Over Funding Life Insurance vs. Roth IRA | TigerDroppings.com

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kyledavis
Member since Nov 2013
734 posts

Over Funding Life Insurance vs. Roth IRA



Does anyone have an opinion on over funding a variable universal life policy vs. a Roth IRA? I believe they both grow interest free but I like the idea of being able to get to my money in case of emergency before retirement. I also believe after 7 years of the insurance policy there is no cap on how much you can invest. The insurance policy is also sheltered against creditors.

It all seems too good to be true. Can someone help me out with this?







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Broke
LSU Fan
AKA Buttercup
Member since Sep 2006
57224 posts
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re: Over Funding Life Insurance vs. Roth IRA


You need to do some more reading. Overfunding an insurance policy is last on my list of things to do.





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kyledavis
Member since Nov 2013
734 posts

re: Over Funding Life Insurance vs. Roth IRA


I'm all ears. What are the cons?





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Broke
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AKA Buttercup
Member since Sep 2006
57224 posts
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re: Over Funding Life Insurance vs. Roth IRA


It's expensive. And I don't believe the tax free growth stuff either. You can do a loan against it. But there are some weird regs. I'm not a CPA





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Bama98
Alabama Fan
Houston
Member since Oct 2011
454 posts

re: Over Funding Life Insurance vs. Roth IRA


Also look at the fees associated with the insurance policies. Those things aren't cheap.





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Cousin
LSU Fan
The Bayou
Member since Feb 2012
4699 posts
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re: Over Funding Life Insurance vs. Roth IRA


quote:

The insurance policy is also sheltered against creditors.


I strongly believe that a Roth IRA is also sheltered from creditors.

I had a whole life insurance policy for 2 years and then it finally clicked that I was only making my financial advisor money and it was a waste. I closed that account, got term insurance, and beefed up my traditional IRA and Roth IRA.






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LSUgolf04
LSU Fan
Member since Aug 2009
255 posts

re: Over Funding Life Insurance vs. Roth IRA


quote:

Does anyone have an opinion on over funding a variable universal life policy vs. a Roth IRA? I believe they both grow interest free but I like the idea of being able to get to my money in case of emergency before retirement. I also believe after 7 years of the insurance policy there is no cap on how much you can invest. The insurance policy is also sheltered against creditors.

It all seems too good to be true. Can someone help me out with this?




If you want to go for life insurance, I would say avoid a variable universal life (high fees) and go for traditional whole life with a company like New York Life, Mass Mutual, MetLife, Northwestern Mutual, State Farm, etc. Whole life is fixed and typically have lower fees. It is not flexible though.

Using average returns, a ROTH IRA will out-gain a Variable UL. There are costs associated with the insurance death benefit, and the variable UL mutual fund shares are typically more expensive than your standard mutual funds that you would use in a Roth IRA. The guarantees that they claim for Variable Universal Life policies typically do not apply when you want to take your money out of the policy. Not only that, you are paying for that guarantee by taking less returns (hidden costs).

However, if you need life insurance and you aren't comfortable with the risk of the market, fixed whole life insurance would be a good deal. You just need to accept the fact that your returns may not keep up with mutual funds within a Roth IRA (not considering time horizon or market timing, etc.).

Bottom line is this... your situation is always unique and you can't use a one-size-fits-all answer from someone who is not licensed or registered through FINRA on a message board. Consult with someone you trust and get multiple opinions from different companies.

If you want to talk more specifics, you can leave your email and I can get in touch with you.






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ds1tiger
LSU Fan
Closer than you think
Member since Apr 2006
262 posts

re: Over Funding Life Insurance vs. Roth IRA


Also note that you can withdraw your contributions from your Roth at any time without penalty. It can be a makeshift emergency fund if need be.





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Alltheway Tigers!
LSU Fan
Baton Rouge
Member since Jan 2004
3246 posts

re: Over Funding Life Insurance vs. Roth IRA


You can stuff more funds into a LI policy than a Roth.

