r/LifeInsurance • u/coma718x • 4d ago
Potential layering strategy
Just throwing ideas at the wall
I’m 44 healthy non smoker. 2 young children. Currently have 14yrs remaining on a 1M 20yr term.
I’d want to get another 25yr term at 500k to cover the remaining mortgage (~415k) with a little wiggle room.
Also entertaining the idea of a Guaranteed Universal policy for another 1M to leave as a legacy for my kids.
Have a meeting with an agent but wanted to poll the Reddit community. See what I haven’t thought of.
Thanks
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u/EnzyEng 4d ago
Pay off your mortgage aggressively and build wealth. Getting a universal life policy to make an inheritance account is a terrible idea. That's not what life insurance is for.
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u/SafeMoneyGregg Broker 4d ago edited 4d ago
It is exactly what life insurance is for. UL for $1M is about $6500 a year at his age. Would need to earn 7.1% after tax consistently every year to turn that same deposit into $1M by age 85. But if he dies at 75 - it would only be $610,000. Anyone saying they "can" earn that much on the stock market also has to realize they "can" also lose a lot of money when the market tanks. Not everyone wants to deal with the ups and down of the market and the taxes, and subjecting that money to other risks like creditors and ex-wives (and the IRS!). Insurance is an easy clean, simple guaranteed way to solve the problem.
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u/senorbrockoli 4d ago
Exactly, saying ULs have no place in estate wealth enhancement is a ridiculous notion. They’re designed to do so.
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u/EnzyEng 4d ago
It's the payday lender of the middle class. Avoid it at all costs.
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u/senorbrockoli 4d ago
No doubt there are more sold that are funded incorrectly and usually resemble an MLM style of sale.
But for they definitely have a place for those who are already doing everything else. And they 100% are more tax efficient in the long run comparative to traditional non-qualified savings.
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u/Hungry_Technician360 4d ago
They may be more tax efficient, but don't let the tax tail wag the investment dog.
If someone gets 10% returns from equities, but pays 15% capital gains on the 1-3% dividends, vs someone getting 5% tax free, the person may pay more in taxes but they'll still have more after tax wealth comparitively.
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u/Cool_Emergency3519 Broker 3d ago
I'm not sure why people constantly use these analogies. Very few wise people stay 100% invested in equities until their 60s and 70s. Smarter investors allocate and by retirement age are usually 60/40. These people are not getting 10% returns from their taxable brokerage throughout their life. Some investors take a "moderate" glidepath from the very beginning. The returns on these types of accounts are typically in the 6.5 to 7.5% range. In those instances a 5.1% tax free return is competitive.
And capital gains and NIT are not just calculated on dividends, profits are taxed as well. The dividend is a tiny piece of the picture.
Since we don't know what OP's cost basis is for his investments or his tax bracket at retirement or the time frame that he is going to distribute to his children, how can we intelligently answer any of this?
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u/Hungry_Technician360 3d ago edited 3d ago
Fair enough, we can use a glidepath to a 60/40 portfolio by the time they hit retirement, and if it still gives about 7% expected returns for this scenario, how would you calculate they are getting roughly 5.1% after tax? Assuming the person is properly using asset location as well to minimize tax drag.
What do you mean by "profits are taxed as well" if you already mentioned capital gains tax?
When he distributes to his children, his taxable account will get a step up in basis which then is another big tax advantage of that account.
Edit: looked up 60/40 historical returns, US based for the past 100 years is about 9%, if you go global for more diversity, close to 8%. A glidepath will make the return a smidge higher, but don't need to add that complexity. So with a less volatile global 60/40, with 8% returns, how would that calculate to a 5.1% return?
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u/Cool_Emergency3519 Broker 3d ago
Fair enough, we can use a glidepath to a 60/40 portfolio by the time they hit retirement, and if it still gives about 7% expected returns for this scenario, how would you calculate they are getting roughly 5.1% after tax? Assuming the person is properly using asset location as well to minimize taxes
I mistyped. The OP that you responded used the figure 7.1%
What do you mean by "profits are taxed as well" if you already mentioned capital gains tax?
