I am always interested in knowing about how to save better for retirement and learn about tax deferred opportunities to save on as much money. I started thinking seriously about life insurance and how it could be beneficial. Everyone has different situations but I believe life insurance could be helpful if you have dependents that you directly support and who would be financially strapped if something were to happen to you.
As you can imagine with financial instruments, things can get complex and its not easy to similarly traverse the land of insurance as well. Products are complex and too many and its hard to figure out which one's the best for you. The other thing you have at the back of your mind is sales people want to think whats best for them and not you since there are big sales incentives tied to the product they sale. Meaning a kiwi would be more beneficial than selling an apple. At the end of the day, its all about margins but that's just how sales works. Hence as a consumer you got to do the research whats best for you.
I particularly got interested in a product called Indexed Universal Life Insurance by reading about avenues to grow wealth. The reason this was attractive is because they act as a death benefit and also allow you to accumulate cash value. Hence part of your premium acts as going towards a term life insurance whereas the other half goes towards building wealth through cash value. The other interesting part about this product was that this follows an equity index like the S&P500 with not the downside if the market was suppose to go down. This further spiked my interest to start digging into it a little bit more. The way insurance companies do it, is they would cap your upper returns to a certain limit and keep your downside to 0. So for example lets say the S&P would rise to 20% returns you would receive 8.5% but if it went down to -15% your loss would have a floor of 0 hence you won't have the great losses.
Some other potential upsides were the capital gains can be tax deferred so unless you take those gains out you don't get taxed for them every year. Money that comes from your premium payments isn't taxable as you already paid the taxes on it. The death benefit is also tax free for your beneficiary. You can further take out any loans you want and there are no required minimum distributions for cash that you need to make unlike in a 401K.
I came across an experienced insurance blogger who has provided a lot of data into current cap rates here.
So guess what, sounds exciting right? Well sure, it does. And that made me pick up the phone, well not literally the phone but I submitted requests to get a quote for an Indexed Universal Life (IUL). The Term Life Insurance which is mostly focused on death benefit was not really exciting to me, given my circumstances. Hence I started looking at some of the quotes and what started scaring me were the costs.
There can be a number of underlying fees and costs attached to providing you the life insurance cover and then the costs of the insurance, some of them would show up as Premium expense charges, administrative charges, surrender charger, riders etc. Its a long list and hence you might quickly start thinking what is the benefit I get out of it?
I started thinking about what additional benefit do I get from rather using a term life insurance policy and then just putting in all the other money in a low cost mutual fund or an Exchange Traded fund (ETF) that tracks the S&P500. I really didn't feel like I needed the term insurance and then thinking about paying the upfront costs that came along with the premiums just for the fact that my capital gains would be tax deferred didn't really feel worth it.
I am a following of the Personal Finance subreddit and learnt about some interesting experiences that people had which was good to read. There were multiple blogs as well that shared their perspective. Two very interesting experiences/stories that I came across were these [1] [2]. Now, I don't know if the stories are real or completely made up, but the costs did make sense based on the research I did.
Hence I ended up going the route of following my gut and investing in the finance vehicles I had faith in, thereby giving up the idea that the Indexed Universal Life Insurance were really a great product for me. As I said, you might be in a different situation where you have dependents, in that case having some sort of life insurance that gives you death benefits definitely makes sense and you should have one. Just make sure to do the right research and understand well all the costs before you make a decision.
(Disclosure: Please review the Disclaimer section prior to any investments.)