Unedited Transcript:

Mark Struthers (00:36)
Hi, welcome to the healthy and wealthy retirement my name is Mark Struthers. I’m your host. Today we are talking about insurance and specifically, we’re going to talk about impermanent insurance here in, in, more specifically index universal life. Most of these products, I’d say almost all, once in while I do run across one where I’m not sure why it exists, are not bad, but often when, at least when the clients come to us, they appear to be sold just highlighting the pros, not showing the trade-off. as we move forward, when you’re doing this decision, if you’re speaking to a commissioned insurance rep, ask them, one, how do you get paid? It doesn’t mean they’re not going to do a good job for you. And also ask them, give me the pros and cons. Give me the alternatives and the trade-offs. And how does this fit into my financial plan? That’s not too much to ask. And if they are really financial planners, they should be able to do it. So in this case, we are going to talk about permanent insurance. And with any type of insurance, you should be asking, what are you insuring? It wasn’t too long ago I was in a presentation that there was an example of actually two clients that have come across my desk in the past.

One of them was a daughter of a long-time client, just a wonderful family, an adult daughter, at least early, in her 30s. I can’t tell how old people are. Once you get to 50 years old, you just can’t tell. But we’ll call it, somewhere in their 30s. We’ll say a 30-something. And she had several term policies. Now these weren’t permanent insurance. But she was in her 20s with no kids, no spouse. There was no one that was going to suffer because of her debt. And they had plenty of money to, say, barrier to settle up her affairs. There was really, if there was a need for insurance, it was very small. And recently she had a baby and got engaged. there her need for insurance is greater.

So also always ask, what am I insuring? And when you look at these projects or these products, ask yourself, is my primary goal insurance? Again, what am I insuring? And then also, if so, the product should be structured that way. If your primary goal is investing, you need to make sure you’re looking at alternatives. in our example today, we’re going to cover that a little bit. going in with that mindset, I think it’s critical.

Too often people have a primary goal of insurance And yet they’re doing things they’re but their products they are purchasing Had don’t have enough insurance and they’re really expensive quite often it might be because they have an investment type tilt or You maybe they are paying more for the permanent insurance A permanent insurance is always going to be more expensive than temporary term insurance. So keep those in mind

To start off with, we’re going to go through the pros of permanent insurance, just in general. So there are a lot of pluses. There are no contribution limits like you have with 401ks or IRAs, no income limits like you have with, IRAs. You do have tax-deferred growth. You can get tax-free withdrawals up to your basis. And this one is actually pretty high on the list for some folks, like physicians, credit or protection.

So when you’re thinking about something that you want to make sure that creditors can’t get to, how much you sacrifice or pay for that, that’s a separate question. What I find a lot is that when things are sold, it’s not that what they’re highlighting isn’t important. It’s just the idea that you pay any price for that often is not for the benefit of you, the client.

A death benefit is income tax free. That’s a huge one.

So we’re going to flash up those bullet points. know for those of in the podcast, you can’t see them. But hopefully you were able to soak those in as I read them. We’re going to flash up an example of a real life illustration. So this one is an indexed universal life.

The amount is $100,000, specified amount. $5,000 premium over 20 years equals $100,000. And obviously, if you pass early, your rate of return’s high, like any insurance, because you’ve paid in so little. But again, there could be alternatives that would be a better fit.

Where folks are kind of lured in is the selling point on these is you participate in the upside of the market, say the S &P 500, a very common one. is kind of more the market. 500 larger US companies. It’s not all the companies. It’s not small or mid-cap emerging markets, international real estate. But it’s the most common.

And up to a point, so up to 7%. So it’s usually point to point, you know, whenever you purchase it for one calendar year. And you have a 0 % floor. So it, when you first hear the sales pitch, it sounds, well, why not? It’s kind of like, I have the upside of the market with no downside.

And those of you that are a little cynical might be saying, what’s the catch? Well, the catch is that you’re never going to get the index. There is no free lunch.

Because the stock market doesn’t return over 7 % every year. You’re not getting that you also have to subtract out the cost of insurance the commissions the surrender charges So you will never get the index the projected return on this This from the insurance company and the one we’re showing up doesn’t have surrender charges. Yours. Yours could look very different This is this is one that is sold to feel the advisor. The projected return on this illustration, I believe is 4.76%.

