WCI #341: How to Surrender One of Those Nasty Indexed Universal Life Insurance Policies

This is the White Coat Investor Podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011.

This is White Coat Investor podcast number 341. If you're looking to boost returns, lower taxes and build wealth, join the WCI Monthly Real Estate Opportunities list for tips and strategies to maximize your real estate returns and for introductions to exclusive investment opportunities, expect educational emails that introduce you to syndicators, fund companies, online courses and online real estate platforms. Go to whitecoatinvestor.com reopportunities to sign up today. You can do this and the White Coat Investor can help. All right, welcome back to the podcast. Hope you're having a great fall. We're getting into winter here in Utah, getting cold and by the time you listen to this we probably got snow. So get stuff put away. Get ready for the cold months. Here we go. By the way, if you're getting really cold where you're at, there is a solution. You can join us in Florida first week of February, February 5th through 8th specifically is when WC Icon 24 is going to take place. This is the Physician Wellness and Financial Literacy Conference. It is a spectacular conference. We have a wonderful array of speakers and experiences lined up up for you there. It is eligible for you to use your CME dollars to purchase. If you are self employed. You can write this off as a business expense, but even if you had to pay cash, it's well worth it. Well worth it. Our first one, we had over 99% of attendees recommend it to their peers and we've had similar numbers with all of the conferences. Since it's really a great event, you can register www.wcievents.com. we've got a special bonus though if you Register before the 16th. Register before the 16th and you also get the world's greatest swag bag. So if you register after that, we don't have time to print the books and cannot get you a swag bag. At least not in its usual glorious form. So if you want to come to the conference, it will be best if you sign up by no later than midnight on November 6th. All right, let's get into your questions. This podcast is driven by you. We want to talk about the subjects you're interested in. We want to have the guests on that you're interested in. We want to answer your questions. So here's the first one. It's coming off the speak pipe. This is about 401s and SEP IRAs.

Hi Dr. Daly, I am a neurologist in the twist area and I have a question regarding 401 and the sole quarantine and Sibira. Basically I have a full time job for which I get 401k match and I contribute to the maximum and I have a side gig basically which done relatively well and my accountant has advised me to open up a SIP IRA to basically defer some of this income and you know, be able to see more for retirement. Listening to your podcast I was under the impression that I need to do solo 401k instead of sip IRA. So I can basically still do backdoor Roth IRA. Although my accountant told me that if I do that then my employer 401k will be still counted towards the maximum total 401 like 66,000 between the solo 401k and the plar 401k is that true and if not, what is the way to do that? Thank you for all you do and I appreciate all your help.

I'm not really sure how to answer this question. It sounds to me like you already know the answer and you already know your accountant is wrong, but if you need me to tell you that again I will. Your accountant is wrong. It's bad advice to give a high earner like you the advice to open a SEP IRA instead of a Solo 401 because that SEP IRA balance, at least the tax deferred balance now that we're supposed to start getting Roth SEP iras soon counts in the pro rata calculation toward your backdoor Roth IRA conversion. So you don't want money in a SEP IRA if you're doing backdoor Roth IRAs. You want it in a Solo 401 instead. It'll be about the same contribution though, because you're using your employee contribution up in Your regular employer's 401. Where your accountant seems particularly confused though is with the rules for multiple 401ks and I have a whole blog post about this on the blog and I would suggest that you send it to your accountant and have them read it because that's the way the world works. Even though most accountants don't know this, and the reason they don't know it is because they don't have very many clients that have more than 1 401k. While this is common in the Dr. World, this is not common in the regular world. Most people aren't maxing out their first 401, much less trying to get an extra one. So this is Kind of actually pretty unusual, but yeah, that's the way multiple 401 s work. If the employers are unrelated, they each get their own separate in 20, 23, $66,000 limit for total contributions into the plan. If they are related employers, that's not the case. They share that limit. But in this case, it sounds like it's you and it's some hospital or something employing you. Those are unrelated employers. They each get a $66,000 limit. Now, whether you'll be able to max both of those out, it sounds like from your situation that you probably can't max either one out. But between the two of them, you'll be able to put away quite a bit of money. So your accountant's wrong about how the multiple 401 rules work. Send them that blog post. Maybe that'll help. Maybe you need a new accountant. I don't know. I'm sorry you got to deal with that. My accountant seems to screw up my Form 8606 on my tax forms every year. So maybe we all just need to lower our expectations for what we think accountants can accomplish. Disappointing sometimes, sure. But I've been getting disappointed by the financial services industry for more than two decades, so it's not unusual for it to happen again. All right, next question. Before we do that though, let's do the quote of the day. This one's from George Soros, who I know has got some political ramifications. He's usually in the news. People don't like that he contributes to Democrats. But anyway, he said something smart, so let's quote him. He said if investing is entertaining, if you're having fun, you're probably not making any money. Good investing is boring and I am a firm believer of that. Okay, now to another speak pipe someone who sold their practice.

