I guess my question is more raw. Why and how do so many exist? Is it all just a scam? Or just something actuaries don’t need? I get contacted by potential financial advisors at least twice a month. Over the years I’ve taken a few initial conversations.
I see them mostly pitching that they will help manage your overall financial situation and help manage your tax strategy. But what this pretty much always boils down to is selling you whole life / permanent life insurance. The pitch is that it functions similar to a Roth IRA in that you put money in post tax and don’t pay taxes on the capital gains / withdrawals. But even more amazing, no limits on contributions or withdrawal timing.
So if I’ve maxed out my other tax advantaged savings (401k, IRA, Roth IRA, HSA, 529, etc.) then this is an additional option. Maybe even a better than all the rest option. And instead of paying 0.06% to Vanguard for the S&P ETF, I can get the same investments within the life insurance policy and pay 0.40%. But instead of paying >50% on capital gains, now I pay 0.
I’m shocked by how many financial advisors exist. Which tells me there is a ton of money to be made off of people like me by selling me insurance products. Which makes me skeptical that I’m getting something of value, and not just paying that value to the advisors.
Dont let someone elses income stop you from making your own decent decisions. Everyones entitled to earn a living.
And with strategies like youre talking about, the tax structures can make a huge difference. 4% earnings is mediocre. 4% after tax, when you have no other tax sheltering, is no longer mediocre. No matter what the advisor is earning.
We have similiar strategies in canada. The numbers work.really well for some people.
And the incomes are less than you think. Most advisors earn a pittance. Ive a friend who overseas hundreds of advisors. He sold his brother a policy and made his own top 20 advisor list for the month lol.
Too many Americans are in debt, so no assets to manage there.
A lot of them probably can’t be bothered.
It involves educating yourself, I bet a lot of them could do so fairly easily when their situations aren’t too complicated.
The AmEx advisor watching over my mom’s money (about $200K) is in some funds with nice juicy expense ratios. They could accomplish the same things with low-cost funds but they don’t. I assume they get $$ out of this somehow, seems like a gross conflict but I guess they have to get paid somehow. I would happily take care of my mom’s money, maybe it’s good that I don’t though.
This mostly. We make good money, and even if all you do is just save away money in a 401k up to the company match (call it 10% of salary), you get to like 3-5 million by retirement. Most people need to be convinced to save money, and don’t get started until after they bought a car or two, a house, etc, so the hit their late 30s with no money saved.
actuaries have the benefit of (generally) good enough incomes, employment at places with good benefits, and spreadsheet skills that allow them to track and project things pretty well if they try.
it doesn’t mean we are expert in asset or other investment selection. but there are solid choices out there via funds/ETFs/target date stuff that, while maybe not optimizing (meaning someone could earn more i guess), are “good enough” for a passive accumulation that should fund a reasonable retirement eventually.,
the stuff mentioned for alternatives (investing within life ins, other asset classes, etc.) are great for people who have maxed out all the stuff in front of them already. Max the 401k (split as needed btw trad and roth) and get all the match; max the HSA and leave it in there. someone has to tell such people, but that doesn’t mean the guy who calls you is the right person to teach you.
even for the withdrawal phase - which I think will be more complicated and could lead to adverse tax impacts if you do it wrong - there’s some info out there. But I think that would be where a planner could provide solid info on a consulting basis
Modest 401k money invested across stocks and bonds, enough to probably last a reasonable retirement without resorting to Medicaid
Minor non-retirement-specific savings
A whole life insurance policy (against my advice)
They pay 1% AUM to a financial advisor annually to manage that. Maybe he’s changed but as of a few years back, when my dad wants to purchase stocks, he calls his advisor and asks him to do it. I log onto the website and do it.
So yes, there is a lot of money to be made selling things to people. I think they’re worse-off for their financial advisor versus doing research, but they don’t seem interested in their own financial literacy so they pay for it.
I’ll give them wholehearted advice but won’t pretend to be their fiduciary. I tell them they should read my advice and research it (and I offer to send them more details), but they have their advisor they pay. So it is what it is.
FWIW, I plan to meet once with a financial advisor at when I think I’m about 10 years, then 5 and 1 year from retirement, to make sure anything like Roth laddering that I should set up is on track. But right now I think I’m more like 12-16 years from, so I haven’t done yet.
Its usually best to try to avoid FAs who work on commission because then you have to be really careful (as they might steer a person to unsuitable investments just to pad their own bottom line).
