Whole life insurance - capped earnings
"The question that I walk away with is ""What is the cost of the downside protection?"" Disclaimer - I don't sell anything. I am not a fan of insurance as an investment, with rare exceptions. (I'll stop there, all else is a tangent) There's an appeal to looking at the distribution of stock returns. It looks a bit like a bell curve, with a median at 10% or so, and a standard deviation of 15 or so. This implies that there are some number of years on average that the market will be down, and others, about 2/3, up. Now, you wish to purchase a way of avoiding that negative return, and need to ask yourself what it's worth to do so.  The insurance company tells you (a) 2% off the top, i.e. no dividends and (b) we will clip the high end, over 9.5%.  I then am compelled to look at the numbers. Knowing that your product can't be bought and sold every year, it's appropriate to look at 10-yr rolling returns. The annual returns I see, and the return you'd have in any period. I start with 1900-2012. I see an average 9.8% with STD of 5.3%. Remember, the 10 year rolling will do a good job pushing the STD down. The return the Insurance would give you is an average 5.4%, with STD of .01. You've bought your way out of all risk, but at what cost?  From 1900-2012, my dollar grows to $30080, yours, to $406. For much of the time, treasuries were higher than your return. Much higher.  It's interesting to see how often the market is over 10% for the year, clip too many of those and you really lose out.  From 1900-2012, I count 31 negative years (ouch) but 64 years over 9.5%. The 31 averaged -13.5%, the 64, 25.3%.  The illusion of ""market gains"" is how this product is sold. Long term, they lag safe treasuries." Pretty simple: When is Cash Value Life Insurance a good or bad idea? It is never a good idea. How can life insurance possibly work as investment? It can't.  Just as car, home, or health insurance is not an investment.  Note for counter example providers:  intent to commit insurance fraud is not an investment. Why not live your life so in 15 or 20 years you are debt free, have a nice emergency fund built and have a few 100 thousand in investments?  Then you can self-insure.  If you die with a paid off home, no debt, 20K in a money market, and 550,000 in retirement accounts would your spouse and children be taken care of? I need to see the policy you are referring to give a more accurate answer. However what could be happening, it’s again the way these instruments are structured; For example if the insurance premium is say 11,000 of which 1000 is toward expenses and Term insurance amount. The Balance 10,000 is invested in growth. The promise is that this will grow max of 9.5% and never below zero. IE say if we are talking only about a year, you can get anything between 10,000 to 10,950.  The S & P long-term average return is in the range of 12 -15% [i don't remember correctly] So the company by capping it at 9.5% is on average basis making a profit of 2.5% to 5.5%. IE in a good year say the S & P return is around 18%, the company has pocketed close to 9% more money;   On a bad year say the Index gave a -ve return of say 5% ... The Insurance company would take this loss out of the good years. If say when your policy at the S & P for that year has given poor returns, you would automatically get less returns.  Typically one enters into Life Insurance on a long term horizon and hence the long term averages should be used as a better reference, and going by that, one would make more money just by investing this in an Index directly. As you whether you want to invest in such a scheme, should be your judgment, in my opinion I prefer to stay away from things that are not transparent.
"Another thing that insurance companies try to do with these types of vehicles is to promote the ""cash value"" of the policy. The longer you participate in the policy, the more your cash value goes up (assuming the investments perform reasonably well). The selling point is that at any time you can take out part of that cash value without impacting your insurance policy. A lot of people see that benefit as being the same as either putting the money in the bank or investing it, when actually they could do better if they did either of those things themselves. One true advantage of the whole term policy is that if you should fall on hard times and are not able to work, the premium payments can be taken out of the cash value. That way even if you can't make the monthly payments, the insurance policy basically pays for itself. I actually experienced this myself many years ago after I lost my job and had some health issues. I was out of work a long time, but my life insurance never lapsed. That in itself made it worthwhile for me." Insurance is for events that are both and Unexpected and, for many people, catastrophic events are, for example, sickness, disability, death, car accidents, house fires, and burglaries, for which you may buy health, disability, life, auto, home, and renter's insurance.  It may be catastrophic for a family relying on a very old earner for that earner to die, and you can buy life insurance up to a very old age, but the premiums will reflect the likelihood of someone of that age dying within the covered period.  