Concept Fine, But Details Absent

Some books can be vague, that means they can be obsolete quickly. That doesn’t mean “wrong,” but it does mean that in order to actually execute, that’s a whole different ball of wax. An example, this person is also the author of The Power of Zero, a popular book, not Dan Brown popular, but still.

Basically this book boils down to:

  • Limit your 401k contributions to the employer-matching level, and then stop.

  • Pay the tax, and put the excess into “permanent” life insurance.. This can be described as a Life Insurance Retirement Plan (LIRP). The cash balance in the permanent life insurance policy will grow (perhaps), on a tax-free basis (since you are using post-tax money) and you will be able to withdraw a portion of the cash value on a tax-free basis, like withdrawals from a Roth IRA.

This is an easy book to read, it is written as a ‘real-life story. (link)

Conceptually, this is fine, it is important to focus on the principles. The key one is that a cash cushion is built. The second is that cash cushion doesn’t depend on financial markets. That’s ok, with a couple of nuances.

Note that I do agree with the idea. While some advisors suggest that people simply adjust their living expenses with the level of financial markets, which would allow markets to recover, my simple reply: “Easier said than done, and I didn’t realize that’s the way that life works.”

Principle aside, the problem here is that there is no description whatsoever about the thousands of different policies and variations available. Further, the types of life insurance and details within each policy are all over the map, which includes the growth rates and your access to the cash value.
In addition, there can easily be limitations to your access to that cash value. Carriers are changing every single input over time.

Example. There ‘used to be’ policies that would be guaranteed to never expire, with the ability to use the death benefit in advance of dying, if you could not perform Activities of Daily Living (ADLs). Further, the return of the money, for some people, would always beat the bond market, on a guaranteed basis, by many percent, even if the person lived to 95. However, you could NOT access the cash value. That would invalidate the LIRP entirely, the bottom line is that you cannot simply, blindly choose a life insurance policy because it has fancy-looking features.

Indexed Universal Life generally does allow access to the cash value, the LIRP could work. In that instance, you need TIME for the cash value to accrete. where the growth of the cash value can be lower than the cost of insurance, in which case, you could face a day where the life insurance expires worthless, in the absence of a very large premium payment in the future.

The issue inside Indexed Universal Life is that the question of whether or not the cash value actually grows? Not necessarily, and here is the issue.

  • The cash value will not be the full value of the premiums that you pay.

  • The cash value will return according to the selection of ‘investment-like’ indices that you select.

  • The cash value can erode if the returns on the ‘investment-like’ indices is lower than the cost of insurance (which you do not control, but must be stated on your policy). The growth will not match equities in an straight-up market, for example dividends are not credited to you, which costs you greater than 2%> year (on average).