Is there better money than biglaw? Forum

[PrinterInk]

Invest into whole-life insurance policies, the investment gains are taxed at a preferential rate.

Total aside but can you elaborate on this? I was under the impression they were total high-fee ripoffs

They are total ripoffs. For whatever bs reason your insurance agent or financial advisor gives to buy one, there is a much cheaper, much more effective tool to meet that goal. Financial advisors often get compensated as a producer on the policies, which leads them to give very bad advice to their clients.

[tlsthrowaway111]

Invest into whole-life insurance policies, the investment gains are taxed at a preferential rate.

Total aside but can you elaborate on this? I was under the impression they were total high-fee ripoffs

They are total ripoffs. For whatever bs reason your insurance agent or financial advisor gives to buy one, there is a much cheaper, much more effective tool to meet that goal. Financial advisors often get compensated as a producer on the policies, which leads them to give very bad advice to their clients.

Not going to say this is completely untrue. But I was the original comment you quoted. I meant purely from a tax perspective, whole-life insurance policies are taxed at a preferential rate. Obviously if you believe that you can offset that preferential rate using ingenious investment strategies with much higher return, go for that option instead.

Whole-life insurance policies have a term element, as well as a savings element. The savings element accrues interest over the term, and eventually pays out. Obviously if you die then your beneficiary isn't taxed on the accrued interest at all under IRS code section 101(a). But even if you survive, there's preferential tax treatment because 1. you didn't have to pay tax on the interest income accrued yearly and 2. you get to offset your final tax bill (which has already been deferred the term of the insurance contract) with your premium payments.

Here is an example. Let's say you're 40 and you buy a 25-year endowment insurance policy that pays out 100K with an annual premium payment of 3500. The company pays your selected beneficiary 100k if you die within the 25 years, or pays you the 100k at the end if you survive. Let's say you live, and at the end of the 25 years they pay you 100k. How much of that would you need to take into income for tax purposes? $12,500. You get to offset the 100k with the total of all your premiums paid through the 25 years (25x3500 = 87,500).

Deferred tax liability is tax dollars saved, because of the time value of money. This is the first benefit, because whole-life insurance policies are allowed to accrue interest tax free, whereas virtually every other investment vehicle is taxed on interest yearly. Additionally, you can think about it like this. If you had purchased just the term policy on its own, your insurance premiums wouldn't be deductible at all since they would be considered personal consumption expenses. But if you choose to buy a whole-life policy, you can use your premiums paid to offset your income from the final payout. Part of each premium payment went towards paying for your term policy, and part of it towards the savings feature. In all likelihood in the example above, the $12,500 you do need to take into income most likely doesn't even account for all of the interest accrued over the 25 year period. If you purchase a larger policy, your savings and tax shielded income will be correspondingly larger. Hope this clears things up

[ChickenSalad]

Invest into whole-life insurance policies, the investment gains are taxed at a preferential rate.

Total aside but can you elaborate on this? I was under the impression they were total high-fee ripoffs

They are total ripoffs. For whatever bs reason your insurance agent or financial advisor gives to buy one, there is a much cheaper, much more effective tool to meet that goal. Financial advisors often get compensated as a producer on the policies, which leads them to give very bad advice to their clients.

Not going to say this is completely untrue. But I was the original comment you quoted. I meant purely from a tax perspective, whole-life insurance policies are taxed at a preferential rate. Obviously if you believe that you can offset that preferential rate using ingenious investment strategies with much higher return, go for that option instead.

Whole-life insurance policies have a term element, as well as a savings element. The savings element accrues interest over the term, and eventually pays out. Obviously if you die then your beneficiary isn't taxed on the accrued interest at all under IRS code section 101(a). But even if you survive, there's preferential tax treatment because 1. you didn't have to pay tax on the interest income accrued yearly and 2. you get to offset your final tax bill (which has already been deferred the term of the insurance contract) with your premium payments.

Here is an example. Let's say you're 40 and you buy a 25-year endowment insurance policy that pays out 100K with an annual premium payment of 3500. The company pays your selected beneficiary 100k if you die within the 25 years, or pays you the 100k at the end if you survive. Let's say you live, and at the end of the 25 years they pay you 100k. How much of that would you need to take into income for tax purposes? $12,500. You get to offset the 100k with the total of all your premiums paid through the 25 years (25x3500 = 87,500).

