Let this story serve as a cautionary tale.
Earlier this year, I married my wife. Both of us are in our 20s. Four years ago, her mother passed away, leaving behind a substantial sum of life insurance money that was inherited by my wife. Over the past few months, we began reviewing our joint finances and making decisions.
However, I was shocked, and my jaw dropped to the floor, at the discovery that my wife had been sold an Indexed Universal Life (IUL) policy a few years ago by her financial advisor. The financial advisor referred to this policy as an LIRP (Life Insurance Retirement Plan). Despite her previous decent income as a freelancer, she was sold an IUL with a death benefit of $1 million, which required annual premium payments of $25,000! In the first year, she paid the $25,000 out of pocket. However, after she stepped away from her freelancing career a couple of years ago and could no longer afford the payments, the financial advisor began withdrawing the money from the sum she received from her mother’s passing. This money is managed in a brokerage account that incurs a 1.8% expense ratio and capital gains tax every time the 25K is pulled out. Consequently, the $25,000 that was withdrawn from the account has already been eaten into by expense ratios and capital gains tax.
To make matters worse, the accumulation value of the IUL is only approximately $64,000 after investing $75,000 into it. This means that $11,000 has already been eaten up by policy fees.
As you can imagine, I was furious. I demanded a meeting with my wife’s financial advisor and chewed her up.
I convinced my wife to exit the LIRP (we will only be able to recover about $35,000 due to surrender charges). Additionally, we requested that all the money her advisor manages under the brokerage be transferred to our own brokerage with very low-cost ETFs. I am not criticizing my wife, whom I love, because she was grieving the passing of her mother when she was taken advantage of.
Mistakes happen and there are VERY BAD advisors out there. I want to emphasize that you should not make the same mistake. Manage your own money and get a TERM life insurance plan instead.
Beware of Universal Life Insurance!
byu/FelixBernhardt3 inpersonalfinance
Posted by FelixBernhardt3
5 Comments
Unfortunately, the financial advisory industry is completely full of *salespeople* masquerading as “financial advisors.”
$11,000 didn’t exactly get eaten up by “fees”, it’s more like she paid $11,000 to have life insurance for a few years. Which is still terrible, but worth more than $0
“Financial advisor” is usually just a scam name for an insurance salesman.
Was the financial advisor a fiduciary to your wife or the firm whom they worked? Finding out who they will be working for and who best interests they serve should be question number one.
I need two hands to count how many ex-friends I have after they became “financial advisors” in some kind of MLM scheme. The semi-legitimate ones usually works for a group associated with a real bank. If their business card says XYZ Financial Group, don’t say another word, just get up and walk away.