Parents in IUL will it hurt them

Submitted by Reasonable-Program29 t3_yhiokp in personalfinance

Key takeaways:

  1. Mid-Late 50s parents, no retirement accounts, only savings. Just finished paying off home.
  2. Just found out my parents have been paying for IUL (Just for dad and me when I was 10) for the last 14 years because of a "family friend"
  3. Sister recently got involved in Transamerica and started selling insurance (I've called her out to no avail)
  4. Sister applying mom for a new IUL and transferring dad to a different one since the current one looks like it was mismanaged (Said my policy was for tobacco when I was 10)

Recently my sister has gotten involved with Transamerica and started to "broker" insurance on the side. From there, there's been a lot of messaging me about 25-year-olds that became millionaires, or how with life insurance I could also make money from etc. Along with that, I realized my parents have also been paying for an IUL for 14 years now with the expectation that they can stop paying at one point and have the remaining balance continue pay for the life insurance benefit until they pass.

These two worlds merged yesterday when my parents wanted my sister's help to determine when they could stop paying and the policy will continue until they die. My sister brought over her "mentor" and looked into the numbers of my dad's current policy.

What they plan to do:

  • I told them to remove me from it entirely and put whatever remaining policy into my dad's since I don't want it nor need it. (~6k added to remaining of Dads (~20-30k in there?)
  • They plan to "upgrade" to a "better" one and pay a little more (~5k/yr) for another 14 years
  • Mom will apply to a new IUL, 14 years ~5k/yr, 200k policy

They've never had a 401k and can't get one but I would love to start them on an IRA(Still debating on roth vs trad, only income when they retire would probably be SS and me and my sisters giving them money, so not sure which tax bracket they'll be) with low-risk indexes where they aren't paying extreme commissions but I'll try that later.

I want to know if this will hurt my parents or any downsides to life insurance until death, I already know it'll probably cost them a lot, but they won't lose money right? I guess opportunity cost but not the actual principle.

Appreciate any advice/thoughts. Thanks

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BouncyEgg t1_iueah5u wrote

Pretty much all forms of Permanent (Whole, Universal, Variable, etc) life insurance are terrible for 99.9% of Americans.

It tries to do two things:

  • Insurance on a life
  • Investing

Unfortunately it does both very very very poorly.

  • It is a very inefficient path for investing.
  • It is an expensive life insurance.

The two combined make them a poor choice.

It is better to accomplish the two goals with separate products:

  • Life insurance: Term.
  • Investing: Follow the PF Wiki Prime Directive.

The Wiki has an excellent section for those looking for a more in-depth explanation on life insurance.

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Reasonable-Program29 OP t1_iuejht7 wrote

Thanks for breaking this up in such a clean way. I've brought up Term during the conversation with them before, but their concern is that with 30-year Term if they end up living past that point all of it would go to waste and they won't be able to give anything to their adult(20-30s) children (us).

It's the thought that people are dying older and also my grandmother recently passed in her late 90s so they dont want the chance they out live the policy term.

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longshanksasaurs t1_iuevtbe wrote

Term life insurance is best used to support people who depend on your income to survive, not to leave an inheritance to adults.

If you're already in your 20s-30s, you may already not rely on your parents income, and 30 years from now you really shouldn't be relying on their income.

If your parents want to leave something to their heirs, they should be investing -- that money can be used if they need it in their lifetime, and can be left to you adult children if they don't need their own money.

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Reasonable-Program29 OP t1_iuewti3 wrote

None of us rely on their income. It's entirely them that want to leave a little more than their savings after they pass. But want it guaranteed as opposed to a 30-year Term.

They've never been taught basic investing so they're risk-averse in losing money from stocks that's why they like the IUL pitch. And I find it difficult to change their minds this late in their life about it. I just hope it won't hurt their current lifestyle.

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BouncyEgg t1_iuf69xg wrote

> their concern is that with 30-year Term if they end up living past that point all of it would go to waste and they won't be able to give anything to their adult(20-30s) children (us).

This is exactly how the salespeople sell these things.

The fact is that you need to see the other side.

This is:

  • Term Life with cheaper premiums
  • Taking the savings and investing that (following the principles as outlined in the PF Wiki).

Once you perform this assessment, you will very quickly realize the impact of fees/commissions/premiums.

You will very quickly realize that IF you make it to the 30 year mark, you will have MORE money than if you went down the Permanent life pathway. Even though that money to Term Life went to "waste," you're still richer.

The other thing to realize is that Insurance is always going to be a "waste."

Why?

Because Insurance is meant to protect you in case a "bad thing" happens. You don't want any "bad thing" to happen. But you acknowledge that sometimes "bad things" happen and you want to prevent yourself from going bankrupt from those things.

For example... car insurance might be considered a "waste" if you never get in a car accident. You're paying all this money. If you never get in a car accident, then you've paid all this money for nothing.

So what's the smart thing to do?

Go with whoever provides reasonable amount of car insurance for your needs at the cheapest price.

Similarly, you buy a reasonable amount of life insurance NOT for the purposes of leaving an inheritance (this is a sales tactic, this is generally a very inefficient use of life insurance). You buy it because someone depends on your income. If you died, this person would have a very hard time surviving. Usually this is young children.

