Variable Life Insurance with guaranteed min 2% return

[TxSteve]

Father in law has gotten himself in the above. The sales guy says the "investment" gains a minimum of 2% per year and it is GUARANTEED to not lose any money.

He is putting a significant amount of money into this thing and is putting a lot of pressure on me to speak to his "salesman" as well.

Anyone know anything about these things? Any online data I can use to show him that its scammish (i'm assuming).

I don't really get how any company could guarantee a return (they base their future projections on an 8% gain per year)

In a severe down turn in the marketplace are these companies going to go bankrupt? If the market is down 10% in a year; they going to take a bath for 12%?

The company I believe is Ameritas (something like that).

Any info anyone has is appreciated. I tend to believe anything too good to be true...is.

Thanks.

[Jimbo232]

Variable whole or permanent life insurance by its nature has a "variable" return and can generally be invested in mutual funds offered by the insurance company. I've never heard of a variable policy with a guranteed return, but at just 2% I'd suppose it is possible.

The scam here isn't offering the 2% guranteed (as you can easily obtain 5+% from an online savings account), but rather whole/permanent life insurance policies are prudent for very few people. I'd recommend reading up on the differences between term and whole life insurance, but I'll give you a quick overview off the top of my head.

In general whole life insurance will have premiums of several thousand per year, whereas a term life policy with the same death benefit will just cost a few hundred per year. If at the end of the policy (say 30 years) you aren't dead the term policy expires, but the whole life policy has built a cash value that you can draw from. This cash value is generally the big selling point for "financial advisers" who are really disguised life insurance salesmen. Almost always you can end up just as well off if you take the difference between the whole life premiums and the term life premiums every year and invest it on your own. Not only will you end up with the same amount of money, you will also not have your $ tied up with the insurance company for decades. The cash value of a whole life policy generally will hit its "breakeven" point somewhere around 15 years, meaning if you are not willing to pay a couple thousand per year for over a decade you will lose a good portion of your premiums because your cash value has not built up to the value of the premiums you paid in yet. Another disadvantage of a whole life policy is often times the funds you have available to put your premiums into are limited and affiliated with the insurance company who are also charging management fees to run the mutual fund so you are getting 1+% taken out from your investment balance every year.

The primary advantage of a whole life policy is that your premiums do grow tax free. I would not classify the cash value as an advantage because you could obtain the same financial position investing the difference in personal investment accounts using cheap and efficient investments such as index funds.

It is my belief that a whole life policy may be advantageous for someone who has an excess amount of cash-flow and is already taking advantaged of other, more beneficial tax-advantage saving opportunities - maxing out 401(K), maxing out IRA, maxing out 529 savings for children, etc. Unless your uncle is fully taking advantage of all the above tax-advantage saving opportunities I would not consider a whole life policy. Life insurance should be used to protect financial dependents in the case of death, a term-life policy does this just fine, there are much cheaper and efficient options to invest and save than a whole-life policy. I urge you and your uncle to read up on term vs. whole life insurance.

/Rant

[TxSteve]

thank you for taking the time to write that up Jimbo.

I've been tring to research through the internet; but; since i'm not really very knowledgable about insurances...a lot isn't registering.

i do appreciate your explanation though; i should check with him to see if he is maxing out his IRA or not. He is talking about a fairly significant amount of money.

He is 57 years old; just began this policy a few weeks ago; and says he will be withdrawing $140,000 per year when he retires at age 65. He says this money will be tax free; and that he will draw 140k FOR LIFE.

He has a history of being gullible - infomercials; scammed by contractors who began jobs but didn't finish them; in general a very well intentioned; but overly trusting guy.

[Jimbo232]

Being that he is 57 years old I think there is even a more basic question to answer - does he even need life insurance? Would anyone experience financial hardships upon his death? If so, he may only need his life insured for a few more years.

1) Does he have any kids that are financially dependent on him? If so, for how much longer?
2) Is his spouse financially dependent on him? Keep in mind if he has a significant amount saved for retirement this may be sufficient to support the spouse. How long until they have enough saved that life insurance becomes unnecessary?
3) Does he have a large estate for which the death benefit could cover estate taxes? If this is the case he should probably have a real financial adviser doing his estate planning.

Honestly, this sounds like a life insurance salesman that found a "mark" - someone too trusting for their own good. There is almost no scenario that I can imagine that someone should be able to sell your uncle this policy with his best interest in mind.

If he needs more life insurance look into a term policy (although any life insurance will be very expensive at 57 years old). If he is looking for a savings vehicle open up a brokerage account at Vanguard (takes 10 minutes) and purchase an equity index fund that should have a very low expense ratio (~0.2%) and will be very tax efficient even in a taxable account. If he can pair his equity holdings in taxable accounts with fixed income holdings (bonds) in his tax-advantaged accounts -401(K)'s, IRA's, etc - as these are less tax efficient than equities and benefit more from tax advantaged accounts, he should be well diversified and very tax efficient with a low expense ratio.

Sorry for the rants, but one of my biggest pet peeves is life insurance salesman pretending to be financial advisers and using and abusing unknowing, good hearted common folk.

[Jimbo232]

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and says he will be withdrawing $140,000 per year when he retires at age 65. He says this money will be tax free; and that he will draw 140k FOR LIFE.

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Hmm... just reread your post. Usually if money is guranteed for life the product is an annuity. Both annuities and insurance policies are sold by insurance companies. Could this be a variable annuity?

With an annuity you'll pay a lump sum and the insurance company will guarantee you a specific periodic payment for life. There is usually a death benefit -the remaining balance that you paid in. With an annuity you probably cost yourself some $$ with higher fees the insurance company will have versus managing your portfolio through cheap online brokers in index funds. But if you uncle isn't the type to manage his own nest egg or is very conservative this may not be a bad thing. IMHO, there is much more space for annuities in a sound financial plan than there is for whole life insurance.

[jthegreat]

He should also check into the fees involved. Usually these things come with high fees.

[TxSteve]

he calls it a life insurance policy that will allow him to pul 140k out per year for life tax free (after 65).....AND gives a 600k death benefit.

he has 2 kids; both financially independent and working

he has a wife who owns her own business; not overly successful but does make money

he does not have estate tax planning issues (his estate is not worth 2 million) (and; this is my father in law; not my uncle)

[Jimbo232]

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and this is my father in law; not my uncle

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Woops... don't know where I got uncle from [img]/images/graemlins/ooo.gif[/img]

[prohornblower]

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and this is my father in law; not my uncle

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Woops... don't know where I got uncle from [img]/images/graemlins/ooo.gif[/img]

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His name might be TxSteve but he's in Minnesota, not Texas! [img]/images/graemlins/tongue.gif[/img]