$10,000 Lesson On Variable Universal Life (VUL)

Variable Universal Life insurance or in short VUL is sold by insurance agents as a smart investment to unsuspecting people. The pitch usually goes like this:

You invest in VUL. The money in the policy grows tax deferred. You get to choose what you invest in, stocks, bonds, international, you name it. It’s like a super IRA, only way better. When you need money after you retire, you can first withdraw what you put in, then borrow from it, all tax free. When you die, your beneficiaries receive money tax free.

Sounds good? Tax deferred investing plus tax free income after retirement. Who wouldn’t go for it? It’s very enticing but you will see the real story at the end of this post.

VUL appeals to people who hate taxes (who doesn’t?), especially to people who have higher income and therefore in higher tax brackets. After you hear about this wonderful clever way of avoiding taxes on your investment, you go “sign me up!” Uh oh, big mistake. Let’s take a look at a real life example, from this thread on the Bogleheads forum.

Poster John and his wife each bought a VUL policy from a “friend” who works as a financial “advisor” at a “well known financial planning organization” (I’m guessing it’s Ameriprise or formerly American Express Financial Advisors). After 9 months into their policies they put in about $5,000 each for a total of $10,000. Now they realize that their VUL policies have high fees and expenses, to the tune of $1,100 a year. But, if they get out before 5 years, they will lose ALL of the $10,000 they paid into the policies (?!?!) because the first $8,300 in each policy goes toward a “surrender charge” or better put, early termination fee like that on a cell phone contract. In other words, if John and his wife put $3,300 more into each policy, the policies will still suck it all in like a black hole with nothing coming out. They paid $10,000 into two policies but they only filled a little more than half way up the big hole that the VUL policies dug for them.

Despite all the help from other posters on the forum, John’s options are still limited because the policies are designed to trap them in good with high fees and various charges. John and his wife can:

  1. Keep paying into the policies and get plucked by high fees (not good); or
  2. Cancel the policies now and receive nothing back (not good); or
  3. Stop paying premiums and let the policies wind down by themselves (not good)

None of the three options is good. The 3rd option is perhaps the least of all evils. Basically they will let what they already paid pay for the insurance and whatever is left over stays in some mediocre investment options with high fees. Every month more money is deducted from the investments part towards the insurance part and fees. After the 5-year surrender period is over, I doubt there will be anything left. Their policies may end even before 5 years because all the money will have been depleted by insurance charges and fees. That $10,000 is gone. They won’t ever see it again. What an expensive lesson!

I feel really sorry for John and his wife. Having this done to them by a “friend” is even more sad. This VUL saga plays out over and over. It’s almost always the same story. I personally know a small business owner who was sold a VUL policy by his “financial advisor” who is also an insurance agent. The “advisor” has nice sounding credentials like CLU and ChFC. The business owner was quite mad at the “advisor” after I pointed out the fees and expenses printed in black and white in the prospectus. Of course he didn’t read the prospectus because he was busy running his business and he trusted that his so-called “advisor” would act in his best interest. The same “advisor” also sold him load funds, an expensive 401(k) plan for his business, limited partnerships that were impossible to get out of … — altogether the “advisor” cost him more than $200k.

Now let’s get back to the wonderful VUL policies New York Life sells. From an 80-page prospectus of their NYLIAC Variable Universal Life 2000 product:

  • 4.5% – 6% charge up front for each deposit, like a load; plus
  • $120 a year contract fees; plus
  • 0.5% – 0.7% a year for M&E and admin charges; plus
  • ~0.8% a year for expenses on investment options

Does it look like a good way of investing money? I like what poster ole meph said [1] on the Bogleheads forum:

“The only way you can benefit from this product is by dying fairly soon.”

Oh wonderful. I’m sure the clients didn’t want to pursue that route when they bought into the VUL policies.

[1] ole meph has been a veteran insurance agent and manager himself for over 40 years.

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  1. Ted Valentine says

    I almost got sucked into one of these when I was fresh out of college. I read the thing and the fees looked really bad and I said no. WHEW. There’s some stupid tax I didn’t have to pay! And trust me, I’ve paid plenty of stupid tax.

  2. think like the rich says

    thanks for discussing this often misunderstood subject. indeed, this type of life insurance product is antiqued and oversold, mostly due to the high commission available to agents. i would in most circumstances throw annuities into the same pile!

  3. Anonymous says

    It’s very sad that you are posting such a mediocre criticism which only exposes your ignorance. I suggest you get a CLU designation or even maybe just a course in critical thinking before you bash products that not only save lives and businesses but also allow tax saving that overshadow the fees discussed.

