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I don't think Whole Life policies are designed to build money up and then take money out permanently. There's typically a net cost to borrow, and if you don't pay that loan back, there's a cost associated with those outstanding loans that can really take a toll as it compounds over time.
I think whole life can accomplish a lot of the same things I'm hoping to accomplish with an indexed universal life (IUL) policy. After all, the Ernst & Young study literally says in the footnote that whole life was used as a volatility buffer strategy. In down years, they borrowed from the whole life policy, and when the stock market came back up, they paid that loan back.
I'm looking at the IUL as slightly to the right of whole life on the risk continuum. I think you only do IUL if you think that risk premium can get you a slightly higher rate of return over time. This slightly higher rate of return could be useful if the goal is to accumulate three to five years' worth of living expenses in your IUL's cash value by day one of retirement. Let's face it; that's your deadline—you've got to have it all there by day one of retirement because you never know if the first year will be a down year.
The question is, whatever money could have otherwise been directed to the stock market is going into my cash value life insurance, and the goal is to get three to five years' worth of living expenses in that cash value life insurance. Which one will enable me to do it less expensively? I'm recognizing that IUL has risks, but I think that in exchange for those risks, I'm getting a slightly higher rate of return. If the goal is three to five years' worth of living expenses, and I put that money into an IUL policy versus a whole life policy, the bet I'm making is that it will take less money to accumulate those expenses. This means I'm not having to take as much money out of my stock market portfolio or redirect as much money to my IUL away from my stock market portfolio. The more money I have to put into these insurance contracts, the greater the opportunity cost I'll experience. So, the question is which one allows me, in theory, to invest the least amount of money to accomplish that end objective?
If you think the IUL can reliably give you one to one and a half points more over time, then, in theory, you would invest less along the way to accumulate the right amount by day one of retirement. The second consideration is that I don't believe Whole Life policies are designed to build money up and then take money out permanently. Tom, you're the PhD on this, so feel free to correct me. There's typically a net cost to borrow, and if you don't pay that loan back, there's a cost associated with those outstanding loans that can really take a toll as it compounds over time. One reason I like the IUL is because I can find a carrier that gives me a guaranteed 0% loan. When it comes time to take that loan out of the IUL to pay for my living expenses in retirement, I don't necessarily have to pay it back. If I had to pay it back, I would pay it back with money that was otherwise in my stock portfolio earning, let's say, 8, 9, 10, or 12%. If I have to pay that loan back, I'm taking money that could have otherwise accumulated in my stock market, and there will be an opportunity cost associated with paying that loan back. That money is no longer growing in my stock market portfolio because I had to pay my loan back. Those are the two considerations I work through. I'm getting a slightly higher rate of return; therefore, I have to put less money into the contract to accumulate the requisite amount I need by day one of retirement. Because I can take that tax-free, cost-free loan out, and I don't have any net interest that I'm paying, I'm not constrained to pay that back with money that could otherwise be growing in the stock market. The net effect of all of those is to build my wealth higher over time. If you believe you can continue to get a reasonable rate of return in the stock market, those two things are a big deal. One addresses accumulation, and the other addresses more efficient distribution. Whole life also checks the boxes for permanent death benefit and long-term care return—all those things are relevant because it's an insurance contract. But the reason I like IUL is that it's potentially a more efficient accumulation and distribution method.