Roth is cheaper because you don't have the cost of Insurance as a drag. Both Whole Life and variations of a Universal Life polices have cost of insurance. UL products will break these costs out. WL can be figured out by a good agent/company.

If waiver of premium for disability rider is available for either type of policy, compare cost of waiver and consider. If disabled, then premiums are made for you by the company. This could make the policy self funding at a very good time for this particular situation. There is no IRA I know of that funds itself in case of a disability. Weight the cost of the rider with the cost of a group or individual disability policy.

Variable UL polices can be VERY expensive. Separate account charges, mortality charges and so on. Know your policy. There are several lost cost or no cost Variable UL policies about there. Do your homework.

You can find decent low cost and high early cash value Whole Life polices. With a Whole Life policy, you don't get the market returns of a VUL or Roth IRA in equities. However, consider a "whole" portfolio view, where as a Whole Life cash value being the conservative allocation of your portfolio. This will allow you to be more aggressive with other investments.

Liquidity with cash value life insurance is a very nice feature.

Regardless, a $2000 Roth will put perform a $2000 life insurance premium....hands down.

Short story:

Pure investment and return driven? Roth IRA
Lots of flexibility and benefits? Cash Value LI






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Alltheway Tigers!
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Baton Rouge
Member since Jan 2004
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re: Over Funding Life Insurance vs. Roth IRA


quote:

ds1tiger Over Funding Life Insurance vs. Roth IRA Also note that you can withdraw your contributions from your Roth at any time without penalty. It can be a makeshift emergency fund if need be.


Roth is not that liquid and especially not for an emergency fund.






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Teddy Ruxpin
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New Orleans, LA
Member since Oct 2006
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re: Over Funding Life Insurance vs. Roth IRA


quote:

Roth is not that liquid and especially not for an emergency fund.



You can have your ROTH funds liquidated in a matter of days.

What kind of emergency are you dealing with where that isn't enough time?






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ds1tiger
LSU Fan
Closer than you think
Member since Apr 2006
262 posts

re: Over Funding Life Insurance vs. Roth IRA


quote:

Roth is not that liquid and especially not for an emergency fund.


Unless you need the funds in 24 hours or less, it can be a useful emergency fund. I've withdrawn from mine in the past and had funds in my bank account in 48 hours.






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Alltheway Tigers!
LSU Fan
Baton Rouge
Member since Jan 2004
3246 posts

re: Over Funding Life Insurance vs. Roth IRA


Correct. Roth principal is tax and penalty free. Monies converted from a traditional IRA to a Roth AND aged over 5 years are penalty free. Any earning on Roth principal are taxed and assessed a penalty unless owner is over 59 1/2 or a qualifying withdrawal. I am not sure you can replace principal that is withdrawn early from a Roth.

Funds in most cash value policy can be ETF to a checking account in less than 24 hours. If taken as a loan, these funds can be replaced. If taken as a surrender, limitations on replacements will apply from company to company.






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Janky
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Member since Jun 2011
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re: Over Funding Life Insurance vs. Roth IRA


quote:

ETF


EFT, and you are correct it's the whole 5 year thing that gets you.






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kyledavis
Member since Nov 2013
734 posts

re: Over Funding Life Insurance vs. Roth IRA


Now that's what I'm looking for. Good information guys. I am going to meet with my agent on Monday to discuss this. This is my plan:

1) Decrease the contributions in my 401K (Still maintaining a 10% contribution)
2) Buy a VUL policy with small death benefit (I think I am already sufficiently covered through other policies and work policies)
3) Over fund the policy with the decreased contributions of the 401K.
4) I like the disability option as mentioned by another poster.
5) I'm skeptical of the fees and increased cost of mutual funds.