The more expected an event is, the more anything referred to as insurance is actually forced savings. Health insurance with no copays on regular checkups expects the insured to use them, so the cost of those checkups plus a profit for the insurance company is factored into the premiums ahead of time.  A wooden pencil breaking may be unexpected. Regardless of foreseeability, no one buys insurance on wooden pencils, as the loss of a pencil is not catastrophic. What is catastrophic can be context dependent. Health-care needs are typically unforeseeable, as you don't know when you'll get sick. For a billionaire, needing health-care, while unforeseeable, the situation would not be catastrophic, and the billionaire can easily self-insure his or her health to the same extent as most caps offered by health insurance companies. If you're on a fixed budget buying a laptop, if it unexpectedly failed, that would be catastrophic to you, so budgeting in the cost of insurance or an extended warranty while buying your laptop would probably make sense. Especially if you need that $2000 laptop, spending an extra 17.5% would safeguard against you having to come out of pocket and depleting your savings to replace it, even though that brings you to a grand total of $2350 before taxes. However, if you're in that tight of a situation, I would strongly recommend you to find a less expensive option that would allow you to self-insure. If you found a used laptop for much less (I can even see Apple selling refurbished Macs for less than $1000) you might decide that your budget allows you to self-insure, and you could profit from being careful with your hardware and resolving to cover any issues with it yourself. Something to consider is how broad is Yahoo! Finance taking in their data for making some comparisons.  For example, did you look at the other companies in the same industry?  On the Industry page, the Top Life Insurance Companies by Market Cap are mostly British companies which could make things a bit different than you'd think. Another point is how this is just for one quarter which may be an anomaly as the data could get a bit awkward if some companies are just coming back to being profitable and could have what appears to be great growth but this is because their earnings grow from $.01/share to $1/share which is a growth of $10,000 percent as this is an increase of 100 times but really this may just be from various accounting charges the company had that hit its reserves and caused its earnings to dip temporarily. "Primerica's primary value proposition is that switching from whole or universal life to term life, and investing the difference is a good idea for most people. However, there are a number of other important factors to consider when purchasing life insurance, and I would also be wary of anyone claiming that one product will be the ""best"" for you under all circumstances. Best Insurance? Without getting into a much larger discussion on how to pick insurance companies or products, here are a few things that concern me about Primerica: They have a ""captive"" sales force, meaning their agents sell only Primerica products. This means that they are not shopping around for the best deal for you. Given how much prices on term life have changed in recent years, I would highly recommend taking the time to get alternate quotes online or from an independent broker who will shop around for you. Their staff are primarily part-time employees. I am not saying they are incompetent or don't care, just that you are more likely to be working with someone for whom insurance is not their primary line of work. If you have substantial reason to believe that you may someday need whole life, their products may not suit you well. Primerica does not offer whole life as far as I am aware, which also means that you cannot convert your term life policy through them to whole life should you need to do so. For example, if you experience an accident, are disabled, or have a significant change in your health status in the future and do not have access to a group life policy, you may be unable to renew your individual policy. Above Average Returns? I am also highly skeptical about this claim. The only possible context in which I could find this valid would be if they mean that your returns on average will be better if you invest in the stock market directly as compared to the returns you would get from the ""cash value"" portion of a life insurance product such as universal life, as those types of products generally have very high fees. Can you clarify if this is the claim that was made, or if they are promising returns above those of the general stock market? If it is the latter, run! Only a handful of superstar investors (think Warren Buffet, Peter Lynch, and Bill Gross) have ever consistently outperformed the stock market as a whole, and typically only for a limited period of time. In either case, I would have the same concerns here as stated in reasons #1 and #2 above. Even more so than with insurance, if you need investment advice, I'd recommend working with someone who is fully dedicated to that type of work, such as a fee-only financial planner (http://www.napfa.org/ is a good place to find one). Once you know how you want to invest, I would again recommend shopping around for a reputable but inexpensive broker and compare their fees with Primerica's. Kudos on having a healthy level of skepticism and listening to your gut. Also, remember that if you are not interested in their offer, you don't have to prove them wrong - you can simply say ""no thank you."" Best of luck!" Alright, team!   