David H. Kinder, RFC®, ChFC, CLU
Rebuttal to "Stay Away from these Scam Artists"
Updated: Jan 18
I wasn't really planning on doing this. I was going to try to "let it go" (everybody sing along!)... but I couldn't. The writing challenge is strong and the rebuttals are just too easy to NOT write this, so I'm doing it. There are a fair amount of critics of agents who use life insurance for retirement income planning. Most of these critics are either "financial entertainers" or they are on the "investment-only" side of our business. They simply don't know what they don't know, and it's quite easy to use simple mathematics and tax concepts to disprove what they think.
But then there's this guy. Let me outline his bio paragraph in a few bullet points:
I’ve been active in the life insurance industry since 1991.
I’ve sold insurance.
I’ve brokered insurance through financial planners and advisors.
I’ve been a Regional Director for a major life insurance company.
I’ve acted as an expert witness numerous times and I’ve helped my clients settle life insurance disputes.
You could say I have some life insurance knowledge.
Now ISN'T this the kind of person you want to "vet" your recommendations and strategies?
However, he doesn't. And he goes through it all with a fine-tooth comb. I will prepare my rebuttal in response. Please note: This was originally printed in 2009, right after the market crash and during the "Great Recession". This is the document <here> and my response has nothing to do with Doug Andrews or "Missed Fortune" but the similar strategies and the understanding required.
I will simply quote directly from his September 13, 2009 San Diego Union advertisement. Let’s start with that catchy headline “Now’s the time to convert your IRAs and 401ks to Better Plans (While tax rates are lower and account values are lower).
When he says “convert” he means sell what is in your pre-tax retirement account, pay the taxes on the sale and then buy life insurance.
There is no mention in his ad about the 10% federal tax penalty for withdrawing money from a retirement account prior to age 59 ½.
If you happen to be 59 ½ already you won’t have that special tax, you’ll just have income tax on that withdrawal.
Ask your accountant what the tax implication would be of liquidating your retirement account?
This is Doug Andrew’s, one-size-fits-all, “better plan”. Sell your investments, pay taxes and buy life insurance. Is he kidding with this? If I hadn’t seen so many commission-motivated scams I wouldn’t even believe someone would have the nerve to publish such ideas.
Point #1: Yes, that's what he's saying.
Point #2: People don't take advice directly from an advertisement, but I would trust that disclosure would be made.
Point #3: If you are age 59 1/2 already, you won't have that PENALTY for an early withdrawal.
Point #4: It's called tax-bracket planning. And you do it over a period of YEARS, not all at once. Of course, when it's an advertisement, not all the details are spelled out. When the market is LOW... why NOT liquidate the retirement plan? GET OUT of the plan! Why continue to grow a pot of money that you cannot calculate the amount of taxes you owe when you want or need to tap into it???
Point #5: Well, that's his biased opinion.
Next he says to “convert (meaning sell) while tax rates are lower”. Lower than what? I wasn’t aware of Mr. Andrew’s position of setting federal income tax rates. I guess that was in his book that I didn’t buy.
It is possible that in the future tax rates may be higher, but then again they may be the same or lower.
Point #1: This person has never studied the ever-changing tax code. I guess he believes that "past results guarantees future returns" - even in taxes?
Point #2: The same or LOWER? I guess he's never visited www.usdebtclock.org? At some point, someone, somewhere, is going to have to pay something.
His next statement is really perplexing. “Convert (meaning sell) while account values are lower”. Hmmm, let’s see if I’ve got this right? I should sell low… sell low… sell low? I’m pretty sure every other financial advisor has told me that in order to make money I should do something different. What was it…? Oh yes, it was sell high! Is he kidding with this statement? No, unfortunately he’s not. What he is doing is playing on investor fears.
He knows most average Americans have losses in their retirement accounts right now and we don’t like it. So he hits us while we’re down, but like all great spinsters he lifts us back up into his comforting arms by offering us his “better plans”. Thank you Mr. Doug Andrew.
Point #1: I gotta laugh. I would sell out of the ACCOUNT and put the after-tax proceeds to work outside of the IRS regulated plan! Why continue to grow an account for the Federal Government where you cannot calculate the amount of taxes you owe? Sell out when values are low, pay the taxes, and re-allocate the proceeds!
Point #2: This is just his commentary.
Mr. Andrew takes the next 6 paragraphs to tell me how hard it will be to recover from my investment losses and then his big wallop “the government has a permanent tax lien on your IRAs and 401(k)s”. Those dirty government people. Apparently they’ll let me save money pretax in my IRA. And they’ll let that money accumulate without being taxed.