Thank you Dr. Dali, for all you do for us. I'm a 60 year old surgeon who sold his practice, moved and took a job in a group where the owner physician is unwilling to start a cash balance plan. There's a 401 that is being maxed out. I became a partner earlier this year, which entitles me to get a monthly ach based on production that is not taxed. What can I do other than 401 max out to reduce my current tax burden? Is there a way I could form a corporation, perhaps llc, C Corp, et cetera, that employs me and start a cash balance plan through that company? I would be using the money earned from my main only gig, which I described above. Thanks in advance for any strategies you may have.

Okay, first of all, there's a little red flag in something you said. You're saying you're getting money sent to you in exchange for your work, for being a quote unquote partner. And I'm not sure what that means, but you're getting money sent via ach to your account that is not taxed. I've got news for you, that is taxable income. You do have to pay taxes on that. It sounds like what you're saying is that the employer is not withholding taxes for you. In which case what that probably means is that you need to start making quarterly estimated payments. And as a prior practice owner, I think you're probably familiar with that process. But if you're not, look that up. We've got blog posts all about making quarterly estimated tax payments. But don't assume that's somehow tax free income. Now, I don't know what you mean by making partner. If you're not a partner in a partnership, then I don't know why you're calling yourself a partner. Maybe for some reason you get a little extra pay for some reason. But if you're a partner, you're also an owner, just like the other owner. Maybe the other owner is a majority owner, but you're an owner if you're a partner in this practice.

Now.

So look into what the real legal situation is to understand that as far as a cash balance or any other retirement plan goes, no, an employee cannot go out. A partner cannot just go out and open their own retirement plan, no matter whether they form an LLC or corporation or whatever and pretend that's the employee. That's not the way it works. You have to use the partnerships or the company's 401, otherwise all the owners would do that, right? If there's 10 Dr. Partners, they'd all have their own 401. They'd be putting $66,000 into it, and they wouldn't put any 401 in place for all the P on employees. Right? And they have rules against that. You can't do that. They have discrimination testing for retirement plans that prevents you from doing that. And just forming some other entity doesn't get you around those rules. So no, you can't go out and form a solo 401. No, you can't go out and form a cash balance plan. Even if you make an LLC or a corporation or another partnership or whatever. If the income is coming from this business that you're earning in this business, then any retirement plan has to include all the employees for that business and has to pass the discriminatory testing every year required of retirement plans. So sorry, good idea. Doesn't work. Lots of docs have thought about it before you and the answer is still the same. Can't do that. All right, our next question is about an indexed universal life policy with a long term care rider that no surprise this person doesn't want anymore.

Hi Dr. Dali, thank you so much for educating us and for all you do. I'm asking for advice for how to surrender an indexed universal life insurance policy with a long term care writer. I'm 41 and healthy. My death benefit is 500,000. My annual premium is 3,500 of which half is taken for fees and cost of insurance. I've had the policy for four years. My premiums paid to date equal 24,000. The surrender cash value is 6,000, the growth rate cap is 10% and the policy is also capped on the bottom at 0%. The investment options are a global total stock market versus S&P 500 fund with unknown expense ratio. I have no dependents. I have enough life insurance through work and will be able to self insure for long term care. Is it better to cut my losses, take the surrender cash value and invest in my taxable account assuming I've already maxed out 401 and Iraq? Or would you suggest exchanging to a Fidelity low cost variable annuity for which I would have to add $4,000 to meet the minimum requirements and then let it grow to my original cost basis? My twin sister has the same policy, only at a 4x multiplier. The difference is her premiums were funded by individual stock money she made off of her startup company ipo. Any different advice for her? Again, thank you so much for everything that you do well.