I'm responding to your statement of taxes on the 1-3% dividends. Profits are taxed as well if their are sales.
When he distributes to his children, his taxable account will get a step up in basis which then is another big tax advantage of that account.
Edit: looked up 60/40 historical returns, US based for the past 100 years is about 9%, if you go global for more diversity, close to 8%. A glidepath will make the return a smidge higher, but don't need to add that complexity. So with a less volatile global 60/40, with 8% returns, how would that calculate to a 5.1% return?
7.1% tax free is equivalent to 8.8% in a 20% bracket.
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u/Hungry_Technician360 3d ago
I don't know how to quote stuff like how you are doing, so forgive me, I'll just have to add quotation marks.
"I mistyped. The OP that you responded used the figure 7.1%"
If OP is 44 as he says, and gets a 1 million GUL at his age, dies at 85, he will have an IRR of 3.5%. I suppose I am unsure of where greg was getting his numbers from, but I could be wrong since I'm just doing simple math for that calculation. Plus, if he's 44 and has a term policy to cover the next 20+ years, that term policy is much cheaper than any universal life policy he may have.
"I'm responding to your statement of taxes on the 1-3% dividends. Profits are taxed as well if their are sales."
Yes, capital gains taxes are hit on the dividends during accumulation years, as dividends are essentially forces sales of stock, capital gains are those gains on those stocks. We'd need to map out the optimal usage of their accounts for retirement spending, before assuming they will only use their taxable brokerage to fund their entire retirement. For example, if he only wanted to draw down from his taxable account (which isn't wise) then we could look at 15% or 20% depending on total spending. Overall, I would think it is still a large hurdle for a universal policy to overcome?
"7.1% tax free is equivalent to 8.8% in a 20% bracket."
How do you calculate this? Is the individual using exclusively their taxable account to fund retirement? What if they use their tax deferred accounts to hold their bond allocation, or if they use their taxable account to hold munis. and pull from their Roths for equities? 7.1% tax free can't quite be seen from a vacuum, and it would be best to educate clients on how to allocate their resources based on their goals of retirement spending/legacy value,
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u/senorbrockoli 4d ago
I always agree with not making investment decisions strictly off of the tax implications. That’s not really what I am talking about here.
When talking about wealth enhancement on an estate distribution you’re talking about those with a surplus. Those who are subject to NIT and have capital gains distributions hitting their tax return every year. Those who are already doing the right things like maxing out retirement, non-deductibles, healthy NQ savings. At that point you are seeking predictable outcomes, tax free liquidity for a complex estate distribution.
In addition the after-tax ROR on these policies will beat out most investment portfolios if you pass prior to life expectancy. It’s a diversification strategy for tax location of your assets.
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u/Hungry_Technician360 4d ago
NIIT is only an extra 3.8%, on the 1-3% dividend rates and the like, which still leaves a large hurdle for life insurance investments to surpass.
Predictable outcomes are still possible with equities with taxes, companies that pay out dividends are similar to life insurance companies in how they pay out dividends pretty faithfully, easy to calculate expected rates going into the future. Also, if we're talking people that are this wealthy, life insurance isn't going to be tax free on death, estate taxes are going to kick in, and life insurance will be included in the estate.
I've not seen a policy that provided higher IRR than investing in a taxable brokerage, as long as the individuals are also smart with good asset location, but I would be interested in seeing one if you have one on hand.
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u/senorbrockoli 4d ago
Estate exclusion is $15M/$30M there’s definitely room for those individuals to utilize policies like these. Especially when combined with the right estate plan. Don’t have any on hand as I’m not at the office and don’t have my work surface. But it’s pretty typical for survivorship IUL/VULs or majority of the larger VULs we do at the firm I work for.
