Last year on these pages I wrote posts extolling the benefits of EIUL’s. Back then I called them FIUL’s. The common usage for awhile has been the former, which we’ll stick to here. What’s an EIUL? It’s permanent insurance, designed, in essence, to deliver tax free retirement income. Some have called it investment grade insurance. It also has many other benefits, including the ability to pass the entire value of the policy tax free to heirs upon the insured’s death.
My point in the previous posts was that if folks would just be objective, they’d realize 401k’s are a trap, baited by government with paltry annual tax savings to lure us in. What folks don’t know, I wrote, is that upon retirement, a disciplined saver finds out that in 4-6 years they’ve already paid back 30 years of ‘tax savings’. Such a deal.
Why would anyone do that on purpose?
It created a barrage of comments, some seemingly personal, but most disbelieving the information imparted. What’s so ironic, is whenever we guide our clients into these vehicles, it’s at a loss to us. We make not a penny on anything done by the EIUL experts to which we refer our people.
Then why do we advise many of them to separate some of the real estate investment capital from their pile in order to acquire an EIUL? Simple — it’s the right thing to do. Yesterday I posted what happened to those who refused to believe me last year.
Those who manage their company’s qualified retirement plans? Please, pretty please, at least check into this? If you’d at least done your own objective research, you would’ve discovered I was simply tellin’ you the way it was, and was gonna be. And now, the way it is.
Those who saw the information for what it was, did not get hurt in the stock market crash of the last couple weeks. It’s been significantly hurtful to most, and absolutely devastating to a majority of American taxpayers heavily invested in mutual funds through their 401k’s.
Those who chose EIUL’s? They not only didn’t lose a penny, they’ll have made about 2% this year. For those who belittled the info I put out last year, some of whom were in a position to make a difference for employees — how is your approach workin’ for ya now?
This recent downturn hasn’t just caused severe financial losses to hard working Americans. What brings insult to injury is that it didn’t have to be that way. Toward that end, I’m on my knees begging you, no, BEGGING YOU — please talk to this expert in EIUL’s. What’s the worst that could happen? Garnering new information?
If folks took the advice offered on last year’s posts, their retirement nest eggs would now be 15-30% larger. Not only that, but when they retire, their income will be tax free. When they die, their heirs will receive the EIUL’s complete value untouched by the death tax.
I’ll stop here, as I’m about to get wound up. 🙂 I’m sick to death of those for whom change is anathema, and to be besmirched at any cost, merely because it’s not what they’ve been doing. That cost in the last year has been devastating to thousands of American families who never knew they had another choice.
What’s worse than that? Many of them were advised by those who knew about EIUL’s, but decided to keep it to themselves. Shame on them.
What do you now say to a family who this month alone lost upwards of 30% of their retirement nest egg? It will take that family years to simply catch up to where they were. Some will be forced to postpone their planned retirements. Think about that. What’s worse than retiring with less income than should’ve been there?
How about not being able to retire as scheduled?
Had a call the other day from a client who’d started their EIUL last year. He and his wife aren’t 40 yet. You could hear his smile as he talked. Wonder what kind of phone calls some of the in house ‘advisors’ have been getting this month?
Please, click the link and at least hear what an expert has to say. Yeah, I’m begging one more time. Imagine if this happens again, and you’re ambushed again. Working into your 80’s isn’t all it’s cracked up to be.
To those who dismissed what I had to say, out of hand last year?
Read my mind.
Jason says:
Interesting post and I will look into the EIUL’s. My question is this…over the long haul, and most would agree retirement investments are long term and this has been a bump (a big bump)in the road, would a 401k garner a higher rate of return over the EIUL say over 25 years? A 2% return looks good in this market, but I have seen my 401k jump much more than 2% over the past 10 years. Even taking into consideration the recent loss on the 401k, it still has done better then 2%. I’m not criticizing, just asking.
I believe in diversification and moderation so my retirement strategy includes a mix of holdings so I am open to adding something else or moving money around. But I also think the losses that have happened recently will be made up for many people. Certainly folks closer to retirement age are going to be affected but for someone not yet 40, that will not touch the 401k for 25 years, this will most likely be only one of many bumps along the way.