I'm so sorry. I'm sorry you bought something that's designed to be sold, not bought. An insurance agent masquerading as a financial advisor talked you into buying this thing that you clearly don't need and clearly has not been a good investment for you. This is pretty typical performance for these sorts of things and now you're kind of stuck with it. Or you have some rather unpalatable options to get rid of it. Yeah, you understand your options. That's the way it is. You paid 24,000 bucks, you got 6,000 bucks. So your return has been minus 75% is your cumulative return on this policy. I owned my whole life policy for seven years. My cumulative return was minus 33%. It's a terrible investment. Luckily I didn't put as much into it as you did, or even worse, your sister. If you have no need for a long term life insurance policy for a lifelong death benefit, you probably shouldn't have bought this. You probably shouldn't keep it. Now the decision to keep it or not is a different decision from the decision to buy it initially. Sometimes the poor returns are kind of front loaded, but with an IUL policy in particular, it's really hard to sort out because there's so many moving parts there. You don't have the guarantees that you have a whole life insurance policy. There's a lot more that's up in the air that the insurance company can can change, crediting rates, so on and so forth. It's tied to indexes, although not usually the same thing as an index fund return because they usually ignore the dividends. But what would I do with this? I would probably surrender it, walk away with my tail between my legs, know that I paid basically an $18,000 quote, unquote stupid tax. I've made financial mistakes in my life and it cost me money. Some cost me more, some cost me less. I'd probably walk away from this one. It is an option, as you mentioned, to exchange this into a low cost variable annuity, let it grow back to basis and then surrender the annuity. What that does is it gives you $18,000 worth of tax free growth. So maybe that saves you taxes of 23.8% of that at most. Maybe a little bit more for state taxes. So let's say it saves you 30%. So you're going to save six grand in taxes by dealing with that hassle. You'll pay a little bit more in fees for the annuity to do that. Is that worth it to you? It might be, but I don't think it would cause me to want to put in another $4,000 just to get to the minimum to have that sort of a thing. I think I'd probably just walk away, but it's your call. One thing that's worth doing with these sorts of policies, whole life policies, et cetera, is getting in force. Illustration calculating what you think your likely return will be going forward from this point. And if that return's acceptable to you as an investment, then keep it. If it's not, then you get rid of it. Especially if you have a better use for your money. Sounds like I'm not hearing a lot of other awesome uses for your money, but you can always just invest more in taxable and frankly I'd rather invest more money in a taxable account than put it into an IUL policy. These are not policies that I like. They're the most frequently sold thing out there by these cash value life insurance salespeople these days. Because everybody kind of knows that whole life insurance isn't a great idea, but they don't know that an index universal life policy is not a great idea. And they hear index and they think index fund, which they hear is a good thing. They don't realize that this is something totally different. So read through the blog post that's called should you'd keep whole life insurance policy and how to cancel and I think you'll have all the information you need to make this decision. But I think I'd just walk away. Your sister's case, four times as much money. That's $24,000 of saved taxes, presumably. I think she's got enough obviously that she doesn't have to add money to go into that annuity. I think I'd probably do it if I were her. I'd probably swap that into an annuity over at Fidelity. I think they have the lowest cost one these days and let it grow back to basis before surrendering it and just investing it in the taxable account. But I don't know her circumstances. Maybe she has a better use for long term life insurance policy than you do. I don't know. You didn't mention that. Good luck with your decision. I hope that's helpful. All right, so those are Speak Pipe questions. If you want to get your question answered on the podcast, you can basically go to whitecoatinvestor.com speakpipe and record up to a 90 second question. You don't have to use all 90 seconds, but you can record your question. We'll answer it on the podcast, so be sure to do that. We want to answer your questions and things you care about and I know listeners enjoy listening to more voices than mine. All right, our next question comes out of my email box. I'm trying to figure out how best to manage matured EE savings bonds without paying interest on them. We live in New York State and make around $400,000 per year. My wife has many paper EE bonds that her family gave her over the years in her name and as they are maturing, we're cashing them out. Neither of us have educational expenses at this point, but we do have five 209s for each of our kids. Can we cash these bonds and then put the money in a 529 without paying interest? Does it matter if they're in my wife's name. Appreciate your guidance. Thanks. Well, that's a great question. I don't think 529 contributions are an allowable education expense. That allows for tax free earnings on savings bonds. But even if it was, you make too much to claim it. There's an income limit on being able to use EE bonds to pay for educational expenses. There's a great page@treasurydirect.gov that talks all about using bonds for higher education. We'll include a link to that page in the show Notes. But basically you've got to keep your income below the amount that they have. Let's see, what is that amount? The current cutoff amount. They have a link on that page that goes to it and I believe it is. I'm looking at Form 8815. Okay, here's the exclusion amount on here. It's in the instructions and it says your modified adjusted gross income is less than $100,800 if single, $158,650 if married, filing jointly. Now, there's going to be some WCI families for whom you'll be under that limit, but an awful lot of you are going to be excluded from that. You just make too much to be able to use EE bonds for educational expenses interest free anyway. And even so, I don't think you can count a 529 contribution. It's the same things that you can use 529 contributions or 529 withdrawals for. But just putting in the 529 is not an acceptable educational expense. Okay, let's take another question off the speak pipe. This one's about legal insurance.

