Blog #68: A Pretend 401(k) Plan vs.
Indexed Universal Life

(Click here for Blog Archive)
(Click here for Blog Index)

(Presentations were created using the InsMark Illustration System.)

Getting Started with InsMark Training Video

Bob Ritter's Blog #68 A Pretend 401(k) Plan vs. Indexed Universal Life image

Lion all mine image
Zero-Split-Case-Premium-Financing-click-here-to-receive-more-information
spacer image

David Wolfe, a neighbor of mine, is a very successful attorney.  He is making maximum contributions to his law firm’s 401(k) plan.

Recently we were grilling steaks together, and got to talking about his 401(k).  I asked him, “If you could put more into your 401(k), would you?”

His response was, “I would.”

I asked him, “How much?”

He thought for a moment, “$50,000 for sure; maybe more.”

Case Study

Let’s make believe for a moment that he can do it.  We will illustrate David contributing $50,000 a year for the next five years to his pretend 401(k) plan.  In his 40% marginal tax bracket, it costs him $30,000 each year after deducting his income tax savings ($50,000 – $20,000).  We will compare the results to an Indexed Universal Life Policy (IUL) with scheduled premiums of $30,000 a year for five years, the same dollars as the after cost of his pretend 401(k) plan.  We will illustrate both plans at 7.50%.

At age 65, we show David making tax free loans on the life insurance policy using an indexed schedule of participating loans starting with $33,000 and ending with $65,542 at age 99.  We illustrated withdrawals on the pretend 401(k) plan that, after tax, match the same cash flow as the IUL.

There is no way the pretend 401(k) plan can compete with the IUL.  Check out the InsMark graphic of the comparison below.

A Pretend 401(k) Plan vs. Indexed Universal Life
A Look at Year 55

blog 68 A Pretend 401(k) Plan vs Indexed Universal Life comparison image

Would you rather view trend lines?

blog 68 Cumulative Payments and Cumulative After Tax Loan Proceeds comparison image

Below is a summary of the two strategies:

(1)
Pretend
401(k) Plan
(2)

Indexed UL
Cum. Contributions $250,000 $150,000
Cum. After Tax Payments $150,000* $150,000
Cum. After Tax Cash Flow
(Age 65 – 100)
$771,247** $1,921,454
Residual Cash Value
at Age 100
$0 $527,767
Overall Value to David $771,247 $2,449,221***
*40% income tax bracket
**Values expire at age 82
***318% greater

Click here to review all the reports for this comparison from the InsMark Illustration System.

Additional Advantages

Unlike the pretend 401(k) plan, the IUL has four additional advantages:

  • It provides a $700,000 life insurance death benefit;
  • If the selected market index drops, there is no loss to the policy owner;
  • There are no required minimum distributions;
  • There is no 10% penalty tax associated for distributions prior to age 59½.

Conclusion

If you are a fan of Indexed Universal Life, there is no more powerful sales strategy I can suggest to you than the comparison between a pretend 401(k) plan and a life insurance policy.  If you use it, you will never run out of prospective customers.

Prospecting

Imagine the response you would get if you ask the following question of individuals similar to David Wolfe:

“If you could invest an unlimited amount into your 401(k), how much more would you contribute annually over the next five years?”

Or this slight variation for those with no access at all to a 401(k):

“If you could invest an unlimited amount into a 401(k), how much would you contribute annually over the next five years?”

Either of these questions produces very favorable responses.  When they occur, use the Other Investments vs. Your Policy in the InsMark Illustration System to show the results your policy vs. the pretend 401(k) plan.

Note:  For those who are currently contributing to 401(k) plans in excess of the employer’s match, using life insurance as an alternative is also very effective for the portion that is not matched.  See my Blog #61 – Sacrificing Cash Flow with a 401(k) Plan for details.

Note:  Most owners of S Corporations, LLCs, or partners in Partnerships are well aware that their pass-through entities offer little opportunity for significant benefit plans.  They typically have 401(k) plans with the standard limit on contributions — like David Wolfe’s law firm.  Introduce these individuals to a pretend 401(k) vs. IUL for as much excess contributions as they desire — you’ll be well rewarded for the effort.

