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daniel k | Is over-funding life insurance a practical means to "self-fund" the costs of future major purchases? |
I learned about a concept today where a person borrows overfunded cash value from a policy to make a mojor purchase. It is claimed this use (and subsequent return) of funds does not effect the policy's long-term growth. It sounds too good to be true. |
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mbrcatz
 |
Yeah, well, it's a dumb financial move.
Using life insurance as a savings account is DUMB. Run the numbers. 10% of what you pay in, goes to the cash value. 90% goes to the insurance company. AND, the amount of the loan gets subtracted from the payout, if you die with it not paid back. OH, and the insurance company keeps the interest you pay back on your own money.
Would you open a savings account where 90% of what you put in, goes away instantly, forever? How dumb is that? how about, give me $1000, and I'll lend $500 of it back to you - at 10% interest? Hey, it's a GREAT deal, it's 5X more than an insurance company will lend you!
Run the numbers. Insurance is NOT a good savings/investment tool. It's a financial planning tool. Different horse. |
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aaron p
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It does affect the policy long-term. How it will affect it is a whole other question. If the insurance sales person actually said that it has "no affect" on your policy, they don't understand the product well enough to sell it. Move along.
If you borrow money from your policy, you will either need to pay it back some day with interest or risk your policy lapsing. You may not care if your policy disappears, but if you have a loan for more than you put into it (your cost basis), you will need to pay ordinary income taxes on the entire amount that exceeds your cost basis.
Let's say you borrow $20,000 from your policy in year 15 with a cost basis of only $15,000. Then if the policy lapses in year 30 and the loan has grown to $25,000 with interest, you will need to pay ordinary income taxes in year 30 on $10,000 or find some magical way to keep the policy in force.
Here's the other thing, if you have a universal life-based policy, the insurance company can usually increase the internal costs at any time for any reason they want to. If you have a whole life-based policy, dividends cannot be guaranteed. Either way your savings plan is at the risk of one company's whim. This is a type of business risk that should usually be avoided regardless of how strong the company looks today.
If you need help defining a good savings plan, talk to a financial planner who can help you without limiting their advice to things they sell for profit.
edit: Guy Morrell I found it interesting that your website states, "Your results may vary widely. Past performance is no guarantee of future performance," while you wrote "guaranteed and risk free" in your post. Nothing is risk free. Phrases like that raise the eyebrows of insurance commissioners and FINRA alike. Sigh. 1982 called and wants its marketing plan back. |
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G_U_C
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Stop at "over-funding"
over-funding life insurance is a great way to please your agent while demonstrating a complete lack of financial savvy.
Anything resembling "whole life" is advantageous only for insurance agents and those too stupid or too lazy to save or invest the difference after buying term insurance. (At least they'll have some money saved up) |
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shiprepairwoman
 |
Don't believe it, I bet you learned this from a salesman selling whole life insurance with a cash value. Whole life isn't right for almost anyone and is one of the worst ways to invest money.
Buy term life if you have someone who depends on you otherwise don't buy life insurance. If you have any assets at all they can be sold to pay for a funeral. Invest in case you don't die young. |
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JJ
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Insurance is not an investment. If you need insurance, buy it. Then, find out how much you have left over and invest it. Savings, Money market, 401k, whatever.
Do not put extra money into this type of account; it will only help to pay the commission of the sales person.
If you run the numbers (as mbrcatz suggested) try this. If your 'self funded' insurance is 200/ month and your term life is 50/month, you would have 150/month left to invest. A typical mutual fund earns your 8-10% (conservatively) while the over-funded life insurance will earn 3-5% (at best).
Good luck |
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Guy M
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The answer to this question has two sides or two perspectives. The one perspective is from those who don't know how to make it work and the other is from the perspective of those who do.
Done the right way, for the right people, in the right circumstances, over-funding can be a fantastic way to make your money work for you. Yes, the rate of return may be higher in other financial instruments, but are these guaranteed and risk free? Do they produce a tax-free retirement income? Do they give you the opportunity to 'double invest'? Do you effectively get 'term' for life without increasing premiums or without paying extra? Etc. Etc.
The point is that a superficial look does not cut it. There are so many additional side benefits that can be generated from an over-funded system that the negatives are often more than compensated. However, one has to receive very specific, specialised training to know how to apply an over funded system properly and very few people have received such training.
Hope that helps. |
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Agency Builder w/ BTID
 |
It depends what the major purchase is......, it can be done. Depending on your situation, and the good outways the bad, then overfunding a life insuracne policy can be a legitimate option.
Here is what someone else wrote on a similar question just copy and paste in your browser.
http://answers.yahoo.com/question/index;_ylt=AjkKc6y9sBO06z4Rne_aqZGuxQt.;_ylv=3?qid=20071128163638AAFT59a |
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bigdaddy60
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Overfunding is highly complex and with the exception of GuyM on this forum, no one is educated enough to share an opinion. The wealthy use both Life Insurance and overfunding for investments. New IUL's can return as much as 12-27% and in most cases TAX FREE. The Wealthy's misuse of overfunding led to new laws in 1984 (DEFRA) and 1988 (TAMRA) regulating overfunding. I wonder, if it's such a bad idea MBRCATZ, Shiprepairwoman and others, why did Congress have to get involved to curtail it? Makes you wonder doesn't it. Have an expert on overfunding (there are few) run you an illustration and it will blow 401k, IRA's and other "Government" programs out of the water. The income from an overfunded IUL is TAX FREE. But make sure it's someone who knows what they're doing, it will make a difference. |
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