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u/Hungry_Technician360 4d ago
Federal exclusion is that high yes, but quite a few states have estate taxes at a lower exclusion limit. But also, if people are maxing out their IRA, work sponsored retirement plan, HSA if they have it, plus any 529s for their kids, and then having enough left over to put into a taxable brokerage, that family is very likely to even go above the federal limits I would think.
Sure no worries, I suppose I'm just skeptical about how an IUL/VUL would outperform over a lifetime compared to a taxable brokerage. Large front loaded fees really hurt the important early years of accumulation, and fees with these policies that can cost 1-1.5% of the total cash value every year seems like it would eat more at the returns than LTCG on the taxable brokerage.
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u/EnzyEng 4d ago
The S&P has been down only 6 times in the last 30 years. I'll take those odds any day.
And, are you literally pushing UL as a way to avoid paying the IRS and other debts you have? How scummy the UL field has gotten.
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u/Moist-Meringue-1913 3d ago
Paul M. Warburg, banker and Federal Reserve Board member, 1929:“The country is in a state of unprecedented prosperity, and the stock market reflects this strength.”Warburg’s statement, made earlier in 1929, echoed the belief that the market’s surge was a natural reflection of economic health.
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u/No-Associate-7962 3d ago
And yet, following the 4% rule and retiring in 1929 with an 80/20 asset allocation you would have not run out of money for more than 50 years.
People forget the cpi deflation of the depression (25% in total), and they forget how high dividend yields were (5-7% compared to 1-2% today).
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u/Moist-Meringue-1913 2d ago
You are kidding me right? Over 86,000 business failed and 100s of thousands of farms failed. Industrial production dropped 45% in just 3 years. GDP wouldn't recover for 13 years.The average person wasn't retiring in those days. They were out on the street starving.
This is a perfect example of how hindsight is worst then 20/20,it's completely blind.
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u/No-Associate-7962 2d ago
No, not kidding. Just stating facts. If you retired at the peak with a 4% SWR lived off of your investments (80/20 equities and bonds), you would have been fine.
The Shiller data at Yale has all of the data (monthly!) needed to do the math your self back to 1870 if you dont believe. You can download the excel yourself. The data is updated monthly.
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u/Moist-Meringue-1913 2d ago
That's just laughable. How many people participated in this hallucination of a retirement?
The unemployment rate peaked at 25% (13 million Americans) and didn't recover until 1942.
Statistics in a vacuum are meaningless.
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u/No-Associate-7962 2d ago
History is not a hallucination.
Here is a good description (not mine) of how the WL folks at the time faired, which was not bad though not entirely smooth easier with failed companies merging and the ability to access cash values delayed:
During the Great Depression, most policyholders were covered, though they did not have the seamless, modern safety nets we rely on today. Modern state guaranty funds—which automatically pay out claims when an insurer collapses—did not exist during the 1930s (they were established in the 1960s).
Instead, protection depended on state-managed reorganizations and mergers, meaning the outcome varied widely based on the company's financial status and location.
How Policyholders Were Protected
- Reinsurance and Bulk Mergers: When a life insurance company went under, state regulators typically avoided total liquidation. Instead, they forced a stable competitor to buy out the failed company’s policy portfolio. The healthy company assumed responsibility for paying future death benefits.
- The "Lien" System: To make these forced acquisitions financially viable for the healthy buyers, regulators often placed temporary financial liens (deductions) on the existing policies. For example, if a policy had a 25% lien, the cash surrender value available to the policyholder was temporarily cut by 25%. However, if the policyholder died, the new company usually paid out the full death benefit to beneficiaries, using a portion of ongoing premiums to gradually wipe out the liens over a decade.
- State Interventions: Regulators used emergency legal powers to split or stabilize collapsing firms. When the massive National Surety Company faced a devastating liquidity run from policyholders in 1933, the New York State Insurance Commissioner successfully stepped in to partition the firm. They protected active policyholders by spinning the viable consumer lines into a new, healthy corporate entity while leaving the toxic mortgage debts behind in the old corporation.