    By the way, if you run a comparison illustration of buying term insurance and then try to get your investment going you will get the benefits of a VUL. Until then do people a favor and shot up.

  4. Harry Sit says


    May I have some more substantive criticism please? If mine was mediocre, I at least let the numbers speak, and readers can draw their own conclusions. Can I see your apples to apples comparison?

  5. Anonymous says

    Did you bother to mention the amount of the insurance? Nope! Did you mention one company and use a prospectus from another? Yep! Did you mention whether the premium paid was the minimum or maximum? Nope! Did you bother the take a snap shot of the TOTAL financial situation? Nope!

    I will agree that there are many financial folks that sell the policies in a hap hazard way. However, there are many including myself that don’t. Thanks for giving me a black eye for a fight I was never in. Ignorant!!

    These policies are right for the right reasons. They are sold to people at a minimum funding level while the client assumes the maximum cash value will be acheived by doing so. THAT is the reality!

    If for any reason you have to question whether you can fund it appropriately, you don’t do it. Thats the in your face test that very very VERY few do.

    I suggest, Mr. Finance Buff, that you go back to school and learn the up-to-date strategies.

  6. Harry Sit says

    Whoa, calm down. Did a prospect of yours read my post and cost you a sale? It doesn’t surprise me that the only people who like VUL are people who sell it.

    I linked to the New York Life prospectus because I also linked the article from New York Life. If you want to see a prospectus from Ameriprise, you can find it on their website.

    * 5% charge up front for each deposit; plus
    * way overpriced cost of insurance; plus
    * 0.9% a year for M&E in the first 10 years, 0.45% a year for the next 10 years, 0.30% a year afterwards; plus
    * ~1% a year for expenses on investment options

    Now let’s look at a real life case. I have a $500,000 term life policy which I need for the next 15 years. I won’t need life insurance after that. I’m paying $225 a year for my policy (the Ameriprise policy above would cost over $800 a year). In addition, I have $1,000 a month available for investing. Please show me which VUL policy is better than my current arrangement.

  7. Anonymous says

    You have two choices when it comes to long term investment gains:
    1. Pay an insurance company (as per your example 5%+0.9%+~1%= ~7%.)
    2. Pay the IRS 15% (capital gains).

    The answer is likely not that simple though.

  8. Harry Sit says

    You are mixing one-time costs and annual recurring costs. In your (1), 5% is one-time, at the time of purchase; 1.9% is year after year. In your (2), 15% is one-time, at the time of sale. Simple math says after 5 years, money paid to insurance company exceeds taxes paid to IRS.

  9. VULs suck says

    James Hunt, a life insurance actuary and former insurance commissioner, has evaluated thousands of vuls. He understands these beasts.

    Per Mr Hunt, at one time a VUL might have be appropriate for a very small percentage of people.

    Obviously, Ameriprise and many other firms have oversold these things. And Ameriprise does not comparison shop for the best vul (like the low-cost Ameritas). They sell people the vul that they are told to sell. The one that makes them, and Ameriprise, the most money.

    Currently ia vul no longer makes sense for anyone.

    “Since the tax law changes of 2003,
    which lowered taxes on qualified dividends and long term capital gains to a maximum of 15%, I have recommended against buying VULs – term life plus a low cost Vanguard stock index fund, say, should work better.” – James Hunt

    If you currently own a vul and would like an evaluation at a very reasonable cost, go here:


  10. Anonymous says


    There is a situation where I will sell a VUL. If my clients do not have Long Term Carte insurance I will do a non MEC VUL with a LTC rider. It is usually cheaper than LTC insurance or a hybrid like Lincolns Money Guard.

    And, unlike pure LTC insurance, if you don’t use it your estate will get the death benefit.

  11. anonymous says

    My husband has had a VUL since 1993…If the policy is valued at $100,000, at what point is the policy NOT (notice I said NOT) in danger of elapsing? I ask this because we would like to borrow OR withdraw some of of the money for emergency bills. We are afraid to do so, however, because we are not sure what will happen

  12. Harry Sit says

    Anon – You’ll have to contact your agent with that question. You already paid your agent. So use his/her service.

  13. yh says

    My friend was sucked into becoming an “associate” despite my best objections and now has bought herself a VUL. *sigh*

  14. Zork Dude says

    I have several VULs, I agree completely with the “Black Hole” Theory. The main issue I have with these is that the cost of insurance isn’t just a little higher then buying, say , 20 yr term. It’s about 3x as much. This acts as a huge headwind and makes the thing much less attractive. I cannot get an answer from anybody that estimates the cost of insurance. These things are a joke. I am sorry I have one, but am stuck in it now.