Deferred tax liability is tax dollars saved, because of the time value of money. This is the first benefit, because whole-life insurance policies are allowed to accrue interest tax free, whereas virtually every other investment vehicle is taxed on interest yearly. Additionally, you can think about it like this. If you had purchased just the term policy on its own, your insurance premiums wouldn't be deductible at all since they would be considered personal consumption expenses. But if you choose to buy a whole-life policy, you can use your premiums paid to offset your income from the final payout. Part of each premium payment went towards paying for your term policy, and part of it towards the savings feature. In all likelihood in the example above, the $12,500 you do need to take into income most likely doesn't even account for all of the interest accrued over the 25 year period. If you purchase a larger policy, your savings and tax shielded income will be correspondingly larger. Hope this clears things up

So your premiums are 87,500 over 25 years and at the end you can withdraw 100k and have deferred tax liability on the difference?

That doesn’t sound that great to be honest. I don’t need ingenious investment strategies to beat that, just an index fund. And my money isn’t tied up for a quarter of a century. Plus costs and fees are virtually zero for an index fund and I can withdraw it at any time without penalty.

A term life policy would cost like $20 a month, I don’t care about deducting $240 in annual costs for a term life policy

What’s the deferred tax rate for these policies? It can’t be any better than the capital gains tax. If it’s treated as income it’s almost certainly worse

[tlsthrowaway111]

I'm not selling you life insurance homie XD. I'm just explaining how it works lmao. The point of my example is not to say that YOU should buy a ton of whole life insurance policies. It's to clarify a question as to how whole-life/endowment policies are taxed at a preferential rate. The people who save the most money on these policies are those who buy whole-life plans worth millions of dollars. That's a lot of tax free interest every year, and a lot of dollars shielded from tax because of the offsetting deduction. For the average person, you may want to consider buying some kind of whole life plan because you essentially get the term insurance for free, while also gaining the stated advantage in tax deferment. See below.

Your point actually works against you. Term life insurance is cheap as hell. You're right. That means if you pay a huge premium of 3500 for a whole-life/endowment policy, how much of that payment is going to pay for the term portion? Not much right. Like let's take your example of 20 bucks. That means 3480 of your premium every year is going towards the savings component.... Not only is that amount accruing interest tax free every year, but in the end of the policy if you live you can deduct the full 3500 each year from your income.... Think of it like this. Let's say you did it yourself separately. You spent the 20 dollars and bought term life insurance for 25 years, and then you invested 3480 a year into some kind of index fund or bond that pays you yearly interest. You would have thrown all of your term insurance payouts down the drain if you survive at the end of the 25 years, no deductions. And you would have had to take the full amount of interest earned on your investment each year into income as ordinary income, taxed at whatever rate you're in. With whole-life insurance policies, you get to fully deduct the premiums at the end, essentially getting the term insurance for free, and also paying less tax on the interest you accrued over the 25 years.


If congress were to not write life-insurance lobbied rules, you shouldn't be entitled to an offsetting deduction at all. Also, it makes no sense to allow you to accrue interest tax free on an investment of 3480 every year for 25 years, just because life insurance companies have decided to bundle their term products with a savings component. This is testament to how powerful the life insurance industry is as a lobby group.

As for your point of "deferred tax rates", I think you're mistaken. If you were to invest the 3480 in let's say an index fund or bond, you would have ordinary income every year for the interest accrued. You would have long-term capital gains only if you sold the asset after holding for more than a year. So if we're just looking at interest payments, the deferment allowed by investing in whole-life insurance plans is definitely a benefit to those who invest in them. Additionally, because of the disproportionate amount of money that goes towards to savings component in each premium payment, you aren't actually forced to take all of the interest accrued over 25 years into income even at the end. The idea is that most people are in a lower income tax bracket at maturity of the whole-life policy, and would be taxed at a lower rate. There isn't a special rate bracket for life insurance payouts.

[nealric]

Invest into whole-life insurance policies, the investment gains are taxed at a preferential rate.

Total aside but can you elaborate on this? I was under the impression they were total high-fee ripoffs

They are total ripoffs. For whatever bs reason your insurance agent or financial advisor gives to buy one, there is a much cheaper, much more effective tool to meet that goal. Financial advisors often get compensated as a producer on the policies, which leads them to give very bad advice to their clients.