I found answers to part 1) and part 2) that I've quote below, but still need help with 3).  The facts in the article below seem to point to the ability for the LLC to contribute profit sharing of up to 25% of the wages it paid SE tax on.  What part of the SE tax is that?  I assume the spirit of the law is to only allow the 25% on the taxable portion of the income, but given that I would have crossed the SS portion of SE tax, I am not 100%.  (From http://www.sensefinancial.com/services/solo401k/solo-401k-contribution/) Sole Proprietorship Employee Deferral The owner of a sole proprietorship who is under the age of 50 may make   employee deferral contributions of as much as $17,500 to a Solo 401(k)   plan for 2013 (Those 50 and older can tack on a $5,500 annual catch-up   contribution, bringing their annual deferral contribution to as much   as $23,000). Solo 401k contribution deadline rules dictate that plan   participant must formally elect to make an employee deferral   contribution by Dec. 31. However, the actual contribution can be made   up until the tax-filing deadline.  Pretax and/or after-tax (Roth)   funds can be used to make employee deferral contributions. Profit Sharing Contribution A sole proprietorship may make annual profit-sharing contributions to   a Solo 401(k) plan on behalf of the business owner and spouse.   Internal Revenue Code Section 401(a)(3) states that employer   contributions are limited to 25 percent of the business entity’s   income subject to self-employment tax. Schedule C sole-proprietors   must base their maximum contribution on earned income, an additional   calculation that lowers their maximum contribution to 20 percent of   earned income. IRS Publication 560 contains a step-by-step worksheet   for this calculation. In general, compensation can be defined as your   net earnings from self-employment activity.  This definition takes   into account the following eligible tax deductions: (1) the deduction   for half of self-employment tax and (2) the deduction for   contributions on your behalf to the Solo 401(k) plan.  A business   entity’s Solo 401(k) contributions for profit sharing component must   be made by its tax-filing deadline. Single Member LLC Employee Deferral The owner of a single member LLC who is under the age of 50 may make   employee deferral contributions of as much as $17,500 to a Solo 401(k)   plan for 2013 (Those 50 and older can tack on a $5,500 annual catch-up   contribution, bringing their annual deferral contribution to as much   as $23,000). Solo 401k contribution deadline rules dictate that plan   participant must formally elect to make an employee deferral   contribution by Dec. 31. However, the actual contribution can be made   up until the tax-filing deadline.  Pretax and/or after-tax (Roth)   funds can be used to make employee deferral contributions. Profit Sharing Contribution A single member LLC business may make annual profit-sharing   contributions to a Solo 401(k) plan on behalf of the business owner   and spouse. Internal Revenue Code Section 401(a)(3) states that   employer contributions are limited to 25 percent of the business   entity’s income subject to self-employment tax. Schedule C   sole-proprietors must base their maximum contribution on earned   income, an additional calculation that lowers their maximum   contribution to 20 percent of earned income. IRS Publication 560   contains a step-by-step worksheet for this calculation. In general,   compensation can be defined as your net earnings from self-employment   activity. This definition takes into account the following eligible   tax deductions: (i) the deduction for half of self-employment tax and   (ii) the deduction for contributions on your behalf to the Solo   401(k).  A single member LLC’s Solo 401(k) contributions for profit   sharing component must be made by its tax-filing deadline. "All life insurance is pretty much the same when it comes to cost. You can run the numbers over certain time period and the actual cost of insurance is about the same. A simplified way to explain life insurance and the differences between them below: The 3 characteristics of life insurance: There are 5 popular types of life insurance and they are: Term Whole Life Universal Life Variable Universal Life Indexed Universal Life But first, one must understand the most basic life insurance which is called Annual Renewable Term:  This is a policy that covers 1 year and is renewable every year after. The cost of insurance typically increases each year as the insured ages. So for every year of coverage, your premium increases like in the simplified illustration above. This is the building block of all life insurance, term or permanent. There is no cash value; all premium goes to the cost of insurance.  