@Josh St Laurent
I have to agree with @Thomas Rutkowski on this subject.
I understand you’re looking at it from an outside perspective and have done some comprehensive research. However, you can’t compare these with a traditional investment vehicle, like index funds.
They are 2 complete different asset classes and should be used for two completely different reasons, in conjunction with each other.
Personally, I don’t like using the coined phrase IBC. It makes it sounds like a bogus sales pitch. And it kind of is. I think it cheapens the entire concept.
However, one main point of these is using IRS section 7702 (tax code referencing the tax deferral within the policy) to manage taxes in the long term.
This is the same tax code whether you call it IBC, Executive Bonus Plan, or Split Dollar Arrangement (like with Jim Harbaugh at U of Michigan just used) or even Deferred Compensation. It’s all the same tax code and all the same design.
The point of the design is that it uses as little death benefit as possible to keep costs as low as possible. The death benefit is an ancillary benefit.
And the loan rates SHOULD be a net 0%. Anything above that is poorly designed. With this design, commissions are 1/3 of what they would be if it wasn’t optimally designed. That’s how you weed out the bad agents/advisors. This is far less of an income than an advisor charging 1% AUM on that kind of money.
For high income entrepreneurs, they could comparably use a Cash Balance Plan and use high contribution rates as well. However, the actuary and administrative costs are included in those which cost 4-5k annually, and is invested at a very conservative rate as well.
If you’ve studied the long term RMDs on a fully funded Cash Balance Plan, it’s super high. I’ve seen individuals with $400,000 in just RMDs annually because of the amount of pre-tax money in their portfolio.
Yes, it’s not as “lean” as an index fund in a brokerage account, but it should complement to all of that to help manage taxes. Not to mention the tax-free death benefit and other protections it allows.
In business, there’s always a net cost, the question is how much are you in the black, or in the red.
These are legitimate strategies. No, I don’t think everyone should use them, but should never be thrown away unless truly understanding them.
There are too many people “villainizing” the entire lot in this industry when there are legitimate advisors who use it properly.