Disclaimers
Though much of what you may read in the box above represents the conventional view within my industry, some of the ideas presented at this site may differ from my point of view .
Of special concern is a product called Variable Universal Life. Because the equity or cash value portion of this policy is in mutual fund like investments, there is substantial risk. To understand this risk one needs to know how the VUL is designed:
As with all Universal Life policies the two main components are mortality (term premium) charges and an accumulation fund. The mortality charges are based on the current age of the insured and the difference between the Death Benefit and the accumulation fund. For example: a $500,000 life insurance policy with $125,000 of accumulation value would have a mortality risk to be charged for of $375,000. Thus, if the mortality cost at a particular age were to be $10.00 per thousand, that mortality charge for that year would be $3,750.
In 2008 the S&P 500 fell 38.49% . Assuming that this is reflected in the cash value of the VUL, the account value would have dropped to $76,888, and the mortality charge for that year could have jumped to $4,231, causing a further loss of value since that also would increase the amount of risk that would be charged for.
Had this happened at an older age, when the accumulation value might be $250,000 and the mortality charge $30.00 per thousand, the mortality charges would have increased from $7,500 for that year to $10,387.
This might not happen again, but loss of value has happened many times; and the older one is when it happens, the costlier it becomes. And if one has been taking withdrawals from the policy, there could be tax implications due to possible loss of coverage. These policies will not be written by the Brumbaugh Insurance & Annuity Agency.
Special comments on Qualified Plans from Willard R. Brumbaugh, LUTCF:
Qualified retirement plans such as traditional IRAs, 401(k)s and 403(b)s have been popular for the belief that by postponing paying income taxes one would save money due to being in a lower tax bracket at retirement. At one time this might have been true. In 1975, when the IRA became available, the top Federal tax bracket was 70%. Now that the top Federal tax bracket is only about half of that, for many people, there is no advantage in delaying the payment of the income taxes.
On top of that, Required Minimum Distributions from their Qualified Plans after age 70 force many to pay income tax on as much as 85% of their Social Security income. Many retirees actually find themselves in a higher tax bracket than while they were contributing to their retirement accounts. People have found that they would have been better off paying their taxes as their money was earned. Unfortunately, by the time this is found out, it is too late to fix it.
It is because of this discovery that in 1998 the Roth IRA (and more recently the Roth 401(k)) was created. Withdrawals from the Roths after age 59 1/2, assuming other qualifying events have been met, are totally income tax free. And since these distributions are not part of one's Adjusted Gross Income, there is a greater possibility that there would be no income tax on the Social Security income.
When talking to employees, I recommend that they contribute only the amount necessary to gain their employers' full contributions. Even this has proved to be hazardous, since many have driven up their credit card debt in order to afford the maximum employer participation. And in the course of answering questions at AllExperts.com, I have had many ask how they can avoid Premature Distribution Penalties due to loans taken out on their retirement accounts that they cannot pay back, and must, since they are no longer with that plan's sponsoring employer.
Additional retirement funding I encourage being put in vehicles that provide income at retirement that is not reportable.
When talking to employers I recommend that they replace 401(k)s and 403(b)s with voluntary employee-chosen salary deduction plans that require no employer contributions whatsoever. And if the employer wants to provide a retirement benefit, I recommend a pure Profit Sharing Plan. PSPs are tied to company profitability rather than payroll, and thus protect the employer from losses during times of low profitability. A side benefit of these recommendations is better employee morale, since the employees have greater control of their funds.
For many companies' employees it is now possible to move part or all funds from their 401(k)s into self-directed IRAs. This gives employees the opportunity to reduce stock market risks and to have greater accessibility. In addition, once the funds have been transferred into IRAs, employees may convert the funds into Roth IRAs, or if desired, into life insurance (by means of IRC 72(t) distributions).
If you are interested in my service in this area, please call me at (888) 792-2379.
Willard R. Brumbaugh, LUTCF
CA License 0374776