  15. Brad says

    Each person’s situation is different and VUL’s are a great tool for people looking to get permanent coverage, invest money for retirement and college education and never be taxed on that money. You would usually use a VUL for people who already have retirement money but will all be taxed at distribution and they are already maxing out thier Roth this is a good tool for this circumstance….. I could sit here and bash term insurance till we are blue in the face….98% of it never gets used. So you can have different oppinions on each product. But each situation is different. Of course there are going to be fees…hello the insurance companies are in this business to make a profit for doing the work that they do. And good advisor’s are going to be upfront with their clients telling them all of these details. Don’t ruin it for those people out there that could benefit from this product.

  16. brian says

    I am a 37 year old small business owner who is “to busy” to handle it all. I used an ameriprise rep to advise me on retirement/investment options. I didn’t qualify for the Roth and was advised to buy a VUL from this “friend”. My wife and I both invested 30,000 into the VUL and have felt like prisoners ever since. We were not given “correct” information about the Policy and feel that the amerprise rep mislead? us. We invest $600 dollare into the policy monthly. What are the opptions to get out if it still has cash value. Should we continue to invest and then “get out” with any of our cash left? Can I file a suit against the the advisor? Please help. Brian

  17. Harry Sit says

    Brian – I’m sorry to see the same happening to you. You basically have the same three choices as I outlined in the post: (1) Keep paying into the policies and get plucked by high fees (not good); or (2) Cancel the policies now and pay the surrender charge (not good); or (3) Stop paying premiums and let the policies wind down by themselves (not good). There is no good option. Depending on how far out the surrender charge period lasts, one option might be slightly better than the other two.

  18. Scott says

    Wow, it would be nice if people had forward vision. If one takes advantage of the low taxes today by paying them, have at least 20 years until a need for cash flow will exist, a cash goal that needs to be met in case of death and they MEC out a VUL, assume the same ROR on any mutual fund available in and out of a VUL, the net after tax of the fund vs the tax free withdrawl that can be taken from the VUL if income vs lump sum is the end goal desired the VUL will CRUSH the Mutual fund in benefit to the living owner and add in the left over DB. It is insane, UNLESS you think taxes will be lower 20 years from now, not to consider a VUL in todays world. If you think taxes will be lower in 20 years, I pity your ignorance. In addition, the cash values have creditor protection in many states, but why would that matter, nobody sues anybody in the USA, right?

  19. Dan says

    Add me to the ranks of those trying to best “get out” of a VUL.\I have a strategy in mind. After running some PV projections,the minimum damage strategy seems to be to 1) immediately withdraw all but the surrender value (the max I am allowed to) from the account, 2) stop paying new premiums and then 3)let the policy eat itself up (account value pays the premiums)and ultimately lapse in about 3 years. Given the market, I wouldn’t have any tax implications cause I’ve seen losses not gains.

    This is like the third choice mentioned in the discussions above. I’ll call it: “having them buy me 3 years of insurance with the surrender charges.” This at least beats getting nothing out of the surrender charges if I surrender the account now.

    But am I setting myself up for other hidden fees and traps? I’d be cutting my losses in half but I am suspicious that the insurance companies would not have closed this exit method by now. I don’t see anything in the details of my contract, is anyone aware of hidden charges in general that could kill my strategy? Thanks. Dan

  20. Dan says

    A quick follow-up on my last post. I thought I did my homework and was okay with my VUL, but I still got burned in a clever (unethical?) way.

    I understood going in that a VUL’s extra fees and higher insurance costs needed to be weighed against its tax advantages. So I negotiated a lower face VUL with a substantial term rider to tilt the odds in my favor. Then I got busy and didn’t follow through on tracking the account.

    The term rider had a much lower insurance rate, but buried in the wording was the hidden fact that the rider’s insurance rate went up TEN-FOLD after year one. Is such an exploding term rider even legal. It seems pretty shady to me. It was very hard to find it in the contract.

    I violated my own “always keep to simple contracts” philosophy and sure enough they found a way to burn me. Complexity in financial contracts is way over-rated. It leaves the uninformed open for a kill…and perhaps leaves the economy less stable than would be desired. Back to Term + Roth for me. Jack Bogel’s new book ENOUGH says it all for me.

