October 16, 2024 • 32 mins
On this episode of Drilling It Down, Liam and Wes explore Indexed Universal Life (IUL) insurance, dissecting its complexities and common misconceptions. They clarify how IULs differ from term life insurance and critique the misleading marketing that positions them as safe investment vehicles. They examine eight key issues associated with IULs, highlighting the risks of embellished growth illustrations and the reality of loan implications against cash values. Emphasizing the need for thorough scrutiny, they advocate for conventional investment options that typically yield better returns. Join us for insights that equip you to make informed financial decisions regarding IULs.
Want to submit a question that will be answered on the next episode? Submit it here or email us at newsletter@mcgillhillgroup.com.
If you're not already, subscribe to The McGill Advisory newsletter to keep up with all the articles mentioned in our episodes, as well as a plethora of other content. Use code Podcast20 for 20% off!
Listen to our sister show, Next Gen DDS! An all-in-one resource for dental students, residents, and early career doctors, discussing both clinical and business aspects of dentistry, hosted by Wes Lyon and Dr. Scott Menaker.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Wesley Lyon:
Welcome back to another episode of Drilling It Down. This is your host, (00:02):
undefined
Wesley Lyon: Wes Lyon, co-hosting with me today, Liam Fitzgerald. Liam, welcome to the show. (00:06):
undefined
Liam Fitzgerald: Wes, thanks so much for having me. Very excited for today. (00:10):
undefined
Wesley Lyon: Absolutely. So today's topic, we want to talk about indexed universal life. (00:13):
undefined
Wesley Lyon: Is that what IUL stands for? (00:19):
undefined
Liam Fitzgerald: It is, it is. And yeah, a pretty big word, and we're really going to dive into it. (00:20):
undefined
Liam Fitzgerald: I know it's a type of permanent insurance, but it's definitely a special brand. (00:26):
undefined
Wesley Lyon: It's insurance. So, oh, man, it's weird. I keep seeing it advertised as an investment fund. (00:29):
undefined
Liam Fitzgerald: There you go. Well, it oftentimes is marketed as such, but we'll learn pretty (00:36):
undefined
Liam Fitzgerald: soon that, you know, anytime a policy, an insurance policy wants to be made (00:40):
undefined
Liam Fitzgerald: like an investment policy, they're usually not good at, usually they're one, right? (00:45):
undefined
Wesley Lyon: Yeah, no, definitely. You know, (00:49):
undefined
Wesley Lyon: I know we've talked about this quite a few times, but it keeps coming up. (00:51):
undefined
Wesley Lyon: So, you know, I want to talk about a little bit more in depth here. (00:54):
undefined
Wesley Lyon: And we came up with about eight quick issues with these policies. (00:57):
undefined
Wesley Lyon: This only took us about 10 minutes to come up with, if that tells you how easy (01:02):
undefined
Wesley Lyon: it is to kind of pick some of this stuff apart. (01:05):
undefined
Wesley Lyon: But we wanted to go through and kind of get a little more granular on the why (01:09):
undefined
Wesley Lyon: behind these things, on why they don't work. (01:13):
undefined
Wesley Lyon: Now, quick overview, for those of you who don't know what an indexed universal life policy is. (01:16):
undefined
Wesley Lyon: This is a type of permanent insurance policy, meaning by permanent, it's not a term. (01:21):
undefined
Wesley Lyon: Basically a term life insurance policy. (01:27):
undefined
Wesley Lyon: You own the life insurance for the term in which you need life insurance, (01:29):
undefined
Wesley Lyon: and then after you don't need it, you no longer pay for it. (01:33):
undefined
Wesley Lyon: But there's different types of products that are permanent life insurance policies, (01:36):
undefined
Wesley Lyon: and they either pay out upon your death, or as we're gonna talk about, (01:41):
undefined
Wesley Lyon: you can take loans from them, distributions. (01:45):
undefined
Wesley Lyon: A lot of people really, I don't think sell these as life insurance. (01:48):
undefined
Wesley Lyon: So we live in a little bit of gray area because, (01:52):
undefined
Wesley Lyon: Uh, Liam, I believe, uh, you had to take a, did you take the series 65? (01:56):
undefined
Liam Fitzgerald: It was actually 66, but it was close enough. Pretty deep in the laws there. (02:02):
undefined
Wesley Lyon: So you had to take the combo. (02:06):
undefined
Liam Fitzgerald: Exactly. (02:07):
undefined
Wesley Lyon: So for those of you who don't know what we're talking about, (02:07):
undefined
Wesley Lyon: there are securities licenses to sell security, and those aren't even to sell (02:09):
undefined
Wesley Lyon: securities. Those are to give advice. (02:13):
undefined
Wesley Lyon: Um, so Liam had to take those. You're also a certified financial planner. (02:16):
undefined
Liam Fitzgerald: Correct. (02:20):
undefined
Wesley Lyon: Um, I had to take all of those as well. Um, and then you were at Vanguard. (02:20):
undefined
Wesley Lyon: I was at Dimensional. did you have to take the Series 7? (02:25):
undefined
Liam Fitzgerald: Series 7 to even talk about trading a stock, right? That was what you did to (02:27):
undefined
Liam Fitzgerald: be able to both give advice, but then also trade as well. (02:31):
undefined
Wesley Lyon: Now, that one's a little bit funny (02:34):
undefined
Wesley Lyon: because technically working on the personal side, you don't need a 7. (02:36):
undefined
Wesley Lyon: It's something a little more either on people selling, actual selling stocks, (02:41):
undefined
Wesley Lyon: but you're part of Vanguard, which does both. (02:46):
undefined
Wesley Lyon: So you're on the personal side, but that is a little technicality. (02:48):
undefined
Wesley Lyon: Now, in order to sell an indexed universal life policy, you have to take an insurance exam, right? (02:52):
undefined
Liam Fitzgerald: You do have to take an insurance exam. Now, the term exam, and apologies for (02:59):
undefined
Liam Fitzgerald: any of our friendly insurance agents watching, but it's not necessarily as in-depth (03:03):
undefined
Liam Fitzgerald: as some of those other exams we were talking about. (03:08):
undefined
Wesley Lyon: Right. That's weird. I took that, Liam. (03:10):
undefined
Liam Fitzgerald: Well, I'm sorry to really offend you there, Wes. I'm not sure, (03:12):
undefined
Liam Fitzgerald: and I studied for it, but I did take it and pass it. Maybe one weekend, right, all it took? (03:15):
undefined
Wesley Lyon: Yeah, we used to work for a fee-based RIA, and we didn't have a broker. (03:20):
undefined
Wesley Lyon: We would directly sell some, (03:25):
undefined
Wesley Lyon: insurance, disability, term life. We don't do that just because when you're (03:28):
undefined
Wesley Lyon: only selling the products that are right for people, the commissions are tiny. (03:34):
undefined
Wesley Lyon: I'm not even doing the paperwork for the tiny commission. We send it out to a broker. (03:39):
undefined
Wesley Lyon: That broker gets to make all the money. He loves us for that, (03:44):
undefined
Wesley Lyon: but he just shops the cheapest policies, and that way there's no conflict on (03:48):
undefined
Wesley Lyon: our part. We don't have to deal with the paperwork. It's just time well spent. (03:52):
undefined
Wesley Lyon: But as you can see, it's much easier to become licensed to sell an insurance product. (03:56):
undefined
Wesley Lyon: And it's not regulated in the same manner that you'd get regulated as far as investment world goes. (04:02):
undefined
Wesley Lyon: And that has to do with performance reporting. (04:08):
undefined
Wesley Lyon: It also has to do with what you show clients or potential clients and really anything under the sun, (04:11):
undefined
Wesley Lyon: which is, I guess, kind of funny, but not really, because they rip a lot of (04:18):
undefined
Wesley Lyon: people off that they can actually market these as a great investment product. (04:22):
undefined
Wesley Lyon: I mean, half the marketing sees, oh, save for your family, you know, (04:26):
undefined
Wesley Lyon: get tax free income in retirement. (04:29):
undefined
Wesley Lyon: And they can do all of these things in which the government is trying to regulate. (04:31):
undefined
Wesley Lyon: But because they do it behind an insurance wrapper, they don't have to actually follow the rules, (04:35):
undefined
Wesley Lyon: which leads to I've seen some Some people honest about marketing these things, (04:41):
undefined
Wesley Lyon: a lot of people dishonest, and I think even sometimes the honest people, (04:46):
undefined
Wesley Lyon: they just don't understand the investments in the back end or have the true (04:49):
undefined
Wesley Lyon: deep understanding of what's going on to realize why this might not be the world's greatest idea. (04:54):
undefined
Wesley Lyon: But Liam, I came up with eight things here. Tell me which one stood out to you. What are you looking at? (05:01):
undefined
Liam Fitzgerald: You know, a good list right here. I would love because I know your background, (05:06):
undefined
Liam Fitzgerald: especially being in the investment world, working for Dimensional, (05:11):
undefined
Liam Fitzgerald: you know a lot about the indices. (05:14):
undefined
Liam Fitzgerald: And yes, when we look at some of these accounts, we say, okay, (05:17):
undefined
Liam Fitzgerald: the S&P 500 is there. Maybe the Russell 1000. (05:20):
undefined
Liam Fitzgerald: I recognize those as indexes. (05:23):
undefined
Liam Fitzgerald: It sounds like they might be backtested. How are these indexes truly implemented (05:26):
undefined
Liam Fitzgerald: into some of these policies? (05:32):
undefined
Wesley Lyon: Yeah, so every one's going to be quite a bit different. (05:33):
undefined
Wesley Lyon: But generally speaking, what we're referring to in these indices is when you (05:37):
undefined
Wesley Lyon: put money into this policy, it kind of grows in this investment account and (05:41):
undefined
Wesley Lyon: you get to participate with the market. (05:46):
undefined
Wesley Lyon: I think that's the word they love to use. You get to participate in market growth (05:49):
undefined
Wesley Lyon: and they put a 0% floor on it. And what they're really talking about is you (05:52):
undefined
Wesley Lyon: have participation in an index based off their rules. (05:56):
undefined
Wesley Lyon: So sometimes the indexes are very straightforward. Like you see the S&P 500 index. (06:00):
undefined
Wesley Lyon: Everybody knows what the S&P 500 is. Well, maybe not knows. They've heard of the S&P 500. (06:06):
undefined
Wesley Lyon: I don't know how many people know exactly how it gets constituted, (06:10):
undefined
Wesley Lyon: details, but everybody's heard of it and can generally talk about it. (06:13):
undefined
Wesley Lyon: So you can latch on to that one. Sometimes, though, they show policies, (06:16):
undefined
Wesley Lyon: and they'll show policies with some sort of index. (06:21):
undefined
Wesley Lyon: Sometimes an index creator created it. (06:24):
undefined
Wesley Lyon: Other times didn't. And sometimes you have to dig into the details if it's too good to be true. (06:27):
undefined
Wesley Lyon: Like, oh, look, this index universal life policy would have performed at 16.5% (06:31):
undefined
Wesley Lyon: annualized over the last 25 years. (06:37):
undefined
Wesley Lyon: And this actually happened where somebody showed me this. (06:40):
undefined
Wesley Lyon: So I looked at the index, and I went to the index provider's website. (06:43):
undefined
Wesley Lyon: By the way, for those of you that don't exactly understand what indexes are, (06:48):
undefined
