Complex Life Insurance: The good, the bad, the ugly
From recent experience, there are several complicated insurance products out there that even I sometimes have a difficult time understanding as an advisor. I wanted to publish this article to serve as an educational piece for anyone that finds themselves in a similar product.
1.????Never buy anything that you do not fully understand: VUL/ IUL/Whole Life are some of the most complicated life insurance products created. Before purchasing any insurance/investment product you want to fully understand what you’re putting your money into.
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2.????Never mix life insurance and investing: Most of these complex policies I’ve reviewed are breaking even after 5/10 years of paying premiums. The S&P 500 is up 60% the last 5 years and over 150% over the last 10 years.
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3.????Keep it simple: If you need insurance coverage through your life, opt for permanent life insurance. For temporary needs, consider term life insurance. Policies like these usually have minimal, if any, cash value. Cash value in policies tends to be beneficial only for closely held corporations, estate planning for high-net-worth individuals, and a few other specific situations.
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4.????Costs matter: These policies often come with hidden underlying costs and have expensive mutual funds associated with them. The list of charges is extensive and includes surrender charges, load charges, monthly fees, and more.
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5.????Tax inefficiencies: Premium payment in these policies go in after tax, any gains are taxed again at high ordinary income rates. You can contribute to a Roth IRA/401k with after tax funds to experience tax free growth, or you can contribute to a brokerage account that gives you advantageous capital gains rates. Additionally, tax loss harvesting is not possible with these insurance policies during market downturns.
In summary, there is a lot of misguidance in selling these complicated hybrid insurance policies. From my personal experience, individuals are sold complex products they do not understand and are not in their best interests. If you find yourself in an insurance product you do not understand, it is worth consulting with a knowledgeable fiduciary to decide if this is what you should be putting your money into.
Jared Gagne
Private Wealth Manager
617.378.3011 | [email protected]
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