Goodthing about UL

[benbenben]

I has lots of interest in insurance policy recently.... I hear lots people complain about the UL policy, as every product exist so many years in the world, it must has it's value, IS IT ANY GOOD THING ABOUT A UL POLICY?

[pitz]

Sure. If you're an insurance agent or insurance company, they're awesome to sell for the high commissions they pay.

You can thank UL for rich insurance company profits, and benefit by buying firms that sell them.

[DanielCarrera]

I hope you don't mind correcting your English. No offense intended. I understand that not everyone speaks English as a first language (English is not my first language either and I make mistakes too).

I has lots of interest

I HAVE lots of interest

it must has it's value

it must HAVE ITS value.

Note: "it's" is a short for "it is". The possessive is "its" without apostrophe.

IS IT ANY GOOD THING ABOUT A UL POLICY?

Is THERE any good thing ...

[Archanfel]

I has lots of interest in insurance policy recently.... I hear lots people complain about the UL policy, as every product exist so many years in the world, it must has it's value, IS IT ANY GOOD THING ABOUT A UL POLICY?

Gambling is probably the one of the oldest kind of businesses. Does it have it value? Sure, it provides a thrill for certain people. Mathematically, insurance is the same, but it provides peace of mind instead.

[DanielCarrera]

Gambling is probably the one of the oldest kind of businesses. Does it have it value? Sure, it provides a thrill for certain people. Mathematically, insurance is the same, but it provides peace of mind instead.

Universal Life insurance combines a true insurance component with a savings component. I can comfortably say that I do not want to mix together my insurance and my savings/investments. I don't see how UL is appropriate for anyone as opposed to getting Term Life insurance along with a separate savings + investment vehicle.

[iamdogdog]

For DIYers, UL is not as good as buy term and invest(especially when they are in the first t10/t20 term).

For people who don't want to spend time on their investment, it's pretty much the same thing because he/she will invest the difference into high MER funds anyways.

For people who are having spending problem, I think it's actually not a bad thing to have a UL because since you don't see your money (sucked up into the UL monthly payment already), meaning that you can't spend it.

Also, even for term insurance, I know a friend who got a really over-priced term too, so when you go look for term, don't always assume any TERM will do.

[DanielCarrera]

For DIYers, UL is not as good as buy term and invest(especially when they are in the first t10/t20 term).

For people who don't want to spend time on their investment, it's pretty much the same thing because he/she will invest the difference into high MER funds anyways.

For people who are having spending problem, I think it's actually not a bad thing to have a UL because since you don't see your money (sucked up into the UL monthly payment already), meaning that you can't spend it.

This is true. My gf has traditionally had a spending problem and the only reason she actually has some savings today is because years ago she got a UL even though she really didn't know what she was doing. Since we got together she has learned about personal finance. She cashed her UL, paid her debts, she is no longer wasting money on term insurance she doesn't need, she has a good budget on a spreadsheet and she now manages her finances reasonably well.

[iamdogdog]

This is true. My gf has traditionally had a spending problem and the only reason she actually has some savings today is because years ago she got a UL even though she really didn't know what she was doing. Since we got together she has learned about personal finance. She cashed her UL, paid her debts, she is no longer wasting money on term insurance she doesn't need, she has a good budget on a spreadsheet and she now manages her finances reasonably well.

I am very glad that your gf is now managing her own finance but many friends of mine still reply on finacial planner(or sales) to do it for them. I see many people end up putting time to their investment plan becasue they are so sick of those insuracne sales/investment advisor/major banks. Therefore, I think those "sales person" does did a good job in this regard. :-0

[6siu]

UL is Permanent Insurance. Unbundling the UL, there a three seperate parts, insurance, investment and expenses. Insurance in UL has two form, either a level cost or Term to 100. While you invest in UL, the return will be tax free and pay back to your cost of insurance. The expense are adminstration fees and stuffs.

UL is very complex, many factore in a UL will affect the good or bad of the policy. Some people will cry for their UL and some will be happy. But I can tell you that many rich people and business owner have a UL, not because a insurance agent sell it to them, but their accountant tell them to get it. They use it to plan their estate, have a retirement income throuth their corporate, and make their children listen to them.

Term insurance's premium is much lower, if you can invest the difference. People with term insurance usually have a mortgage. After they paid up the mortage, they stop their term insurance. Usually the issue age of term insurance is 18 to 70. Some term insurance allow R&C, some company may also offer joint term insurance. People with more presure on financial usually look for term insurance.

[Archanfel]

Here is a discussion I had with an insurance adviser recently.