Wesley Lyon: probably a whole conversation for another day. (06:52):
undefined
Wesley Lyon: But some entity is doing portfolio construction rules in a theoretical space, (06:55):
undefined
Wesley Lyon: and they're creating these are the rules, and this is what gets included. (07:01):
undefined
Wesley Lyon: And those are the rules. So the S&P 500 is what, the largest 500 in the US? (07:04):
undefined
Wesley Lyon: So that reconstitutes on a certain day in the largest 500 companies in the US (07:09):
undefined
Wesley Lyon: by total outstanding share price. So number of shares multiplied by the share price. (07:14):
undefined
Wesley Lyon: That is going to be your metric to get into that index. So sometimes you look (07:21):
undefined
Wesley Lyon: at these and you look at the methodology and you go, what in the world? (07:25):
undefined
Wesley Lyon: Somebody did rocket science to get here. And then you look back and I'm looking (07:29):
undefined
Wesley Lyon: at this illustration showing, hey, look at what this policy would have done over 20 years. (07:33):
undefined
Wesley Lyon: Well, the index was created two years ago. Somebody went and looked backwards (07:38):
undefined
Wesley Lyon: and they were like, hey, this is fantastic. (07:42):
undefined
Wesley Lyon: Look, if I did this much S&P 500, you know, they just over-engineered this thing (07:47):
undefined
Wesley Lyon: to be the perfect index for the last 20 years, which clearly ain't going to (07:52):
undefined
Wesley Lyon: be the perfect index for the next 20. (07:56):
undefined
Wesley Lyon: But yeah, it's just a back-tested index. (07:58):
undefined
Wesley Lyon: And, you know, when I was working at Dimensional, I had a colleague of mine (08:02):
undefined
Wesley Lyon: and we were always selling against some of this stuff because some of these (08:05):
undefined
Wesley Lyon: indices, they use them in life insurance. (08:09):
undefined
Wesley Lyon: But some investment companies, they take this garbage data and they actually (08:11):
undefined
Wesley Lyon: put it to work and they invest this way. (08:15):
undefined
Wesley Lyon: And I remember sitting there and some knucklehead advisor is showing us this (08:17):
undefined
Wesley Lyon: great thing and I was going to invest in it. (08:22):
undefined
Wesley Lyon: And this guy, we're young, we're doing all the math behind it. (08:25):
undefined
Wesley Lyon: This guy was older and wise and he just turned with a smile on his face and (08:29):
undefined
Wesley Lyon: looked and goes, I've never seen a back test I didn't like. (08:34):
undefined
Wesley Lyon: And to his point, what he was subtly saying is, yeah, they probably came up (08:40):
undefined
Wesley Lyon: with 50 iterations of this that didn't work and they threw out the garbage. (08:45):
undefined
Wesley Lyon: And then number 51, you know, that was the one that worked. (08:49):
undefined
Wesley Lyon: So, you know, when you're looking at something that hasn't been existed, (08:53):
undefined
Wesley Lyon: it has been back tested or, you know, look, if I would have done X, (08:56):
undefined
Wesley Lyon: Y, and Z, well, it's like, yeah, if I would have bought Sears when it was $2 (09:00):
undefined
Wesley Lyon: a share, sold at the top and traded it all in for Apple, I might have more money (09:03):
undefined
Wesley Lyon: than, you know, Bill Gates, but I didn't do that. (09:07):
undefined
Wesley Lyon: So, you know, you have to be careful if they just really back-tested, (09:11):
undefined
Wesley Lyon: created an index just to make their illustration look good. (09:15):
undefined
Liam Fitzgerald: Makes sense. Yeah, I'm going to jump on your list because I noticed one point (09:18):
undefined
Liam Fitzgerald: we had was some really bad enforced illustrations. (09:22):
undefined
Liam Fitzgerald: And I think about a mutual client that we have that thought they were secure for retirement. (09:25):
undefined
Liam Fitzgerald: They were getting ready to go off and travel and sell their practice and enjoy. (09:29):
undefined
Liam Fitzgerald: And they really put most of their eggs in this basket of, hey, I have X amount, (09:34):
undefined
Liam Fitzgerald: a guaranteed basis for life, right? And almost an annuity type. (09:40):
undefined
Liam Fitzgerald: Talk to me about some of these illustrations. Seems to me borderline illegal (09:44):
undefined
Liam Fitzgerald: to make it seem like this. (09:48):
undefined
Wesley Lyon: Definitely. And by the way, if you're listening to this, because I remember (09:50):
undefined
Wesley Lyon: we jumped on the phone and said, oh, that was me. And I was like, it was you and 18 others. (09:53):
undefined
Wesley Lyon: So if you have done any of this stuff, don't feel bad. Give us a call. (09:59):
undefined
Wesley Lyon: You know, we'll try to work with you. Get it worked out. So don't feel horrible. (10:02):
undefined
Wesley Lyon: Most dentists have been wrapped up into one of these. but it is fairly common. (10:06):
undefined
Wesley Lyon: You know, it's unfortunate that conversation I've had to have over and over (10:10):
undefined
Wesley Lyon: again through the years of, hey, you're not, but enforced illustrations are (10:13):
undefined
Wesley Lyon: hypothetical performances. (10:18):
undefined
Wesley Lyon: It would be the same as, well, now we're not allowed to do this and we would (10:20):
undefined
Wesley Lyon: never do this, but we would show somebody, you know, hey, if you invest in this, (10:23):
undefined
Wesley Lyon: look how much money you're going to have and showing them that, (10:27):
undefined
Wesley Lyon: you know, it's going to earn like 12% a year, which is absolutely insane. (10:29):
undefined
Wesley Lyon: I can't imagine doing that. (10:32):
undefined
Wesley Lyon: So we obviously don't do that. We're not allowed to, but somehow you're allowed (10:35):
undefined
Wesley Lyon: to do this with insurances. (10:39):
undefined
Wesley Lyon: Now, some funny things we've seen in some of these illustrations, (10:41):
undefined
Wesley Lyon: like when you dive into it, (10:44):
undefined
Wesley Lyon: one in particular, I know we were looking at and, you know, you're doing very (10:46):
undefined
Wesley Lyon: simple math and the math is the money in times the crediting rate used. (10:51):
undefined
Wesley Lyon: You know, you can sit there, oh, these are the deposits. Here's the interest (10:56):
undefined
Wesley Lyon: rate that the product is going to hypothetically earn. (11:00):
undefined
Wesley Lyon: And you calculate out what the value of the policy should be. (11:03):
undefined
Wesley Lyon: Now, this is not that uncommon where the policy value exceeds the stated interest crediting rate. (11:06):
undefined
Wesley Lyon: So we've got a huge problem there that indicates there's negative mortality (11:15):
undefined
Wesley Lyon: charges, mortality and expenses, because the insurance company is going to charge fees on top of that cap. (11:21):
undefined
Wesley Lyon: So, I mean, it's just mind-blowing to sit there and look at something where (11:28):
undefined
Wesley Lyon: you know you're going to have to pay fees to the insurance company, (11:34):
undefined
Wesley Lyon: but they're modeling out that they're going to actually pay you. (11:36):
undefined
Wesley Lyon: And it's not every single one of them. some we look at and whether or not we (11:40):
undefined
Wesley Lyon: agree with the fact they're going to get there, they're at least done correctly. (11:44):
undefined
Wesley Lyon: But that stuff is just staggering. And then showing somebody that, (11:47):
undefined
Wesley Lyon: you know, the S&P, or you do this, and this is the cap rate, (11:51):
undefined
Wesley Lyon: the participation rate, which kind of dives into a couple other issues on the list. (11:56):
undefined
Wesley Lyon: They're in the illustration, but you say, well, why or how did they come up (12:01):
undefined
Wesley Lyon: with that? Or what's wrong with the illustration? (12:07):
undefined
Wesley Lyon: And one of the big things, you know, other than it just being completely wrong, (12:10):
undefined
Wesley Lyon: like 100% just wrong, something I like to call cap rate integrity. (12:16):
undefined
Wesley Lyon: Now, when you sign this universal indexed universal life, IUL. (12:24):
undefined
Liam Fitzgerald: Yep, you got it. (12:30):
undefined
Wesley Lyon: Okay, we don't sell these, so we don't know the jargon as well. Little rusty. (12:31):
undefined
Wesley Lyon: When you sell this, it's a contract with an insurance company. (12:35):
undefined
Wesley Lyon: Right? you don't have your own account of money. (12:38):
undefined
Wesley Lyon: It's a contract with an insurance company, and they're providing you some guarantee in return. (12:41):
undefined
Wesley Lyon: When you read the fine print of most of these insurance contracts, (12:46):
undefined
Wesley Lyon: they have the right to change the cap and the participation rate at their free (12:50):
undefined
Wesley Lyon: will, which sometimes can be the same thing. (12:55):
undefined
Wesley Lyon: Sometimes you'll get 70% of the index. Sometimes you'll get the index return (12:57):
undefined
Wesley Lyon: less or something, but other times you just get, hey, you can get the S&P 500 (13:02):
undefined
Wesley Lyon: capped at 9%. So if it does 30, you get 9%. Well. (13:07):
undefined
Wesley Lyon: That contract usually states that the insurance company can lower the cap rate, (13:12):
undefined
Wesley Lyon: lower the participation rate at their own doing. (13:18):
undefined
Wesley Lyon: So it's a unilateral contract. It's no guarantee. (13:23):
undefined
Wesley Lyon: So, you know, it might start with a very high participation rate or cap rate. (13:28):
undefined
Wesley Lyon: You know, you might get, I think, like 13%. You know, we've got a 13% cap rate. (13:34):
undefined
Wesley Lyon: The S&P 500 is 15. and you get 13 of it. That sounds phenomenal. (13:39):
undefined
Wesley Lyon: But then you go back five years later and the cap's only nine, it's eight. (13:45):
undefined
Wesley Lyon: So the cap rate going down can be a huge problem. (13:50):
undefined
Wesley Lyon: And they're illustrating one thing, but in the background, they're going to change something else. (13:53):
undefined
Wesley Lyon: So that can be a huge one. And same with the participation rates. (13:59):
undefined
Wesley Lyon: There's no guarantee on those participation rates. (14:03):
undefined
Wesley Lyon: So they're illustrating something that just ain't going to come true. (14:05):
undefined
Liam Fitzgerald: That's fair. And I especially saw the cap rates can be very dangerous because, (14:10):
undefined
Liam Fitzgerald: okay, it seems like a win-win. (14:15):
undefined
Liam Fitzgerald: You have a floor, maybe it's zero. You're never, quote unquote, (14:18):
undefined
Liam Fitzgerald: never going to lose anything. (14:20):
undefined
Liam Fitzgerald: Your cap is eight. But if you look at the, let's take the S&P 500, (14:21):
undefined
Liam Fitzgerald: the history of that, most of the market growth usually comes in bunches, right? (14:25):
undefined
Liam Fitzgerald: So, hey, the S&P was up 20% a couple of years ago. Well, someone was stuck over here at eight. (14:30):
undefined
Liam Fitzgerald: Yes, you didn't lose anything, but you're really, after fees, (14:35):
undefined
Liam Fitzgerald: you're not getting 8% average annual return a year. Is that right? (14:39):
undefined
Wesley Lyon: No, that's right. And a lot of times too, people don't realize that most of (14:43):
undefined
Wesley Lyon: these are done like point to point. (14:47):
undefined
Wesley Lyon: So if you're doing, okay, I've got, (14:49):
undefined
Wesley Lyon: one year. Yours usually isn't January 1st to December 31st. It's usually your date to your next date. (14:54):
