Paul Winkler: And hi there. I haven’t thought I was going to say welcome. I’m just going to miss you, man. You are not getting me on that one.
EB: I know. I saw you. I saw you.
PW: This is The Investor Coaching Show. Paul Winkler, along with Evan Barnard. And I have a feeling we’re off to a great start. Should be fun.
EB: People be driving in circles on the freeway before.
PW: That is if they can get out of the ditch. So there’s actually some actually fairly humorous stuff that I have run across in the financial world.
But I’m going to lay on Evan and all of you as well. So there is so much news out there that I don’t even know where to start. But you know what? I’m going to give it a shot anyway.
Okay, I think I know where I’m going to start.
EB: Lay it on us.
PW: Something that I thought I would never have to even ever talk about again. Ever. Did I say ever? I think I did.
EB: You’re going to get married sometime, Paul. I know you got to have that conversation.
PW: No, no, no. Not that one. That’s another day. So I came from the insurance industry.
EB: Right.
The “Hotel California” of Investing
PW: That’s where I started. And I started off with a big insurance company that was number two, but we tried harder.
And it was one of those things where it was always competing against number one, and we’re better, and you can see how people get to that, “Rah, rah, rah! We’re great! We’re number one! We’re number two! But we’re number one!” or, “We’re the greatest. We’re the smartest or the best!”
And you can see where people get into that mentality working for a big investment firm or a big insurance company or wherever they work. And it’s hard to be objective when you work for the company and that’s all you ever hear.
It’s kind of like being on Facebook.
If all you ever hear is one side of the story, you never hear the other side of the story, and you’re indoctrinated just as much as the other side that you think is indoctrinated on their side.
And that’s exactly where we found ourselves. But we were very, very much pushed to call up people and say, “Hey, Mrs. Jones, when are you going to have your CD renewed?”
“And how do you know I have a CD?”
“Oh, well, doesn’t everybody?”
And interest rates were kind of trending down at the time.
EB: Yeah.
PW: And because CDs would be the shorter term ones, based on more short-term interest rates and savings accounts, more on short-term interest rates in money markets, more on short-term interest rates. Whereas when you’re talking about annuities because it’s an insurance company portfolio, they would have had longer term bonds in the portfolio that were backing the annuities.
So the interest rates were a little bit higher, and you could call up and say, “Hey, when is it renewing?”
And Mrs. Jones would tell you what her interest rate was, and then you say, “Oh, we got an annuity that’s paying 3% higher, whatever.” And you go, “Okay, give me a call.”
And when it renews and if you keep track, you could sell a bunch of annuities to the tune of a commission.
Of course, you got the interest rate and the interest rate was locked in. If interest rates happened to go back up, you were locked in at that rate and sometimes you had contracts that would do other things.
But for the most part, the back and surrender penalties because of the commissions that were paid up front to the advisor to get out. I kiddingly called them the “Hotel California” of investing. If you want to check out, you can check out anytime you want to, but you can never leave.
EB: Right.
First-Year Commissions
PW: And that was the problem. And then the other thing that was a big push was for the younger people that didn’t have a whole lot of money. And you can’t get a lot of commission if they don’t have a lot of money.
So what was a struggling financial advisor to do? Sell universal life insurance or whole life insurance? You go because the commissions are so much higher. It’s based on a first-year premium, so you might have 110% commission on the first-year premium.
So if you got somebody to put in a couple hundred bucks, that was $2400 a year, you might get somewhere in the neighborhood of $1400 in commission or whatever. Some of those contracts paid 110%.
And Evan looked at me funny because . . .
EB: I just didn’t get $2700.
PW: Yeah. I didn’t pay that much. Ours was 50% FYC (first-year commission).
So I’m used to thinking if I see first-year commission … but we actually had a lower commission than some of the other insurance companies. So that’s what made us better because we had lower commissions, one of the things that was our selling point. But some of these contracts did 110% of the first-year premium.
And so what happened was you had these illustrations that you put out on the insurance contracts at 8 3/4%. You could go up to 12%.
EB: I was going to say 8 3/4% can serve.
PW: That’s right. But we were better than everybody else, Evan.
We didn’t overshoot. We overshot, but we just didn’t realize we were overshooting.
We didn’t realize you’d come to a day where there would be 1% interest rates or less.
So you would do the illustrations. You show people how much money you could get coming out of these contracts and how huge of a payout tax free that they could get.
Because the idea being you pay the premium, money goes in, goes into a separate account, so to speak, that pays that interest rate, then a little bit of money comes out, pays the term insurance.
But you’re young. Term insurance, you might pay $100 premium or $200 premium, as for my example. Just stick with that example.
Your term insurance costs maybe 15 bucks or something like that. One hundred eighty five dollars goes into the cash account, stays in the cash account, earning interest. And that cash account builds up so much that when you’re older and your insurance premium is no longer that small amount, your insurance premium is $200 a month or whatever.
The term insurance cost goes up as you age, then what happens is they siphon the money out of the account, and then they pay that insurance cost. But there’s so much left over because your account is so big that it just really doesn’t matter a whole lot at all.