October 21, 2008 — 8:37 pm
Jeff Brown says:
Jason — The 2% return is the floor provided for in the policy’s contract. It’s not the average return. Depending upon who’s talking, the return, factoring in fees, goes from 6.5-8.5% annually. Sometimes more, sometimes less. Never less than the floor of 2%. So this year when the DOW dropped from well around 13,000 to 8,000? The holder of an EIUL actually MADE 2%.
The latest study, which I will let Dave Shafer explain, shows the historical return for well over 90% of 401k’s has been around 4.5% — and that’s over the last 20 years. So yes, if you’d had an EIUL the last 20 years, you’d have beaten the average 401k return hands down.
Furthermore, the income at retirement is not taxed, as they are for 401k’s, which is at ordinary income rates. EIUL’s aren’t taxed period. There are many advantages they have over 401’s, but I’ll let the expert explain them.
Thanks Jason.
October 21, 2008 — 8:50 pm
Jeff Brown says:
Jason — I neglected to address you final observation.
>Certainly folks closer to retirement age are going to be affected but for someone not yet 40, that will not touch the 401k for 25 years, this will most likely be only one of many bumps along the way.
EIUL’s don’t have bumps, Jason, so the irreplaceable time taken to make up for those bumps is never required. As Warren Buffett is so fond of saying — (paraphrased) “Not having to make up for losses is one of the best advantages any investor can have.”
EIUL’s provide that advantage.
October 21, 2008 — 10:36 pm
Sean Purcell says:
Jeff,
There is a financial advisor in our office who began putting his clients into these plans (insurance annuities) last year. He simply went through his large rolodex of clients and called anyone within ten years of retirement age. Time to move your assets into something with guaranteed returns, guaranteed market participation on the upswing and guaranteed tax breaks. He was in my office today, a little stressed, talking about his younger clients and all the nervous calls he has to field right now. He takes every one of his clients’ portfolios personally. I asked him how much money he moved over to these investments in the last year. $10 million he said. Based on the market that means he saved his clients close to $4 million dollars. I told him to be fair to himself. If he is going to take things personally he should take the savings of $4 millions dollars personally.
I think I am going to start calling him the $4 million dollar man. Everyone with less than 10 or even 15 years to retirement (Dave, thoughts?) should look into these ASAP. By the way, insurance companies are just about the soundest companies on earth. Might even argue they are a better bet than Treasuries… at least right now.
Thanks for getting the word out. I think we all appreciate it when you “spread the wealth” Jeff. 🙂
October 21, 2008 — 10:59 pm
Michael Cook says:
Jeff,
Three quick points. I am certainly not against your strategy, but I agree there should be an age caveat. First, most companies have a match to 401k contributions. No one should throw away that match for some safety. My personal strategy is to max to the match, then keep the rest of my money for my own investing purposes.
Second, people should be more hands on with their 401k. If you are 50, God forbid 60, this down turn should not have affected you because you should not have had that much of your investments in equities. Obviously people are risk takers until it bites them in the rump. These guys are key candidates for what you are talking about.
Third, long term investors 20+ years would probably be better off with Roth IRAs, but are not significantly worse off now. As long as people reinvest their tax savings in vehicles yielding 7-10% a year and plan on making less money than they make now, which for many is a reality.
Sure, I expect to make more money every year than I made last because I am an active investor and plan on building a very strong portfolio of real estate investments. I cant impose that proposition on the average American, who works their entire life and retires to do absolutely nothing. Tax shelters need to be tailored to a persons needs. Keep in mind, most Americans make the median income and have surprisingly small savings accounts.
October 22, 2008 — 5:13 am
Jeff Brown says:
Hey Michael — One must ask why over 90% of 401k’s are invested in mutual funds. Surely I’m not the guy with the answer, but I know why I wouldn’t be in stocks. The advisors, (stock brokerages) haven’t exactly set the world on fire when it comes to stock advice. If they had, folks wouldn’t have fled almost universally into the so-called diversified approach of mutual funds. Let’s not even begin the conversation about the higher fees charged for mutual funds.
Roth IRAs? They’re the best of the gov’t lot. Still, they have limitations not found in EIULs. They don’t measure up either. Again, I’m not gonna argue the point — but defer to EIUL experts.
Employer matching is a bar bet.