Not going to say this is completely untrue. But I was the original comment you quoted. I meant purely from a tax perspective, whole-life insurance policies are taxed at a preferential rate. Obviously if you believe that you can offset that preferential rate using ingenious investment strategies with much higher return, go for that option instead.

The problem with the vast majority of whole life policies is that the embedded fees tend to entirely offset the tax savings. They mostly make sense for ultra-high net worth types who use them for estate planning. Middle (and upper middle) class schlubs are almost always better off buying a cheap term policy and putting the difference in an index fund. You don't need "ingenious investment strategies" to come out ahead- just normal market returns that are unburdened by high fees.

[run26.2]

I just want to make a quick point about valuing public market equity compensation for these in-house roles, because I think some people are viewing share-based compensation the wrong way.

If I were trying to compare my BigLaw compensation to my in-house compensation, I would treat the share-based compensation as worth whatever it's worth the day I get it. The fact that my RSUs might appreciate in value is nice, but it's not much different than if I invest an equivalent cash bonus from my firm in that same stock (or another stock) and it appreciates in value. (Another way of thinking about this is that the RSU's appreciation needs to be discounted by the "market" return of a comparable investment in public market equities.)

I'll give an example to make a point.

Say I'm an Amazon in-house lawyer, and I make $100K + 20 shares of Amazon stock per year. I get that December 31, 2019, and that day my Amazon shares are worth $5,000 each. My all-in compensation is ($100K + (20 x $5,000)) $200K.

Amazon has a great year, so shares double to $10,000 each by year-end. Was my salary "actually" ($100K + (20 x $10,000)) $300K?

I would say no.

Think about it this way. What if Amazon gave me $100K salary + $100K bonus, and I used that bonus to *buy* shares in Amazon instead? I would have the same amount of money at year end - $300K. Would I say that Amazon paid me $300K? No, I was paid $200K and made an independent investment decision that worked out for me. I could have also bought Tesla, or an index fund, or whatever.

If you're looking at this and thinking, "Wait, I'd rather just be paid in cash and decide for myself how to allocate my money" -- well, yes. Yes you would. So would Amazon. That's why they're paying you in stock, not cash.

Two disclaimers here: I'm not factoring in any potential tax differences between RSUs and cash comp. And I'd probably look at true startup equity differently - if you're getting half or a quarter a percentage point in some YCombinator company, that's got a potential seven, eight, or nine-figure return profile. Those sorts of fat-right-tail returns are unique.

But if you're working at FAANG, look at the RSUs as cash comp that's put into a little account for you that you're forced to invest in FAANG.

While the above analysis has some validity, I can think of a couple of points worth considering. First, you probably would not put the entire $100k into the market. Second, if you did you would probably diversify your investments, to lower your risk (rightly, most would say), but also probably lowering your return.

My point is that your returns are probably lower in the second scenario if you're talking about a FAANGs or similar company whose stock has done really well. Obviously, though, if your company falters, you're worse off.

[LBJ's Hair]

I just want to make a quick point about valuing public market equity compensation for these in-house roles, because I think some people are viewing share-based compensation the wrong way.

If I were trying to compare my BigLaw compensation to my in-house compensation, I would treat the share-based compensation as worth whatever it's worth the day I get it. The fact that my RSUs might appreciate in value is nice, but it's not much different than if I invest an equivalent cash bonus from my firm in that same stock (or another stock) and it appreciates in value. (Another way of thinking about this is that the RSU's appreciation needs to be discounted by the "market" return of a comparable investment in public market equities.)

While the above analysis has some validity, I can think of a couple of points worth considering. First, you probably would not put the entire $100k into the market. Second, if you did you would probably diversify your investments, to lower your risk (rightly, most would say), but also probably lowering your return.

My point is that your returns are probably lower in the second scenario if you're talking about a FAANGs or similar company whose stock has done really well. Obviously, though, if your company falters, you're worse off.

My point is really just: Given the choice, wouldn't you rather have $100K in cash bonus (that you could put into FAANG if you wanted, or the S&P or w/e) vs $100K in FAANG stock that you can't sell?