She recommended that I put in $100 for my kid each month for 10 years (for a total of $12,000) then on the 99th year, the death benefit would be $5,329,907 assuming 6% return. The investment vehicle is an index fund with 3.25% MER.

I did the same calculation using the identical TD efunds with 0.31% MER. In order for her fund to return 6%, the pre-MER return needs to be 9.25%. Therefore, my return is 8.94%.

For the first 10 years, I am contributing $1,200 a year. At the end of the period I should have $1,200 * ((1+8.94%)^11 - 1)/8.94% = $21,005. For the next 89 years, my portfolio would grow to $21,005 * (1+8.94%)^89 = $42,854,723. Assuming 40% tax rate, my after tax return is $25,712,833.

In other word, the insurance company would have made over $20 million off my imaginary kid, using the exact same assumptions made in her calculation. Interestingly enough, the scenario was made a lot worse by her insistence of using 99 years as the time frame. Apparently, her software can only do 99 years.

Another interesting thing was she also used the argument that a lot of rich people buy insurance. I wonder whether they teach that in adviser schools.

[6siu]

Here is a discussion I had with an insurance adviser recently.

She recommended that I put in $100 for my kid each month for 10 years (for a total of $12,000) then on the 99th year, the death benefit would be $5,329,907 assuming 6% return. The investment vehicle is an index fund with 3.25% MER.

I did the same calculation using the identical TD efunds with 0.31% MER. In order for her fund to return 6%, the pre-MER return needs to be 9.25%. Therefore, my return is 8.94%.

For the first 10 years, I am contributing $1,200 a year. At the end of the period I should have $1,200 * ((1+8.94%)^11 - 1)/8.94% = $21,005. For the next 89 years, my portfolio would grow to $21,005 * (1+8.94%)^89 = $42,854,723. Assuming 40% tax rate, my after tax return is $25,712,833.

In other word, the insurance company would have made over $20 million off my imaginary kid, using the exact same assumptions made in her calculation. Interestingly enough, the scenario was made a lot worse by her insistence of using 99 years as the time frame. Apparently, her software can only do 99 years.

Another interesting thing was she also used the argument that a lot of rich people buy insurance. I wonder whether they teach that in adviser schools.

It is true that rich people buy a lot of insurance, they also have good accountants. It works for them becuase their accountant gave them a lot of advide on how to use their insurance policy. A good insurance advisor can teach you to do that also. If you think you know more than your advisor, find another one.

[Archanfel]

It is true that rich people buy a lot of insurance, they also have good accountants. It works for them becuase their accountant gave them a lot of advide on how to use their insurance policy. A good insurance advisor can teach you to do that also. If you think you know more than your advisor, find another one.

Rich people have their own needs. I would re-evaluate my situation when I am a billionaire. Are you saying every ordinary people should hire body guards since they do it?

Maybe you can educate us on how you can generate $20 million extra from that policy then. Buy the insurance company, maybe? :D

[brunes]

Rich people have their own needs. I would re-evaluate my situation when I am a billionaire. Are you saying every ordinary people should hire body guards since they do it?

Maybe you can educate us on how you can generate $20 million extra from that policy then. Buy the insurance company, maybe? :D

Rich people don't buy UL for the insurance, they buy it for the tax sheltering.

[DanielCarrera]

Rich people don't buy UL for the insurance, they buy it for the tax sheltering.

I find it funny how everyone seems to "know" what "rich people" do.

[pitz]

Yes, its true, rich people buy life insurance. But they sure as h*ll don't buy the bloated, fee-laden, rip-off products that are hawked by carpetbaggers to low-end 'retail' clients who don't have a clue.

[YYZFA]

Yes, its true, rich people buy life insurance. But they sure as h*ll don't buy the bloated, fee-laden, rip-off products that are hawked by carpetbaggers to low-end 'retail' clients who don't have a clue.

Don't hold back. Seriously, tell us how you really feel!

[Archanfel]

I would have no problem if the insurance brokers do the exact same calculation as I did and show it to their customer. You never know, some customers might come out ahead with a UL. Some customers might think the peace of mind is worth $20 million. The problem is they never do. Worse yet, they do compare their thing to investment with false information. The adviser I talked to (and every other advisers that tried to sell UL to me) showed me comparison chart between their product and an investment that returns 6% - taxes.

Another thing is a lot of time these people have no clue on how to calculate returns. All they got is a program that does things for them. This lady had a master of science degree, yet she insisted that only an actuary can calculate returns.

[halflife150]

But I can tell you that many rich people and business owner have a UL, not because a insurance agent sell it to them, but their accountant tell them to get it. They use it to plan their estate, have a retirement income throuth their corporate, and make their children listen to them.