Hi, Dr. Dali, this is Samantha from California. Thank you for all you do. I'm calling about legal insurance. My employer offers a plan through Arag for a little over $10 a month that covers a range of legal services. I'm currently enrolled in the program to set up an estate plan, will and revocable trust. These things are fully covered, but there are also other services and I'm curious about continuing this coverage after completion of this plan. You talk a great deal about ensuring against catastrophe. And I don't think I've heard you comment on legal insurance in the past. I'd be curious what your thoughts are. Thank you.

You know, a legal issue usually isn't a financial catastrophe, so it may not make much sense to insure against it. That said, that's not very expensive. I pay more than $10 a month for many subscriptions. I pay more than $10 a month just to have a satellite in reach text device available to me should I get in trouble while I'm out in the boondocks. So if you want to buy this thing, I have no problem whatsoever with you buying it. I mean, $120 a year is really cheap for getting the assistance of a good attorney. I mean, if somebody offered this to me, I use a lot of lawyers. We've got an estate planning attorney who does some asset protection work. We've got a team of intellectual property lawyers. I've got a business lawyer that assists with WCI. So $10 a month would be a fantastic value to get all those people to work for me. But I suspect there's some limitations on what you can actually get from this attorney. But $10 a month is $10 a month. I mean, it's just not much money. So if you're getting valuable services that you think are worth more than $10 a month, keep this thing and you can drop it later. I'm sure if you don't want to have it anymore, but might as well keep it while you're getting your will and trust done and get to know them and see what else they can do for you. And you may find it to be a very good value going forward just to get legal opinions on stuff. I'm amazed that they can offer a lot of benefit at that price point. But I guess if a lot of people are paying into it and not very many people are using it, it could be financially worthwhile for the attorney to offer something that inexpensively. And maybe the way this is working is maybe your employer's paying most of the cost. Maybe the real cost is $50 a month and your employer's picking up $40 of it, in which case, hey, that's a really good benefit. Might as well keep that. All right, next question. Comes in through email, says my question is regarding disability insurance. I'm a second year medical student and every time I read one of your blogs or book chapters regarding disability insurance, I get a little nervous. The reason I get nervous is that I'm fairly confident I want to be a surgeon. But a couple years ago I had a minor surgery on both of my wrists. Ganglion cyst removals. I guess my question to you is, will my prior surgeries disqualify me from getting a good disability insurance plan, especially when I want to use my hands as a surgeon the rest of my life? I haven't had any complications and my wrists are great now, but I know surgery doesn't always look good. Are there any workarounds to this without being dishonest or shady? Well, number one, don't be dishonest or shady. Okay? You'll get caught. These insurance companies, when they do your underwriting, they have access to a lot of databases. You may not realize they have access to these. These include insurance claims that have been made. They include like prescription histories, medical records. So there's a very good chance if you've actually had something like this done, it's going to be found out in underwriting and you're going to get surprised. Your agent's going to get surprised. It may result in you having a policy that has some limitations on it, exclusions, or may just result in an outright decline. And you