And some of you might be saying, well, is that real, Mark? that possible? And the answer is probably yes. It doesn’t take long in today’s AI world to Google something and get to how many years has the SP500 returned that. It was roughly almost 70%. So you can think 70 times 7, 68 % times 7. So that kind of projection is a pretty good starting point. You’re not guaranteed that.

So could you have an abnormal long, whether you’re looking at 20, this illustration goes out 40 years. Or so it goes out 60 years good. Absolutely. You could have an abnormal time where you’re getting seven percent eighty percent at the time You know, but didn’t you really do got to think to yourself? We’ve all seen the markets What’s what are the odds of you getting that kind of return more than the 50 year at 50 what happened over the last 50 years? Probably not huge but it’s possible

But the main thing you need to be aware of is that you don’t always get the index, you also don’t get the dividends. You’re not actually invested in the SP500. there’s been times where the SP dividend has been 2%. I think it’s at 1.16%. Don’t quote me on that. So you don’t get that. So when you take a total return, if

If the insurance company is investing in this SP500 over the long term, those of you who study this stuff, like me, you know that total return basis, you can easily average well over 7%. You certainly can get up into the, and just by the very fact that they’re doing this. 7%, if you tack on another 1 % for the dividend, that’s pretty good.

Even when you’re done paying and we’ll put up that graphic as well You still don’t get the the full That full call 4.76 percent again now that amount’s not guaranteed because of policy fees. So even when you’re in year Now if you’re done paying after 20 20 years if you’re in year 40 or 60 You still don’t get you still don’t get that full

The other thing to notice about this illustration is you can see the off to the far right, the death benefit as it grows. If your your primary goal is insurance, this this one’s awful expensive for a not a lot of debt benefit. Even if you assume the four point seven six percent again, could it be higher? It could, but probably not a lot. You know, and you could have your advisor kind of model in instead of a kind of 70 percent of the seven

percent, what if it was 80, 90, course again, you’re starting to roll the dice and further you get up there. But if you’re someone who’s primary goal is insurance, having 100 to 200K in insurance, especially if when you’re younger, you’re still working, your kids are younger, maybe colleges have paid for it, that might not be enough. That’s another thing that I’ve seen a lot. used to, part of our business used to be employee financial wellbeing.

And I used to see a lot of insurance policies come through the desk. And that was one thing, which I say was a little disheartening. had younger couples in their thirties with young kids who were, who needed insurance.

They really they could not afford they couldn’t even take advantage of the company match They had a whole life policy and I won’t go into how it was sold to them But you know, maybe some level of permanent insurance they needed but also they could afford it what they really needed was term insurance which was a lot cheaper and They could get a lot more death benefit which at least for probably the next five to ten years is what they needed So that’s one thing to keep in mind

Most often when these are sold, and this is pretty universal, pun intended, is these are sold as an investment. if your primary goal is an investment and it’s being sold as investment, you need to know what’s the alternative investment. So the most obvious one with this one is buy term and invest in the S &P 500.

So when you think about if I buy term and invest a difference, some of you might be saying, well, but then my term ends after 20 or 30 years. And that might be a reason to do it. If you’re someone who says, I want to have life insurance for my heirs, I want to make sure that there’s something there when I die, again, there’s nothing wrong with that.

But just be aware of the trade-offs because if you take our example further and say you don’t go out just 20 years, you go out to, we’ll go to the end of the illustration and then when you’re 60, when they’re 100, your debt benefit, it grows to $1 million. Not guaranteed. Could that be a little higher? It could. It’s probably not gonna be a lot. Could it be a little bit lower? It could. It’ll go again.

When you think in terms of the SP 500, unless the US really goes downhill over the next 60 years, it’s really unusual. It’s going to be a whole lot lower. But if you say that million, you look at that million and say, well, that’s a lot. Well, it’s a lot when you, it’s a lot now, but a million dollars in 60 years, isn’t going to be the same as a million dollars now. Just like a million dollars 60 years ago was a lot more money.