As far as I know, UL premiums aren't tax deductible so anyone who purchases UL because their accountant told them to get it for their corporation should probably switch accountants.

From what I've read, UL is never good for anyone because people could always be better off by buying term and investing the difference. The after-tax return would be higher then the tax-free return from the fee laden UL policy.

[brunes]

I find it funny how everyone seems to "know" what "rich people" do.

Well, let's put it another way then, "Smart rich people buy UL for the tax sheltering".

Someone who is "rich" doesn't need life insurance; the reason they buy it like other posters are going on about is because it allows you another means of tax sheltering your investment gains.

[John_In_Vancouver]

As far as I know, UL premiums aren't tax deductible so anyone who purchases UL because their accountant told them to get it for their corporation should probably switch accountants.

Actually the corporation can use pre-tax dollars to buy the life insurance. The death benefits flows tax free through the capital dividend account. The accountant knows what he or she is talking about.

Families and individuals have to pay for their life insurance with after-tax dollars.

[Archanfel]

Here is a case where UL makes perfect sense. Say somebody makes 50 million a year and save 30 million. He put 40% of that into UL buying fixed income investment. Assuming the return is 5%. After tax, he could only get 3%, but a low fee UL would shelter investment. Therefore, I do recommend people making 50 million to buy a low fee UL policy, if such thing exists.

[pitz]

Here is a case where UL makes perfect sense. Say somebody makes 50 million a year and save 30 million. He put 40% of that into UL buying fixed income investment. Assuming the return is 5%. After tax, he could only get 3%, but a low fee UL would shelter investment. Therefore, I do recommend people making 50 million to buy a low fee UL policy, if such thing exists.

People making $50 million could easily access other perfectly legal tax sheltering schemes in offshore banking centres, that would make UL irrelevant :).

[6siu]

Rich people have their own needs. I would re-evaluate my situation when I am a billionaire. Are you saying every ordinary people should hire body guards since they do it?

Maybe you can educate us on how you can generate $20 million extra from that policy then. Buy the insurance company, maybe? :D

Life insurance do not major in money investment, I think everyone knows that. If you really want to know more detail and what can you do about UL, I can try to help you in pm, it's part of my job. But I can tell you here that insurance company will not approve a $20 million policy to a middel class.

Rich people don't buy UL for the insurance, they buy it for the tax sheltering.

That is one of the good thing about UL.

[pitz]

Life insurance do not major in money investment,


...nor in English apparently.

Anyways, that's one of the big problems with life insurance licensed salespeople selling UL policies. They (usually) aren't licensed to sell securities, so they are forced to recommend what is, in many cases, a less than optimal solution to their clients.

[Archanfel]

Life insurance do not major in money investment, I think everyone knows that. If you really want to know more detail and what can you do about UL, I can try to help you in pm, it's part of my job. But I can tell you here that insurance company will not approve a $20 million policy to a middel class.



That is one of the good thing about UL.

Apparently insurance advisers don't know or they wouldn't sell it as a great investment idea and tax shelter to the middle class, would they?

[halflife150]

Actually the corporation can use pre-tax dollars to buy the life insurance. The death benefits flows tax free through the capital dividend account. The accountant knows what he or she is talking about.

Umm..no, if it isn't tax deductible it means the corporation is paying it with after tax dollars. The only difference is corporate tax rates are lower then the top personal tax rates. UL policies are so bad that it doesn't matter if you pay it with a lower after tax corporate dollar or after tax personal dollar.

[JWL]

Here is a discussion I had with an insurance adviser recently.

She recommended that I put in $100 for my kid each month for 10 years (for a total of $12,000) then on the 99th year, the death benefit would be $5,329,907 assuming 6% return. The investment vehicle is an index fund with 3.25% MER.

I did the same calculation using the identical TD efunds with 0.31% MER. In order for her fund to return 6%, the pre-MER return needs to be 9.25%. Therefore, my return is 8.94%.

For the first 10 years, I am contributing $1,200 a year. At the end of the period I should have $1,200 * ((1+8.94%)^11 - 1)/8.94% = $21,005. For the next 89 years, my portfolio would grow to $21,005 * (1+8.94%)^89 = $42,854,723. Assuming 40% tax rate, my after tax return is $25,712,833.

In other word, the insurance company would have made over $20 million off my imaginary kid, using the exact same assumptions made in her calculation. Interestingly enough, the scenario was made a lot worse by her insistence of using 99 years as the time frame. Apparently, her software can only do 99 years.

Another interesting thing was she also used the argument that a lot of rich people buy insurance. I wonder whether they teach that in adviser schools.

There is something wrong with the math here.
The future value (FV) of $100/month for 10 years, at 6% in year 99 is $2.9 M not $5.3M.