undefined
Wesley Lyon: So it's kind of funny just based off of these caps that you could have two policies (15:01):
undefined
Wesley Lyon: sold within a week of each other with wildly different returns if there was (15:06):
undefined
Wesley Lyon: extreme market volatility within those couple weeks that there's overlap one way or the other. (15:11):
undefined
Wesley Lyon: So yeah, you don't necessarily get that, but that's the biggest thing there (15:17):
undefined
Wesley Lyon: is if you're capped at eight and the return is at 30, 20. (15:22):
undefined
Wesley Lyon: And these aren't that absurd of returns. (15:27):
undefined
Wesley Lyon: You're not going to get that return annualized. I mean, it's not going to be (15:30):
undefined
Wesley Lyon: your average or what you expect over time, but a lot of your return is going (15:32):
undefined
Wesley Lyon: to come from big, big years and you're stuck at eight. Yeah. (15:37):
undefined
Liam Fitzgerald: No, that's big opportunity costs there and uncomfortable. (15:41):
undefined
Liam Fitzgerald: And we talked earlier, we both took the series seven. (15:45):
undefined
Liam Fitzgerald: We're both pretty heavy into the investments. we're talking a lot about rates (15:49):
undefined
Liam Fitzgerald: of return and percentages, but I know that dividends are certainly a part of (15:52):
undefined
Liam Fitzgerald: investments. And a lot of our investors and clients will count on dividends (15:56):
undefined
Liam Fitzgerald: at the end of the year, quarterly. (16:00):
undefined
Liam Fitzgerald: Sometimes retirees will count on that for their income. Are dividends a part of this at all? (16:02):
undefined
Wesley Lyon: They can be. Usually not. Usually you're going to do a price to price. (16:06):
undefined
Wesley Lyon: So you're looking at the percentage increase of the S&P 500, (16:10):
undefined
Wesley Lyon: not what the dividends are paying out. (16:15):
undefined
Wesley Lyon: And I think historically, the S&P 500 has done roughly 10% with dividends. (16:17):
undefined
Wesley Lyon: A little bit over. And without dividends, Liam, do you know what the number is? (16:23):
undefined
Liam Fitzgerald: Oh, you're putting me on the spot. I don't know exactly, but it could be close to half that, right? (16:30):
undefined
Wesley Lyon: It is more than half. I'll give you that. Give me your best guess. (16:35):
undefined
Liam Fitzgerald: I'll say seven. (16:40):
undefined
Wesley Lyon: It's just a little over seven. You lose about 3% not having a dividends. (16:41):
undefined
Wesley Lyon: Now that fluctuates sometimes up, sometimes down. (16:46):
undefined
Wesley Lyon: A lot of dividends really have to do with the tax law and what the best way (16:49):
undefined
Wesley Lyon: to return money to shareholders is. (16:53):
undefined
Wesley Lyon: But yeah, I mean, you're already losing 3% there. So, that's not great. (16:55):
undefined
Wesley Lyon: You've got a cap on it. That's not great. (16:59):
undefined
Wesley Lyon: And then, gosh, we're just going to pick apart these illustrations. (17:03):
undefined
Wesley Lyon: So, then we already know that we've got cap rate integrity. We've got participation rate integrity. (17:08):
undefined
Wesley Lyon: We're not including dividends. We do have cap rates. So, these are all bad things. (17:13):
undefined
Wesley Lyon: And then they're going to show us getting our money out tax-free. (17:19):
undefined
Wesley Lyon: But Liam, how do you get money out of a permanent life insurance policy completely tax-free? (17:23):
undefined
Liam Fitzgerald: Oh, man. Unfortunately, someone has to die for it, right? (17:27):
undefined
Wesley Lyon: Yeah. Or how do they promote it? (17:31):
undefined
Liam Fitzgerald: Oh, well, let me just tell you about this loan that you can take. (17:34):
undefined
Liam Fitzgerald: Borrow from yourself, man. Go ahead. Oh, yeah. (17:38):
undefined
Wesley Lyon: Infinite banking, right? Yeah. So it's a loan. and when they illustrate the (17:41):
undefined
Wesley Lyon: loans, they illustrate an interest rate on the loans. (17:46):
undefined
Wesley Lyon: Loan rate integrity is a thing too. You read that contract, that loan rate is (17:50):
undefined
Wesley Lyon: not guaranteed. The insurance company is going to set it. (17:54):
undefined
Wesley Lyon: So, yikes. So you're looking at it, then all of a sudden the loan rate goes (17:58):
undefined
Wesley Lyon: up and now this is always the funny thing because we see the illustrations on (18:02):
undefined
Wesley Lyon: the front end that show them, oh my gosh, this is amazing. (18:06):
undefined
Wesley Lyon: And then we see the real results on the back end of people that come in here (18:09):
undefined
Wesley Lyon: 15, 20 years into a policy. (18:12):
undefined
Wesley Lyon: And all of a sudden, all these rates and everything have changed. (18:14):
undefined
Wesley Lyon: And yikes, I even had a client in a few weeks ago that we've got big issues (18:18):
undefined
Wesley Lyon: because they thought these policies were going to be enforced forever. (18:25):
undefined
Wesley Lyon: The problem is the fees and mortality expenses have gone up And the policies (18:28):
undefined
Wesley Lyon: are in jeopardy of not being enforced anymore because there's not going to be enough payment on it. (18:36):
undefined
Wesley Lyon: What is the word when a policy is no longer in force? (18:45):
undefined
Liam Fitzgerald: Oh, man, that's a good policy lapses. There you go. (18:52):
undefined
Wesley Lyon: The policy can lapse and this can be dangerous if you fortunately this client (18:56):
undefined
Wesley Lyon: didn't have a loan on it. So we don't really have any tax issues. (19:00):
undefined
Wesley Lyon: But a lot of people get caught in this trap. They don't realize, (19:04):
undefined
Wesley Lyon: you know, okay, they put the money in. (19:07):
undefined
Wesley Lyon: So let's just be realistic here. They put a million in over 20 years and it's worth about a million. (19:09):
undefined
Wesley Lyon: That's say that's about normal. (19:15):
undefined
Liam Fitzgerald: I'd say that's generous. It's probably generous. I've seen some that have made money. (19:18):
undefined
Wesley Lyon: 80% of them are worth less than what the people put into them, I'd say. (19:23):
undefined
Wesley Lyon: But now, okay, you got that million. So you take a loan against the cash value (19:27):
undefined
Wesley Lyon: to get your money out tax-free. (19:31):
undefined
Wesley Lyon: Now, all of a sudden, the fee, the interest, and the mortality and insurance (19:34):
undefined
Wesley Lyon: expenses start going up on you. (19:39):
undefined
Wesley Lyon: And there's no cash value because you took it all out as a loan. (19:42):
undefined
Wesley Lyon: So what ends up happening is you either have to pay additional premiums in, (19:46):
undefined
Wesley Lyon: which can be hefty, or the policy lapses. (19:51):
undefined
Wesley Lyon: Now, if the policy lapses, it had a million in cash value, you took it out as (19:55):
undefined
Wesley Lyon: a loan, and you already spent the money, and now the policy lapses. (19:59):
undefined
Wesley Lyon: You're going to have a big tax bill. It's going to be an ugly day, (20:04):
undefined
Wesley Lyon: and people don't talk about the fact that these policies can lapse, (20:09):
undefined
Wesley Lyon: but they absolutely can. and these illustrations should not be trusted. (20:13):
undefined
Liam Fitzgerald: Right. No, that's fair. And I always love when, all right, you meet this person (20:17):
undefined
Liam Fitzgerald: and they're an insurance agent and a financial advisor and apparently a tax (20:21):
undefined
Liam Fitzgerald: expert too, because, oh, we can tax deferred growth and all of that. (20:24):
undefined
Liam Fitzgerald: But when that comes out, when it lapses, when you surrender it, (20:29):
undefined
Liam Fitzgerald: if there's a gain, that's not tax or capital gains rates, right? (20:32):
undefined
Liam Fitzgerald: You're going to pay pretty much your top rate at that. (20:36):
undefined
Wesley Lyon: You are going to pay ordinary income taxes on that, which can be devastating. (20:38):
undefined
Wesley Lyon: Yeah, I don't know how much worse it can get when that happens. (20:44):
undefined
Wesley Lyon: And people don't really price that in that it could happen, but it absolutely could happen. (20:47):
undefined
Wesley Lyon: No doubt in my mind, especially if you're taking big loans against a policy. (20:53):
undefined
Wesley Lyon: But yeah, you've turned a capital gain into ordinary income. (20:57):
undefined
Wesley Lyon: People say, well, if I put a million in, I got a million out. (21:00):
undefined
Wesley Lyon: You know, I didn't have a gain. Wrong. (21:02):
undefined
Wesley Lyon: The insurance company, you have a tax basis and a policy. (21:06):
undefined
Wesley Lyon: And some of your premium goes towards the tax basis. but a lot of your premium goes towards expenses. (21:10):
undefined
Wesley Lyon: So this is how you can have a million dollar policy that you put a million dollars into. (21:15):
undefined
Wesley Lyon: They're telling you that it's returned 7% a year because they're calculating (21:20):
undefined
Wesley Lyon: the return after the mortality charges, which that's basically the cost of insurance (21:24):
undefined
Wesley Lyon: plus the administrative charges in there. (21:29):
undefined
Wesley Lyon: So if 400,000 of your money went into expenses, (21:32):
undefined
Wesley Lyon: which wouldn't be absurd in some of these policies, then in this case, (21:36):
undefined
Wesley Lyon: you would have a $600,000 tax basis, you'd owe ordinary income tax on $400,000 immediately. (21:41):
undefined
Liam Fitzgerald: Look at this. (21:49):
undefined
Liam Fitzgerald: Scary, scary day. And that's the other concern I have is that when I talk to (21:50):
undefined
Liam Fitzgerald: a lot of these clients who have these policies like this, (21:57):
undefined
Liam Fitzgerald: they do it or they're bought into it because they're scared of the market and (22:00):
undefined
Liam Fitzgerald: they're sold that this is a conservative way to invest. (22:03):
undefined
Liam Fitzgerald: This is a way that you can save your money and not risk it in the market. (22:07):
undefined
Liam Fitzgerald: It sounds like one of the riskiest ventures is putting your money in and maybe (22:11):
undefined
Liam Fitzgerald: not having the same amount to come out after years and years and years, (22:15):
undefined
Liam Fitzgerald: probably much more aggressive than a traditional investment would be. (22:19):
undefined
Wesley Lyon: Yeah, you'd be better off in cash probably half the time. I mean, (22:22):
undefined
Wesley Lyon: it's just, it's kind of sad that this stuff still goes on. (22:26):
undefined
Wesley Lyon: People put a whole bunch, like I've seen a whole bunch of people argue on this (22:30):
undefined
Wesley Lyon: guy on LinkedIn. He's hilarious. (22:36):
undefined
Wesley Lyon: He argues with all the insurance salespeople in his free time. (22:38):
undefined
Wesley Lyon: He needs to spend some more time getting some new clients, but maybe he gets some out of this. (22:42):
undefined
Wesley Lyon: Maybe it's actually, I never thought of that. Maybe all the people looking at (22:46):
undefined
Wesley Lyon: that, read him tearing this guy apart and they call him like, (22:50):
undefined
Wesley Lyon: Hey, I clearly need to talk to you. It could be his whole marketing. (22:53):
undefined
Wesley Lyon: Um, his name's Andy Penko. I don't know him. I just find him hilarious. (22:56):
undefined
Wesley Lyon: Um, but yeah, you know, he, he goes and argues with them all and you know, (23:01):
undefined
Wesley Lyon: they're, they're just selling it and selling it. (23:05):
undefined