  21. William says

    I was suckered into a VUL. Shame on me . I dumped the worthless adviser and dealt with the insurance company myself after I realized what a mistake I made. The rep at Principal life helped me to reduce my policy to the minimum face amount for tax deferred gains, and the minimum premium to keep the policy active until the surrender charge period is over. $30 a month for 140,000 face value. Not cheap but it’s supplemented by a very cheap 30 yr 350,000 term policy I found myself. I’m hoping the stock market will rebound nicely during the next 8 years of the surrender charge period so that if I decide to cash out the policy I may at least break even. Buy term and invest the rest with a no load, low fee institution like Vanguard. Choose the retirement vehicle the makes the most sense for you, be it a Roth or regular IRA, Simple or SEP IRA. There is even the self employed 401k for business owners without employees. You can max out more than one of these options at once for maximum retirement savings. I’m maxing a Roth IRA and will put any additional savings into a SIMPLE IRA. You don’t need a financial adviser. Do your homework and do it yourself. It’s not that hard. Just educate yourself.

  22. Justin says

    These vehicles are of no benefit to 99% of the population. Many agents of WFG and other companies will defend this product as the all purpose investment vehicle. I challenge anyone to defend this product that also has a CFP/CFA designation, oh yeah, not gonna happen. I got out of mine years ago. My buddy still paying his telling me I will be wrong in 20 years doing term and invest the difference. I am kicking his butt right now since I am investing the same amount in a mutual fund and direct stock purchase meanwhile he has to pay more to keep his VUL in place with the hit in the market and rising cost of insurance. Hope he can keep it up with this economy right now, otherwise he won’t make it to the 20 year mark and will lapse having nothing to show for it over the last 5 years. Sometimes it’s better to admit you goofed and cut your losses, I know I did and left that queasy feeling in my tummy back 4 years ago.

  23. J says

    When it comes to commissionable products, there is always going to be the battle of what is being sold correctly and incorrectly. It is unfortunate that we must question a professionals motives, but sadly, it is true. This is what I will say on the subject, please, to both sides, do not make blanket statements. While you can be confident in your position, arguing back and forth about who is undeniably right and who is undeniably wrong, is futile. Leave that to that the shock jocks that are trying to sell some books about how right they are the end all be all. I am sure there are professionals on both sides of the coin here, and for those people looking to get good advice, they don’t need a blanket statement, they need a good advisor to look at their particular situation and provide appropriate feedback. Here are the facts: VULs are expensive, Term insurance is not. However, comparing the two on a fee basis is simply silly (one is permanent, one is not). I agree that VULs are mis-sold in about 90% of ALL situations, and unfortunately is done by advisors who do not do their own research on the cost of the products they are selling. VULs charge a high upfront fee, so that the insurance company can provide themselves with financial protection and leverage for volatile markets throughout the life of the policy (they are a business, if that sickens you, don’t buy it). They also charge on an annual basis for the cost of insurance, policy fee, and investment option charges. These charges, however, differ, DRASTICALLY!!!, from company to company, do your research, and don’t tie yourself to a proprietary advisor (one who only sells what’s in his/her bag of products). VUL has it’s place, but it isn’t the glorious silver bullet all advisors make it out to be. Over funded, long term, income generating, flexible investing option, that’s most it. Most large companies offer significant cuts in costs for over funding policies (this makes them the least profitable VUL to the company, and less overall commission for the advisor and those are two typically good things for you). You pay big fees up front, which means you need a long-term outlook, if you have 10 years, typically look elsewhere, minimum of 20 years before you touch it is a good starting point. If you have a large amount of non-qualified dollars (typically cash), and need/want to get them tax-deferred immediately, VUL can be a powerful tool, one because it has pretty flexible purchasing options, most other investments do not, and two, it means you will be over funding the policy, as stated, a good thing. Lastly, if you want income at some point. For most cases, if you are just looking for death benefit, there is typically a much more cost effective way to get it. The income aspect is where you really need to do your research, if the company does not have zero net loans, you are basically paying a lot of money to get a loan in retirement. You don’t need all of those, but, for the most part, there you go, that should sum up 95% of all VUL sales. The remaining 5% are typically advanced sales concept (college planning, trusts, etc.) and I think that is beyond the scope of this chat. There will always remain the constant battle of what method works best. I and everyone else here can show “apples to apples” comparisons (p.s. it more an apples to bananas comparison), and honestly, they don’t differ from a dollars stand point IF YOU FACTOR ALL CHARGES AND TAXES, you need both and often each side will only show you one. Those people looking to have a cheap liquid account of investments and temporary insurance, do not buy a VUL, that’s not what it is made for, there buying term and investing the difference looks attractive. For everyone who wants/needs advice, just be diligent in working with someone that not only you trust, but knows the product inside and out. A good advisor should know every fee and charge, pro and con, and appropriate and inappropriate placement. Find out by asking open-ended questions, “why would you recommend this to me?” and since they will give you a programmed line, follow it with “tell me more about it”, “what are the benefits”, “what are the downsides”, “what would be another option”. You have all the power, because you make the ultimate decision. For the advisors, I am sure the ones who are combative are good advisors who know their products, controversy is a talking point, make it what sets you apart. When a client says, “I have heard bad things are VUL’s, respond to it, simply say “yes, there is some bad press around VULs, let me tell you why…”, a client will respect your honesty, and can draw their own conclusions from the TRUTH about VULs. For the shock jocks, please do not make blanket statements, I have as many success stories about both sides, using VUL and buying term plus investing the difference, each were right for each situation. Lastly, for those who are in a policy that they should not be in, I am sorry, typically there will not be a great exit strategy, and all you can hope for is a rally in the markets that give you decent returns inside the policy. What I will tell you is, look to the prospectus, and see if there are any funding options that will lower your fees, while it may not be a saving grace, it may lessen the blow. I hope this helped anyone who read it.

