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Who Should Use EIUL’s — 401(k)’s Aren’t Cutting It For Most

Equity Indexed Universal Life is, when simplified, investment grade insurance. It’s a tool, a vehicle used by folks to create retirement income. I’ve written of this before, much to the chagrin of Mr. Swann. I’ve since put many clients into them using industry experts. Why? ‘Cuz it’s the right thing to do. Every dollar a client spends on this vehicle is a buck they’re not spending with me. I make zip, nada, zilch. They understand this, and appreciate it. They’ve come to rely on our consistent congruency when it comes to keeping their agenda #1. And their agenda is a magnificently abundant retirement. We make use of what i’ve called a Purposeful Plan. Sometimes that Plan includes investment vehicles other than real estate. We do what works.

EIUL’s work.

As a favor to Greg, though he didn’t ask, I’ve moved this party over to my place. Last time I think his head almost exploded when this subject came up here. People tend to get upset when it’s their ox being gored. Heck, I’m goring my own ox with this one. But again, it’s the right thing to do much of the time.

David Shafer is the guy who will answer your technical questions for this post. He recently wrote a guest post on BawldGuy Talking explaining why and when taxpayers would opt for an EIUL over their qualified retirement plan.

Soon, I’ll be writing a piece referencing a recent 20 year study showing mutual fund returns inside 401(k)’s have been less than 5% annually. And this study is used as a marketing tool. Go figure. I’ll make the study available, probably in dual form with David’s site. This study sheds light on the dirty little truth about mutual funds and their performance inside taxpayers’ qualified retirement plans.

  • Folks aren’t starting with realistic numbers. Mutual fund returns in 401(k)’s not good.
  • Front loading EIUL is best — drives down the cost of the insurance.
  • Your combined income tax rate is over 15%? Then numbers skew toward EIUL.
  • The higher the combined retirement income tax bracket, the more the numbers favor EIUL
  • EIUL never tells you when you can access your money or force you to pull it out.
  • Insurance component: 50% die before 84 — 25% before 75 years old.
  • Average return rate reported my mutual funds don’t allow for ‘down’ (negative) years
  • Negative years hurt more than positive years help — EIUL’s don’t have negative years.
  • It’s been my contention since I learned about the EIUL that 401(k)’s are Uncle Sam’s own retirement plan. It begins by saddling Boomers with bigger tax bills than they ever paid while working. Those who believe their tax bite in retirement will be less are either ill informed, or not candidates for an EIUL. Why? ‘Cuz their retirement plan was so bereft of any real planning, their income will in fact not be high enough to put them into a higher tax bracket. They won’t be entering retirement as much as they’ll be beginning their life sentence.

    OK — Let the games begin. Go see what David has to say, and give him your best shot.

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  • 26 comments

    26 Comments so far

    1. Sean Purcell June 3rd, 2008 12:33 pm

      Why? ‘Cuz it’s the right thing to do.

      Not too many answers as pure as that.

    2. Chris June 3rd, 2008 2:02 pm

      What about a Roth IRA?

    3. Jeff Brown June 3rd, 2008 2:08 pm

      Roth’s are pretty cool — when compared to the alternative qualified retirement plans for sure. No argument there. That said, I’d have this conversation with David.

      The tax free nature of the EIUL is what give it the edge most of the time.

      David is, as we speak, on his way to New Hampshire with his family.

      He’ll be accessing this post and the one on my blog when he gets to today’s family visit.

    4. Mark McGlothlin June 3rd, 2008 2:37 pm

      “Do the right thing.” Spot on, Jeff. It should be tattooed on the forehead of everyone headed to serve in Washington.

    5. Jeff Brown June 3rd, 2008 2:41 pm

      Mark — how many of life’s complications simply vaporize when we consistently do the right thing?

    6. Hunter Jackson June 3rd, 2008 3:18 pm

      Jeff,
      I have one of these. I purchased it when I was 19. I put $250 a month back, and can not believe the potential it has…even the guarantee is unbelievable.

      Being 19 when I purchased, I feel it will perform very well by the time im 55…60 or whenever.

      Once I quit smoking, it will do even better :)

    7. Jeff Brown June 3rd, 2008 3:38 pm

      Hunter — That EIUL alone will make a huge difference in your retirement income. Make sure to increase the monthly pmt as you’re able.

      I’ll assume you’ve already begun the process to quit killin’ yourself. :)

    8. Robert Kerr June 3rd, 2008 4:38 pm

      Is there any risk? What happens to EIULs in market especially volatile and bearish on financials, like we’re in now?