don't want that. But what I wouldn't do is delay going through the disability insurance process for this. Okay? Now, I don't know if I'd buy it as a second year medical student, but I'd certainly buy it by the time I was an intern. So you need to get your disability insurance and that's a good time to get it. But what is the process? Well, in your case, you want to get an independent insurance agent, but you also want to be looking at whether your institution has a guaranteed standard issue policy. And if it does, you probably want to apply for that first. Get that in place. That's not always with the company you want the policy with, but you can get it. It's guaranteed standard issue, so you can get it. You might be able to get a better policy. You might be able to get a cheaper policy, but you can do both of those after you have this one in place. So if your institution has one and you have any concerns whatsoever about your, you know, medical problems you've had in the past or currently have, then get that first. Second, when you get your independent agent, be honest with them. Tell them what's going on. Say, you know what, I had surgery on my wrist. It's been four years or whatever at that point. And I'm worried this is going to cause me to have some exclusions or be declined. Can you shop me around informally to the insurance companies to see if any of them would offer me a policy if my policy is going to have an exclusion on it or how that's going to work before applying? Really want to get declined. And by the way, I've already got this GSI policy, but if you can get me a better deal or a better policy, I'd like to replace that. That's the way the process works. Now, I like to think that every insurance agent out there knows about every GSI policy out there and is more than willing to send you to a different insurance agent that has that GSI contract at your institution. But this is real life and people have conflicts of interest and they're motivated by money and sometimes they don't know if there's a policy or who has that policy or where to even send you. So a little bit of that is going to have to be your responsibility. But those are the things you want to be looking at. Independent agent that can sell you a policy from any company that's going to shop you around informally and a GSI policy. Those are the two things you want to be looking at. I hope that's helpful. I would bet that you are probably going to have a GSI policy available to you, but I'll bet they don't care about this. And I bet you can go ahead and get a regular policy that's probably going to have better rates on it. But I'd get the GSI policy in place first if it's available. If it's not available, I would definitely have that agent shop you around informally because you don't want to have to answer on future applications that you've ever been declined. All right. You know hard things we go through as docs, right? Not only are you have your own medical problems, but you got to take care of other people and it can be hard sometimes. So thanks for what you do. I don't know if anybody's told you that today, but if not, let me be the first. Okay, let's take another question. This one off the speak pipe. This one's From Rich hello Dr. Dali.

I have a question about tips. With tips yields finally at a respectable level, do you think there is a benefit to selling some of my Vanguard Total Bond Fund to finance a tip slider? I would plan on holding each rung to maturity to avoid a potential loss in principal value. I currently have about 25% of my retirement account in a mix of intermediate and short term bond funds and ETFs, but no tips. I hesitate to do this since my total bond fund is down about 18% this year. On the other hand, TIPS prices have come down as well since yields have risen. I am currently about seven to eight years from my planned retirement. Thank you for the advice and for the great podcast.

