Last summer a friend of mine went to work for an insurance company and since I needed life insurance, I said… hey, can you give me a quote for life insurance. The next thing I knew, they were attempting to sell me the following products: A Global Indexed Universal Life Insurance Policy (GIUL), Term with Return on Premium, a Variable Annuity for Roth IRA, and Disability Insurance. They also wanted to manage the rest of my investments. Seriously? All that I asked for was a quote on life insurance.
I explained that all I really wanted was simple term life insurance, but despite asking for this they proceeded to pitch me on all of these services which I didn’t need, and most of which are a horrible, horrible product. I say horrible, and that’s really how I feel.
I sent my friend a number of emails attempting to persuade him that they were a horrible product, but he was too far down the rabbit hole to see clearly, and I ended up not buying anything from them.
Here’s what I wrote to him about the GIUL policy:
After really looking at this one, I’ve come to the conclusion that I don’t believe that I can afford this policy because it forces me to invest in the same way for a 30-50 year timespan. I think that I would rather have m
ore control over my investing choices. I’d rather be able to change my mind and invest in different sectors like real estate. It doesn’t appear that I would have th
at control here, but correct me if I’m wrong. Also, it’s like a forced savings plan, and it just feels unsafe in that I’d have to make that payment every month.
Since there’s basically no benefit for the first 7 to 10 years (except the life insurance death benefit which is an important benefit) I felt like the next 7 to 10 years are the ones I would like to have liquid assets (and, working on paying off house).
Assuming a term life policy only cost me $100 month during that period, I would be only down $24,000.
I took the last 20 years of the S&P 500 and it looks like it had an annual rate of 6.24% from Dec 31, 1992 through Jan 2, 2013. Investing $338.06 per month for those 20 years would have resulted in a return of approximately $162,692.37 which is more than the 20 year net surrender value of the GIUL policy. The GIUL policy has a surrender value of $149,307 (page 20) at 20 years (assuming 8.5% return). If I were to die 20 years from now, and carried a term policy at that time, I’d have the death benefit from a term policy + my investment return as well. I am having difficulty seeing why I wouldn’t want to do that. From the looks of it, by going with a GIUL I am running the risk of losing my additional investment if I were to die. But, I understand there’s the tax-free aspect… but not until I’m 70.
From what I can understand about this policy, the death benefit would be all I would get if I were to die before an older age. If I am wrong about this, please correct me. That’s just not a good investment practice from my understanding. Why risk that? For less money, I can have a term life insurance policy that protects me, and then anything I invest I know I will have access to. Way more liquid. I’d much rather wake up 20 years from now having “invested the difference” and have a liquid nest egg than have it be tied up in an insurance policy. I do understand the loan lets me get access to that money, but there are some tax implications there that can’t be overlooked.
I also am having a hard time coming to terms with the idea that if I died within 7-10 years I am not further ahead than if I “invested the difference” (but, I can see that I’m further ahead if I lived to 70 or 80).
On the other hand, I can see the value in a forced investment approach. Will I really invest the difference?
Questions to ask your insurance salesperson: Is there a cap on how much I can earn on the investment? I also read somewhere that dividends earned by the S&P 500 aren’t paid out, is that true? What are my approximate fees? From reading an article, I get the idea that long-term it actually pays off admirably.
Ask yourself if it is wise to place a sizable percentage of your income for the next 30+ years into one investment method.
It might sound like I’m completely against the GIUL but I’m not, I just am having a difficult time accepting such a large monthly expense especially compared against the fact that I want to also fund my Roth IRA to the max ($5,500/year), pay off my house early, and grow my liquid nest egg over the next 10 years. If I had an extra large emergency fund laying around, I would feel a lot safer about a monthly “cost” like this and I’d probably be okay with the costs considering the rewards.
Looking at it further, if I were to die at 63 (age my mom died) after 30 years of investing in the GIUL policy I would have invested $152,444.88 over that time. The death benefit is $500k and the Net Surrender Value is $380,194. If we take the S&P 500 average over the last 30 years we get 8.120% return. After 30 years of investing $338.06 on a monthly basis I would end up with $507,944 which is more than the death benefit. Let’s guess over that period I would have paid out $36,000 for a 30-year term (might be low). Even taking half of the proceeds for taxes and fees, with a term-policy my wife would be left with a term-life death benefit and the “invest the difference” investment of maybe $250,000. I guess in summary the way I understand it, the GIUL looks like a really good deal if I don’t die.