I could make this extremely short and to the point by simply stating that life insurance is not a Retirement Plan because the fees are exhorbitant, but from the large number of insurance complaints we are representing for our clients the topic deserves a closer look.

First let me say for those agents who are promoting the ideas of Nelson Nash and Infinite Banking, Patrick Kelly and Tax Free Retirement Income, and Doug Andrew and Missed Fortune 101 a word of warning. In 1994 MET Life was forced to offer restitution to 60,000 policyholders in Pennsylvania for selling variable life insurance as a retirement plan. In a similar case the same year MET Life was fined $20 million. The NASD responded with suitability guidelines for selling variable products. Whole life and Equity-Indexed universal life products are not securities so the NASD (now FINRA) has no authority over them, but every state has consumer protection and fair dealing laws and each state’s insurance department has clear definitions of concealment and misrepresentation.

Now let’s look at life insurance as an investment.

Life insurance was originally intended to indemnify against the happening of an unexpected event; death. The basic idea behind life insurance is to provide money when an insured dies. If you aren’t interested in that basic feature, don’t buy life insurance.

It seems that without being able to play on people’s dislike of taxes the promoters of Infinite Banking, Tax Free Retirment Income and Missed Fortune 101 would have a hard time selling their schemes. They like to tell you that 1. the policy cash value earns tax-deferred interest and 2. you can get tax-free income at retirement from life insurance. Let’s look at these items by comparing life insurance and a taxable mutual fund.

Life insurance: As interest is earned in life insurance there is no tax due as long as the money stays in the policy. At the same time however there are, at the very least, policy fees and mortaility fees (not to mention surrender fees, rider costs, cost-per-$1000 fees, and others as well). A 60 year old healthy male, with a $1million death benefit whole life policy, could easily be charged $6,000.00 of fees for the year (why use age 60? Most people hope to retire near age 60). Each year the mortality fee goes up, and the policy gets more expensive. Think you’ll live to age 85? Look at the mortality fee on a $1million death benefit for an 85 year old. If you guessed $70,000.00 you’d be right in the ballpark.

A mutual fund, by comparison, has an average fee of 1.5% of assets. So at age 60 I need $400,000 in my mutual fund before the fees are equal to the life insurance fee . If I live to age 85 I need $4.6million in the mutual fund to equal the fees in the life insurance policy. There are taxes on mutual funds each year, but the tax is dependant on factors like turnover rate, long-term or short-term tax rates and dividends. Your mutual fund may have a 10% rate of return for the year, but chances are you will only be taxed on a small percentage of that return (10%-30%) and then the amount of tax will be a percentage of that, depending on your tax bracket. So when the schemer tells you that you’ll pay 33% tax on your mutual fund, they’re most likely wrong.

As for “tax free retirement income”, there is no such thing from life insurance. Life insurance is NOT a retirement plan and if it was it does not produce tax free income, period. What these schemers are promoting is the ability to borrow from a life insurance policy. When you borrow you are taking a loan and there is no tax due, but the loan balance can get bigger than the cash value balance. When that happens you either start paying off the loan or your policy lapses and you owe tax on all the money you borrowed. How would you like to be 85, having borrowed a couple million dollars from your life insurance policy and it lapses? The IRS then sends you a tax bill for $2million.

I admit that insurers have come-up with some interesting policy Riders to protect against this taxable event happening, but read the wording of the Riders and you’ll see qualifying conditions like a) you must be at least 75 years old, b) the outstanding debt to us divided by the excess of the Accumulated Value over the Surrender Charge must exceed 0.95. c)  and “Notification will be sent to you when these conditions have been met. The rider must be exercised within 60 days of the date we mailed the notification. If not exercised within that 60 days, the rider will be terminated.”

The mutual fund, by comparison will be taxable when you withdraw the money. Assuming you’ve held the mutual fund for more than 12 months you’ll be taxed (under current law) at your applicable long-term investment rate. It’s a pay-as-you-go system so you don’t get blindsided by taxes.

I am a strong believer in the benefits of life insurance. My concern is that I am seeing too many complaints from unsuspecting consumers based on the schemes in Infinite Banking, Tax Free Retirment Income and Missed Fortune 101. The investment solution these schemers offer in each case is a very large life insurance policy and the inducement to buy the policy is always based on; a Retirement Plan with tax-deferred growth and tax-free income, no limits on what you can put in or when you can take it out. This is a scheme designed to earn large commissions.

If you have been a victim to this scheme please contact us at info@cflid.com. We will represent your case against all parties promoting these schemes and help you recover your money.