Wesley Lyon: And like, if you talk to these guys, they'll call us like, oh let me explain (23:07):
undefined
Wesley Lyon: the benefits of it to you i'm like dude i'm a cpa that's well known for my tax (23:11):
undefined
Wesley Lyon: knowledge and they're just like well you don't know about this really i've. (23:16):
undefined
Liam Fitzgerald: Heard it yeah. (23:22):
undefined
Wesley Lyon: Like really you don't think i know about this like no i do know about it it's (23:23):
undefined
Wesley Lyon: an absolute scam here but if instead you put your money in the stock market (23:27):
undefined
Wesley Lyon: of that 20 years you know your million probably goes to like four and sure you (23:32):
undefined
Wesley Lyon: can risk losing 30 of it but you're gonna risk losing like 30, (23:36):
undefined
Wesley Lyon: 40% of your millions, not your million. (23:39):
undefined
Liam Fitzgerald: Exactly. (23:43):
undefined
Wesley Lyon: You know, there's no fear of losing money when you don't have any, (23:44):
undefined
Wesley Lyon: but a lot of times too, they always talk and they argue. (23:48):
undefined
Wesley Lyon: This is where I was going with that story. They argue about how the money gets (23:52):
undefined
Wesley Lyon: invested and the strategies behind it. (23:57):
undefined
Wesley Lyon: I think, I don't know this for certain, but I think if you oftentimes found (24:00):
undefined
Wesley Lyon: that most of this money is just invested in the general account of the insurance (24:03):
undefined
Wesley Lyon: company and the insurance company just kind of sets what the spreads are, all that. (24:07):
undefined
Wesley Lyon: They know what the policy is going to end up paying out and they're taking the (24:11):
undefined
Wesley Lyon: administrative expenses, the mortality charges on it. I mean, they know. (24:15):
undefined
Wesley Lyon: So, it's not, I don't know, there's not rocket science. (24:20):
undefined
Wesley Lyon: I think people have this view in the background that there's these really, (24:23):
undefined
Wesley Lyon: really smart investment guys trading option strategies to make this happen. It's like, (24:27):
undefined
Wesley Lyon: Nah, it's probably in the general account of the insurance company. Sure. (24:33):
undefined
Wesley Lyon: You never worked on the institutional side. Are you aware of how basically insurance companies function? (24:38):
undefined
Liam Fitzgerald: I don't know. Share a little more. (24:44):
undefined
Wesley Lyon: They keep premiums with expected payouts, right? (24:47):
undefined
Wesley Lyon: Whether or not it'd be a life insurance policy, whether or not it would be disability (24:50):
undefined
Wesley Lyon: policy, whether or not it's going to be flood insurance. Whatever it is that (24:56):
undefined
Wesley Lyon: they're insuring, they've got really smart actuaries in the background. (25:00):
undefined
Wesley Lyon: And the actuaries are calculating out, based off the risk, how much they expect to pay out. (25:05):
undefined
Wesley Lyon: Now, they're collecting the premiums, but they're not paying out big events every single year. (25:10):
undefined
Wesley Lyon: So they're investing the premiums. And they're typically going to be in really safe investments. (25:15):
undefined
Wesley Lyon: They're probably the biggest buyer of corporate bonds is insurance companies. (25:19):
undefined
Wesley Lyon: They're very, very bond heavy. We would look at it for a client if they came (25:23):
undefined
Wesley Lyon: in with that portfolio and be like, are you scared of your own shadow? (25:28):
undefined
Wesley Lyon: And it's not that they're scared of their own shadow. It's that this money is (25:32):
undefined
Wesley Lyon: being invested to pay out claims. (25:36):
undefined
Wesley Lyon: It's not being invested to beat the market. It's being invested to pay out claims. (25:39):
undefined
Wesley Lyon: So it's going to be a lower investment return. And it's not a knock on insurance (25:44):
undefined
Wesley Lyon: companies. It's just a business model. (25:47):
undefined
Wesley Lyon: That's where your money is being invested. it's like this, this isn't it. (25:50):
undefined
Wesley Lyon: This isn't it. Your money needs to be growing faster. (25:57):
undefined
Liam Fitzgerald: And if you take on that risk, you're paid for that. And to be able to say, (25:59):
undefined
Liam Fitzgerald: hey, I'm going to put it into a traditional investment. (26:04):
undefined
Liam Fitzgerald: That's right for me. And that doesn't mean you have to put all of the heat on, (26:07):
undefined
Liam Fitzgerald: be very, very aggressive. (26:11):
undefined
Liam Fitzgerald: No, you can have a conservative portfolio with traditional investments, (26:13):
undefined
Liam Fitzgerald: just like those companies do. (26:17):
undefined
Liam Fitzgerald: And I always laugh because when I look at the biggest skyscrapers around and (26:19):
undefined
Liam Fitzgerald: I look at the stadiums, like the New York Giants and New York Jets, (26:24):
undefined
Liam Fitzgerald: they play in MetLife Stadium and the Texas Rangers playing Globe Life Park. (26:27):
undefined
Liam Fitzgerald: These insurance companies are huge entities. They're not losing money on you. (26:32):
undefined
Liam Fitzgerald: They are not doing you a favor. They are not your best friend. (26:36):
undefined
Wesley Lyon: No, they're definitely making money off of you. And they're investing conservatively. (26:39):
undefined
Wesley Lyon: They just don't have a way to return this, money to you with a 10% annualized return. (26:43):
undefined
Wesley Lyon: There's just no way for them to do it. (26:50):
undefined
Liam Fitzgerald: Sure. (26:52):
undefined
Wesley Lyon: So again, not necessarily knocking (26:53):
undefined
Wesley Lyon: the insurance companies and not to say permanent life has zero place, (26:55):
undefined
Wesley Lyon: Maybe, though. We don't want to say zero, but we're in the decimal places there. (27:00):
undefined
Wesley Lyon: I've seen some people use it for taxation purposes, or sometimes people can't (27:07):
undefined
Wesley Lyon: get insured due to a health issue, and a permanent life insurance policy is kind of our only option. (27:13):
undefined
Wesley Lyon: So, I've certainly seen that, too. A client straightforward tells us when I (27:18):
undefined
Wesley Lyon: went and looked at it, he goes, I know you're going to be mad about it. I got it when I was 30. (27:22):
undefined
Wesley Lyon: I had two kids, and we had nothing else to fall back on and my health didn't (27:26):
undefined
Wesley Lyon: allow me to get insurance other than this. So he was like, I know it was a bad idea. (27:31):
undefined
Wesley Lyon: I was like, oh, well, you know, it served a great purpose for a long time for him. (27:35):
undefined
Wesley Lyon: So not to completely bash him, but just like 99.7% bashed. (27:40):
undefined
Liam Fitzgerald: That's a pretty good guarantee. So that's fair. Did anything else on the list (27:45):
undefined
Liam Fitzgerald: that you're thinking of? (27:50):
undefined
Liam Fitzgerald: We don't want to beat it to death, but I think it's pretty much dead now, (27:50):
undefined
Liam Fitzgerald: but anything else we haven't covered yet? (27:54):
undefined
Wesley Lyon: You know, my last one is just the value of compound interest. (27:56):
undefined
Wesley Lyon: And like we kind of went through and we talked about where you're losing money, different spots here. (28:00):
undefined
Wesley Lyon: So kind of to recap, where are we losing money? Right. We've got a cap rate (28:05):
undefined
Wesley Lyon: or participation rate. We're not going to fully participate. (28:09):
undefined
Wesley Lyon: We're unlikely to be capturing dividends. Right. So there's if we're S&P 500, (28:11):
undefined
Wesley Lyon: we're about 3% lower right there. (28:16):
undefined
Wesley Lyon: So we're just sitting there. We're just going down and down and down. (28:18):
undefined
Wesley Lyon: Oh, then we're going to have administrative fees and expenses on the policy. (28:21):
undefined
Wesley Lyon: Then, we're going to have the mortality expense on the policy, (28:25):
undefined
Wesley Lyon: and we just kind of want to overall look and remember the value of compound interest. (28:30):
undefined
Wesley Lyon: What, even at 3%, 3.5%, your money doubles every 20 years. (28:35):
undefined
Wesley Lyon: It's 7%, it doubles every 10 years, and what, at 10%, it doubles every seven years. You got it. (28:40):
undefined
Wesley Lyon: All right, so let's just do some quick math with a million here. (28:46):
undefined
Wesley Lyon: I'm going to be 40 years old and put a million dollars into this policy. (28:50):
undefined
Wesley Lyon: I'll be lucky if it doubles in 30 years. It's probably not going to move anything. (28:55):
undefined
Wesley Lyon: Now, at 7%, I'm going to double every 10 years. (29:00):
undefined
Wesley Lyon: So at 50, it's going to be 2. At 60, it's going to be 4. At 70, it's going to be 8. (29:04):
undefined
Wesley Lyon: Compound interest is your friend. Now, if we're 40, though, and we're doing (29:10):
undefined
Wesley Lyon: this, okay, we can probably afford to be more aggressive. (29:15):
undefined
Wesley Lyon: We're going to get somewhere in the ballpark of 9 to 10. It's every seven years. (29:20):
undefined
Wesley Lyon: So 47 we got to, 54 we have four, and then, what, 61 we have eight, 68 we have 16. (29:25):
undefined
Wesley Lyon: Like these percentage points matter. (29:37):
undefined
Wesley Lyon: They matter a lot. And there's nowhere where it's just exaggerated more than (29:42):
undefined
Wesley Lyon: getting into one of these policies versus just having it invested in simple (29:48):
undefined
Wesley Lyon: things. And this is true. (29:53):
undefined
Wesley Lyon: We'll probably have to start doing a bash that series. I like to be positive. (29:54):
undefined
Wesley Lyon: So we'll end on our positive. Well, diversified, low cost, be in good shape. (29:59):
undefined
Wesley Lyon: Yeah, absolutely. The name of the game. (30:02):
undefined
Wesley Lyon: But, you know, not that we want to beat something up, but we do want to prevent (30:05):
undefined
Wesley Lyon: people from getting into these. A ton of people sell them. (30:09):
undefined
Wesley Lyon: So I'll kind of end on, Liam, do you know the average commission that gets paid (30:12):
undefined
Wesley Lyon: for selling a permanent life insurance policy? (30:16):
undefined
Liam Fitzgerald: Oh, my goodness. You're going to tempt me to join the industry after I hear (30:19):
undefined
Liam Fitzgerald: how much they make on some of these, right? (30:22):
undefined
Liam Fitzgerald: But let me say 3%. That would be nice. (30:24):
undefined
Wesley Lyon: No, typically it's going to be more like 6% to 8% in an indexed universal life. (30:28):
undefined
Wesley Lyon: I mean, some are only 3%, some can be higher, but yeah, typically it's going to be 7-ish percent. (30:35):
undefined
Liam Fitzgerald: So the agents are pretty incentivized to, I wouldn't necessarily call them fiduciaries, (30:40):
undefined
Liam Fitzgerald: right? They're given a reward to sell these. (30:45):
undefined
Wesley Lyon: Yeah, I mean, it's almost cheaper to just look at the guy and go, (30:47):
undefined
Wesley Lyon: hey, look, if I go to the boat store right now and I buy you a boat, (30:50):
undefined
Wesley Lyon: will you never call me again? Because that'll be cheaper. (30:54):
undefined
Liam Fitzgerald: Right. That makes a lot of sense. So, no. (30:56):
undefined
Wesley Lyon: But no, that's it. So, just want to end, you know, is an indexed universal life (31:01):
undefined
Wesley Lyon: insurance policy an investment product, a permanent insurance or a life insurance product, or a scam? (31:05):
undefined
