Cash Value Life Insurance VS Self Directed IRA

[Greta Andrews]

Cash Value Life Insurance VS Self Directed IRA

I know the two aren't usually talked about in the same breathe. Each would be compared to other products in the same wheelhouse. And they would be introduced by very different professionals. However, with my limited knowledge they seem like they could serve a similar purpose for me. Save money, pay less taxes, spend it on real estate and the stock market. I have wanted a self-directed IRA since I first learned of them about a year ago. The idea of Cash Value Life insurance is brand new to me, and was introduced by a financial advisor, but looks promising.

Some background on me:

I have a W-2 job and make about $80,000/year.  

I'm a real estate agent, and hope to make about $40,000 as an agent this year and intend to continue until I outgrow my W-2 job.

I will soon start renting out a triplex after April 1st.

My goal is to buy more small multifamily until my net worth is high enough to invest in someone else and sit back and collect the check Ie. apartment syndication.

Thought and comments are appreciated.

[Jeff Nash]

I’ll jump back in here and digress for a bit and make a few comments that I’ve seen here and in other more recent posts. 

As I previously noted, based on the fact pattern described whole life really is not appropriate or a good option; however, in the right situation and for the right person permanent life insurance (aka cash value), which might consist of whole life, IUL, VUL, etc, can be very useful.  I am a CPA and CFP (financial/investor advisor, whatever label) and my family uses a combination of both term and whole life as part of our financial plan.  We believe it it very valuable for protection, legacy planning, education planning, long-term care perhaps, and as a supplement to our investment portfolio.  It is multi-faceted and might be called upon for any number of these purposes (the cash value can be reused).  We don’t put all of disposable income into it as it represents one piece of the ongoing puzzle. From an advisory standpoint, it can be used in some less conventional situations such as for executive compensation and buy-sell agreements for example.  

I know there are plenty of insurance agents that want you to allocate a considerable amount to insurance regardless, as they are not fiduciaries and that’s how they make a living. They sell product only in many cases, and if you are working with someone you must apply some critical thinking and skepticism to their advice and see if it is in your best interests.

I frankly get annoyed when I see and hear comments about high compensation of insurance agents as an argument against using it, as that is really not relevant if the ultimate solution is good and valuable.  For life insurance agents they get paid by directly by the insurance companies they represent. Real estate agents and loan officers can be highly compensated just the same (they have strong lobbies) and their industries set it up so they are paid commissions (which I don’t think is a dirty word), but the difference is that the public just views those products or services more as an inevitable necessity compared to insurance.  Not choosing to do something because you don’t want someone to be paid makes no sense (cutting off ones’s nose to spite one’s face).  If you are about to sell a house and see that the realtor commissions are 6% on the CD are you going to call it off?  That’s the conventional standard that has been set, but I’m just putting that out there as an example. Same thing can be said for a loan officer, title insurance, attorneys, etc.  I still view their services as valuable and necessary and their compensation by itself is not a deterrent or distraction.  I know too that with all these professions (realtors, LOs, insurance agents) that considerable time is also spent with prospects or clients where they do not get paid at all.  That is hard to gauge but it certainly is true.

I saw the mention of Dave Ramsey who is not a financial advisor (or fiduciary), but rather a financial entertainer.  In most cases he tells you the obvious (stay out of bad high interest credit card debt) and he appeals to the masses in which permanent life insurance may not be a good solution (ie so term would be better for protection only). He has a number of conflicts of interest and is not required to disclose them. I could take it in another direction if you wanted to pan annuities and say Ken Fisher (who actually is a financial advisor and fiduciary) is right as they have “nose bleed fees”.   For his firm, he has chosen to be compensated by managing traditional investment portfolios, so anyone using annuities would take away from his potential AUM so he tries to attract and convert them. He probably does not like real estate or alts either for the same reason, but annuities are just easier to jab at and are more liquid. Annuities are a form of insurance (opposite of life) and get similar negative attention and criticism, and my take is they can serve a purpose for the right person in the right situation.  Allen Iverson or Bobby Bonilla should be thankful for their advisors (look it up)! 

Anyway, I just felt like elaborating and to emphasize that you have to evaluate someone’s situation thoroughly, and of the financial products and services available I would not label anything in particular outright bad, it just may not be appropriate or as useful depending on the context of the situation.