This is an ART that spans over a longer time period than 1 year (say 5, 10, 15, 20 or 30 years). All the cost is added together then divided by the number of years of coverage to give a level premium payment for the duration of the policy. The longest coverage offered these days is 30 years. There is no cash value; all premium goes to the cost of insurance. The premium is fixed (level) for the term specified. If the policy comes to an end and the owner wishes to renew it, it will be at higher premium. This can be seen in the simplified illustration above for a 15-year term policy.  Because life insurance gets very expensive as you reach old age, life insurance companies came up with a way to make it affordable for the consumer wishing to have coverage for their entire lifespan. They allow you to have interest rate crediting on the cash value account inside the policy.  To have cash value in the first place, you must pay premiums that are more than the cost of insurance. The idea is: your cash value grows over time to help pay for the cost of insurance in the later stages of the policy, where the cost of insurance is typically higher. This is illustrated above in an overly simplified way. This is a permanent life insurance policy that is designed to cover the lifespan of the insured. There is cash value that is credited on a fixed interest rate specified by the insurance company (typically 3-5%). The premium is fixed for the life of the policy. It was designed for insuring the entire lifespan of the insured. This is variation of Whole Life. There is cash value; it is credited on a fixed interest rate specified by the insurance company, but it does fluctuate year to year depending on the economy (typically 3-6%). The premium is flexible; you can increase/decrease the premium.  This is basically a universal life policy, but the cash value sits in an account that is invested in the market, normally mutual funds. Your interest that is being credited (to your account with your cash value from investments) is subjected to risk in the market, rise/fall with the market depending on the portfolio of your choosing, hence the word ""Variable"". You take on the risk instead of the insurance company. It can be a very good product if the owner knows how to manage it (just like any other investment products). This is a hybrid of the UL and the VUL. The interest rate depends on the performance of a market index or a set of market indices. The insurance company states a maximum interest rate (or cap) you can earn up to and a guaranteed minimum floor on your cash value interest that will be credited (typically 0% floor and 12% cap). It is purely a method to credit you interest rate. It takes the market risk out of the equation but still retains some of the growth potential of the market. Term policy is designed for temporary coverage. There is no cash value accumulation. Permanent policies such as whole life, universal life, variable universal life and indexed universal life have a cash value accumulation component that was originally designed to help pay for the cost of insurance in the later stages of the policy when the insured is at an advanced age, so it can cover the entire lifespan of the insured. People do take advantage of that cash value component and its tax advantages for retirement income supplement and maximize the premium contribution. Always remember that life insurance is a life insurance product, and not an investment vehicle. There is a cost of insurance that you are paying for. But if you have life insurance needs, you might as well take advantage of the cash value accumulation, deferred tax growth, and tax-free access that these permanent policies offer." "To your first comment: yup. To your second comment, A = L + E. If E goes down, and L goes up, the net effect is 0. Then, if L goes down, and A goes up, the net effect is 0 and we are balanced once again. There is no ""rebalancing"" equity. You just have to make sure that, at the end of your journal entries, the accounting equation holds.  It's a very unintuitive concept to wrap your head around, but spend some time mapping out the flow of various journal entries. Once it clicks, you'll really understand the logic." "You're asking explicitly about $250K+ wage earners. Well, believe it or not, but this is the most discriminated group of people in the US tax code. This is what is called ""the upper middle class"". People who still have to work for a living, but treated as if they're rich (I don't consider people who must work to keep up their life style as rich). Many of the deductions cannot be taken by them. Lets go over the list Keith made: You mentioned losses - you cannot deduct gambling losses (in excess of gambling income), and you cannot deduct passive (rental real estate, for example) losses. While for rental real estate there's a small amount of losses you could deduct, it phases out well below the $250K line (can be deducted against passive income, or when disposed of the property). 529 plans are not deductible (in fact, its a gift subject to the gift tax). Bottom line, being a high earner with wages only means you pay the most tax. You either find a way to become self employed and have a lot of business deductions on your schedule C/1120S, or switch to capital gains. You can marry an unemployed partner, it will make your life slightly easier."