[Anonymous User]

I just want to make a quick point about valuing public market equity compensation for these in-house roles, because I think some people are viewing share-based compensation the wrong way.

If I were trying to compare my BigLaw compensation to my in-house compensation, I would treat the share-based compensation as worth whatever it's worth the day I get it. The fact that my RSUs might appreciate in value is nice, but it's not much different than if I invest an equivalent cash bonus from my firm in that same stock (or another stock) and it appreciates in value. (Another way of thinking about this is that the RSU's appreciation needs to be discounted by the "market" return of a comparable investment in public market equities.)

While the above analysis has some validity, I can think of a couple of points worth considering. First, you probably would not put the entire $100k into the market. Second, if you did you would probably diversify your investments, to lower your risk (rightly, most would say), but also probably lowering your return.

My point is that your returns are probably lower in the second scenario if you're talking about a FAANGs or similar company whose stock has done really well. Obviously, though, if your company falters, you're worse off.

My point is really just: Given the choice, wouldn't you rather have $100K in cash bonus (that you could put into FAANG if you wanted, or the S&P or w/e) vs $100K in FAANG stock that you can't sell?

I concede that most people would probably answer your question with a yes. But there's a reason someone coined the phrase golden handcuffs.

[LBJ's Hair]

I just want to make a quick point about valuing public market equity compensation for these in-house roles, because I think some people are viewing share-based compensation the wrong way.

If I were trying to compare my BigLaw compensation to my in-house compensation, I would treat the share-based compensation as worth whatever it's worth the day I get it. The fact that my RSUs might appreciate in value is nice, but it's not much different than if I invest an equivalent cash bonus from my firm in that same stock (or another stock) and it appreciates in value. (Another way of thinking about this is that the RSU's appreciation needs to be discounted by the "market" return of a comparable investment in public market equities.)

While the above analysis has some validity, I can think of a couple of points worth considering. First, you probably would not put the entire $100k into the market. Second, if you did you would probably diversify your investments, to lower your risk (rightly, most would say), but also probably lowering your return.

My point is that your returns are probably lower in the second scenario if you're talking about a FAANGs or similar company whose stock has done really well. Obviously, though, if your company falters, you're worse off.

My point is really just: Given the choice, wouldn't you rather have $100K in cash bonus (that you could put into FAANG if you wanted, or the S&P or w/e) vs $100K in FAANG stock that you can't sell?

I concede that most people would probably answer your question with a yes. But there's a reason someone coined the phrase golden handcuffs.

Oh, sure - this isn't anti-in-house generally, just clarifying how you compare RSUs to cash bonuses

[Anonymous User]

I just want to make a quick point about valuing public market equity compensation for these in-house roles, because I think some people are viewing share-based compensation the wrong way.

If I were trying to compare my BigLaw compensation to my in-house compensation, I would treat the share-based compensation as worth whatever it's worth the day I get it. The fact that my RSUs might appreciate in value is nice, but it's not much different than if I invest an equivalent cash bonus from my firm in that same stock (or another stock) and it appreciates in value. (Another way of thinking about this is that the RSU's appreciation needs to be discounted by the "market" return of a comparable investment in public market equities.)

While the above analysis has some validity, I can think of a couple of points worth considering. First, you probably would not put the entire $100k into the market. Second, if you did you would probably diversify your investments, to lower your risk (rightly, most would say), but also probably lowering your return.

My point is that your returns are probably lower in the second scenario if you're talking about a FAANGs or similar company whose stock has done really well. Obviously, though, if your company falters, you're worse off.

My point is really just: Given the choice, wouldn't you rather have $100K in cash bonus (that you could put into FAANG if you wanted, or the S&P or w/e) vs $100K in FAANG stock that you can't sell?

I concede that most people would probably answer your question with a yes. But there's a reason someone coined the phrase golden handcuffs.

Oh, sure - this isn't anti-in-house generally, just clarifying how you compare RSUs to cash bonuses

I'd say how you "can" compare them. There are a range of ways (and there are papers on valuing employee stock options/RSUs). I do think your method is one valuable one, and probably the most reasonable one, but also tends to undervalue them (not in the way where you've compared them to the bonus scenario, but in the way where you're trying to assign a certain value to your compensation on day 1). This is not a criticism, though; all methods of valuing them are subject to a large degree of uncertainty.