Episode #15: Your Personal Wealth Report - Part 2 of 3

When evaluating the costs associated with financial vehicles, you must also consider the amount of taxes you will pay as being a cost. In this episode of Money Script Monday, Brian continues the conversation about Your Personal Wealth Report and compares the summary charges of an Indexed Universal Life (IUL) policy against various financial alternatives.


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Video transcription

Hi, welcome to another episode of Money Script Monday. My name's Brian Manderscheid and today we're going to go over part two of your personal wealth report.

In this section, we're going to be going over the IUL policy costs as well as how they compare to the taxes and fees of the various alternatives. To go in depth, we're going be talking about the policy summary, pages, the total expenses, and taxes paid, total charges by age as well as yearly breakdown. With that said, let's go ahead and jump to the screen.

Policy summary

We're now in the cost section of your personal wealth report. Before I get into it, I do want to go over some assumptions used in this analysis.

First, we looked at the Indexed Universal Life with a 6.5% growth rate. We're going to compare the policy expenses of the IUL to the same three alternatives we looked at in the previous video. Those are the Taxable Account, Tax Deferred Account and Tax-Exempt Account. All three we're going to be illustrating at the same light-to-light growth rate of 6.5% with a 1% annual expense.

Now it's important to note that you may be paying a higher or lower expenses on your investments and we can customize a Personal Wealth Report with your information. In this analysis, we use a 28% tax rate, both in working years and retirement years, that again can be adjusted in your Personal Wealth Report.

The IUL summary at age 85, you can see we paid $0 in taxes, that's to be expected because as long as we're designing this policy appropriately, we will not pay taxes on gross distribution or transfer. We do have policy fees which at age 85 cumulatively are roughly $142,000.

It's important to not look at that number in a vacuum, and then instead look how that compares to the other alternatives.

Total expenses and taxes paid @ age 85

IUL Account

When we break those down you can see with the IUL we have $500,000 cumulatively being funded into the policy. The expenses of $142,000 are 28% of what we funded into the contract. Those policy expenses went to a death benefit, which at age 95, is projected to be roughly $1.3 million.

Taxable Account

With a Taxable account, we have lower expenses of $110,000 but we have taxes of $191,000 on the annual gains, so our total expenses are roughly $300,000 which is 60% of what we put in and keep in mind that our account value went to zero at age 77. And if this alternative actually lasted to age 85, we actually would have had higher expenses and taxes.

Tax-Deferred Account

The Tax-Deferred account you can see that we have a higher total contribution because we actually gross up the contribution into this account because the contributions are being made pretax. Our expenses with this option are $228,000 and taxes are $521,000. Our total expenses and taxes are 3/4 of a million dollars at age 85 which is 101% of what we put in.

We also see that the account value went to zero at age 82 for this account. Lastly, the Tax-Exempt account, we don't have any taxes but we do have fees of $164,000 which is 33% of what we put in. We have the same result at the end when the account went to zero at age 82.

Total charges by age

If we look at this graphically, one thing I always like to point out, is the IUL policy costs in the beginning are actually higher than all three of the alternatives. It takes some time for the other three options, Taxable, Tax Deferred and Tax-Exempt, to cross over the cumulative costs of the IUL. I also like to point out in the latter years that there is a jump up in costs of insurance rates in the latter years of life usually beginning in the early '90s, if we make it that long.

Now, while the policy costs are higher in those particular years, you can see that our other options ran out of money prior to that, while we do have higher fees in those years, we actually are still providing a benefit in form of tax free income as well as a death benefit leftover.

Total expenses and taxes paid yearly breakdown

If we look at this year by year, the first year you can see that we're paying the highest fees in the IUL when you compare those to the alternatives. We're paying roughly $4,100 in fees in the IUL versus $700, $370 and $266 in the other alternatives.

In the latter years, when we're using this policy for income, at age 66 our IUL policy fees that year are about $2,500 which are actually the lowest out of all three alternatives, we had $19,000, $43,000 and roughly $9,000 with the other options. With the IUL policy the costs are the lowest when you need the money the least and the highest when actually you need the money the most.

So when you get to the retirement years, that's when you want our policy fused to be the lowest because that's when we're going to start distributing the money for tax free income. With our Taxable, Tax-Deferred and Tax-Exempt accounts, once our account value starts to grow, so do the expenses and taxes that we're going to pay, likewise when we pull the money out with a Tax-Deferred account that is when we're going to experience taxation.

In the latter years of life, like I mentioned starting in roughly the early '90s, you can see that we do have a jump up in Costs of Insurance rates but we are providing a benefit in those ages in forms of tax free income and a death benefit. After age 95, the Costs of Insurance rates, actually drop off and the only fees we have are the Policy Admin fees which in this case are $7.50 per month.

So again, when you look at the expenses in the alternatives in those years there are no expenses because we actually ran out of money, there's no benefit income for ourselves or death benefit for our family at that point.

Lastly, really the biggest takeaway I have from this analysis, is the fact that with the IUL our policy costs are front loaded and it's important to not just look at the first few years of the IUL contract but instead look at the lifetime of costs you're going to be paying in comparison to the alternatives.

Your Personal Wealth Report

That wraps it up for this section on the IUL policy costs. Next week we're going to be getting into the IUL back casting of historical returns. If you're interested in moving forward with a copy of your personal wealth report, please use the information in this page and we'll generate a custom copy for your personal situation. Thank you very much. We'll see you next time.

About Brian Manderscheid

Brian Manderscheid is the Vice President of Case Design at LifePro. He works with financial professionals designing advanced case illustrations that are built for longevity and are always in the best interest of the client.