But during my retirement I’ll have to pay taxes on the money that I decide to withdraw, when I want, and in the amount I want. How can they get away with such crimes? (Yes, I am being sarcastic).
Point #1: Do you believe taxes will be higher in the future? Obviously he doesn't think so since he stated above that taxes could be "the same or lower".
Point #2: Um... nope. You can only decide what you want between the ages of 59 1/2 and 70 1/2. Before age 59 1/2, you are penalized 10% for withdrawing early. After 70 1/2, if you DON'T take enough out, you pay a 50% penalty on what you SHOULD have taken out.
To make sure I didn’t miss his point so far he tells me “One thing is certain: Future taxes will be going up”. How does he know this?
What if I need less money during my retirement than I need today? Then might my taxes be less than what they are while I’m working 60 hours a week? I thought Mr. Andrews was just another insurance scam artist, but apparently he’s a fortuneteller as well. Good back-up career.
Point #1: He knows this because the writing is on the wall. Again, see www.usdebtclock.org and look at past years. And there are plenty of other government and economic experts who agree with that assessment.
Point #2: Really? You want to plan to need "less money" during retirement? Granted, this was BEFORE the (un)Affordable Care Act passed and other things, but I suppose he doesn't know that Social Security will very likely be included in his taxes because those limits are NOT indexed to inflation and haven't budged since 1981.
I really like his next statement because it leaps to so many bad conclusions in so few words. He states, “I don’t own an IRA or 401(k) – never have, never will! There are better ways to save and have tax-free income during retirement”.
Now I’m no rocket scientist but didn’t he just tell me how bad taxes are and now he’s telling me to pay more tax today (invest after-tax) so I can put fewer investment dollars into life insurance? Hmmm? Pay more tax today and invest less money, or pay no tax today and invest more money. What to do, what to do? But alas, he does give me a hint of something that peaks my interest; “tax free income in retirement”. That sure sounds good.
Point #1: That was his opinion, and he's entitled to it.
Point #2: He's obviously not a rocket scientist. But YES, he's advocating paying taxes today, NOT deferring taxes in IRS regulated plans... and have "less" money. What HE doesn't know is the Capital Equivalent Value of life insurance. If he knew that, he would understand that WHERE your money is, is far more important than how much you have and the rate of return it earns.
But first Mr. Andrews goes on to tell me lots of cool stuff about his “better plans”. He states “there is only one savings accumulation vehicle that provides liquidity and safety while earning an attractive rate of return”. Don’t you just love this stuff? There is “only ONE”. Not two, “only one”. Of all the investments in the world only this one offers all of this great stuff…according to Doug Andrew. Let’s break this down.
Response: Is there only one? We'll talk about it. Obviously his opinion is biased, but we'll expose it.
“Liquidity”. I understand this to mean I can have my money from this investment when I want it. Isn’t that true of stocks, bonds, mutual funds, savings accounts and money market accounts?
But is it true of life insurance? Not always. Insurance policies have back-ended surrender charges which limit a person’s liquidity. If you put $100 into a life insurance policy today and need your $100 back in 6 months, guess what? You’re not getting $100 back. Ever!
Point #1: Yes... and no. It depends on WHERE those stocks, bonds, and mutual funds are! If they are within IRS Qualified Plans, such as a 401(k), then you are subject to either loans or eligible IRS Hardship provisions (which suspend your ability to contribute to your plan for 6 months). IRAs have no loan provisions available or you invalidate the IRA, but you could get around the 10% penalty if it's a qualifying IRS hardship. Savings accounts and money market accounts are very liquid - no disputing that.
Point #2: Now he's putting in a time assumption and a policy funding assumption. He *may* be right, or he may be completely wrong. MOST policies, if funded correctly, will have all their premiums equal their cash values by year 8-9. Life insurance is NOT a short-term savings plan and there's no disputing that. If you have short-term savings needs, that should be coordinated with savings and money market accounts.
“Safety”. I have to admit I have no idea what Mr. Andrew means by “safety”. If he means that I cannot lose my money, I’m pretty sure that if I stop paying the premium and the policy fees keep getting deducted from my cash value, at some point I’m going to lose my money.
Point #1: Yep, I concur. You have no idea! Has he never heard of a "Reduced Paid Up" feature on a Whole Life Insurance policy? Doesn't he know that you can simulate the same effect on a Universal Life or Index Universal Life policy? By reducing the death benefit AFTER you're done putting in cash values (or some other strategies with UL policies), you can greatly reduce the amount of those ongoing policy fees and charges to where the earnings should GREATLY outpace any cost of insurance charges.