I think the ability to grow it tax free is a huge advantage. I can't predict the future obviously but when I retire in 25+ years I can only imagine what the tax rate will be like. The US government has to find a way to pay down the 14 trillion in debt. I also like the ability to get to my money without taxes or penalties in case of emergency.






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Janky
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Member since Jun 2011
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re: Over Funding Life Insurance vs. Roth IRA


Don't take my post as something that promotes the idea of using life insurance as a savings vehicle.





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Alltheway Tigers!
LSU Fan
Baton Rouge
Member since Jan 2004
3246 posts

re: Over Funding Life Insurance vs. Roth IRA


quote:

Now that's what I'm looking for. Good information guys. I am going to meet with my agent on Monday to discuss this. This is my plan: 1) Decrease the contributions in my 401K (Still maintaining a 10% contribution) 2) Buy a VUL policy with small death benefit (I think I am already sufficiently covered through other policies and work policies) 3) Over fund the policy with the decreased contributions of the 401K. 4) I like the disability option as mentioned by another poster. 5) I'm skeptical of the fees and increased cost of mutual funds. I think the ability to grow it tax free is a huge advantage. I can't predict the future obviously but when I retire in 25+ years I can only imagine what the tax rate will be like. The US government has to find a way to pay down the 14 trillion in debt. I also like the ability to get to my money without taxes or penalties in case of emergency.


- Be sure to check cost of disability rider and type of disability rider. Some riders will only pay the cost of insurance. Others will actually pay the "scheduled" premium. Scheduled premium meaning the premium suggested by the company to keep the policy enforced for a certain time periods, making various assumptions for the costs withini the policy. Make sure you understand the difference. I am almost postive the agent won't.

- Don't MEC the policy. Make sure you understand exactly the dollar premium limits. Making the policy a Modified Endowment Contract by paying too much in premiums will totally change the advantages of this plan.

- If the agent says the investments inside the Variable UL are mutual funds, he is wrong. They are separate accounts. These separate accounts may have similar names to their mutal fund counterparts, but the fee structure can (and probably are) different. Make sure you are comparing the correct fees and cost.

If fact, if the agent is offering you a VUL as a term insurance/mutual fund tax savings combo, then you need to read and research more. It is not. The cost of insurance in a VUL is much higer than term insurance. There are many valid reasons why, but understand it is different. Same with the mutal fund and separate account info from above.


Be warned: The government has been looking at cash value life insurance and its tax deferred/tax free income features for a long time. There is no guarantee the insurance lobby can hold off the U.S. government's search for dollars forever nor is there a guarantee that existing policies will be grandfathered in.

Be warned x 2: You are getting advice from a public forum with aliases.






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Broke
LSU Fan
AKA Buttercup
Member since Sep 2006
57224 posts
 Online 

re: Over Funding Life Insurance vs. Roth IRA


quote:

1) Decrease the contributions in my 401K (Still maintaining a 10% contribution)
2) Buy a VUL policy with small death benefit (I think I am already sufficiently covered through other policies and work policies)
3) Over fund the policy with the decreased contributions of the 401K.
4) I like the disability option as mentioned by another poster.
5) I'm skeptical of the fees and increased cost of mutual funds.



Good God man. If you are skeptical of mutual fund fees, you are gonna shite a brick at the VUL fees. You know they are the mutual fund fees PLUS M&E, dealer add back and pinstriping.






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TheDiesel
LSU Fan
Houston via Baton Rouge
Member since Feb 2010
2474 posts

re: Over Funding Life Insurance vs. Roth IRA


quote:

5) I'm skeptical of the fees and increased cost of mutual funds.


Why not pick an Index fund then? If you can't handle .1% in fees I dont know what to tell you.






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tirebiter
LSU Fan
ATL
Member since Oct 2006
5243 posts

re: Over Funding Life Insurance vs. Roth IRA


quote:

I strongly believe that a Roth IRA is also sheltered from creditors.



It is highly dependent on the state an individual lives in.

LINK






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