What is the board's thoughts about utilizing Life Policies as a safe money tool? (not a high premium life policy for the benefit of the life agent)

Assume that all free money is being received from 401k, Roths are participated in, if not maxed, etc.

Why would you do that?

nactownag said:

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This is gonna be good

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Yep.

I can buy annuities for safery.

Lower rates on their safe money and lack of liquidity compared to the life insurance.

Other than the tax deferral CDs are as good if not better than fixed rate annuities in today's environment.

Even if the end result is worth it to you, it's not a vehicle for spare cash. You have to commit to saving the exact same amount every year for 30 years.

It's a valid and widely used strategy for folks maxing out their Roths and 401ks, as I understand it. Safe money, not at market risk for those at or getting close to retirement, tax free.

I'm not here selling it. I'm curious to get the thoughts of those who use it as a strategy, typically higher net worth folks, who need to do more than sock it away in a qualified account or put it in brokerage.

No you don't. You can pay it up over any period of time you'd like.

Well, that's true. But if you have all the cash up front what's the point?

To return better than the .01-1% you'd see in interest from the bank.

The have a guaranteed return in the neighborhood of 5% tax deferred/free.

To have money set aside for retirement that has little to no real market exposure.

What kind of liquidity is there? If I change my mind how large are the penalties? How is it possible to grow 5% with no risk? Must have some really high premiums for the amount of insurance such that the insurance company is basically just giving you your own money back maybe?

nactownag said:

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What kind of liquidity is there? If I change my mind how large are the penalties? How is it possible to grow 5% with no risk? Must have some really high premiums for the amount of insurance such that the insurance company is basically just giving you your own money back maybe?

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Given your profession, do you legitimately not know this?

Not being obtuse, merely curious.

Edited
Guy above me brought up my questions

If you have the time to wait, absolutely.

When you die what happens to the cash value?
How long does it take to accrue the cash value?

It depends on how the policy is structured, and there's a million ways to structure a life policy as opposed to a Roth or an annuity. Which is why it's an attractive option for high net worth folks with some decent time in front of them who have already taken advantage of some of the other avenues.

If you pull from the cash value, your death benefit is reduced.

If you die, your beneficiary receives the death benefit.

I do know the answers I was just posing some of the negatives I see in the form of a question I guess.

I don't disagree there are some benefits: liability protection and tax deferral but i don't see why I wouldn't want to do a variable policy and hope for a better return with what i suspect is either lower premiums or cost.

I guess I'm just so worn out by constantly seeing insurance sold incorrectly to benefit the producer that I just generally have a negative impression of it.

I generally never do a permanent policy unless it is for estate planning reasons or for long term care planning.

We manage a lot of money and I can't really think of but maybe 1 or 2 out of our 1000 household that have a LIRP or other permanent policy that isn't specifically for passing wealth down or long term care.

If you never do a permanent policy then perhaps you're either a) exposing what should be "safe" money to too much market risk, or b) putting "safe" money in a place where it's earning next to nothing making it difficult for some investors to take the recommendation of having enough set aside.

CV life policies also allow the client to take arbitrage the market without having to have that sitting in a 0% situation to do so.

Also, not entirely a knock on certain firms, but those "money managing" firms are often more focused on just that, managing money, rather than managing situations and plans.

I dont see what's wrong with having no debt besides a mortgage, solid emergency fund, funding normal retirement vehicles and then fund after tax investments with capital gain taxation treatment. I can buy a tax free muni bond that will get me a decent return with less risk if I want or need that.

Again I don't think it's entirely wrong but I just believe the number of situations where that is truly appropriate are few and far between. Yet somehow I see it happening often.

A tax free muni bond carries less risk than a contractually guaranteed payment and returns more than 5.5%

They're few and far between because, as I mentioned, there are a lot of firms and folks more interested in how much money they manage and not in understanding something that's complex, yet very useful.

And why fund something with "normal tax treatment" if you can fund something with favorable tax treatment and 0 market exposure in retirement?

It's not the entire answer, but if the question is "what do I do with these extra dollars that are earmarked for retirement" it sure is a better one than a brokerage account.

What is high net worth? 1million? 5? 10?

I am all about developing financial plans for people and am not opposed to using permanent insurance in creating a plan. I do a lot of insurance business. Just not typically this type of policy unless a very specific situation. I would generally rather see a person have more control and liquidity and lower cost. Unless they have so much income and assets that it doesn't matter

Unless liquidity is an issue, but I'm assuming that's already been addressed

The problem is that there's a ton of agents out there selling this setup to the person who has a net worth of 100k

You don't have to have 1M for this to be a viable answer at all.

Forgive my skepticism in thinking that you do a lot of permanent business if you see putting money into a regular tax treated account is a better option for the situation we're discussing.

Knowing certain firms the way I do, I know that insurance is an absolute afterthought, especially when it eclipses the term variety.

It's not nearly as much of a net worth situation as it is a cash flow situation.

nactownag said:

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The problem is that there's a ton of agents out there selling this setup to the person who has a net worth of 100k

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Actually that's not the problem here for what Squareone is talking about. That's the problem for the people that buy it for the wrong reasons but that doesn't have anything to do with the viable reasons that Square is referencing. And I don't think it should be a reason that an advisor/client should run from the concept either. Just because it was a bad idea for someone else in a different situation doesn't mean it should be a bad idea for everyone else.