We kind of did away with this in the UK with the retail distribution review, which stopped those commissions in favour of fixed payouts for FAs. This is probably hard to find in the US though.
Are whole life policies really this magical tax haven? Unlimited contributions? Unlimited withdrawals at any age? No taxes on capital gains or withdrawals? Similar investment options to normal post-tax accounts? What’s the catch?
I just can’t understand how there can be so much money to make by life insurance companies and financial advisors in selling these things. They are each making 20 bp on all AUM. For funds that you can get for 6 bp. So people are willing to pay for these because there is tax arbitrage? So just the government is losing out?
Also, can’t I just go directly to insurance companies and get them myself?
So if you buy an ETF, you are going to lose 30bps a year in taxes on a fund that pays out a 2% dividend along with a 15% cut on LT gains vs locking up the money in an insurance policy while paying something more like 1.5% (ballpark guess of the all in cost) annually on your total funds deposited. Insurance costs will come out on top of that, which depending on how you view the need for that might be excessive…at some point your accumulated savings might be more than enough to satisfy what you feel is what you want your family to have if you pass.
Life insurance as an investment is only ever one of two things: Horrible, stupid, fat and ugly, or OMG why didn’t someone show me this before - greatest thing since sliced bread. There’s no middle ground. And the dividing line is whether you have other tax advantaged savings vehicles or not. If you do, then life insurance is horrible. If those are not available any more because they’re maxed, then compared to other options, life insurance (because taxes) starts to look crazy good.
Small clarification. In that scenario, life insurance might start to compete with equities, but has liquidity and other problems, so no to taking money from equities and putting it into life insurance. However, at that point, life insurance will absolutely smoke fixed income.
Therefore if you have all your tax advantaged savings vehicles maximized, look at any further investments. Take the amount you have in fixed income, and put it into life insurance, specifically whole life (well maybe UL in the US, Im not expert). And you will get probably 2X the returns that you would from fixed income.
And here’s what we do in Canada. RRSP’s and TFSA’s maxed, You have $100k in fixed income, so we can compare $100K in fixed income - pulling that money out in retirement, vs paying $100k in life insurance premiums and see how much we get at retirement.
So you purchase a whole life policy which has targetted cash value - given $100K premiums, which plan has maximum cash value at retirement.
Now at retirment if you collapse the policy and take the cash value, taxes. So, instead you use the policy as collateral for a loan. Which, the banks will do. You have an annual loan say for 20 years - all the fun years of retirement. Now it’s retirement income, but it’s not actually ‘income’ for gov’t purposes so it doesn’t impact any thing that’s ‘income tested’. So now you have a stream of income that you can compare against the fixed income investment.
Now you die. The life insurance pays off the loan, and life insurance is tax free, so you just paid off the loan with tax free dollars. So you built up the ‘investment’ in a tax sheltered environment, took money out without paying taxes, and paid off theloan without taxes.
Yes, it’s a crappy rate of return, but compared to AFTER TAX returns on a fixed income investment, it will smoke it.
And bonus, the death benefit will be larger than the loan so the loan gets paid off and your family still gets a decent sized life insurance payout basically for free.
They key is, only after other tax sheltering, and only compared to fixed income. So the industry needs to pull it’s horns in a bit instead of recommending this to everyone for everything.
And yeah, those high premium policies pay a huge commission. Like, time for a kitchen reno commissions. Does it matter if the strategy is hugely beneficial to you? You can’t normally change the commission, it’s just a fixed cost in the strategy.
It’s a loophole only taken advantage of by the very wealthy - like, at a guess perhaps the 0.1%, and then further the ones of those who take advantage of generational wealth-building. So there isn’t a lot of public outcry to fix an estate planning loophole, especially when 30% of the country currently might suggest that any taxes should be illegal.
On the other hand, there’s money to be made selling them, and the people going to financial advisors are skewed toward being unsophisticated, so why not be a little predatory?
You’re paying interest on the loan though. And each year that goes by before you die, you pay more interest. Say you get a 6% interest rate loan because it’s collateralized. That’s 6% each year on 100K that you need to pay. How does that affect things?
the numbers still work out. The CSV is growing as fast or faster than the loan interest (I think). Or at least, it doesn’t throw the strategy offside. Either way, the collaterization of the interest doesn’t prevent the strategy from being beneficial.