Is an Equity Index Universal Life Insurance Policy a good investment?
Life insurance is not an investment. Ever. You have to DIE to get 100% of the money you supposedly “have.” Keep contributing the max to your 401k. If you can also do an IRA that’s good. It is also really a good idea to get in the habit of putting some of your pay into some sort of savings/brokerage account (that you will ideally convert to higher yield investments such as stocks, bonds, mutual funds, ETFs). Otherwise, you need enough term life insurance to bury you, pay any debts you may leave behind, and keep your dependents afloat for a few years (while they transition to life without you). I realize that at your age, that’s thinking way ahead. Of course your agent wants you to think this is a great idea. He gets a hefty commission that may actually be most of your first year’s premiums! I can’t confirm that they will test for illegal drugs, but I can confirm that they will test for a variety of things including blood sugars, thyroid, cholesterol, etc.
Universal life if the same thing as Whole Life, and a few other things. It’s both an insurance policy and also an investment. The problem is that rolled into it is also massive commissions for the guy selling it. That is money that isn’t yours. Typically you can save/invest more money by separating the two components by buying term life insurance (the death benefit) and then investing the difference in a IRA or even a regular taxable account. Secondly, you very well might not need any life insurance. Do you have kids? Other dependents who can’t work for themselves? Well, then you probably need it, otherwise just invest the whole amount. If you end up needing life insurance, just buy the 20 year term, at which point you’ll have enough from investing that you can self-insure. Whole life can be a useful investment tool, but for a much smaller segment than it is sold to. It can do some tax tricks that I’m not all up on, but in general, if you don’t know you need it, you don’t.
If you can contribute $250/month to a stock index fund in an IRA or 401(k) for 30 years, and they go up 12% a year, you’ll have $882,000 at the end of that time. Here’s a handy calculator for that. If the return is 8% the amount in 30 years is only $375,000. Where the negatives lie is that your balance is indexed to equities. In other words, you’re investing in the stock market with your life insurance nut. That means that if the stock market goes down instead of up, the value of your policy goes down too. Not only is the 12% not guaranteed, *nothing* is guaranteed. You could invest $250 a month for five years (1999-2004, say) and at the end of that time be left with less than 70% of what you contributed. Basically these types of insurance instruments are useful to you if you want to invest in stock index funds and you’ve already maxed out your other tax-advantaged options. That’s because the amount of fees and commiss
Run away from this agent as fast as you can. He is pushing this plan because it is good for him, not for you. He will be collecting at least 5% of each payment from you for the rest of your life. A few of these deals and he is set for life. That 5% off the top each month is money that never goes to work for you in your investment. Read part 1 and part 2 of this this warning. Life insurance and investments should be kept separate. Depending on your age and health you can probably get $1 million in term life insurance for about $50 per month. With the $200 you save over universal life you can invest 100% in a better investment vehicle like maxing out your 401k or IRA. If you need life insurance — you currently have kids or other dependents — then buy term life insurance. This is generally a fixed
I disagree that equity life is a good deal when you can buy term insurance much cheaper and it directly serves the limited time that you need life insurance. Why pay for lifetime coverage when you only need it for a limited time. I also disagree that it is the best vehicle for people who have maxed out their tax advantaged accounts. The 5% or more load is unconscionable. On top of that there is probably a 2% annual management fee. You can buy low cost variable annuities at Vanguard that are a much better deal. But I still wouldn’t recommend even annuties for someone this young. They are better off just investing in a taxable account than paying the high fees. For example you can buy and hold a no-load Total Stock Market mutual fund for an annual fee of 0.1% and that is very tax efficient, about 0.25% per year. You only pay taxes on gains when you withdrawal, the same as for equity life. Because of the high fees and loads associated with equity life, you will end up with less after-tax
