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Guarding Your Wealth for Senior Citizens
Beware Of Universal Life Insurance:
Part 2
Perfect retirement
vehicle, new way to build wealth? Exposing the fallacies
By Jeffrey D. Voudrie, CFP
 August 17, 2006 - In my last article, I explained
the basic differences between term and permanent insurance. Permanent
insurance such as Whole Life, Universal Life, Equity-Indexed Universal
Life and Variable Universal Life is regularly promoted as the perfect
retirement vehicle or the new way to build wealth. This week I will
expose the fallacies of those arguments.
First of all, I believe that the need for life
insurance should be met in the most economical way possible. With
universal insurance, where life insurance is combined with investing,
you end up paying too much for the insurance while earning too little on
the investment. It’s the worst of both worlds. Term insurance allows you
to purchase the life insurance you need at a lower cost, while giving
you the flexibility and control over your investments.
Universal policies unnecessarily lock you in.
You’re committed to paying a high annual premium. For instance, the
annual premium on one million dollars of universal life for a healthy,
45-year old non-smoking male is around $8,000. That’s $8,000 each
year---for the rest of his life.
On the other hand, the annual premium for one
million dollars of 20-year term insurance is about $1400. That’s a
difference of $6,600 each year. With universal insurance, most of that
additional premium builds the cash value of the policy. But because of
administrative and other fees, the amount added to your cash value each
year is reduced. By the way, has your agent mentioned there is a way to
buy no-load universal life insurance?
Insurance agents tout universal policies as a
wonderful investment vehicle. They’re not. Better returns can certainly
be found elsewhere. Many of these policies are pitched to people in
their prime earning years, most of whom are raising their families.
These investors will earn a far better return by
first paying down their debt. That’s a guaranteed return, of up to 20%
on credit card debt. For those without debt, any extra money they have
is better used for 401Ks, IRAs, etc.
The tax benefits heavily promoted as a major
benefit of universal insurance are suspect as well. It’s true that money
drawn out of these policies for retirement spending isn’t taxed, but
that’s because this money is actually a loan. In essence, you’re
borrowing your own money. And since it’s a loan, it has to be paid back.
If you hold the policy until you die, a portion of
the death benefit is used to pay back the loan. If you surrender that
policy, the cash value is used for that purpose. Suddenly that money
isn’t tax-free. Just like you may have to pay capital gains taxes when
you sell your home, you will have to pay taxes on the amount of the cash
value that is greater than the amount you paid in premiums.
Last of all, you need to be aware of the tremendous
financial incentive agents have in selling universal life insurance
policies. Commissions on universal insurance are 70% or more of the
first year’s premium, then 5% of the premium each year after.
One of the most egregious sales tactic used to
promote universal policies as an investment is that you should take the
equity out of your home and ‘invest’ it in a universal life insurance
policy. The argument is that your home equity is an asset that should be
used, not left dormant. The tax benefits are also touted—the transfer is
tax-free, the growth is tax-free and the distribution is tax-free!
That’s triple compounding, they say.
Do not fall for this trap. Frankly, those
recommending it should lose their licenses. The arguments used to
support this scheme are all smoke and mirrors. The tax benefits are
bogus, you lose control of your money and the agent earns a big fat pay
day.
Nor will the earnings be what you expect. Most of
the time you will end up paying more in interest on your home equity
loan than you will make in the policy. The distribution is tax-free, but
all death benefits paid on life insurance policies are tax-free. So you
can leave the equity in your home, buy a term life policy and have the
same tax-free distribution benefit.
>> Click here to Part 1 of this series on universal
life.
If you have a specific question or would like more
information give me a call toll-free at 1-877-827-1463 or you can also reach me by email at
jeff@guardingyourwealth.com.
About Guarding Your Wealth:
“Guarding Your Wealth” is a
nationally syndicated weekly personal finance column written by Jeffrey
D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group,
a private wealth management firm that employs sophisticated proprietary
strategies designed to protect and grow its clients' investments. Please
visit his website,
www.guardingyourwealth.com to read past articles under the Guarding
Your Wealth Article Archive.
Guarding Your Wealth for Seniors are
a collection of columns by Voudrie that deal with issues of particular
interest to senior citizens.
Click here
for all columns.
In addition to being a nationally
syndicated columnist and Certified Financial Planning Practitioner, Mr.
Voudrie provides personal, private money management services to clients
nationwide.
Looking for an energetic expert who
is passionate about financial and wealth management? Mr. Voudrie is an
excellent speaker who will excite and inspire your audience. Mr. Voudrie
is available for a limited number of speaking engagements, television
appearances and radio talk shows. For booking information, email e-mail
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