Liam Fitzgerald: Borderline a scam right that is it's a legal scam but it is a scam nonetheless i would say. (31:13):
undefined
Wesley Lyon: Yeah the actual product itself isn't the scam but the sales agents what they (31:18):
undefined
Wesley Lyon: promise that's the scam on it so do yourself a favor buy term life invest in (31:22):
undefined
Wesley Lyon: low cost well diversified and get on your road to financial freedom perfect. (31:28):
undefined
Liam Fitzgerald: Advice thanks wes. (31:33):
undefined
Wesley Lyon: Well liam thanks for joining us everyone out there we'll see you next time. (31:34):
undefined
undefined
Wesley Lyon: Wes Lyon, co-hosting with me today, Liam Fitzgerald. Liam, welcome to the show. (00:06):
undefined
Liam Fitzgerald: Wes, thanks so much for having me. Very excited for today. (00:10):
undefined
Wesley Lyon: Absolutely. So today's topic, we want to talk about indexed universal life. (00:13):
undefined
Wesley Lyon: Is that what IUL stands for? (00:19):
undefined
Liam Fitzgerald: It is, it is. And yeah, a pretty big word, and we're really going to dive into it. (00:20):
undefined
Liam Fitzgerald: I know it's a type of permanent insurance, but it's definitely a special brand. (00:26):
undefined
Wesley Lyon: It's insurance. So, oh, man, it's weird. I keep seeing it advertised as an investment fund. (00:29):
undefined
Liam Fitzgerald: There you go. Well, it oftentimes is marketed as such, but we'll learn pretty (00:36):
undefined
Liam Fitzgerald: soon that, you know, anytime a policy, an insurance policy wants to be made (00:40):
undefined
Liam Fitzgerald: like an investment policy, they're usually not good at, usually they're one, right? (00:45):
undefined
Wesley Lyon: Yeah, no, definitely. You know, (00:49):
undefined
Wesley Lyon: I know we've talked about this quite a few times, but it keeps coming up. (00:51):
undefined
Wesley Lyon: So, you know, I want to talk about a little bit more in depth here. (00:54):
undefined
Wesley Lyon: And we came up with about eight quick issues with these policies. (00:57):
undefined
Wesley Lyon: This only took us about 10 minutes to come up with, if that tells you how easy (01:02):
undefined
Wesley Lyon: it is to kind of pick some of this stuff apart. (01:05):
undefined
Wesley Lyon: But we wanted to go through and kind of get a little more granular on the why (01:09):
undefined
Wesley Lyon: behind these things, on why they don't work. (01:13):
undefined
Wesley Lyon: Now, quick overview, for those of you who don't know what an indexed universal life policy is. (01:16):
undefined
Wesley Lyon: This is a type of permanent insurance policy, meaning by permanent, it's not a term. (01:21):
undefined
Wesley Lyon: Basically a term life insurance policy. (01:27):
undefined
Wesley Lyon: You own the life insurance for the term in which you need life insurance, (01:29):
undefined
Wesley Lyon: and then after you don't need it, you no longer pay for it. (01:33):
undefined
Wesley Lyon: But there's different types of products that are permanent life insurance policies, (01:36):
undefined
Wesley Lyon: and they either pay out upon your death, or as we're gonna talk about, (01:41):
undefined
Wesley Lyon: you can take loans from them, distributions. (01:45):
undefined
Wesley Lyon: A lot of people really, I don't think sell these as life insurance. (01:48):
undefined
Wesley Lyon: So we live in a little bit of gray area because, (01:52):
undefined
Wesley Lyon: Uh, Liam, I believe, uh, you had to take a, did you take the series 65? (01:56):
undefined
Liam Fitzgerald: It was actually 66, but it was close enough. Pretty deep in the laws there. (02:02):
undefined
Wesley Lyon: So you had to take the combo. (02:06):
undefined
Liam Fitzgerald: Exactly. (02:07):
undefined
Wesley Lyon: So for those of you who don't know what we're talking about, (02:07):
undefined
Wesley Lyon: there are securities licenses to sell security, and those aren't even to sell (02:09):
undefined
Wesley Lyon: securities. Those are to give advice. (02:13):
undefined
Wesley Lyon: Um, so Liam had to take those. You're also a certified financial planner. (02:16):
undefined
Liam Fitzgerald: Correct. (02:20):
undefined
Wesley Lyon: Um, I had to take all of those as well. Um, and then you were at Vanguard. (02:20):
undefined
Wesley Lyon: I was at Dimensional. did you have to take the Series 7? (02:25):
undefined
Liam Fitzgerald: Series 7 to even talk about trading a stock, right? That was what you did to (02:27):
undefined
Liam Fitzgerald: be able to both give advice, but then also trade as well. (02:31):
undefined
Wesley Lyon: Now, that one's a little bit funny (02:34):
undefined
Wesley Lyon: because technically working on the personal side, you don't need a 7. (02:36):
undefined
Wesley Lyon: It's something a little more either on people selling, actual selling stocks, (02:41):
undefined
Wesley Lyon: but you're part of Vanguard, which does both. (02:46):
undefined
Wesley Lyon: So you're on the personal side, but that is a little technicality. (02:48):
undefined
Wesley Lyon: Now, in order to sell an indexed universal life policy, you have to take an insurance exam, right? (02:52):
undefined
Liam Fitzgerald: You do have to take an insurance exam. Now, the term exam, and apologies for (02:59):
undefined
Liam Fitzgerald: any of our friendly insurance agents watching, but it's not necessarily as in-depth (03:03):
undefined
Liam Fitzgerald: as some of those other exams we were talking about. (03:08):
undefined
Wesley Lyon: Right. That's weird. I took that, Liam. (03:10):
undefined
Liam Fitzgerald: Well, I'm sorry to really offend you there, Wes. I'm not sure, (03:12):
undefined
Liam Fitzgerald: and I studied for it, but I did take it and pass it. Maybe one weekend, right, all it took? (03:15):
undefined
Wesley Lyon: Yeah, we used to work for a fee-based RIA, and we didn't have a broker. (03:20):
undefined
Wesley Lyon: We would directly sell some, (03:25):
undefined
Wesley Lyon: insurance, disability, term life. We don't do that just because when you're (03:28):
undefined
Wesley Lyon: only selling the products that are right for people, the commissions are tiny. (03:34):
undefined
Wesley Lyon: I'm not even doing the paperwork for the tiny commission. We send it out to a broker. (03:39):
undefined
Wesley Lyon: That broker gets to make all the money. He loves us for that, (03:44):
undefined
Wesley Lyon: but he just shops the cheapest policies, and that way there's no conflict on (03:48):
undefined
Wesley Lyon: our part. We don't have to deal with the paperwork. It's just time well spent. (03:52):
undefined
Wesley Lyon: But as you can see, it's much easier to become licensed to sell an insurance product. (03:56):
undefined
Wesley Lyon: And it's not regulated in the same manner that you'd get regulated as far as investment world goes. (04:02):
undefined
Wesley Lyon: And that has to do with performance reporting. (04:08):
undefined
Wesley Lyon: It also has to do with what you show clients or potential clients and really anything under the sun, (04:11):
undefined
Wesley Lyon: which is, I guess, kind of funny, but not really, because they rip a lot of (04:18):
undefined
Wesley Lyon: people off that they can actually market these as a great investment product. (04:22):
undefined
Wesley Lyon: I mean, half the marketing sees, oh, save for your family, you know, (04:26):
undefined
Wesley Lyon: get tax free income in retirement. (04:29):
undefined
Wesley Lyon: And they can do all of these things in which the government is trying to regulate. (04:31):
undefined
Wesley Lyon: But because they do it behind an insurance wrapper, they don't have to actually follow the rules, (04:35):
undefined
Wesley Lyon: which leads to I've seen some Some people honest about marketing these things, (04:41):
undefined
Wesley Lyon: a lot of people dishonest, and I think even sometimes the honest people, (04:46):
undefined
Wesley Lyon: they just don't understand the investments in the back end or have the true (04:49):
undefined
Wesley Lyon: deep understanding of what's going on to realize why this might not be the world's greatest idea. (04:54):
undefined
Wesley Lyon: But Liam, I came up with eight things here. Tell me which one stood out to you. What are you looking at? (05:01):
undefined
Liam Fitzgerald: You know, a good list right here. I would love because I know your background, (05:06):
undefined
Liam Fitzgerald: especially being in the investment world, working for Dimensional, (05:11):
undefined
Liam Fitzgerald: you know a lot about the indices. (05:14):
undefined
Liam Fitzgerald: And yes, when we look at some of these accounts, we say, okay, (05:17):
undefined
Liam Fitzgerald: the S&P 500 is there. Maybe the Russell 1000. (05:20):
undefined
Liam Fitzgerald: I recognize those as indexes. (05:23):
undefined
Liam Fitzgerald: It sounds like they might be backtested. How are these indexes truly implemented (05:26):
undefined
Liam Fitzgerald: into some of these policies? (05:32):
undefined
Wesley Lyon: Yeah, so every one's going to be quite a bit different. (05:33):
undefined
Wesley Lyon: But generally speaking, what we're referring to in these indices is when you (05:37):
undefined
Wesley Lyon: put money into this policy, it kind of grows in this investment account and (05:41):
undefined
Wesley Lyon: you get to participate with the market. (05:46):
undefined
Wesley Lyon: I think that's the word they love to use. You get to participate in market growth (05:49):
undefined
Wesley Lyon: and they put a 0% floor on it. And what they're really talking about is you (05:52):
undefined
Wesley Lyon: have participation in an index based off their rules. (05:56):
undefined
Wesley Lyon: So sometimes the indexes are very straightforward. Like you see the S&P 500 index. (06:00):
undefined
Wesley Lyon: Everybody knows what the S&P 500 is. Well, maybe not knows. They've heard of the S&P 500. (06:06):
undefined
Wesley Lyon: I don't know how many people know exactly how it gets constituted, (06:10):
undefined
Wesley Lyon: details, but everybody's heard of it and can generally talk about it. (06:13):
undefined
Wesley Lyon: So you can latch on to that one. Sometimes, though, they show policies, (06:16):
undefined
Wesley Lyon: and they'll show policies with some sort of index. (06:21):
undefined
Wesley Lyon: Sometimes an index creator created it. (06:24):
undefined
Wesley Lyon: Other times didn't. And sometimes you have to dig into the details if it's too good to be true. (06:27):
undefined
Wesley Lyon: Like, oh, look, this index universal life policy would have performed at 16.5% (06:31):
undefined
Wesley Lyon: annualized over the last 25 years. (06:37):
undefined
Wesley Lyon: And this actually happened where somebody showed me this. (06:40):
undefined
Wesley Lyon: So I looked at the index, and I went to the index provider's website. (06:43):
undefined
Wesley Lyon: By the way, for those of you that don't exactly understand what indexes are, (06:48):
undefined
Wesley Lyon: probably a whole conversation for another day. (06:52):
undefined
Wesley Lyon: But some entity is doing portfolio construction rules in a theoretical space, (06:55):
undefined
Wesley Lyon: and they're creating these are the rules, and this is what gets included. (07:01):
undefined
Wesley Lyon: And those are the rules. So the S&P 500 is what, the largest 500 in the US? (07:04):
undefined
Wesley Lyon: So that reconstitutes on a certain day in the largest 500 companies in the US (07:09):
undefined
Wesley Lyon: by total outstanding share price. So number of shares multiplied by the share price. (07:14):
undefined
Wesley Lyon: That is going to be your metric to get into that index. So sometimes you look (07:21):
undefined
Wesley Lyon: at these and you look at the methodology and you go, what in the world? (07:25):