And if you’ve done an option A death benefit, which is a death benefit that stays level, thereby actually because your cash goes up, your death benefit that you’re buying goes down.
EB: Paying for less and less insurance.
PW: You’re paying for less and less insurance. And this works out wonderfully well. And you could be rich and all of this stuff.
But what they don’t tell you is that if this premium goes up, which it did, and not only did it go up, but they went up because interest rates went so low that they went below the guarantees in the contracts. So you’d have these 4% guarantees in these contracts, so who could go wrong? And the insurance costs were illustrated.
But they were always smart enough at the insurance company to have a guaranteed column.
And that guaranteed column was what if the interest rate goes down to four and we increase the premiums on the cost of insurance internally? How is this contract going to operate?
But we were trained: “Don’t look at that. That will never happen.”
Wrong. It happened.
Interest rates went below four. And in order to not lose money, even though mortality costs dropped, basically what the insurance companies did, they increased the cost of insurance because they could.
EB: Right.
Watch Out for Taxes with UIL
PW: And hence it didn’t work out so well.
And fast forward to now you have these things imploding. There was an article in The Wall Street Journal about this very thing. This was Universal Life Insurance in 1980. Sensation has backfired.
So that was one of the things that I was looking at. So I thought, Here we go.
We had a lot of people saying, “No, buy term insurance and invest the difference between what you would have paid in a term insurance or whole life insurance contract versus the term insurance premium in your IRA, Roth IRA, or whatever you had. And you do it that way.”
And that was forever. People talked about that and it just kind of died. Nobody talked about it anymore.
But it was because this is so obvious. Let’s not mess with this. And these contracts have blown up so badly, so publicly, that we don’t even need to talk about this anymore.
Lo and behold, no, they are back and raging back.
EB: Interesting.
PW: These contracts. Oh, yeah. So what’s happened is this, and this is what the insurance industry does: “This didn’t work. Oh, regular universal. Oh, that doesn’t work. You’re right. That’s no good. All your whole life insurance. But that’s indexed universal life. Now you got something different here. This is really, really good.”
And this is so what they do is they come out with a different twist on the contract.
“You kind of like annuities. This one stinks. What’s your biggest objection?”
“This is my biggest objection.”
“Oh, we’ll fix that and we’ll give you something to object about someplace else that you’re not looking that you won’t see for three years because you’re not looking for this stuff.”
EB: Let’s pass the bill so we can see what’s in it.
PW: Yeah. So in effect, what happens is that you have basically the same thing. You got the term insurance cost that goes up as you age.
But instead of putting money in an account with an interest rate that’s nonexistent, we basically tell you that you can participate in the growth of the stock market if you buy this contract. And you can get returns that are more stock market-esque if you do that.
And what we’re seeing now, blew my mind this week, saw this. An agent was actually talking to somebody about pulling money out of an IRA, paying the taxes on the IRA, and pulling money out of an unqualified account, paying taxes on the gains on the non-qualified account, which is a taxable account.
EB: Yeah.
PW: And sticking the money in maximum funding because there are funding limits on these contracts because they don’t want it to be something that doesn’t look like life insurance anymore, and they don’t want what’s called a modified endowment contract, and max funding this thing over a period of years.
And in essence, what happens is that this person goes and just gets nailed with taxes.
And the idea is that I can get tax-free income out of this in the future when the government raises taxes to nosebleed levels. And it sounds really good, the sales pitch does.
What they don’t tell you is that if that cash you’re pulling money out for income in retirement, you’re pulling money out, and you pull out your basics first and then you pull out vile loans, and you’re taking a loan against your death benefit.
So if I put in $100,000 over the period of owning this contract, or $200,000, or God forbid, more than that. And let’s say it’s $200,000. Let’s just use that as an example.
And I have $800,000. Let’s say I hit the nail on the head and I got lucky enough for that to happen.
And I burned through the $200,000 of basics first. Then I take a loan on the $600,000 gain.
And because it’s an advance on the death benefit, I’m getting the death benefit in advance and death benefits are tax free. They will charge me interest on that, but they’ll credit back interest as if the money were still there because the insurance company has no risk.
I know this is complicated, folks. Don’t go into the ditch. I promise I’m going to try and make this less complicated.
So I take out $100,000, let’s say. And what they do is they credit me 6% interest. Let’s just use that now.
Say they charge me 6% interest. Let me go there first.
They credit back 5% or 6% percent interest as if the money were still in the contract. Because if I die, they get that money back.
If I withdraw money because they just reduce my death benefit by the amount of the loan, or let’s say that I cancel the contract and I cash out, they will just give me my cash value minus the loan I have outstanding. Okay, so it’s really no risk.
And that’s in essence how they can tell you it’s tax free.
What they don’t really get too clear about is that the cost of insurance keeps going up on the other side of the ledger.
And if you don’t have enough cash because you took too much money out because you were living too high on the hog in retirement, if that plus your withdrawals, plus your insurance cost get to the point where they deplete the cash account, and especially if those insurance costs go up and the investment returns aren’t necessarily what they said they’d be, that happens. You have a tax bill.
EB: A big one.
PW: Yeah.
