Recently, a client brought a life insurance illustration to me that he had received from his insurance agent. The insurance company illustration projected that if he would pay annual premiums of $36,000 to a variable life insurance product for 20 years, he would be able to withdraw $173,400 tax free for 20 to 40 years. I compared this to a Roth IRA (which he could not do because of income limitations), a qualified plan, an annuity, and a taxable account, using my favorite Monte Carlo software, Crystal Ball, from Decisioneering Inc. Again, the plan was to pay in for 20 years then begin withdrawals in the 21st year. After running 1000 simulations I looked at the probability of exhausting the funds (cash value in the insurance policy), and the results were shocking. With the insurance policy, in the 20th year of the withdrawal period (40 years from today), the probability of running out of money was 57%. In the 15th year it was 46% and in the 10th year it was 26% (see graph below). When he realized that the insurance policy might not even provide 10 years of withdrawals, he quickly changed his mind. Incidentally, none of the other plans in the comparison ran out of money. His agent, or I should say former agent, was at best in the dark concerning this and at worst only interested in the hefty commission he would make. This client informed me that he considers me and his CPA to be his principal advisors–what a compliment!
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