education administrator. Over the same period of time, I maxed out my traditional IRA every year with money from summer employment or coaching jobs. Can’t say that my investments were superior, but compounding produced a substantial nest-egg. I am now retired and receiving a Teacher Retirement System pension (as is my wife). We also have 6 annuities, valued at $1.7 million and a self-directed portfolio currently valued at $700K. For our legacy goal, we have purchased a second-to-die insurance policy that will provide our 4 children and their children with a sizable tax-free inheritance. We can spend our retirement nest-egg on ourselves doing what we want to do rather than worrying about leaving any of it to our children. My advice to others: Start early (even with a small amount of money), save regularly, automate it, never stop, and increase the amount every year. This approach has worked extremely well in my personal experience.
Post: How did you get started as an investor?
Link to comment from April 17, 2023
As educators, we accumulated a reasonably large retirement fund in TSA’s before retiring in 2006. At that time we converted the TSA’s to IRA’s managed by financial advisors with brokerage firms. We did quite well initially, growing our funds to around $1M, but got clobbered in the Great Recession, losing about 45% of our savings. We remained invested (somewhat more conservatively) and recovered our losses over the next 6+years. We realized at that time that our retirement account had grown by about 1% over a 9-10 year period, and that the only ones making money were the brokerages. We also learned about “sequence of returns risks” and resolved to secure our retirement income by investing in Variable Annuities. We chose highly reputable companies, and purchased 5 annuities, each guaranteeing 5-6% returns on the Income Base and market returns after fees. We purchased riders to guarantee lifetime income for both of us. (Yes, we’re we’re fully aware of the fees, but the guarantees were worth it to us.) The bull market increased the values of our accounts and locked in the Income Base (from which lifetime payments are determined) in each account. Over 4 years the growth was approximately 45%, at which time we started taking income, which we will continue to receive until we die - hopefully many years from now. The comfort that secured income provides is palpable. For those who may be interested, we advise due diligence. We probably spent 3 months working with an advisor to fully understand the intricacies of the contracts we purchased. We purchased policies from some of the very best Insurance companies. And, we felt that we really knew what we were getting into. We watch and sympathize with friends and relatives who are stressed over current market volatility, the losses they have incurred, and the negative impact it is having on their anticipated retirement income. We feel quite satisfied with our decision to go with annuities when we did.
Post: Are annuities ever worth buying—and, if so, which type?
Link to comment from October 29, 2022