    9. Dave Shafer June 3rd, 2008 5:11 pm

      Robert,

      I will make this simple for now. Ask away as your questions will lead to greater detail. Risk? Yes, all plans have risk. What EIUL’s do is give a guarantee, say 2% and give you a ceiling on rate of return typically 12%. The general investments of the insurance company provide the guarantee (bonds, mortgages, treasuries, etc.) and then they put the rest of the money in futures for an index. So say your rate is connected to the S&P 500 stock index. Each year is the index is positive you get that return up to 12%. If it goes negative then your account stays at the same amount. Each segment (5 or 6 years) is subject to the guarantee. This is key as you don’t go negative as all indexes do 3 out of 10 years on average. And if you do the math you understand that negative numbers have to be made up by larger positive numbers to get to even. Because it is an index you get the broad stock market movement, not the risk of any particular sector like financial companies or technology companies. The insurance companies have back dated their policies looking at historical averages and come up with a rate of return around 8%. I use 6.5% to illustrate for safety sake. The bottom line is that if the S&P only averages 2% rate of return for 30 years the insurance costs eat up the policy. You would need to add more money under this situation. But, if the S&P 500 only returns 2% your mutual funds will be worth little anyway. So to answer your risk question directly, if our economy implodes, then this as well as every other strategy will fail!
      But the greater issue is that if you think you are going to build wealth using mutual funds either inside a 401K/IRA wrapper or not, the data suggests you are very wrong. So EIUL’s are a hedge against inflation and a way to avoid the tax man down the line.

    10. Tom Vanderwell June 3rd, 2008 6:15 pm

      Jeff,

      Do the right thing no matter what. We need to continue to do and preach that over and over again.

      Thanks for saying it!

      Tom

    11. Jeff Brown June 3rd, 2008 6:29 pm

      Tom — Clients see pretty much everything. Whenever they see us go against our own best interests to serve theirs, they become believers.

    12. Tom Vanderwell June 3rd, 2008 7:15 pm

      Jeff,

      It’s ironic how going against our own best interests to serve theirs is actually in our own best interests, isn’t it?

      To be the kind of Realtor or lender we want to be, we need to put our interests behind theirs and then we can build the kind of long term business that is successful.

      Keep on doing it and keep on talking about it!

      Tom

    13. David Shafer June 3rd, 2008 7:22 pm

      Chris,

      Roth’s are great, but limited to how much you can put into them. Once again do the math and see how much you have if everything goes right and you fund it to the limit for 25 years. Remember to account for inflation for the 25 years you are funding it and the 20 years you are likely to live in retirement. Personally, I have a Brokerage Roth and fund it with Berkshire Hathaway B’s (21% Return last 43 years), but most financial planners would tell you that is a risky proposition. I have blogged on this strategy here http://shaferfinancial.wordpress.com/2008/05/20/saving-for-retirement/ and http://shaferfinancial.wordpress.com/2008/05/01/betting-against-warren-buffett/ and http://shaferfinancial.wordpress.com/2008/04/21/retirement-strategies-redux-old-school-v-my-way/

    14. Robert Kerr June 3rd, 2008 7:35 pm

      Hi, Dave. Looking over your mutual fund v. EIUL growth comparisons, it seems you’re not accounting for 401(k) money being pre-tax.

      A $15,000 contribution to an EIUL costs $15,000, plus any fees. A $15,000 contribution to a 401(k) is closer to $12,000 in actual cost.

    15. David Shafer June 3rd, 2008 8:15 pm

      Robert, If you are paying income tax on your cash flow that is too high in your opinion, then there are many strategies that could lighten that road not using an 401K investment strategy.

      The real issue is would you rather pay taxes on input or output? So you input $100,000 and have a $250,000 output. Which would you rather pay taxes on?

      Personally, I have learned there are many options to deal with the tax issue on my income/cash flow. But when you are retired and are FORCED to take cash flow from your 401K and incur income tax there are much fewer options. The popular one for most financial planners is to be so poor as to not have to pay a high income tax rate. :-)

      There are some real reasons why I think most 401K plans are a fools paradise (low rate of returns, loss of control, penalties for access, more net tax obligations, etc.) but for most folks who are employees I think the biggest one is the con job Wall Street has done convincing them that this retirement strategy can become one’s primary retirement income. Nothing wrong with funding a 401K if your company is matching you up to the match, but if that is all you got you are in trouble. That is why I show people how to build real wealth in other vehicles and then suggest they have a EIUL to protect them from premature death and the tax man. I think that the 401K/EIUL comparision is a straw man argument because both are poor wealth creators.
      Better put that $15K/year into investment real estate and have some real time tax protection, build wealth, and then protect it with a EIUL.

      You see it is the plan that is important and how each strategy fits into the plan. I just don’t think buying mutual funds is much of a wealth building plan whether you get a tax break from it or not.

