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Lisa Johnson is a single mother, age 40. She owns an employment agency in San Francisco that is thriving in the hi-tech environment.
Lisa is considering acquiring $700,000 of Indexed Universal Life (IUL) max-funded for retirement cash flow with five level premiums of $20,500. She is in a marginal state and federal income tax bracket of 35.00%.
Lisa wants the life insurance coverage, but her accountant has suggested that term insurance might be a smarter buy. So she is also looking at buying $700,000 of inexpensive 30-year level term at $700 a year and investing the difference.
Let’s compare the two plans. We’ll do it two ways:
- Term insurance with the difference in premiums going into a taxable side fund yielding 7.50%, the same illustrated interest rate as the IUL.¹
- Term insurance with the difference in premiums going into an equity account with a growth rate of 7.50% plus a dividend yield of 1.00%.²
| ¹ Plus 0.75% management fee. |
| ² 0.75% management fee; Capital Gains rate of 30.00%; Dividend tax rate of 30.00%; 70.00% long-term gains; 30.00% short-term gains; 25.00% portfolio turnover. |
Below are summary graphics of each comparison:
| Term Insurance and a Taxable Side Fund |
| versus |
| Indexed Universal Life |
| (60 Year Analysis) |
Not only does the taxable account and its related cash flow run out of gas, it is illustrated to do so at Lisa’s age 71. That’s way too early for a retirement plan to have much significance. Lisa would have to earn 14.07% year in and year out on the taxable account to match the results of the IUL. (The 30-year term insurance will have expired by her age 70.)
Click here to see the full illustration.
| Term Insurance and an Equity Account |
| versus |
| Indexed Universal Life |
| (60 Year Analysis) |
The equity account and its related cash flow are illustrated to collapse at Lisa’s age 75. That’s still way too early for a retirement plan to be of much value. Lisa would have to experience growth of 11.02% year in and year out on the equity account (plus the dividend noted) to match the results of the IUL. (The 30-year term insurance will have expired by her age 70.)
Click here to see the full illustration.
Conclusion
Buy term and invest the difference . . . There is no valid economic theory that explains why a bad idea is acceptable simply because one hears it frequently.
Variations
Check out these Blogs to see how IUL compares to a 401(k):
Blog #61: Sacrificing Cash Flow with a 401(k) Plan
Blog #68: A Pretend 401(k) Plan vs. Indexed Universal Life
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More Recent Blogs:
Blog #77: Integrated Planning for College and Retirement
Blog #76: Smart Use of Term Coverage for Funding College Costs
Blog #75: Golden Handcuffs for Sam Hunt
Blog #74: Long-Term Care – Insure or Self-Insure
Blog #73: The Discounted Dollars Strategy (Part 2 of 2)
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