His next big selling point is “your money is tax-advantaged while it accumulates”. This is true, life insurance cash values are not taxed as interest is earned.
But wait a minute Doug Andrew. Isn’t every IRA and 401(k) tax-advantaged while they accumulate?
Point #1: True.
Point #2: Apples and Oranges. Yes, they both grow "tax-deferred"... but that's only HALF the story. The other half is the tax calculation to be figured out upon withdrawal. Taxes are not static and the IRS doesn't track your "IRA Arrangement contribution basis" in your plan. It all just "meddles" together as the arrangement's total balance.
Now here’s the really big one, “it can remain tax free when you withdraw it”. What selling skills Mr. Andrew has here. It is true you can take money out of a life insurance policy without paying taxes on the money. It’s called a loan. That’s l-o-a-n.
In order to be a loan you must be charged an interest rate. So while you do not pay tax on the money, you will owe interest on it. Yes, you will owe interest on money that you borrowed from yourself. (It gets complicated so email me if you want a detailed explanation.)
Point #1: There's actually a terminology error. I wouldn't ever "withdraw" it. I would borrow against it.
Point #2: Yes, that's true. There will be an amount of interest against the policy commensurate with the amount of the loan(s). And you don't have to pay that loan interest back AS LONG AS your policy is earning interest far more than it is costing in interest. It's about the VOLUME of interest, not the mere fact that you are charged interest.
For example: Let's assume that you have a policy with $500,000 of cash values. And you want a loan against it for $25,000 (5% of the cash values). Let's assume the policy is earning 5% and the loan interest is 5%.
$500,000 x 5% earnings = $525,000 (then you subtract costs of insurance)
$25,000 x 5% loan cost = ($1,250)
$525,000 - $1,250 = $523,750 to continue to grow.
Now, while you're alive, that original $523,750 will continue to grow as though you hadn't touched it - aside from modest loan interest costs - if properly managed.
What would happen if we borrowed a lot of money out of Mr. Andrew’s “better plans” (life insurance policy) and because of the continuing annual fees and accumulating loan and interest, the policy lapsed?
Since Mr. Andrew isn’t here I’ll answer my own question. All of the money we took out of the “better plans” would become immediately income-taxable. I’m pretty sure that would be bad for most people. That point, of course, isn’t mentioned in Mr. Andrew’s advertisement.
Instead he goes on to tell me that “many smart people are now converting their IRAs and 401(k)s by doing… a strategic rollout”. I guess I’m not a “smart people” because I wouldn’t touch this concept with a 10-foot pole… or my IRA.
Point #1: The plan is not designed to do that.
Point #2: LOL! And he's an "expert witness". What he's referring to is a "phantom income tax" for all the gains and loan amounts which become taxable in the year the policy "implodes". What he doesn't know is that many insurance companies now have "overloan protection riders" to prevent this tax bill from ever becoming a reality!!! So, even if you DO borrow too much, and you've met the requirements for the rider, you WON'T get that tax-bill! (See your specific policy and/or consult with your agent.)
Point #3: Even Ed Slott, CPA calls it an "IRA Rescue" to convert your "Forever Taxed money to Never-Taxed money".
I hope my one simple point has been made. Beware of anyone peddling the Missed Fortune concept. Life insurance is not a retirement plan. At The Center for Life Insurance Disputes we are getting calls from unsuspecting investors being sold the Missed Fortune concept from insurance agents and financial planners across the country. Stay away from these scam artists.
Yep - your point HAS been made. And it doesn't hold water. What it does prove is that you don't (or didn't) know what you were talking about. Your perspective was that only of protecting the cash in the accounts without regard for past or future taxation.
This is PROOF that the vast majority of insurance agents and advisors out there don't know about the work that I and others do, nor the value that we bring with our expertise. Side-note: I wouldn't bother with these guys for representing a policy holder with a legitimate claim for life insurance fraud, if their arguments are this transparent and biased. If I was taken to court, and this was their case... while I AM biased, I'm reasonably certain it would be "case dismissed".
Well, that was fun! It doesn't get more scathing or detailed than someone IN the industry with those credentials... who just doesn't "get it". I hope I was able to bring clarity to his points.
The real question is: Does it make sense to you to keep doing what you're doing? Or would you prefer to look at a completely different retirement income strategy?
I really should get this video clip re-done with custom audio: