{ "media_type": "text", "post_content": "Anyone have insight into Indexed Universal Life insurance as a tax free investment vehicle? My financial advisor is saying there is no downside risk and 5-7% return and tax free. Sounds either too good to be true, or is this how the wealthy avoid paying taxes??", "post_id": "60d1f9fdf272d5001cdd9403", "reply_count": 14, "vote_count": 4, "bowl_id": "5b3f7377ab53db00136f7b4c", "bowl_name": "FIRE Financial Independence Retire Early" }

Anyone have insight into Indexed Universal Life insurance as a tax free investment vehicle? My financial advisor is saying there is no downside risk and 5-7% return and tax free. Sounds either too good to be true, or is this how the wealthy avoid paying taxes??

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Avoid. Very high fees. Insurance salesmen make bank on these. Is your advisor tied to an insurance company? Consider this. If everyone was guaranteed a 7-10% return (before taxes) risk free, why wouldn’t more people use this “investment” vehicle?

likesmarthelpful

My financial advisor said the same thing. I did some research and learned that financial advisors push these products because they pay the advisors well so they are heavily incentivized to get clients to sign up. Granted, I’m not an expert on this and these life insurance policies may work for some folks, but I think I’m just gonna get term life insurance and just invest in an index fund. Can’t make sense as to why anyone would pay 10x the premiums of term life but willing to hear from other people.

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This is not how the wealthy avoid paying taxes

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Reading through some online articles, I get the sense that they protect your cash amount from downside but also heavily cap your gains relative to index gains. There’s a cap rate, participation rate, and spread rate aside from fees, which all limit your upside and eat into your gains. You also need to understand how the insurer does index calculation, and the risk is having to pay more into the policy or lose coverage and face tax consequences.

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Dont do it. The only person getting ahead from this is your advisor, in commission. Nooooooooo 👎

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I created a model to analyze this, and it’s worse than 5% yoy market return even before age 70...if you buy it, I’d only treat it as insurance (not investment)

likehelpful

I have whole life insurance and not IUL, but I think the considerations are very similar. It’s basically a very low risk and very low return investment. If I have known better, I would’ve just put the money in index funds. The idea is if the market crashes, the cash value in the policy is still protected. There is some value to it, but a 1% CD would achieve the same results without the downside of a whole life policy.

funny

Yeah and he was recommending it as a savings vehicle that you can use to spend on big expenses down the road like college tuition or second home etc. that also doubles as a life insurance policy. It’s crazy to me that it acts like a Roth with tax savings, there’s no age limit to withdraw, and there are no limitations on what you spend it on???

funny

What the advisor saying isn’t technically wrong, obviously they are trying to sell you a product and are highlighting the pros of the products. The advantages aren’t any different than a CD, you put away money consistently to gain minimal returns, you get a 1099 every year on the interest/dividends and pay tax on it, if you draw money to fund a big expense, you are just taking money from your own savings so no tax implications, if you don’t put the money back the investment stops growing. The differences however for universal or whole life insurance are 1.) hefty premiums are required annually, if you stop you lose; 2.) return on investment in the early years is less then 1% (or negative), it gets to like 2% to 4% after 30 years. So there are other low risk alternatives that can provide better returns and better flexibility.

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Avoid

IUL policies put a floor and a cap on annual returns - eg, a 0% floor (so if the market does worse you get the floor) and a 10% cap (so if the market does better, like it has over the past year at 40%+, you just get the cap). Plus, there are long holding windows required, and then future disbursements are based on “tax free loans” from the eventual life insurance value. So as many others have pointed out, the reason these products are being pushed hard is because of high commissions for the sellers.

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