EB: Potentially a big one.
PW: Yeah. And then and literally what happens is if the numbers I used are there, $200,000 put in, and it was $800,000.
EB: Yeah.
PW: He got $600,000 gain in essence and that you’ve got to pay taxes on. And guess what? I don’t have any money to pay the taxes.
And guess what? IRS is not really a kinder, gentler organization as has been led to believe.
EB: Right.
Recent Critics of IUL
PW: So if you go out on the internet, I mean, you go out anywhere, you can find this stuff. I just did a cursory look on the internet and found articles.
Forbes sounding the alarm on indexed universal life. What did they have to say about it? For the past 10 years, indexed universal life has been one of the insurance industry’s most profitable businesses.
More than 20% of all premiums written were for IUL policies in 2019. Critics say the indexed universal life is being sold dishonestly.
You think?
“They are complex products sold with a false premise and deceptive marketing,” says Bernie Birnbaum, director of nonprofit center for economic justice. “Stay away from them,” he says, “writing an index cash value with an IUL policy is tied to an index.”
This might include banning plain vanilla ones like the S&P 500 and Russell Indexes and things like that. Options allow the holder to buy and sell the underlying index at a certain price, certain time, which can rise or fall rapidly.
If the options are exercised in the money, then you can make some money. If it’s not, then you basically lose the money that went into that option contract … is the way it works.
I won’t get into the nuts and bolts that I’ve done on other shows.
Exactly why the IUL is a riskier investment than traditional insurance: “Critics say that the risk is not properly disclosed and borne by the policyholders. Consumers should avoid IUL because insurers and agents who sell the product have no obligation to work in the consumer’s best interest,” the article says.
And you can see that for yourself out there.
And then you have things like this, the white coat investor. This is a guy that actually writes to doctors and does stuff that is the same thing.
Vast majority of people that are high-income Americans like physicians. They’re going to want to avoid taxes.
That’s a big selling point of these things. And yet he talks about the same stuff.
I’m not going to belabor, but he does have this one thing down here. He says now if you go back and you look at some of the problems … number one … one problem that he talks about is you don’t need a permanent death benefit for most people. A lot of people—you’re not going to be dealing with estate taxes.
And the reality of it is you build up money and then what happens is you are at work, which is what insurance is for. It’s reimbursing or helping people out because you weren’t able to work as long as you were going to.
That’s the whole idea behind life insurance. Typically there are a couple of other uses, but that’s typically “you at work” is replaced by the savings that you put away at work later on. That’s the idea.
Always Read Your Contract
Now, complexity does not favor the buyer and talks about how complex these things are. And people just get confused.
Even the agents get confused. I find that they don’t even understand how this works half the time.
I found that the people that I worked with … I was a person that studied the contract like crazy. And I just walked away. Yes. I can’t do this.
And the managers say, “Don’t.”
EB: “Yeah, don’t read it.”
PW: Exactly.
EB: It isn’t a lot to read contracts all through there. I mean, it’s just …
PW: Yeah.
EB: It’s just like a dog with a sock when we get these things.
PW: Yeah. Yeah he is that way. No question about it. I always don’t count the dividends. So that’s another thing.
Let’s say you’re 50 years old and you live at age 90 and you look at the S&P 500 without the dividends. Ten thousand dollars in the S&P 500 without dividends. If you got the whole return of the S&P 500, it’s $437,000 dollars.
But if you got the dividends, it’s over $1.7 … almost $1.8 million that was going back. How far is it going back? Forty years.
Okay, so you look at that and go that’s huge. You’re removing the dividends.
Yes, they remove the dividends from the rate of return.
EB: It’s the same problem with the indexed annuities. I mean, it’s the same precise problem. They miss out on the dividends on those two.
PW: Yeah, precisely.
And then you have cap rates where if the market goes up 20% and you have a cap on it of 8%, you give up that 12% return right there. Yes. So you’ve got that issue.
Then you got participation rates. You only participate so much to the upside.
If the market goes up 20% and the participation rates, let’s say 80, you get 16 of it, minus the dividends, all that stuff.
So you basically get hosed all over the place with these contracts is the problem. And so this stuff’s all over the place.
Well, my point is this. If you still, after listening to everything I have said about this contract, want to go out and buy one of these things, there is a bright spot.
There are a couple attorneys, law firms, that are out there doing class action suits on this stuff. And there’s all kinds of all kinds of write-ups out there by these firms.
You don’t have to just pick one firm that’s doing these class action lawsuits regarding these products.
If you’re really a thrill seeker and want to get involved in one of these things because it seems like a good retirement venture, be my guest.
Practice attorney diversification.
EB: Yes, you could participate in three class action lawsuits.
PW: So hence, my opinion on index universal life contracts, just say no. Just say no.
This is something that I cannot … there aren’t very many things out there that I’m just absolutely … I can’t stand this stuff. But that’s one of those things I just cannot stand. And I hate to see people taken advantage of.
And if you really run into one of these contracts, bring it to somebody that does not have a dog in the fight, that’s not selling the contract to review it for you—if you really think that you found the exception to all the rules that I’m talking about. Really important.
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