Why only five years of payments?  It is a short time horizon which makes it easier for your prospect to decide.  At the end of five years, do another one.  And then another.

Important Note:  Many of you are rightly concerned about the potential tax bomb in life insurance that can accidentally be triggered by a careless policyowner.  Click here to read Blog #51:  Avoiding the Tax Bomb in Life Insurance.

 

InsMark’s Digital Workbook Files

If you would like some help creating customized versions of the presentations in this Blog for your clients, watch the video below on how to download and use InsMark’s Digital Workbook Files.

New Zip File Downloaders
Watch the video.

Digital Workbook Files For This Blog

Blog68zip

Download all workbook files for all blogs

Experienced Zip File Downloaders Download the zip file, open it, and double click the Workbook file name to open it in your InsMark System.

Note:  If you are viewing this on a cell phone or tablet, the downloaded Workbook file won’t launch in your InsMark System.  Please forward the Workbook where you can launch it on your PC where your InsMark System(s) are installed.

 

Licensing

To license the InsMark Illustration System, contact Julie Nayeri at julien@insmark.com or 888-InsMark (467-6275).  Institutional inquiries regarding enterprise licensing should be directed to David Grant, Senior Vice President – Sales, at dag@insmark.com or 925-543-0513.

InsMark’s Referral Resources

If you would like assistance with any InsMark illustration, contact any of the Referral Resources listed below.  All are InsMark Agency Platinum Power Producers®, and they are highly skilled at running InsMark software and can help you using your choice of insurance company.  Mention my name when you talk to one of our Referral Resources as they have promised to take special care of my readers, and none of them require a commission split.  My only request is if a Referral Resource helps you get the sale that you place at least that case through them.

Joint Interviews

If you want or need help from a qualified producer for joint interviews with any InsMark illustration and are willing to share the case, email us at bob@robert-b-ritter-jr.com, and we will provide you with recommendations.

Testimonials

"InsMark is the Picasso of the financial services world — their marketing savvy never fails to amaze me."
Doug Peete, Past President, Top of the Table, InsMark Silver Power Producer®, Overland Park, KS

“The InsMark Illustration System has significantly enhanced my life insurance production scope.  I feel I can now present my ideas with superb backup support material.”
Ross Hoffman, Ventura, CA

seperator bar

More Recent Blogs:

Blog #67: Filling the Pothole in Wealth Planning

Blog #66: Buy Now vs. Buy Later Video

Blog #65: An Exceptional Video on Retirement Planning

Blog #64: More on Single Premium Immediate Annuities

Blog #63: Sometimes You Just Need a Good Calculator

3 Reasons Why It’s Profitable For You To Share These
Blog Posts With Your Business Associates and
Professional Study Groups (i.e. “LinkedIn”)

 

Robert B. Ritter, Jr. Blog Archive

 

11 thoughts on “Blog #68: A Pretend 401(k) Plan vs.
Indexed Universal Life

  • May 25, 2015 at 8:09 am
    Permalink

    You said:

    “In his 40% marginal tax bracket, it costs him $30,000 each year after deducting his income tax savings ($50,000 – $20,000)”

    My reply: Are you sure this is correct? A marginal tax bracket isn’t the amount of tax he pays.

    Your lawyer friend would have to be making $500,000 a year to be in a 40 percent marginal bracket. And, even then, the average tax rate (the actual amount of tax he pays on his income) is 30.91 percent…and that is with no tax deductions whatsoever.

    Years ago, I was speaking with Jason Konopik, who is now the CFO for AMZ, but he is also an actuary who helped designed some of the first AmerUs Indexed life products.

    He was gracious enough to send me a spreadsheet of all of the major players in the industry, and even more gracious in explaining how the policies work, what they’re designed to do, and what they aren’t.

    Long story short, according to him, 7.5 percent is not a realistic long-term crediting rate for IULs. For most carriers, anything over 7 percent is marketing hype. Anything over 8 is not realistic for anyone.

    Maybe some insurers can lower costs on those options contracts, but I think that at some point, there is a limit to their buying power.

    This would change the assumptions in this illustration dramatically. What do you think?

    Reply
    • June 2, 2015 at 2:52 pm
      Permalink

       

      Recently we received a Comment to Blog #68 from David Lewis that requires a rather elaborate Response.  Click here to review that Comment and my Response.