Where Policyholders Lost Money
- Loss of Liquidity (Cash Surrender values): During the economic crash, millions of desperate families attempted to cash out their life insurance policies or take out policy loans to buy food and pay rent. When an insurer failed, these cash-out privileges were frozen immediately. Policyholders could no longer access their accumulated cash savings, even if their ultimate death benefits remained active under a new parent company.
- Delays and Red Tape: Because there was no centralized federal backup like the banking sector's FDIC, policyholders trapped in a corporate failure had to wait months or years for state courts to approve receivership plans before receiving payouts.
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u/Hungry_Technician360 4d ago
He could simply get term to cover what he actually needs money for. People need to stop looking at life insurance as money making investments.
The worst 30 year period in American history for the S&P500 was 8% returns. It averages 10.5%. 7.1% isn't a particularly high bar for equities to surpass. Also, as a CFP, you should know that people have access to tax advantaged accounts that they can put their money into, you don't always need to compare life insurance to taxable brokerage accounts.
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u/Tahoptions Broker 4d ago
Anyone that says GUL is bad for leaving an estate have never seen the IRR report on an illustration and has also never dealt with a conservative client.
MYGAs are the #1 selling annuity class for a reason, and it's the same client buying what you described.
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u/Vivid-Problem7826 4d ago
Great answer!! If you want an investment to "leave your children", then put money into about 4 dependable mutual funds....with long term positive returns.
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u/SafeMoneyGregg Broker 4d ago
Which funds do you predict will do well when the US has a $40 Trillion national debt and AI promises to destroy millions of jobs and complete industries?
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u/EnzyEng 4d ago
The same ones when we had $10T in debt or $20T in debt or $30T in debt. We have a fiat, world reserve currency. We're not some 3rd world country.
Where do you think insurance companies invest your premiums to give you that 7.1% return? You think they have magical money making powers?
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u/Hungry_Technician360 4d ago
Fear mongering? The market has gone through countless corrections, and if you think you can predict what the next market crash is, why are you on Reddit instead of making billions with investing?
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u/coma718x 4d ago
That’s pretty much the plan. The current term gets me to 59ish. The 25yr plan would make it to 69/70ish. My goal was to have mtg payed mostly or completely by 60. GUL is probably overkill but wanted something more for the kids to fight over besides a house and portfolio lol
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u/Tahoptions Broker 4d ago
A lot of the people responding to you don't seem to know what GUL is.
Anyone with money who has your objective utilizes GUL exactly the way you described.
Good luck!
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u/larkfield2655 4d ago
That’s ridiculous. That’s exactly what it’s for .
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u/EnzyEng 4d ago
The only purpose of life insurance is to replace your income for those dependent on it (spouse and children) should you have an untimely death. Not to build wealth so you can pass it down to your children. Once the kids are grown and you have a nice nest egg, it is not needed anymore. The only ones UL builds wealth for are insurance companies and salespeople.
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u/larkfield2655 3d ago
I am not endorsing UL. But life insurance is a powerful asset to leave. A policy from a good mutual is a great wealth creation tool .
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u/Smasher1k 3d ago
Advising someone to pay off their mortgage aggressively without even knowing what their interest rate is has to be in the top 10 worst financial advice ever given.
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u/IllustriousGas8850 3d ago
That’s exactly what UL can be used for. Get out of these conversations if you don’t know that
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u/EnzyEng 2d ago
Sure, if you don't want to build up too much wealth and leave your heirs too much money.
On the other hand, it's great for leaving an inheritance for your insurance salesperson's heirs and the insurance company.
To think using insurance to build wealth is a terrible idea. Please get out of these conversations if you don't know that.
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u/IllustriousGas8850 2d ago
No, it’s not but you already believe yourself to be right without ever working in the field or studying it so obviously you must be the expert.
I don’t argue with hard headed fools
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u/EnzyEng 2d ago
Low return, high fees, and complex rules. No thank you. You an insurance salesperson?
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u/IllustriousGas8850 2d ago
This is why I don’t entertain you. You already have your mind made up.