All right, great question. The first thing I thought about after listening to your question was is the total Bond Market fund really down 18% year to date. And I'm looking this up on Morningstar. This is the Vanguard Total Bond Market Index Fund. It is down 2.46% year to date. So if you're in a total bond market fund and it really is down 18% year to date, there's a real problem. And you need to look at that much more carefully. Now, 2022 is a terrible year for bonds. The Total Bond market fund was down 13% last year. But as in the day I'm recording this, which is November 1st, it's not even down 2.5% this year. Now, I wouldn't be thrilled about being down 2.5%, but it's very different from 18. So let's correct that. Start with what we're talking about here is changing your plan. I assume you have some sort of a written investing plan. If not, get that in place that can guide future decisions like this. But what you're talking about is talking about changing your plan based on changes in the interest rate environment, in the economic environment, in the investment environment. And that can be a really tricky thing to do. You're assuming now that going forward from today, TIPS are going to perform better than Total Bond Market. And I would submit that you don't know that, that you have no idea which one's going to do better going forward. Both of those can be very reasonable plans for your fixed income. Lots of people, their only bond holding is a total bond market index fund. Now, none of those people were very happy about losing 13% last year. Most of them aren't very happy about being down 2.5% this year. But that's not a reason to abandon the plan. You expect that there's going to be times when bonds don't do very well and times when they do great. For example, if you look back at 2019, you made almost 9% in total bond market. In 2020, you made almost 8% in total bond market. Right? So there are good years and bad years. And you shouldn't abandon your plan just because you had some bad returns. TIPS ladders are particularly attractive these days. I mean, 5 year, 10 year, 20 year, 30 year, tips have yields around 2.5% real right now. It's been many years since you could get 2.5% real on a tips. And so lots of people are talking about this and saying, hey, even Alan Roth's talking about, well, you could guarantee like a 4.6 withdrawal rate for 30 years just by buying TIPS right now. And so it is pretty attractive. It might get more attractive they might be yielding 3% a year or two from now instead of 2.5%, I don't know. But there's some real benefits to buying tips, to buying individual tips, to laddering out tips, which just means you buy a one year and a two year and a three year and a four year and a five year up to 20 or 30 years. That's how you build a TIPS ladder. The nice thing about holding individual bonds is you're guaranteed not to lose principal. When you're holding individual tips, you're guaranteed not to lose principal on both a nominal and an inflation adjusted basis, at least inflation adjusted to cpi, which you may or may not have anything to do with your actual spending. But adjusted to cpi. So should you change? Well, I've always split my bonds because I don't know which type is going to do better. I got half my money in nominal bonds, I got half my money in inflation protected bonds like TIPS and I bonds. And so I don't really know which one's going to do better, so I split it. Do I have some individual tips? Yes, I do. Have I gone to the trouble to make a formal ladder of them? No, I haven't done that. But I've got some individual tips. I've got a tips ETF, Schwab's tips ETF that I hold in my 401, and I've got some I bonds as well, as much as we've been able to buy of them the last two or three years. And that's kind of what we have on the inflation index bond side. But I don't like this idea of you just going, I'm going to change my plan because the type of bond I hold hasn't done well. And I see this other shiny object and I want to change and go after that. So be careful about that. Making plans or making changes frequently in your investing plan can be really a mess. Oftentimes you end up chasing something that's done well recently and end up abandoning something that's about to start doing well. So I have no idea which one of these is going to perform well going forward. That's why I own half of each. When it comes to my fixed income portfolio, you'll have to make that decision on your own. Both can be good investments. Maybe you split the difference, maybe keep half your money in your total bond fund and put the other half into a TIPS ladder. That would be a very reasonable compromise, I think, if you're looking to boost returns, lower taxes and build wealth, join the WCI monthly Real estate opportunities list for tips and strategies to maximize your real estate returns and for introductions to exclusive investment opportunities. Expect educational emails that introduce you to syndicators, fund companies, online courses, and online real estate platforms. Go to whitecoatinvestor.com reopportunities to sign up today. You can do this and the White Coat Investor can help. Don't forget Swag Bag deadline today the 16th, the day this podcast drops. If you sign up by midnight for WCICON 24, you get a swag bag. If you sign up tomorrow, you can still come to the conference. It's a great conference, even without a swag bag. But why not get the swag bag? It's great. You can get some books in it and get some other cool stuff and it's just a nice bonus for signing up a little bit earlier for the conference. Thanks. For those of you who tell your friends about this podcast and leave us five star reviews. It really does make a big difference in spreading the word to other people. One of our reviews from Q Brill says informative and entertaining. Great advice for physicians from a physician. Follow your doctor's advice and listen to this show. It is informative and entertaining. 5 stars. Thanks for that great review. All right, that's it. We've come to the end of the podcast. Time to go into the hospital. Time to go into your clinic. Time to get out of the car and go into the house. See the family. Maybe it's time to be done with your walk. However, you're listening to this, but until we come back together next week, keep your head up and shoulders back. You've got this. We'll see you next time on the White Coat Investor Podcast.

The hosts of the White Coat Investor are not licensed accountants, attorneys or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.