      You don’t think that the government designed the 401K to decrease tax revenue do you?

    16. Jeff Brown June 3rd, 2008 8:28 pm

      David — This is magnificent. Your answers are classic. You just described the strategy I’ve been using with the majority of my clients.

    17. David Shafer June 3rd, 2008 8:44 pm

      Thanks, Jeff. I don’t want to sell EIUL’s as something they are not. But unfortunately, we all have to deprogram ourselves from the Wall St propaganda first before we can actually have a real conversation about the product.

      Robert, it is fairly easy to set up some assumptions to have a 401K funded with mutual funds in which you end up with more income than a EIUL. But when I ran those assumptions through the real evidence we have, those assumptions would include much luck (8-10% RR, Living close to life expectancy, income taxes not going up, being in a low marginal tax bracket, not needing the money for anything like a wedding, your sickness, job loss, etc.

    18. Brian Brady June 4th, 2008 1:09 am

      “You don’t think that the government designed the 401K to decrease tax revenue do you?”

      No. It was a tax banking scheme so that Boomers would fund the shortage in SSI…but we’re learning, we’re learning.

    19. David Shafer June 4th, 2008 5:27 am

      Brian, and then we can ask the corollary question, why did they structure the 401K in such a way that it virtually predetermines the investment vehicle (mutual funds)?

      And finally, why do upper level management folks perfer to take their additional compensation in the form of a permanent life insurance contract instead of a 401K, despite the genesis of the 401K as a way to additionally compensate upper level management?

    20. Jeff Brown June 4th, 2008 9:12 am

      David & Brian — This subject is dominated by what I call Investment Physics. Though certainly there is room for discussion on some minor points, the numbers are pretty much analogous to gravity — bet the wrong way at your financial peril.

      Those employees, who are looking for a friend up top to give them the real story, are the ones suffering the consequences of the managers’ black abyss of ignorance. What’s worse is when the guy in charge refuses to see the forest for the trees simply because his ox is being gored. It’s time for these program managers to grow a pair.

      One hopes some will see what we see so clearly, and reach down to help those who’re blindly headed for a pre-ordained, disappointing retirement income. Most managers of these retirement programs, don’t realize the consequences of their advice.

      The bright side though, is how many are beginning to see their elders’ eyes open to the reality of what their retirement will never be. It’s too late for them, but not their kids.

    21. Sue June 5th, 2008 4:41 am

      Thanks Dave and Jeff for this information. Where I don’t meet the recommended criteria for the EIUL…my hand went down during the questionnaire. This is certainly making me rethink mutual funds…something I’ve been concerned about for a while as I see the lack of growth. Real estate would be a much wiser investment. I also read something not long ago about putting IRA money into small businesses (another form of real estate). Perhaps a growing real estate company like KW. Any thoughts on that?

    22. Bawldguy Talking June 5th, 2008 8:33 am

      Sue — Sorry about your hand. I’m not sure I’d be investing in any of the large RE companies. I’d love to hear Dave’s thoughts, but I don’t think the biggies are gonna fare well as time goes on. I believe this will be true even after markets recover.

      Slowly but surely I’m thinking their big producing agents will migrate to their own setups or be successfully recruited to much smaller operations catering to the needs of teams.

      Of course, now that I’ve made that opinion public, only large brokerages will exist five years from now. :)

    23. Sue June 5th, 2008 2:56 pm

      “Of course, now that I’ve made that opinion public, only large brokerages will exist five years from now.”

      Well time will tell. At second read, my hand may not be totally down for the EIUL, but I need to understand and digest it more. I sent this to a friend to get his thoughts as well. I’m always looking for smarter things to do with my money, other than the “not spend” option.

    24. David Shafer June 5th, 2008 8:15 pm

      Sue,

      Investing in companies is a good idea, but not necessarily the one you mentioned. I am a disciple of Warren Buffett. In fact I use his work for my wealth education program (www.shaferwealthacademy.com). If I may make a shameless recomendation you might consider joining the academy. The value of understanding how wealth is built, building a real wealth plan, and having a wealth coach to help you implement is worth its weight in gold. But I make no bones about owning Berkshire Hathaway stock (rate of return 21% over the last 43 years). If you go or anyone else goes to my website and fills out the contact form I will send you the latest Dalbar report on mutual fund investors rate of return. Also of course would love to talk to you personally about all this.

    25. Sue June 5th, 2008 8:42 pm

      Thanks Dave, I will check it out and most likely fill out the form. I must be careful at this point because I made a really bad decision with a large sum of money in the past…10 years ago and its worth less now then it was then. I would like to see the Dalbar report.

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