That’s why you had Austin Powers talk about $1 million and they laughed. It’s because inflation, inflation erodes that purchasing power.

in our example, if you buy term and invest a difference, you’re going to be awful close, most likely, to your death benefit and certainly a lot higher than your cash value. I think the cash value at year 20 was 160,000.

Again, the question is, how much do you want to pay for that guarantee?

And again, you might like the combination of a product that you do have the insurance that’s going to pay early on. Well, if you go beyond year 20, and if we continue to grow that at 7%, not even counting dividends going forward, forget the dividends even, but that really adds up over these long time horizons. But you certainly are going to around $3 million

And that’s what we’re going to talk a little bit about here. I made reference to the fact that there was, there has been times where I’ve seen things like this where it just didn’t make sense. And where that, when that happens, I often see caps, whether it’s the floor is zero. you know, you’re no, you can’t lose anything in essence, but your max upside is a much lower cap. I saw one, it’s been a couple of years, but it was

the same rate as the 10 year treasury. So it had a surrender charge. You know, the one you’re looking at now does not, but the most you could get is the cap on the S and P was the 10 year treasury at the time. Well, if that’s your max amount and you’re not guaranteed it, you’re not going to get that every year. As we just discussed, why not just buy the 10 year treasury?

If your primary goal is investment, that’s what you really need to look at. So if we were to buy term and invest a difference, so buying $100,000 worth of term for a healthy 40 year old is not much.

I mean, I think I saw one come across my desk where it was I want to say it was like ten or fifteen dollars a month one to two hundred dollars. So if you a year So if you invest that in SP 500 and you get what they’re assuming this is seven percent and the fact that the insurance company has it tells you that they even believe that’s a valid number and Doesn’t take long to realize that yes, you can get that well

After 20 years, you’re going to have over $200,000 in the value of your S &P 500. And you still have the death benefit if you were to pass.

You the the difference is you’re that that SP 500 as you’re buying into it is Is going to go up and down Where if you have this insurance policy, it doesn’t it’s not priced every second of every day So you’re not gonna see it. So that is comfort and there’s nothing wrong with saying I like comfort I have seen folks where something like this might be a good fit for them because they do not have the stomach for any sort of market volatility

They can’t ignore it. They don’t want to take time to understand it or they just, understand it. They just don’t like it, which if you’re one of those people, that’s fine, but be aware what you’re giving up. Be aware that in our law, since we’re in retirement longer, our longer time horizons, we need risky assets to keep pace with inflation. need risky assets to grow, to grow our assets, to get to a spot to where we can, can retire and live in retirement for 30 years.

But we also need assets in retirement to help compensate for inflation. So as with anything, if you like the comfort of having the 0 % floor, that’s great, but still take time to realize what is what’s the trade off, what’s the alternative and what are you giving up? There’s risks in all your decisions.

the other thing I’m going to close on here is it’s not just looking at the alternatives as far as like say by term and invested difference. It’s also looking at how it fits in your financial plan. You know, when you think about 30 years of producing income and retirement, something I specialize in.

You know, you need to factor in, are you going to need to access this? Will you need to take out some of the basis? You know, what does that look like? the integrating these into a financial plan, whether you’re going by kind of the 4 % rule or you’re doing a probability of success with Monte Carlo simulations or whatever it is, you need to factor in.

You know, do you need to access this? Is it going to be taxable if you access it early? You know, what do what do loans look like? If that’s what happens, you know, what role does this play?

$100,000 invested in something like this over 60 years you need to make sure that it fits into your Your income plan and retirement. How does it work with Social Security your pension? With drawing from other assets RMDs and so on so All right. There we have it. So Financial planning investing is all about making informed decisions If you take some of these tips to analyze whether you’re going to purchase an indexed universal life policy

Or you’re going to keep your policy again, even if you see this, it I want to get rid of it. Just be careful. that’s, that’s a, that’s a episode for another day. you don’t want to make sure you make an informed decision. If you’re going to keep something like this or get rid of it. Cause there, there might be some better alternatives. Thank you for joining us. Cause if you do all these things, you’re going to have a healthier, a wealthier and a happier retirement. Don’t forget to hit subscribe. Do it takes a second. It’s subscribe, like share. Bye