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I was recently told of a practice that is supposed to work better than simply saving back money for retirement age.

For example:
You buy a policy for the sole intent of dumping money into it, and borrowing from it, and paying the money back with a higher rate of interest in order to “build your own bank” so that you can have retirement money.
Is this a common practice? Anybody know anything about it?
Thanks

8 Thoughts on Has anyone ever heard of buying a Universal Life Insurance policy in order to have retirement money?
  1. Reply
    Rick B
    August 22, 2011 at 6:34 am

    Many insurance salesmen present these in many ways. They are ALWAYS a bad idea. Buy level term life insurance and deposit retirement funds in a retirement account!

    Ask the person how much commission they get on the policy. Ask them how much money you will get if you drop the policy in 1 year, 3 years, 5 years? In other words, is there any money that is yours like if you invest it yourself?

    If you die, your heirs get the insurance payment, but what happens to the cash value you have saved? IT’S GONE! If you follow the advice above, they get the life insurance payment AND whatever is in your retirement account.

    Don’t get taken. And don’t let them turn around and try to sell yo uan anuity either!!

    Good luck!

  2. Reply
    I_Walk_Point
    August 22, 2011 at 7:30 am

    It is a very common practice and a deceptive one. Here’s why:

    The rate of return on the savings in a life insurance policy is terrible compared to what you would get if you put the same money in an index mutual fund. Likewise, they are overly optimistic in the projections they show you. The more likely rate of return is the 2.5 percent or whatever it is that they guarantee.

    If you need that money in the short term it is unavailable, if you look at the projections, the cash value isn’t there until at least a decade down the road. If you put it into an investment account, it would be there in the short term if an emergency arose.

    Another problem with borrowing against your life insurance policy is that it reduces your death benefit by the amount that you borrowed. That may not be a big deal now, when you are presumably young, but it will be when you have a family or a business that you want to protect with that money.

    However, the salesperson makes a much larger commission on a universal life policy than he or she would on a term policy and letting you save the difference in premium in a separate account.

  3. Reply
    Agency Builder w/ BTID
    August 22, 2011 at 7:50 am

    Most consumers would do better buying term and invest the difference in a ira or roth ira. Using insurance to for savings is only good for a select few.

    I recommend that you talk to at least 4 or 5 agents, let them do a needs analysis for you. Whoever you feel more comfortable with is probably who you should use.

  4. Reply
    Jack M
    August 22, 2011 at 8:22 am

    Yes, because we make a whole lot more commission.

    Don’t buy life insurance as an investment for retirement buy life insurance to protect your love ones.

    Their are certain Tax advantages to dumping money into a life policy but the only people that benefit from this is the rich. I would strongly suggest you just look into a regular mutual fund instead. The commission and expenses can be a lot lower and you can barrow from it with out paying interest. The mutual fund will have risk associated with it. The only down side is you will need to pay tax on the interest earned of the capital gains every year (unless Mitt Romney becomes pres). I would talk with a CPA I don’t not do taxes.

    Good Luck!

  5. Reply
    rmjavier94
    August 22, 2011 at 9:10 am

    I don’t know if Universal Life Insurance policy is the
    same as the VARIABLE life insurance policy offered
    by the American International Group ( AIG ).

    In a variable life insurance policy, majority of your funds
    is invested in equities / bonds by professional fund
    managers. A small portion is set as the premium for
    a life insurance policy.

    Since the fund is managed by AIG fund managers
    handling billions ( yes billions of US dollars ) , returns
    are usually better than if manage your money yourself.

  6. Reply
    mbrcatz17
    August 22, 2011 at 9:27 am

    Life insurance is NOT as good an investment tool as socking money into a mutual fund.

    Run the numbers.

    You can’t ever borrow as much as you put into it – usually you can only borrow about 10% of what you’ve paid in. Plus, there are a ton of commissions and fees that get paid out of YOUR MONEY.

  7. Reply
    ernesto_tig
    August 22, 2011 at 9:27 am

    UL has some tax deferred investment advantages but the costs associated with maintaining the life insurance make it a poor investment. Some articles:

    http://www.insuranceyak.com/life-insurance-as-an-investment/
    and
    http://www.insuranceyak.com/disappearing-permanent-life/

    outline costs associated with the policies. I’d only consider this option if permanent insurance is a must AND I’ve maxed out all other tax-deferred investment options.

  8. Reply
    aaron p
    August 22, 2011 at 10:19 am

    Despite the rosy projections you might be shown in your sales illustration, the most common reason these do not work out is because of the risk the insurance company poses to your cash value.

    I’ll say that differently because it’s important. Most projections show a current and a guaranteed column. Read about the difference between these columns. It may reflect a percentage rate difference, but may also include a different cost of insurance. Very often the cost of insurance has more swing over the contract than the difference in interest rate. Companies can increase these internal costs at anytime for any reason they see fit.

    If you or the agent is only focusing on the percentage credited to the cash value, you are probably missing half the story.

    You may be comfortable with interest rates going up and down – that seems familiar. How do you feel about an insurance company changing its internal costs for any reason? Will you feel the same way about this one insurance company 15 or 30 years from now when you plan on retiring? What if you are in a loan position and THEN the company decides to increase its cost of insurance? Would you still be healthy enough to get a new policy that won’t lapse, causing a taxable event? What does the average investor know about trying to retire on the faith of one large company?

    Long story short, this strategy requires handling a very conservative asset in a very aggressive manner.

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