The future value (FV) of $100/month for 10 years, at 8.94% is $19,430, not $21,005 and at year 99 is $39.6M not $42.8M.

Also, you've indicated the first scenario has a "death benefit" of $5.3M so I assume it is insurance. You can't compare an insurance scenario to an investment only scenario straight-up. Insurance does cost and insurance does have value.

However, in the end, your point mostly boils down to the belief that low-MER funds (which tend to be index funds) are better than higher-MER funds. I tend to agree, but most advisors will recommend active higher MER funds, not just insurance agents.

[Archanfel]

There is something wrong with the math here.
The future value (FV) of $100/month for 10 years, at 6% in year 99 is $2.9 M not $5.3M.

The future value (FV) of $100/month for 10 years, at 8.94% is $19,430, not $21,005 and at year 99 is $39.6M not $42.8M.

Also, you've indicated the first scenario has a "death benefit" of $5.3M so I assume it is insurance. You can't compare an insurance scenario to an investment only scenario straight-up. Insurance does cost and insurance does have value.

However, in the end, your point mostly boils down to the belief that low-MER funds (which tend to be index funds) are better than higher-MER funds. I tend to agree, but most advisors will recommend active higher MER funds, not just insurance agents.

The value for UL is very complex, they have bonuses on top of bonuses, premium on top of premium. The 5.3M was from the agent, not me.

I calculated the number using a yearly contribution rather than a monthly contribution. You are probably right, but the difference is small enough.

It's a UL insurance. They are selling it as a great investment though and that's what bugs me.

My point is any UL funds would have very high MER. It's the exact same index fund (not an actively traded high MER one), just with a much higher MER.

[6siu]

...nor in English apparently.

Anyways, that's one of the big problems with life insurance licensed salespeople selling UL policies. They (usually) aren't licensed to sell securities, so they are forced to recommend what is, in many cases, a less than optimal solution to their clients.

Well, salespeople selling securities are forced to recommend non insurance products.

Apparently insurance advisers don't know or they wouldn't sell it as a great investment idea and tax shelter to the middle class, would they?

Insurance advisors sell insurance not investment.

Umm..no, if it isn't tax deductible it means the corporation is paying it with after tax dollars. The only difference is corporate tax rates are lower then the top personal tax rates. UL policies are so bad that it doesn't matter if you pay it with a lower after tax corporate dollar or after tax personal dollar.

They try to transfer the money from corporation to personal without trigger their marginal tax rate.

The value for UL is very complex, they have bonuses on top of bonuses, premium on top of premium. The 5.3M was from the agent, not me.

I calculated the number using a yearly contribution rather than a monthly contribution. You are probably right, but the difference is small enough.

It's a UL insurance. They are selling it as a great investment though and that's what bugs me.

My point is any UL funds would have very high MER. It's the exact same index fund (not an actively traded high MER one), just with a much higher MER.

UL is life insurance. Advisor should sell it with a insurance idea, not pure investment. UL funds have around 3% investment MER for index fund.

[Archanfel]

Well, salespeople selling securities are forced to recommend non insurance products.

Insurance advisors sell insurance not investment.

They try to transfer the money from corporation to personal without trigger their marginal tax rate.

UL is life insurance. Advisor should sell it with a insurance idea, not pure investment. UL funds have around 3% investment MER for index fund.

It's not my idea to compare UL to investment. The agent had no problem showing me UL vs. a 6% return, fully taxed investment side by side and she was not the first one doing that.

Hiding costs in the MER itself is less than honest by itself. Unless the insurance company has a legitimate reason to charge 10 times higher MER than the bank. Ironically, UL does not have a 3% MER since it has a 1.5% bonus rate if you stay with them for certain time. That's why the number did not match JWL's calculation. I guess anybody who would notice the MER is not a target customer of the insurance company.

[JWL]

It's not my idea to compare UL to investment. The agent had no problem showing me UL vs. a 6% return, fully taxed investment side by side and she was not the first one doing that.

Hiding costs in the MER itself is less than honest by itself. Unless the insurance company has a legitimate reason to charge 10 times higher MER than the bank. Ironically, UL does not have a 3% MER since it has a 1.5% bonus rate if you stay with them for certain time. That's why the number did not match JWL's calculation. I guess anybody who would notice the MER is not a target customer of the insurance company.

I think we are on the same page in general.

The concept of earning investment return inside an an insurance contract so the investment return is not taxed has merit/possibilities. The problem is that there are so many components bundled that it is difficult for the average (or even knowledgable) consumer to tell what is going on and it is easy for the insurance company to bury a high MER or other costs beyond the basic insurance and investment components in the calculations.