I didn’t say anything about this in the post, not wanting another $%&# storm like last time, but I’ve now spoken with three separate EIUL experts. All three of them say the same thing about employer matches: If the combined tax rate of the taxpayer (state/fed) exceeds 25%, even the dollar for dollar matching loses to EIULs.
Dollar for dollar matches are a bar bet. They look unbeatable, but clearly are not. Over on my blog, a reader noticed I’d done a 180 in this week’s post on EIULs. I said to go ahead and take the employer match. He wanted to know why, since it wasn’t what I’d said last year here. The answer is simple, I tired of folks arguing what appeared to be true instead of what empirical analysis showed to be true as a matter of fact. EIULs beat 401k’s from here to East Toilet Seat, Idaho and back.
David Shafer (who IMHO should be a BHB contributor) can come in here and tell you about the most recently published 20 year study on 401k returns. Try less than 5% annually — for the last 20 years. The number was actually about 4.5%.
I’m not gonna argue the point. I’ll let EIUL experts do it.
I understand where you’re coming from on the age thing. Let’s look at a 30 year old couple. What if they invested for retirement the next 35 years — and never, ever had a losing year? How would that affect their retirement income bottom line? Not one year wasted playing catch up to a down cycle. Meanwhile, they didn’t go for the sucker bet of saving nickels and dimes on taxes each year so they’d have the privilege of paying all of it back within the first few years of their retirement.
The taxpayer who pays the most taxes doesn’t win in the real world.
Works for me.
October 22, 2008 — 9:55 am
Jeff Brown says:
Hey Sean — Were they EIULs?
Imagine how long it would’ve taken all those young families to recover from that kind of a loss. It’s the time burned in recovering from large losses that becomes the black abyss of retirement plans gone awry.
Though over 90% of taxpayers have chosen mutual funds as their 401k investment of choice, I gotta believe it’s due in part to fear of the track record of their buddies who waded into the stock market based upon their Wall Street advisors.
Be safe! Get into mutual funds. You’ll be incredibly diversified. In fact, you’ll be diversified into almost no growth to speak of. 🙂 I’ve always liked how Warren Buffett defined diversification.
He said, “Diversification is for those who don’t know what they’re doing.”
Hey, I didn’t say it. Those disagreeing with that sentiment? Feel free to argue with Warren.
And Sean, like you, I love spreading the wealth.
October 22, 2008 — 10:10 am
David Shafer says:
I have posted here before on this subject. I have yet to have a client who I have sold an EIUL too, come back and complain about the product. As long as one understands how to use a EIUL to your advantage and how to seperately create wealth the product works as advertised. The argument of EIUL versus mutual funds inside a 401K wrapper, is simply a straw man argument because neither will get you to a comfortable retirement alone. No doubt the poor performance individuals get from investing in mutual funds (4.4% last 20 years, Dalbar, Inc. data)is largely the result of being sold a wrong product for the job at hand (building wealth). EIULs do the job of moving wealth out of the tax man’s hands fully into your hands. Is there a cost to this? Yes! But it is nowhere near the cost the taxman will charge you!
I always find it amazing that folks will readily address the media complicit propaganda coming from politicians, but fail to see the same conduct coming from Wall Street. Diversification is a rate of return reducing mechanism skewed toward reducing positive returns. There are a host of folks out there making double digit returns from stocks that don’t have the last name of Buffett! These folks aren’t on TV, don’t write articles in Money magazine, or have radio shows. They just go about making money in a working man way by planning it, implementing the plan, persistence!
If mutual fund investing was so good, then where are all those mutual fund millionaires hiding? Might we not have a book titled “The mutual fund millionaire next door?” And since when is it simple or automatic to get rich? Personally, I put the invest in mutual funds to retire comfortably theory right next to the tooth fairy and Santa Claus theories.
Folks that want some straight talk about wealth production and asset protection (inflation and taxes) make up the majority of my clients. Those that want to believe it is simple or automatic argue over mundane details like fees and commissions. Its the results folks, that is important. And the studies point out the results!
October 22, 2008 — 11:57 am
Jean Louis R says:
SO interesting!! I will definitely pass the info about EIUL! Thanks
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October 22, 2008 — 1:59 pm
Anonymous says:
My retirement will consist of a ton of real estate and government bonds. I can get a better return on building lots than in a 401k.
October 22, 2008 — 7:56 pm