People come to me and say, "Dave, the guy that wrote the forward for your book, *The Guru Gap*, Wade Fau, prefers whole life." I say, "Great. Whole life could totally work in this situation." I'm just saying that if the goal is to build three to five years' worth of living expenses, it's going to take more money to pull that off, and money isn't going to grow quite as quickly. If you believe that the IUL, given that risk premium, is going to push you further ahead, and if you look at the Ernst & Young study, the loans were paid back out of the stock market portfolio. Those are my considerations. I'm not demonizing the whole life approach because, for crying out loud, Ernst & Young used it. You can't really vilify it. I think I heard you say on a video once, Tom, that the reason you believe the way that you do is because you were weaned in a whole life company environment where they inculcated this idea that you have to protect, you know, you have to build a foundation of protection. That's sort of what you do right out of the chute—you've got to build a foundation of protection. That doesn't ever really enter into the picture for me. I've got very stated objectives: build net worth as effectively as you can, save as well as you can over time, and invest mostly in stocks during your accumulation period. I do think there would be an opportunity cost if you started early in life with whole life and incorporated that bond-like alternative into the mix too early. I do think there would be erosion in your net worth over time because you're taking money that could have otherwise harnessed the power of the stock market and putting it very early on into a bond-like return. That's a consideration, but at the end of the day, I'm not using the IUL as a way to protect my assets; it doesn't even enter the picture. I'm looking at it as a tool slightly to the right of whole life on the risk continuum. I'm basing that on the idea that over the last 20 years, an IUL through a good carrier has gotten those types of rates of return. I've talked to actuaries who have done Monte Carlo scenarios on these things using caps of about 10% over time, and they say that 99.5% of the time these policies stay enforced when funded properly—when maximally funded and executed as intended. There's risk associated with down returns, certainly, but you're getting something in exchange for that risk—a slightly higher rate of return, and I think history bears that out. Over the last 20 years, we've had high interest rates, low interest rates, and surging interest rates, so we've seen all sorts of different environments. I think an IUL through a good carrier with integrity when it comes to cap rates has performed as intended—a point to a point and a half higher than what you could have otherwise gotten had you put that money into whole life. Given the choice between a guaranteed 0% loan and a loan provision where it could fluctuate based on interest rates or the portfolio rate, where you could be paying two or three percent net, I would take the guaranteed 0% every single time.
In summary, I'm looking at something where I think, based on historical rates of return, I can get one to one and a half percent higher and to get that guaranteed 0% loan so that I'm not required to pay that money back out of my stock market portfolio down the road. I've done comparisons where you take an IUL, maximum fund it, and just put the money in the fixed account and then run that out and compare it against a whole life policy where you're maximum funding it and then take loans out of both policies out the back end. You're not even messing around with the index caps; you're just going with the fixed account. I know fixed accounts don't give you the same thing every year, but it's based on interest rates. Interest rates affect Whole Life policies like they affect IULs, but because of that 0% loan, that IUL policy is going to distribute money more efficiently over time than the whole life policy because you have to reckon for that net cost of borrowing. If you're just looking at pure building money up, even if you forget the index part of it, just go to the fixed account and say I don't want to mess with the index—there's too much risk associated with that. I'm just going to put money into the fixed account each year. Couple that with the guaranteed 0% loan that I can distribute down the road. I think that's a pretty efficient way to go. It's not going to build the money quite as quickly, but I think that when given the choice of that approach versus the whole life approach, I'd still take the IUL.
You said you don't use life insurance as asset protection, or maybe you don't necessarily buy into the backstop conversation. I think that was the epiphany for me around why you believe this, but I understand if someone did see it as a backstop. For me, a backstop wouldn't be a whole life policy; it would be a guaranteed lifetime income annuity coupled with Social Security, possibly a company pension. The backstop is wanting to guarantee 100% of my living expenses and adjust those for inflation over time. Then I can use the IUL to accomplish some specific objectives in retirement, primarily long-term care, but in some cases, the volatility buffer. You're essentially saying, if this isn't the foundation or the backstop, then why would I, if that's less important to me, if I already have that backstop with maybe different annuities and Social Security and planning, why wouldn't I try to get a higher outcome? But you could also see where it's like if someone had that as the backstop or foundation and that was it. It may bring a lot more peace of mind when it comes to planning to say, "Hey, I would be willing to take less upside potential over time but to have that peace of mind." I know the reason people do IUL is for that upside potential and maybe more efficient distribution, but I know there are people that just say, "Well, over a long period of time, that's going to be the exact opposite." I don't know if we even need to get into that now, but I think it would be—no one would do IUL if there wasn't—you wouldn't take less guarantees and then get less; you wouldn't take less guarantees for a smaller outcome in growth and distribution. I think that's a pretty fair statement. If we live in a market that wants to stay competitive, the IUL carriers have to try to give some type of reason why you would maybe part ways with more guarantees for that upside.