  24. FatN Happy says

    Forget annuities or Vul. For any small business owner I would recommend a 401k plan. For any 1099 or independent contractors you can also get a Solo 401k. No other plan except defined benefit plans allow you to shelter more.

    Many providers such as your payroll company can offer these services for very low administration cost, ; of which you can write off as a business expense. These providers if their not an insurance company usually have no cots to invest, no loads sale charges surrenders.. except 12-b1 fees.

    On top of that it will help you attract and retain good employees.

    With the 401k no one can guarantee performance except the taxes you wont pay. If you fund a modest amount the tax savings will cover the cost of the recordkeeping portion 1-4k year.

    Most plans now can be set up with open fund offerings so you can choose which funds you want to invest in and almost all are no load funds.

    In addition for any highly compensated individuals the pension protection act of 2006 allows for anyone regardless of income to put up to 15K in the 401k as a Roth contribution. Again NO INCOME LIMIT.

    I have sold against annuites for quite some time now… get a calculator and it becomes obvious what you should choose.

  25. Faclon99 says

    I wish I had known this 4 years ago! MY wife and I were sold VULs from a “friend”. Long story short – the funds in the VUL were seized by Ameriprise because the values had declined below the surrender charge level even though we DID NOT want to surrender the policies and we were paying the cost of insurance. We were told by our adviser and friend to ignore notices from Ameriprise.

    Later our adviser admitted that he regretted selling us these policies. Now Ameriprise is willing to give us back our money (the value in the policies) and waive the charges after we threatened to go to the insurance commissioner.

    Its been 4 very very expensive years and the only person who’s got rich is the adviser!!

  26. captain of my ship says

    I filed a complaint with my state’s banking and insurance dept. against the adviser who sold me a VUL. It was not an appropriate product for me and other, less expensive options were deliberately not brought to my attention. I was ignorant. The adviser was greedy. It took a while but eventually the insurance company waived my surrender charge and returned the cash value of my policy. I hope the adviser had to return his commission. The lesson here. I am my best adviser when it comes to my money. So is everyone else with their money. Libraries, bookstores and the internet have more than enough information to help the average person take control of their financial future.

  27. aldo says

    all good points.. but all I read is complaints from people that have VUL that were not qualified propespects. A lot of VUL are sold as Executive Bonues compensation, Estate Planning purposes and to qualified prospects. It all boils down to time horizon, the prospect needs to make enough money because he or she needs to overfund the policy by at least 100% of target premium. And if it used indeed like a Roth Alternative then you really have limited options when it comes down to tax free income at retirement.

    And it also does not help if you did it with an advisor that is looking for a quick buck.

    All in all, VUL work extremely well for certain people.

  28. aldo says

    to the comment of Captain of my ship.

    “The lesson here. I am my best adviser when it comes to my money. So is everyone else with their money. Libraries, bookstores and the internet have more than enough information to help the average person take control of their financial future.”

    Really? Well why use CPAs, Lawyers, Doctors if you can find all that information out there. My example is extreme but you get the point.

    Don’t let a bad experience send you the wrong way… just get yourself a good financial advisor.