undefined
Wesley Lyon: Somebody did rocket science to get here. And then you look back and I'm looking (07:29):
undefined
Wesley Lyon: at this illustration showing, hey, look at what this policy would have done over 20 years. (07:33):
undefined
Wesley Lyon: Well, the index was created two years ago. Somebody went and looked backwards (07:38):
undefined
Wesley Lyon: and they were like, hey, this is fantastic. (07:42):
undefined
Wesley Lyon: Look, if I did this much S&P 500, you know, they just over-engineered this thing (07:47):
undefined
Wesley Lyon: to be the perfect index for the last 20 years, which clearly ain't going to (07:52):
undefined
Wesley Lyon: be the perfect index for the next 20. (07:56):
undefined
Wesley Lyon: But yeah, it's just a back-tested index. (07:58):
undefined
Wesley Lyon: And, you know, when I was working at Dimensional, I had a colleague of mine (08:02):
undefined
Wesley Lyon: and we were always selling against some of this stuff because some of these (08:05):
undefined
Wesley Lyon: indices, they use them in life insurance. (08:09):
undefined
Wesley Lyon: But some investment companies, they take this garbage data and they actually (08:11):
undefined
Wesley Lyon: put it to work and they invest this way. (08:15):
undefined
Wesley Lyon: And I remember sitting there and some knucklehead advisor is showing us this (08:17):
undefined
Wesley Lyon: great thing and I was going to invest in it. (08:22):
undefined
Wesley Lyon: And this guy, we're young, we're doing all the math behind it. (08:25):
undefined
Wesley Lyon: This guy was older and wise and he just turned with a smile on his face and (08:29):
undefined
Wesley Lyon: looked and goes, I've never seen a back test I didn't like. (08:34):
undefined
Wesley Lyon: And to his point, what he was subtly saying is, yeah, they probably came up (08:40):
undefined
Wesley Lyon: with 50 iterations of this that didn't work and they threw out the garbage. (08:45):
undefined
Wesley Lyon: And then number 51, you know, that was the one that worked. (08:49):
undefined
Wesley Lyon: So, you know, when you're looking at something that hasn't been existed, (08:53):
undefined
Wesley Lyon: it has been back tested or, you know, look, if I would have done X, (08:56):
undefined
Wesley Lyon: Y, and Z, well, it's like, yeah, if I would have bought Sears when it was $2 (09:00):
undefined
Wesley Lyon: a share, sold at the top and traded it all in for Apple, I might have more money (09:03):
undefined
Wesley Lyon: than, you know, Bill Gates, but I didn't do that. (09:07):
undefined
Wesley Lyon: So, you know, you have to be careful if they just really back-tested, (09:11):
undefined
Wesley Lyon: created an index just to make their illustration look good. (09:15):
undefined
Liam Fitzgerald: Makes sense. Yeah, I'm going to jump on your list because I noticed one point (09:18):
undefined
Liam Fitzgerald: we had was some really bad enforced illustrations. (09:22):
undefined
Liam Fitzgerald: And I think about a mutual client that we have that thought they were secure for retirement. (09:25):
undefined
Liam Fitzgerald: They were getting ready to go off and travel and sell their practice and enjoy. (09:29):
undefined
Liam Fitzgerald: And they really put most of their eggs in this basket of, hey, I have X amount, (09:34):
undefined
Liam Fitzgerald: a guaranteed basis for life, right? And almost an annuity type. (09:40):
undefined
Liam Fitzgerald: Talk to me about some of these illustrations. Seems to me borderline illegal (09:44):
undefined
Liam Fitzgerald: to make it seem like this. (09:48):
undefined
Wesley Lyon: Definitely. And by the way, if you're listening to this, because I remember (09:50):
undefined
Wesley Lyon: we jumped on the phone and said, oh, that was me. And I was like, it was you and 18 others. (09:53):
undefined
Wesley Lyon: So if you have done any of this stuff, don't feel bad. Give us a call. (09:59):
undefined
Wesley Lyon: You know, we'll try to work with you. Get it worked out. So don't feel horrible. (10:02):
undefined
Wesley Lyon: Most dentists have been wrapped up into one of these. but it is fairly common. (10:06):
undefined
Wesley Lyon: You know, it's unfortunate that conversation I've had to have over and over (10:10):
undefined
Wesley Lyon: again through the years of, hey, you're not, but enforced illustrations are (10:13):
undefined
Wesley Lyon: hypothetical performances. (10:18):
undefined
Wesley Lyon: It would be the same as, well, now we're not allowed to do this and we would (10:20):
undefined
Wesley Lyon: never do this, but we would show somebody, you know, hey, if you invest in this, (10:23):
undefined
Wesley Lyon: look how much money you're going to have and showing them that, (10:27):
undefined
Wesley Lyon: you know, it's going to earn like 12% a year, which is absolutely insane. (10:29):
undefined
Wesley Lyon: I can't imagine doing that. (10:32):
undefined
Wesley Lyon: So we obviously don't do that. We're not allowed to, but somehow you're allowed (10:35):
undefined
Wesley Lyon: to do this with insurances. (10:39):
undefined
Wesley Lyon: Now, some funny things we've seen in some of these illustrations, (10:41):
undefined
Wesley Lyon: like when you dive into it, (10:44):
undefined
Wesley Lyon: one in particular, I know we were looking at and, you know, you're doing very (10:46):
undefined
Wesley Lyon: simple math and the math is the money in times the crediting rate used. (10:51):
undefined
Wesley Lyon: You know, you can sit there, oh, these are the deposits. Here's the interest (10:56):
undefined
Wesley Lyon: rate that the product is going to hypothetically earn. (11:00):
undefined
Wesley Lyon: And you calculate out what the value of the policy should be. (11:03):
undefined
Wesley Lyon: Now, this is not that uncommon where the policy value exceeds the stated interest crediting rate. (11:06):
undefined
Wesley Lyon: So we've got a huge problem there that indicates there's negative mortality (11:15):
undefined
Wesley Lyon: charges, mortality and expenses, because the insurance company is going to charge fees on top of that cap. (11:21):
undefined
Wesley Lyon: So, I mean, it's just mind-blowing to sit there and look at something where (11:28):
undefined
Wesley Lyon: you know you're going to have to pay fees to the insurance company, (11:34):
undefined
Wesley Lyon: but they're modeling out that they're going to actually pay you. (11:36):
undefined
Wesley Lyon: And it's not every single one of them. some we look at and whether or not we (11:40):
undefined
Wesley Lyon: agree with the fact they're going to get there, they're at least done correctly. (11:44):
undefined
Wesley Lyon: But that stuff is just staggering. And then showing somebody that, (11:47):
undefined
Wesley Lyon: you know, the S&P, or you do this, and this is the cap rate, (11:51):
undefined
Wesley Lyon: the participation rate, which kind of dives into a couple other issues on the list. (11:56):
undefined
Wesley Lyon: They're in the illustration, but you say, well, why or how did they come up (12:01):
undefined
Wesley Lyon: with that? Or what's wrong with the illustration? (12:07):
undefined
Wesley Lyon: And one of the big things, you know, other than it just being completely wrong, (12:10):
undefined
Wesley Lyon: like 100% just wrong, something I like to call cap rate integrity. (12:16):
undefined
Wesley Lyon: Now, when you sign this universal indexed universal life, IUL. (12:24):
undefined
Liam Fitzgerald: Yep, you got it. (12:30):
undefined
Wesley Lyon: Okay, we don't sell these, so we don't know the jargon as well. Little rusty. (12:31):
undefined
Wesley Lyon: When you sell this, it's a contract with an insurance company. (12:35):
undefined
Wesley Lyon: Right? you don't have your own account of money. (12:38):
undefined
Wesley Lyon: It's a contract with an insurance company, and they're providing you some guarantee in return. (12:41):
undefined
Wesley Lyon: When you read the fine print of most of these insurance contracts, (12:46):
undefined
Wesley Lyon: they have the right to change the cap and the participation rate at their free (12:50):
undefined
Wesley Lyon: will, which sometimes can be the same thing. (12:55):
undefined
Wesley Lyon: Sometimes you'll get 70% of the index. Sometimes you'll get the index return (12:57):
undefined
Wesley Lyon: less or something, but other times you just get, hey, you can get the S&P 500 (13:02):
undefined
Wesley Lyon: capped at 9%. So if it does 30, you get 9%. Well. (13:07):
undefined
Wesley Lyon: That contract usually states that the insurance company can lower the cap rate, (13:12):
undefined
Wesley Lyon: lower the participation rate at their own doing. (13:18):
undefined
Wesley Lyon: So it's a unilateral contract. It's no guarantee. (13:23):
undefined
Wesley Lyon: So, you know, it might start with a very high participation rate or cap rate. (13:28):
undefined
Wesley Lyon: You know, you might get, I think, like 13%. You know, we've got a 13% cap rate. (13:34):
undefined
Wesley Lyon: The S&P 500 is 15. and you get 13 of it. That sounds phenomenal. (13:39):
undefined
Wesley Lyon: But then you go back five years later and the cap's only nine, it's eight. (13:45):
undefined
Wesley Lyon: So the cap rate going down can be a huge problem. (13:50):
undefined
Wesley Lyon: And they're illustrating one thing, but in the background, they're going to change something else. (13:53):
undefined
Wesley Lyon: So that can be a huge one. And same with the participation rates. (13:59):
undefined
Wesley Lyon: There's no guarantee on those participation rates. (14:03):
undefined
Wesley Lyon: So they're illustrating something that just ain't going to come true. (14:05):
undefined
Liam Fitzgerald: That's fair. And I especially saw the cap rates can be very dangerous because, (14:10):
undefined
Liam Fitzgerald: okay, it seems like a win-win. (14:15):
undefined
Liam Fitzgerald: You have a floor, maybe it's zero. You're never, quote unquote, (14:18):
undefined
Liam Fitzgerald: never going to lose anything. (14:20):
undefined
Liam Fitzgerald: Your cap is eight. But if you look at the, let's take the S&P 500, (14:21):
undefined
Liam Fitzgerald: the history of that, most of the market growth usually comes in bunches, right? (14:25):
undefined
Liam Fitzgerald: So, hey, the S&P was up 20% a couple of years ago. Well, someone was stuck over here at eight. (14:30):
undefined
Liam Fitzgerald: Yes, you didn't lose anything, but you're really, after fees, (14:35):
undefined
Liam Fitzgerald: you're not getting 8% average annual return a year. Is that right? (14:39):
undefined
Wesley Lyon: No, that's right. And a lot of times too, people don't realize that most of (14:43):
undefined
Wesley Lyon: these are done like point to point. (14:47):
undefined
Wesley Lyon: So if you're doing, okay, I've got, (14:49):
undefined
Wesley Lyon: one year. Yours usually isn't January 1st to December 31st. It's usually your date to your next date. (14:54):
undefined
Wesley Lyon: So it's kind of funny just based off of these caps that you could have two policies (15:01):
undefined
Wesley Lyon: sold within a week of each other with wildly different returns if there was (15:06):
undefined
Wesley Lyon: extreme market volatility within those couple weeks that there's overlap one way or the other. (15:11):
undefined
Wesley Lyon: So yeah, you don't necessarily get that, but that's the biggest thing there (15:17):
undefined
Wesley Lyon: is if you're capped at eight and the return is at 30, 20. (15:22):
undefined
Wesley Lyon: And these aren't that absurd of returns. (15:27):
undefined
Wesley Lyon: You're not going to get that return annualized. I mean, it's not going to be (15:30):
undefined
Wesley Lyon: your average or what you expect over time, but a lot of your return is going (15:32):
