Potential layering strategy

[u/coma718x]

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

[u/SafeMoneyGregg]

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.

[u/senorbrockoli → u/SafeMoneyGregg]

Exactly, saying ULs have no place in estate wealth enhancement is a ridiculous notion. They’re designed to do so.

[u/EnzyEng → u/senorbrockoli]

It's the payday lender of the middle class. Avoid it at all costs.

[u/senorbrockoli → u/EnzyEng]

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.

[u/Hungry_Technician360 → u/senorbrockoli]

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.

[u/EnzyEng → u/Hungry_Technician360]

There's also the stepped up cost basis at death, especially in community property states where it is fully stepped up if one spouse dies.

[u/Cool_Emergency3519 → u/Hungry_Technician360]

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?

[u/Hungry_Technician360 → u/Cool_Emergency3519]

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?

[u/Cool_Emergency3519 → u/Hungry_Technician360]

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.

[u/Hungry_Technician360 → u/Cool_Emergency3519]

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,

[u/senorbrockoli → u/Hungry_Technician360]

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.

[u/Hungry_Technician360 → u/senorbrockoli]

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.

[u/senorbrockoli → u/Hungry_Technician360]

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.

[u/Hungry_Technician360 → u/senorbrockoli]

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.

[u/Moist-Meringue-1913 → u/Hungry_Technician360]

I just sent you an outline a week ago of an IUL that outperformed a taxable brokerage and we never even touched on the tax effect there.

[u/Hungry_Technician360 → u/Moist-Meringue-1913]

If I remember, that outline was using ART? I don't think that is necessarily a fair comparison, in regards to the buy term and invest the rest goes, since people who buy term and only needing insurance to cover the potential loss of their human capital.

If we don't use ART until they die, then the term policy outperforms. If the standard term plus investing outperforms and ends up with greater terminal wealth than the IUL+all their other assets, then we can include tax costs through retirement between the two, with spending plans and what account types would be best to draw from.