So you buy a reasonable amount of life insurance for your needs at the cheapest price.

This is what Term is for.

You SHOULD outlive the policy.

By the time the policy ends, you should either:

  • Have accumulated enough assets so that your dependent can live even if you died.
  • Your dependent has their own assets and no longer depends on your income to survive.

This requires a fundamental unwinding of all the sales tactics that your family has already been convinced of. It requires an understanding that it's okay to pay insurance and get nothing out of it. It means you've actually won the game.

  • Health insurance: Never use it? Great! You've won the genetic lottery
  • Car insurance: Never use it? Awesome! I hope you never have to.
  • Disability insurance: Never use it? Nice! Being disabled is not fun.
  • Umbrella insurance: Never use it? Strong work! Avoiding random liabilities!
  • Life insurance: Never use it? Amazing! It means you're not DEAD.
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sonnyfab t1_iue70g9 wrote

>I want to know if this will hurt my parents

It will just cost them money on a bad product.

>any downsides to life insurance until death

It's very expensive and also unnecessary.

>but they won't lose money

If you don't consider the $5k per year for 14 years in premiums "losing money" then unless the insurance company defaults, they won't lose money.

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Reasonable-Program29 OP t1_iuekgto wrote

Can you dive deeper into the unnecessary part of life insurance until death?

What do older people do when they don't have the most money but still want to guarantee there is something for their children after death? They believe that with Term Life insurance it isn't guaranteed they'll pass before the policy expires.

For the 5k a year not losing money part, I didn't consider it because my thought is the 70k after 14 years will continue to pay the premium for the remaining years they'll live. And 200k policy - 70k cost = 130k is still positive in the long run for their dependants.

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sonnyfab t1_iuekwzt wrote

>What do older people do when they don't have the most money but still want to guarantee there is something for their children after death?

People who die destitute typically do not leave a legacy to their children. People who make wide financial decisions and do not die destitute and pass on their wealth to their children.

>They believe that with Term Life insurance it isn't guaranteed they'll pass before the policy expires.

Correct. The purpose of life insurance is to provide a replacement for your income if you pass while people still depend on your income.

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Reasonable-Program29 OP t1_iueo8yp wrote

Is there no middle ground for the legacy portion? My parents aren't poor, they still make a little more than 100k gross combined in a year, and will continue to work for a few more years. So I wouldn't say they are destitute, but I wouldn't say they have been the wisest with their money, they still have a bit of savings at the minimum and just want to help their children a bit more when they pass.

Your 2nd point also makes sense. No one depends on their income at this point. It's just a tough situation for them due to no other investments but they want to leave their children more than what they currently have in the future.

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sonnyfab t1_iueoovz wrote

If the just invest 5k per year for 14 years into VTI, they're going to leave you and your siblings a lot more than 200k if they live into their late 70s or later.

That's the whole point.

The only way you and your siblings end up ahead with this life insurance scheme is if they die very soon, in which case term insurance would pay a lot more anyway.

Term life + index fund investment is a better way to leave a legacy than IUL.

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Reasonable-Program29 OP t1_iuepvgt wrote

All good points and what I already plan/am doing with my 401k, IRA etc. And when I have kids do Term life + continue indexing.

They're old-mindset people. They're afraid of stocks and the idea of losing money in the short term and enjoy the idea of an IUL being life insurance for their remaining life. Even though the IUL is already buying Index's (which are stocks lol) with high costs it won't go negative at least.

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Reasonable-Program29 OP t1_iueqrek wrote

But from everything here I guess ultimately it won't necessarily hurt them or their current lifestyle if they continue with this? And on the side, I push for them to open an IRA at least and help them pick low-cost indexes. Sounds like the only thing I can help do for them?

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sonnyfab t1_iuesnic wrote

>it won't necessarily hurt them

They'll be dead. It's you who is being hurt by the insurance company taking your inherence.

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Reasonable-Program29 OP t1_iuevxi3 wrote

Lmao fair. I don't need nor want their money. Just want them happy with their current lifestyle and that this won't bite them in the ass 14 years later and they're still alive.

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akmco14 t1_iuf02jt wrote

It might bite them in the ass when they don't have access to the funds if they need them like they would of they put this money in a retirement account.

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tnvolfan1 t1_iueaq7k wrote

At that age most people should start transitioning out of investment products into safer strategies to protect their retirement not starting.

As far as the IUL in this situation it’s a big no for me. The cost of insurance at their age is going to be too high and short period of time to grow makes it almost impossible. If they illustrate over 5% don’t believe the hype. Remember just like all market products there are no guarantees.

If they want guaranteed and safe and income for the rest of their lives they should look into fixed index annuities.

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Reasonable-Program29 OP t1_iueky1h wrote

I wish they had the information for retirement accounts and investments when they were younger but unfortunately, that is their situation. For them, they just want to leave something to us when they eventually pass and believe a Term policy isnt long enough of a time window.

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tnvolfan1 t1_iug5ea8 wrote

They are not alone. Unfortunately the United States ranks 14th in the world in financial literacy. I think an IUL has its place but this isn’t one of them. Your sister is doing more harm than good in this situation. Shame on her boss as well. I honestly think given your situation a fixed income annuity with an income rider is the best way to go. They can get an 8-10% guaranteed return per year for 10 years.

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