undefined
Wesley Lyon: to come from big, big years and you're stuck at eight. Yeah. (15:37):
undefined
Liam Fitzgerald: No, that's big opportunity costs there and uncomfortable. (15:41):
undefined
Liam Fitzgerald: And we talked earlier, we both took the series seven. (15:45):
undefined
Liam Fitzgerald: We're both pretty heavy into the investments. we're talking a lot about rates (15:49):
undefined
Liam Fitzgerald: of return and percentages, but I know that dividends are certainly a part of (15:52):
undefined
Liam Fitzgerald: investments. And a lot of our investors and clients will count on dividends (15:56):
undefined
Liam Fitzgerald: at the end of the year, quarterly. (16:00):
undefined
Liam Fitzgerald: Sometimes retirees will count on that for their income. Are dividends a part of this at all? (16:02):
undefined
Wesley Lyon: They can be. Usually not. Usually you're going to do a price to price. (16:06):
undefined
Wesley Lyon: So you're looking at the percentage increase of the S&P 500, (16:10):
undefined
Wesley Lyon: not what the dividends are paying out. (16:15):
undefined
Wesley Lyon: And I think historically, the S&P 500 has done roughly 10% with dividends. (16:17):
undefined
Wesley Lyon: A little bit over. And without dividends, Liam, do you know what the number is? (16:23):
undefined
Liam Fitzgerald: Oh, you're putting me on the spot. I don't know exactly, but it could be close to half that, right? (16:30):
undefined
Wesley Lyon: It is more than half. I'll give you that. Give me your best guess. (16:35):
undefined
Liam Fitzgerald: I'll say seven. (16:40):
undefined
Wesley Lyon: It's just a little over seven. You lose about 3% not having a dividends. (16:41):
undefined
Wesley Lyon: Now that fluctuates sometimes up, sometimes down. (16:46):
undefined
Wesley Lyon: A lot of dividends really have to do with the tax law and what the best way (16:49):
undefined
Wesley Lyon: to return money to shareholders is. (16:53):
undefined
Wesley Lyon: But yeah, I mean, you're already losing 3% there. So, that's not great. (16:55):
undefined
Wesley Lyon: You've got a cap on it. That's not great. (16:59):
undefined
Wesley Lyon: And then, gosh, we're just going to pick apart these illustrations. (17:03):
undefined
Wesley Lyon: So, then we already know that we've got cap rate integrity. We've got participation rate integrity. (17:08):
undefined
Wesley Lyon: We're not including dividends. We do have cap rates. So, these are all bad things. (17:13):
undefined
Wesley Lyon: And then they're going to show us getting our money out tax-free. (17:19):
undefined
Wesley Lyon: But Liam, how do you get money out of a permanent life insurance policy completely tax-free? (17:23):
undefined
Liam Fitzgerald: Oh, man. Unfortunately, someone has to die for it, right? (17:27):
undefined
Wesley Lyon: Yeah. Or how do they promote it? (17:31):
undefined
Liam Fitzgerald: Oh, well, let me just tell you about this loan that you can take. (17:34):
undefined
Liam Fitzgerald: Borrow from yourself, man. Go ahead. Oh, yeah. (17:38):
undefined
Wesley Lyon: Infinite banking, right? Yeah. So it's a loan. and when they illustrate the (17:41):
undefined
Wesley Lyon: loans, they illustrate an interest rate on the loans. (17:46):
undefined
Wesley Lyon: Loan rate integrity is a thing too. You read that contract, that loan rate is (17:50):
undefined
Wesley Lyon: not guaranteed. The insurance company is going to set it. (17:54):
undefined
Wesley Lyon: So, yikes. So you're looking at it, then all of a sudden the loan rate goes (17:58):
undefined
Wesley Lyon: up and now this is always the funny thing because we see the illustrations on (18:02):
undefined
Wesley Lyon: the front end that show them, oh my gosh, this is amazing. (18:06):
undefined
Wesley Lyon: And then we see the real results on the back end of people that come in here (18:09):
undefined
Wesley Lyon: 15, 20 years into a policy. (18:12):
undefined
Wesley Lyon: And all of a sudden, all these rates and everything have changed. (18:14):
undefined
Wesley Lyon: And yikes, I even had a client in a few weeks ago that we've got big issues (18:18):
undefined
Wesley Lyon: because they thought these policies were going to be enforced forever. (18:25):
undefined
Wesley Lyon: The problem is the fees and mortality expenses have gone up And the policies (18:28):
undefined
Wesley Lyon: are in jeopardy of not being enforced anymore because there's not going to be enough payment on it. (18:36):
undefined
Wesley Lyon: What is the word when a policy is no longer in force? (18:45):
undefined
Liam Fitzgerald: Oh, man, that's a good policy lapses. There you go. (18:52):
undefined
Wesley Lyon: The policy can lapse and this can be dangerous if you fortunately this client (18:56):
undefined
Wesley Lyon: didn't have a loan on it. So we don't really have any tax issues. (19:00):
undefined
Wesley Lyon: But a lot of people get caught in this trap. They don't realize, (19:04):
undefined
Wesley Lyon: you know, okay, they put the money in. (19:07):
undefined
Wesley Lyon: So let's just be realistic here. They put a million in over 20 years and it's worth about a million. (19:09):
undefined
Wesley Lyon: That's say that's about normal. (19:15):
undefined
Liam Fitzgerald: I'd say that's generous. It's probably generous. I've seen some that have made money. (19:18):
undefined
Wesley Lyon: 80% of them are worth less than what the people put into them, I'd say. (19:23):
undefined
Wesley Lyon: But now, okay, you got that million. So you take a loan against the cash value (19:27):
undefined
Wesley Lyon: to get your money out tax-free. (19:31):
undefined
Wesley Lyon: Now, all of a sudden, the fee, the interest, and the mortality and insurance (19:34):
undefined
Wesley Lyon: expenses start going up on you. (19:39):
undefined
Wesley Lyon: And there's no cash value because you took it all out as a loan. (19:42):
undefined
Wesley Lyon: So what ends up happening is you either have to pay additional premiums in, (19:46):
undefined
Wesley Lyon: which can be hefty, or the policy lapses. (19:51):
undefined
Wesley Lyon: Now, if the policy lapses, it had a million in cash value, you took it out as (19:55):
undefined
Wesley Lyon: a loan, and you already spent the money, and now the policy lapses. (19:59):
undefined
Wesley Lyon: You're going to have a big tax bill. It's going to be an ugly day, (20:04):
undefined
Wesley Lyon: and people don't talk about the fact that these policies can lapse, (20:09):
undefined
Wesley Lyon: but they absolutely can. and these illustrations should not be trusted. (20:13):
undefined
Liam Fitzgerald: Right. No, that's fair. And I always love when, all right, you meet this person (20:17):
undefined
Liam Fitzgerald: and they're an insurance agent and a financial advisor and apparently a tax (20:21):
undefined
Liam Fitzgerald: expert too, because, oh, we can tax deferred growth and all of that. (20:24):
undefined
Liam Fitzgerald: But when that comes out, when it lapses, when you surrender it, (20:29):
undefined
Liam Fitzgerald: if there's a gain, that's not tax or capital gains rates, right? (20:32):
undefined
Liam Fitzgerald: You're going to pay pretty much your top rate at that. (20:36):
undefined
Wesley Lyon: You are going to pay ordinary income taxes on that, which can be devastating. (20:38):
undefined
Wesley Lyon: Yeah, I don't know how much worse it can get when that happens. (20:44):
undefined
Wesley Lyon: And people don't really price that in that it could happen, but it absolutely could happen. (20:47):
undefined
Wesley Lyon: No doubt in my mind, especially if you're taking big loans against a policy. (20:53):
undefined
Wesley Lyon: But yeah, you've turned a capital gain into ordinary income. (20:57):
undefined
Wesley Lyon: People say, well, if I put a million in, I got a million out. (21:00):
undefined
Wesley Lyon: You know, I didn't have a gain. Wrong. (21:02):
undefined
Wesley Lyon: The insurance company, you have a tax basis and a policy. (21:06):
undefined
Wesley Lyon: And some of your premium goes towards the tax basis. but a lot of your premium goes towards expenses. (21:10):
undefined
Wesley Lyon: So this is how you can have a million dollar policy that you put a million dollars into. (21:15):
undefined
Wesley Lyon: They're telling you that it's returned 7% a year because they're calculating (21:20):
undefined
Wesley Lyon: the return after the mortality charges, which that's basically the cost of insurance (21:24):
undefined
Wesley Lyon: plus the administrative charges in there. (21:29):
undefined
Wesley Lyon: So if 400,000 of your money went into expenses, (21:32):
undefined
Wesley Lyon: which wouldn't be absurd in some of these policies, then in this case, (21:36):
undefined
Wesley Lyon: you would have a $600,000 tax basis, you'd owe ordinary income tax on $400,000 immediately. (21:41):
undefined
Liam Fitzgerald: Look at this. (21:49):
undefined
Liam Fitzgerald: Scary, scary day. And that's the other concern I have is that when I talk to (21:50):
undefined
Liam Fitzgerald: a lot of these clients who have these policies like this, (21:57):
undefined
Liam Fitzgerald: they do it or they're bought into it because they're scared of the market and (22:00):
undefined
Liam Fitzgerald: they're sold that this is a conservative way to invest. (22:03):
undefined
Liam Fitzgerald: This is a way that you can save your money and not risk it in the market. (22:07):
undefined
Liam Fitzgerald: It sounds like one of the riskiest ventures is putting your money in and maybe (22:11):
undefined
Liam Fitzgerald: not having the same amount to come out after years and years and years, (22:15):
undefined
Liam Fitzgerald: probably much more aggressive than a traditional investment would be. (22:19):
undefined
Wesley Lyon: Yeah, you'd be better off in cash probably half the time. I mean, (22:22):
undefined
Wesley Lyon: it's just, it's kind of sad that this stuff still goes on. (22:26):
undefined
Wesley Lyon: People put a whole bunch, like I've seen a whole bunch of people argue on this (22:30):
undefined
Wesley Lyon: guy on LinkedIn. He's hilarious. (22:36):
undefined
Wesley Lyon: He argues with all the insurance salespeople in his free time. (22:38):
undefined
Wesley Lyon: He needs to spend some more time getting some new clients, but maybe he gets some out of this. (22:42):
undefined
Wesley Lyon: Maybe it's actually, I never thought of that. Maybe all the people looking at (22:46):
undefined
Wesley Lyon: that, read him tearing this guy apart and they call him like, (22:50):
undefined
Wesley Lyon: Hey, I clearly need to talk to you. It could be his whole marketing. (22:53):
undefined
Wesley Lyon: Um, his name's Andy Penko. I don't know him. I just find him hilarious. (22:56):
undefined
Wesley Lyon: Um, but yeah, you know, he, he goes and argues with them all and you know, (23:01):
undefined
Wesley Lyon: they're, they're just selling it and selling it. (23:05):
undefined
Wesley Lyon: And like, if you talk to these guys, they'll call us like, oh let me explain (23:07):
undefined
Wesley Lyon: the benefits of it to you i'm like dude i'm a cpa that's well known for my tax (23:11):
undefined
Wesley Lyon: knowledge and they're just like well you don't know about this really i've. (23:16):
undefined
Liam Fitzgerald: Heard it yeah. (23:22):
undefined
Wesley Lyon: Like really you don't think i know about this like no i do know about it it's (23:23):
undefined
Wesley Lyon: an absolute scam here but if instead you put your money in the stock market (23:27):
undefined
Wesley Lyon: of that 20 years you know your million probably goes to like four and sure you (23:32):
undefined
Wesley Lyon: can risk losing 30 of it but you're gonna risk losing like 30, (23:36):
undefined