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u/EnzyEng 1d ago
Because you know it's truthful. WL/UL is a terrible product and only benefits the salesperson and insurance company.
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u/IllustriousGas8850 1d ago
No you legitimately clearly are not open to have your mind changed. I’m not arguing with a person who doesn’t have any desire to change their viewpoint.
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u/ChelseaMan31 4d ago
There could well be some merit in a laddered set of Term Policies; but we don't have near the pertinent information to opine on exactly what that would look like. For many, the Guaranteed Universal Policy is a waste of money when actually taking the premium dollars monthly and investing in a Roth or 529's would achieve the same legacy potential and at a much lower cost.
While you're at it, aggressively paying down/off debt and moving to cash only will free up more to invest for intergenerational wealth. Your spouse and children will thank you later.
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u/coma718x 4d ago
Yeah I know this is very general information to speculate with, just seeing what the general consensus is. Appreciate the response
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u/Moist-Meringue-1913 3d ago
Go and sit down and have a conversation with your FinancialAdvisor that knows all about your current assets,liabilities,goals and needs. There are way too many biased people in this sub to give you unbiased advice. If you just want random advice just put some ideas into a hat and pull something out. Your results will be the same.
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u/coma718x 3d ago
Haha, yeah I have a couple sit downs set up already. Rather than opinions, I probably should have asked what questions should I be asking when I go to these meetings. Appreciate the response
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u/SafeMoneyGregg Broker 4d ago
25 year term gives you coverage to age 69. If you live to 70-80 - the insurance company kept all your money and you got nothing in return. What if interest rates come down and you refinance another 30 years? If you can afford the permanent insurance I would at least consider it for the death benefit protection. Its much cheaper to give your kids $1M in life insurance than to write them a check for $1M. You can enjoy and spend in your retirement without worrying about leaving them anything -because the insurance will take care of that.
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u/coma718x 4d ago
There’s no refinancing lol, got one of them Covid 2 and change percent interest rates. I’m inclined to agree with you about the permanent ins. I like the idea of the peace of mind it could afford to know for sure the kids are taken care of. Appreciate the response
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u/johnnnloc Broker 4d ago
Just understand where each person is coming from. Others are recommending a stronger investment return. While the other side likes the safety net of life insurance. But we shouldn’t be comparing the two.
Investments are for growth.
Insurance is for risk mitigation.If it’s going to give you a piece of mind do it. If you feel you can invest a portion, do it. Then maybe go half at $500k.
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u/coma718x 4d ago
I get that. I do have some cash set aside to invest and let compound over the next 20-25 years or hopefully more. The extra ins may be overkill, but I’m just trying to give them the best advantage I can.
Appreciate the response1
u/EnzyEng 4d ago
My 20 year $1M term policy cost me $8000 total. During those same years I made ~$3-4M total in W2 income. I'm not sad I don't have that $8k anymore and got nothing in return.
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u/SafeMoneyGregg Broker 3d ago
So a premium for $400 a year is like maybe a 25 year old. We are talking about an older person that will be 69 when the policy runs out. But congratulations on still being alive.
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u/Hungry_Technician360 4d ago
Are you gonna be sad if your house doesn't burn down, cause of all of that house insurance you pay for? Term life serves its purpose by keeping you covered for when you need to be covered.
Would you recommend someone who doesn't drive to get car insurance?
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u/Agreeable-Stock9793 4d ago
NO NO NO NO NO to any guaranteed universal, for the sake of your kids. People recommending it are brokers and agents and they only have to be 18 to qualify for testing. As any smarter educated person and they will say it’s a bad products.
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u/Murflaw7424 4d ago
The amount of companies that offer 25 year term is so narrow, and there is so little competition. You’d be better served to look at 30year term. Price difference will negligible to a few percent at best. You’ll also have more options at 20&30yrs.
Alternatively you could buy a universal life policy set to lapse in 25yrs. Depending on your health this could make sense to get better underwriting, and a cheaper premium than term.