       

      Bob Ritter

       

      President, InsMark, Inc.

       

      Reply
      • June 2, 2015 at 5:38 pm
        Permalink

        Hi,

        You said: You are referring to an effective tax rate of 30.91%, David, i.e., total taxes divided by
        total taxable income.   This has nothing to do with the marginal tax rate. 

        My reply: I guess the missing piece of information is how much your lawyer friend is making. I’ll assume you worked out the numbers. I was actually curious about total income and a few other things because it wasn’t mentioned.

        You said: It’s odd you make a distinction between 7.50% is bad; 7.00% is OK.  That is close to a
        distinction without a difference.  I think the client’s input is important unless you
        prefer to think they are all financial dummies.  I was working with a hedge fund
        principal recently who felt 10% was a reasonable projection.  For some very
        conservative clients, 4.00% (or less) may be closer to the comfort zone.

        My reply: I don’t think client expectations are relevant at all, unless they’re financial experts, or at least pretty savvy about financial markets.

        If the U.S. economy grows at about 3 percent a year over the long-term, and inflation runs at 2 percent, and dividends give investors 1-2 percent, do you think 10 percent is realistic?

        I don’t, and neither should investors. That’s what financial advisors should do – tell clients about realistic possibilities, not feed their pipe dreams of 10+% returns for the next 30 years.

        I mean, even if your hedge fund friend thinks 10 percent is realistic, there’s a wide gap between a hedge fund’s assets and a life insurer’s index crediting strategy.

        Inside of an IUL, you’re capped at whatever the insurer decides and the crediting rate is limited by whatever the insurer can buy those index options for, along with the usual other costs of a life insurance policy.

        I’m not saying 7.5 percent is bad and 7 percent is good. I’m saying a professional actuary who built them (and advised a lot of insurers) told me that that is unrealistic.

        …and the difference between 7.5 percent and 7 percent can be significant after 30 years.

        You said: do I detect you prefer whole life?

        My reply: No, you do not.

        My only point is that you’re selling IUL. The costs of which are largely driven by options contracts. That’s what affects the rate of return too. It’s relevant to your blog if you’re talking about IULs, costs, and benefits.

        Actually, I would love to see the illustration on this so that I can reverse engineer it and see what the assumptions being made in the illustration are.

        When I did a whole life vs BTID analysis, the strategies came out to be very similar after 30 years so this would actually be very interesting to me if IULs are significantly better.

        Reply
      • June 2, 2015 at 7:24 pm
        Permalink

        Oh, I forgot to ask.

        What was the ending balance at the time of withdrawals in both strategies? And, what is your assumed withdrawal rate in both strategies?

        Thanks!

        Reply
        • June 15, 2015 at 5:19 pm
          Permalink

          Hi David,

          7.50% assumption:

          The balance in the IUL was $402,537 just prior to after tax cash flow beginning at age 65. The illustration assumed a 1.00% annual management fee on the “pretend” 401(k), and its ending balance was $769,855 just prior to after tax cash flow beginning at age 65.

          Withdrawals from the “pretend” 401(k) were grossed up to match the after tax cash flow from the IUL. The balance in the IUL was $527,767 at the end of the analysis. The balance of the “pretend” 401(k) was $0 at the end of the analysis as it ran out of funds at age 82 trying to match the after tax cash flow from the IUL.

          The after tax cash flow from the IUL was an indexed schedule. The after tax cash flow from the “pretend” 401(k) matched the after tax cash flow from the IUL until the funds in the “pretend” 401(k) were exhausted at age 82.

          6.50% assumption:

          The balance in the IUL was $334,878 just prior to cash flow beginning at age 65. The illustration assumed a 1.00% annual management fee on the “pretend” 401(k), and its ending balance was $649,959 just prior to after tax cash flow beginning at age 65.

          Withdrawals from the “pretend” 401(k) were grossed up to match the after tax cash flow from the IUL. The balance in the IUL was $192,278 at the end of the analysis. The balance of the “pretend” 401(k) was $0 at the end of the analysis as it ran out of funds at age 88 trying to match the after tax cash flow from the IUL.

