Overfunded Universal Life Insurance

[Ian Saingarm]

Hi guys, I was at an asset protection conference and one of those guru's who tries to sell you a tablet and a "program" was all about index linked overfunded insurance and I liked some of what I heard.  The idea being you get life insurance (which my wife and I like the idea of) and an investment that grows with the market and has a cash value that you can borrow against tax free for future real estate investments.  If the market has a bad year, you get the guaranteed interest rate which is low but much better than say a year like 07/08. 

State Farm had a plan where you get a guaranteed 2% and a "illustrated" rate of 3 ish percent.  For a $300k policy with a premium of $908/ month or $10,908 per year.  After 10 years of paying the premium I would have a cash value of about $107k.  It grows from there.  From year one there is a death benefit of $300k+.

I went to Farmers and they had a local "expert" who has a certification in securities which he said was unlike other firms and he said I should go with a Mutual fund liked overfunded policy with no guaranteed amount.  He suggested a fund linked to some of the American Growth Funds specifically AGTHX and says they have an average return of 13% per year, and projected we'd have a couple million dollars after "not long at all".  Sounds pretty legit right?  :-) 

American Funds

He proceeded to show me their website and a graph... which to me looked like the S&P outperformed the fund pretty easily over the last 10 years.  His response was, "its hard to see" and "its complicated" and I told him unless I'm reading the graph wrong which is entirely possible, it doesn't seem that complicated, it seems like the mutual fund underperforms the market.  Maybe the dividend reinvestment is much more powerful than I am thinking.

Here's how yahoo finance stacks them up:

Yahoo Finance

So, what are your thoughts on overfunded insurance as a tax advantage investment that has a dual purpose serving as life insurance for a family?  Where should I be looking?  I like the idea but have not found my unicorn yet.

Ian

[Damien Pagano]

There are going to be a lot of people on here who are going to mention "buy term and invest the difference" because they've been fed information from Dave Ramsey and other financial entertainers that whole life or universal life is a bad "investment". But that's not your question and you're looking to have growth and liquidity, so an insurance vehicle can help you here. 

An Indexed Universal Life policy is an asset that has underlying investments (index funds), but there's also an insurance expense which is basically term each year.  Using it for what you've mentioned is an alternative source of financing that has tax advantages if done right, but the devil is in the details.  That insurance expense will increase as you age, but if you keep enough cash in the policy then that will help to mitigate that increase in cost.  If you don't keep it well funded there's a possibility in can lapse. The policy should be a non-recognition policy (they still pay interest and dividends based on your cash value amount and don't recognize any loans you have out on the policy when making these), and a mutual company would (most likely) be best since the dividends won't be taxed, and can still be reinvested into the policy.

As for the mutual funds - that's more along the lines of a variable product and there are more fees and risk than an indexed policy, plus it's difficult to consistently beat the index.  You seem like you still want it to provide a life insurance benefit, so just use caution in deciding how much risk you want this to be exposed to (risk is related to control, not always reward).

Disclaimer - I am licensed to sell life insurance and we do this exact type of investing with clients, so it can be done if set up correctly, but it's not an "off-the-shelf" type of product.  If properly designed and used, you can do very well with it.  I would look for someone who works in your area that has done this successfully.  I'm with MassMutual (we use a whole life product for this instead of an indexed universal policy), and there are some Guardian, and Northwestern Mutual policies among others that also work well for these.

Good luck in your search.