Wesley Lyon: 40% of your millions, not your million. (23:39):
undefined
Liam Fitzgerald: Exactly. (23:43):
undefined
Wesley Lyon: You know, there's no fear of losing money when you don't have any, (23:44):
undefined
Wesley Lyon: but a lot of times too, they always talk and they argue. (23:48):
undefined
Wesley Lyon: This is where I was going with that story. They argue about how the money gets (23:52):
undefined
Wesley Lyon: invested and the strategies behind it. (23:57):
undefined
Wesley Lyon: I think, I don't know this for certain, but I think if you oftentimes found (24:00):
undefined
Wesley Lyon: that most of this money is just invested in the general account of the insurance (24:03):
undefined
Wesley Lyon: company and the insurance company just kind of sets what the spreads are, all that. (24:07):
undefined
Wesley Lyon: They know what the policy is going to end up paying out and they're taking the (24:11):
undefined
Wesley Lyon: administrative expenses, the mortality charges on it. I mean, they know. (24:15):
undefined
Wesley Lyon: So, it's not, I don't know, there's not rocket science. (24:20):
undefined
Wesley Lyon: I think people have this view in the background that there's these really, (24:23):
undefined
Wesley Lyon: really smart investment guys trading option strategies to make this happen. It's like, (24:27):
undefined
Wesley Lyon: Nah, it's probably in the general account of the insurance company. Sure. (24:33):
undefined
Wesley Lyon: You never worked on the institutional side. Are you aware of how basically insurance companies function? (24:38):
undefined
Liam Fitzgerald: I don't know. Share a little more. (24:44):
undefined
Wesley Lyon: They keep premiums with expected payouts, right? (24:47):
undefined
Wesley Lyon: Whether or not it'd be a life insurance policy, whether or not it would be disability (24:50):
undefined
Wesley Lyon: policy, whether or not it's going to be flood insurance. Whatever it is that (24:56):
undefined
Wesley Lyon: they're insuring, they've got really smart actuaries in the background. (25:00):
undefined
Wesley Lyon: And the actuaries are calculating out, based off the risk, how much they expect to pay out. (25:05):
undefined
Wesley Lyon: Now, they're collecting the premiums, but they're not paying out big events every single year. (25:10):
undefined
Wesley Lyon: So they're investing the premiums. And they're typically going to be in really safe investments. (25:15):
undefined
Wesley Lyon: They're probably the biggest buyer of corporate bonds is insurance companies. (25:19):
undefined
Wesley Lyon: They're very, very bond heavy. We would look at it for a client if they came (25:23):
undefined
Wesley Lyon: in with that portfolio and be like, are you scared of your own shadow? (25:28):
undefined
Wesley Lyon: And it's not that they're scared of their own shadow. It's that this money is (25:32):
undefined
Wesley Lyon: being invested to pay out claims. (25:36):
undefined
Wesley Lyon: It's not being invested to beat the market. It's being invested to pay out claims. (25:39):
undefined
Wesley Lyon: So it's going to be a lower investment return. And it's not a knock on insurance (25:44):
undefined
Wesley Lyon: companies. It's just a business model. (25:47):
undefined
Wesley Lyon: That's where your money is being invested. it's like this, this isn't it. (25:50):
undefined
Wesley Lyon: This isn't it. Your money needs to be growing faster. (25:57):
undefined
Liam Fitzgerald: And if you take on that risk, you're paid for that. And to be able to say, (25:59):
undefined
Liam Fitzgerald: hey, I'm going to put it into a traditional investment. (26:04):
undefined
Liam Fitzgerald: That's right for me. And that doesn't mean you have to put all of the heat on, (26:07):
undefined
Liam Fitzgerald: be very, very aggressive. (26:11):
undefined
Liam Fitzgerald: No, you can have a conservative portfolio with traditional investments, (26:13):
undefined
Liam Fitzgerald: just like those companies do. (26:17):
undefined
Liam Fitzgerald: And I always laugh because when I look at the biggest skyscrapers around and (26:19):
undefined
Liam Fitzgerald: I look at the stadiums, like the New York Giants and New York Jets, (26:24):
undefined
Liam Fitzgerald: they play in MetLife Stadium and the Texas Rangers playing Globe Life Park. (26:27):
undefined
Liam Fitzgerald: These insurance companies are huge entities. They're not losing money on you. (26:32):
undefined
Liam Fitzgerald: They are not doing you a favor. They are not your best friend. (26:36):
undefined
Wesley Lyon: No, they're definitely making money off of you. And they're investing conservatively. (26:39):
undefined
Wesley Lyon: They just don't have a way to return this, money to you with a 10% annualized return. (26:43):
undefined
Wesley Lyon: There's just no way for them to do it. (26:50):
undefined
Liam Fitzgerald: Sure. (26:52):
undefined
Wesley Lyon: So again, not necessarily knocking (26:53):
undefined
Wesley Lyon: the insurance companies and not to say permanent life has zero place, (26:55):
undefined
Wesley Lyon: Maybe, though. We don't want to say zero, but we're in the decimal places there. (27:00):
undefined
Wesley Lyon: I've seen some people use it for taxation purposes, or sometimes people can't (27:07):
undefined
Wesley Lyon: get insured due to a health issue, and a permanent life insurance policy is kind of our only option. (27:13):
undefined
Wesley Lyon: So, I've certainly seen that, too. A client straightforward tells us when I (27:18):
undefined
Wesley Lyon: went and looked at it, he goes, I know you're going to be mad about it. I got it when I was 30. (27:22):
undefined
Wesley Lyon: I had two kids, and we had nothing else to fall back on and my health didn't (27:26):
undefined
Wesley Lyon: allow me to get insurance other than this. So he was like, I know it was a bad idea. (27:31):
undefined
Wesley Lyon: I was like, oh, well, you know, it served a great purpose for a long time for him. (27:35):
undefined
Wesley Lyon: So not to completely bash him, but just like 99.7% bashed. (27:40):
undefined
Liam Fitzgerald: That's a pretty good guarantee. So that's fair. Did anything else on the list (27:45):
undefined
Liam Fitzgerald: that you're thinking of? (27:50):
undefined
Liam Fitzgerald: We don't want to beat it to death, but I think it's pretty much dead now, (27:50):
undefined
Liam Fitzgerald: but anything else we haven't covered yet? (27:54):
undefined
Wesley Lyon: You know, my last one is just the value of compound interest. (27:56):
undefined
Wesley Lyon: And like we kind of went through and we talked about where you're losing money, different spots here. (28:00):
undefined
Wesley Lyon: So kind of to recap, where are we losing money? Right. We've got a cap rate (28:05):
undefined
Wesley Lyon: or participation rate. We're not going to fully participate. (28:09):
undefined
Wesley Lyon: We're unlikely to be capturing dividends. Right. So there's if we're S&P 500, (28:11):
undefined
Wesley Lyon: we're about 3% lower right there. (28:16):
undefined
Wesley Lyon: So we're just sitting there. We're just going down and down and down. (28:18):
undefined
Wesley Lyon: Oh, then we're going to have administrative fees and expenses on the policy. (28:21):
undefined
Wesley Lyon: Then, we're going to have the mortality expense on the policy, (28:25):
undefined
Wesley Lyon: and we just kind of want to overall look and remember the value of compound interest. (28:30):
undefined
Wesley Lyon: What, even at 3%, 3.5%, your money doubles every 20 years. (28:35):
undefined
Wesley Lyon: It's 7%, it doubles every 10 years, and what, at 10%, it doubles every seven years. You got it. (28:40):
undefined
Wesley Lyon: All right, so let's just do some quick math with a million here. (28:46):
undefined
Wesley Lyon: I'm going to be 40 years old and put a million dollars into this policy. (28:50):
undefined
Wesley Lyon: I'll be lucky if it doubles in 30 years. It's probably not going to move anything. (28:55):
undefined
Wesley Lyon: Now, at 7%, I'm going to double every 10 years. (29:00):
undefined
Wesley Lyon: So at 50, it's going to be 2. At 60, it's going to be 4. At 70, it's going to be 8. (29:04):
undefined
Wesley Lyon: Compound interest is your friend. Now, if we're 40, though, and we're doing (29:10):
undefined
Wesley Lyon: this, okay, we can probably afford to be more aggressive. (29:15):
undefined
Wesley Lyon: We're going to get somewhere in the ballpark of 9 to 10. It's every seven years. (29:20):
undefined
Wesley Lyon: So 47 we got to, 54 we have four, and then, what, 61 we have eight, 68 we have 16. (29:25):
undefined
Wesley Lyon: Like these percentage points matter. (29:37):
undefined
Wesley Lyon: They matter a lot. And there's nowhere where it's just exaggerated more than (29:42):
undefined
Wesley Lyon: getting into one of these policies versus just having it invested in simple (29:48):
undefined
Wesley Lyon: things. And this is true. (29:53):
undefined
Wesley Lyon: We'll probably have to start doing a bash that series. I like to be positive. (29:54):
undefined
Wesley Lyon: So we'll end on our positive. Well, diversified, low cost, be in good shape. (29:59):
undefined
Wesley Lyon: Yeah, absolutely. The name of the game. (30:02):
undefined
Wesley Lyon: But, you know, not that we want to beat something up, but we do want to prevent (30:05):
undefined
Wesley Lyon: people from getting into these. A ton of people sell them. (30:09):
undefined
Wesley Lyon: So I'll kind of end on, Liam, do you know the average commission that gets paid (30:12):
undefined
Wesley Lyon: for selling a permanent life insurance policy? (30:16):
undefined
Liam Fitzgerald: Oh, my goodness. You're going to tempt me to join the industry after I hear (30:19):
undefined
Liam Fitzgerald: how much they make on some of these, right? (30:22):
undefined
Liam Fitzgerald: But let me say 3%. That would be nice. (30:24):
undefined
Wesley Lyon: No, typically it's going to be more like 6% to 8% in an indexed universal life. (30:28):
undefined
Wesley Lyon: I mean, some are only 3%, some can be higher, but yeah, typically it's going to be 7-ish percent. (30:35):
undefined
Liam Fitzgerald: So the agents are pretty incentivized to, I wouldn't necessarily call them fiduciaries, (30:40):
undefined
Liam Fitzgerald: right? They're given a reward to sell these. (30:45):
undefined
Wesley Lyon: Yeah, I mean, it's almost cheaper to just look at the guy and go, (30:47):
undefined
Wesley Lyon: hey, look, if I go to the boat store right now and I buy you a boat, (30:50):
undefined
Wesley Lyon: will you never call me again? Because that'll be cheaper. (30:54):
undefined
Liam Fitzgerald: Right. That makes a lot of sense. So, no. (30:56):
undefined
Wesley Lyon: But no, that's it. So, just want to end, you know, is an indexed universal life (31:01):
undefined
Wesley Lyon: insurance policy an investment product, a permanent insurance or a life insurance product, or a scam? (31:05):
undefined
Liam Fitzgerald: Borderline a scam right that is it's a legal scam but it is a scam nonetheless i would say. (31:13):
undefined
Wesley Lyon: Yeah the actual product itself isn't the scam but the sales agents what they (31:18):
undefined
Wesley Lyon: promise that's the scam on it so do yourself a favor buy term life invest in (31:22):
undefined
Wesley Lyon: low cost well diversified and get on your road to financial freedom perfect. (31:28):
undefined
Liam Fitzgerald: Advice thanks wes. (31:33):
undefined
Wesley Lyon: Well liam thanks for joining us everyone out there we'll see you next time. (31:34):
undefined
Popular Podcasts
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
The Joe Rogan Experience
The official podcast of comedian Joe Rogan.
24/7 News: The Latest
The latest news in 4 minutes updated every hour, every day.