          The after tax cash flow from the IUL was an indexed schedule. The after tax cash flow from the “pretend” 401(k) matched the after tax cash flow from the IUL until the funds in the “pretend” 401(k) were exhausted at age 88.

          Unstated in either comparison was the substantial amount of policy death benefit provided by the IUL. Had I run a comparison between IUL and the “pretend” 401(k) plus term insurance, the results would have been even more favorable for the IUL.

          Bob Ritter
          InsMark President

          Reply
          • June 22, 2015 at 6:57 am
            Permalink

            Thanks.

            That’s interesting that the IUL balance was lower and yet produced a higher income. When you say the income from the IUL was an “indexed schedule”, do you mean that it was paid out based on the hypothetical index crediting rate or some other rate? Or was it effectively annuitized somehow (which it doesn’t sound like it was, because there was a CV balance after).

            I’m still a little confused by how a smaller savings results in more income. There is no magic inside an IUL. It’s insurance and a compounding function.

            Perhaps you could explain this a bit more because it’s unstated in the article and also in the comments.

            Thanks again for your time,
            David

  • December 14, 2014 at 3:27 pm
    Permalink

    what about if they are getting 100% dollar for dollar match on their 401K. How do the numbers look? What about dollar coast averaging? I seem to hear this over and over and no one seems to want to address these to questions.
    Stacey

    Reply
    • December 16, 2014 at 2:46 pm
      Permalink

       

      Stacy –

       

      I do want to answer your two questions.

       

      Very, very few (if any) employees are getting a 100% match on the max 401(k) contribution of $17,500, If you want to assume a 100% match on the first $17,500, do the “pretend plan” for amounts above that. Don’t forget, Blog #68: A Pretend 401(k) Plan vs. Indexed Universal Life started with the assumption that David is already making maximum contributions to his law firm’s 401(k) plan. I asked him, “If you could put more into your 401(k), would you?” He responded, “$50,000 for sure; maybe more.” That’s above his current limit of $17,500. I saw no reason to include an employer match on that “pretend” excess. The result I hope my subscribers would reach is this: Even if you could put an additional $50,000 a year into a supplemental 401(k) (which you can’t), you can accomplish significantly better results using an investment-grade life insurance policy like Indexed Universal Life with a premium equal to the after tax cost of the $50,000, $30,000 in David’s 40% tax bracket.

       

      The lesson for those with partial matching contributions is to continue with the level of contribution that gets the full match, and put the after tax balance in Indexed Universal Life (or variable universal life if you’re so inclined,) You may want to review Blog #61: Sacrificing Cash Flow with a 401(k) Plan where I used an example of an employee getting a partial match which is the more likely scenario where a match is involved.

       

      Re dollar cost averaging, if you are using an Indexed Universal Life policy as I showed for David, you are taking advantage of dollar cost averaging each time the selected index is credited with the added advantage of no negative yields — a significant improvement over standard dollar cost averaging.

       

      Thanks for taking the time to comment.

       

      Bob Ritter

      President, InsMark, Inc.

       

      Reply
  • September 2, 2014 at 12:10 pm
    Permalink

    Please send me the actual insurance illustration from Blog #68 as I am unable to reproduce the numbers.
    Robert

    Reply
    • September 2, 2014 at 12:12 pm
      Permalink

      Robert,

      I suspect you are overlooking the presence of participating loans (with guaranteed loan interest rates in the area of 5.00%) where cash values securing policy loans continue to participate in the credited rate (in this case, 7.50%). This provides for some serious arbitrage and is likely the reason for your comment. I assume you are aware of participating loans, but you may want to review my Blog #52: Participating Loans vs. Fixed Loans.

      InsMark has a firm policy of not providing actual illustrations since we have been criticized in the past of promoting one client company over others. I’m afraid it will be up to you to do your own research to find a carrier with similar numbers. I suggest that the best one you have located so far will likely beat the socks off the “Pretend 401(k)” illustrated in Blog #69.

      Bob Ritter
      InsMark President

      Reply
      • September 2, 2014 at 12:13 pm
        Permalink

        Bob, I am not familiar with participating vs. fixed loans. That is probably what caused my incredulity in the numbers.

        Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

AlphaOmega Captcha Classica  –  Enter Security Code