    The real advisor sees his payout through referrals/introductions and does not focus solely on commissions. If you are a good advisor you wouldn’t sell what is not suitable. Trust the commssions paid don’t go that far.

  29. Harry Sit says

    @aldo – “All in all, VUL work extremely well for certain people.” I can’t disagree with that. That number of certain people pales in comparison to the number of people who are sold VUL though. Marijuana has some medicinal use. It also works extremely well for certain people. But that’s not how the vast majority of it is used.

  30. Max says

    Now there is new type of life insurance called Index Universal life(IUL), would you like to provide some inputs in this subject too?

  31. Harry Sit says

    Max – Index Universal Life (IUL) is still a type of Variable Universal Life (VUL). Instead of using mutual funds in the sub-accounts, it uses Equity Index Annuity, which is worse than regular mutual funds in the long run. Equity Index Annuity is always pushed during a bear market. It gives you some downside protection in a bear market but it limits your upside in a bull market. Buying downside protection when substantial downside has already happened is exactly the wrong time to do it.

    Index Universal Life is still VUL. It’s worse than regular VUL.

    [Update on Jan. 8, 2010] See correction below.

  32. Lory says

    My husband and I purchased VUL’s as an investment vehicle. We didn’t put any money into them upfront except for our first premium fee’s. We pay our premiums monthly and have been slowly accumulating money. They are Ameriprise/Riversource VUL’s. I believe that our SC will be over after 10 years. If we want to save money overtime and also invest it I take it after reading the previous comments that this is a lousy vehicle! What would you suggest we do after out SC period is over?

  33. anonymous says

    Can someone tell me more about the Indexed Univeral Life? For example those of Life Insurance of the Southwest? Is this the best retirement and college funds savings for me and my family? What are the tax implications when I need to take the money out for my children’s education, say 10-15 years from now? I was looking to eliminate their 529 and stop my 401K contributions to participate in these policies. I have been informed that this is the best tax-free retirement income and college funds when the child is 18. After reading all these posting, I’m reconsidering what I’m about to do. Please advise.

  34. Harry Sit says

    @Lory – After the surrender charge period is over, you will have to see what the cash value is compared to your cost basis (get both numbers from Ameriprise). If your cash value is above your cost basis, you can just cash out. You will have to pay taxes on the gain. If your cash value is below your cost basis, you can do a “1035 exchange” to a low cost variable annuity that does not have a surrender charge, such as variable annuities offered by Vanguard. Let the market value catch up to your cost basis before you cash out from the variable annuity.

    @anon – Indexed Universal Life is most likely NOT the best retirement and college funds savings for you and your family. Don’t just take my words for it. Also read this article by Money Magazine senior editor Walter Updegrave:

    Investing in a pricey life insurance policy

  35. William says

    Indexed universal life insurance for college savings? My instinct says do not fall for it. The sales man will likely get a nice commission from the sale of this product. Don’t stop 401k contributions. Don’t you get an employer match for you contributions? And aren’t contributions tax deductible?You should be maxing that vehicle out. I’m not sure about 529s. You might qualify to contribute to a roth ira. Earnings from a roth are withdrawn tax free after 59 1/2. Principal can be withdrawn tax and penalty free at any time. The principal balance of a roth ira can be a good source of college funds, held in your name, for your children. Think about it. If you start when the child is 8, at $5000 a year, you will have $50,000 at your disposal,tax free, when the kid is ready for college. The earnings are yours, tax free, after 59 1/2. You may need other sources like a 529, but its a start. Stay away from insurance as an investment vehicle. I know from experience. Buy term life insurance. It is a good value these days. Insurance wrapped in investments can cost up to from 5x to 10x what a term policy of the same face value would cost. Educate yourself before you commit to this type of insurance policy.

  36. GIAC in VB says

    Hi everyone,
    I am a seasoned insurance agent and investment advisor. I’ve worked with some high quality firms.
    I feel like no one specific strategy is good or bad for everyone. That is why so many clients and advisors get in trouble! You can make blanket statements like ‘buy term and invest the difference’ or ‘all VUL policies are bad’ or trash variable annuities.
    Please remember this, and this as the ONLY rule of thumb that applies: your strategy should be individually crafted based on your goals and aspirations. Just as you should not listen to an ‘advisor’ that cannot offer a wide variety of strategies amongst multiple top notch companies, you should not make assumptions about your own strategies that are in place based on some disgruntled web bloggers.
    Go get a professional opinion. If you don’t know how to find a great advisor, ask for a referral from the most successful person you know! If no one you know has an advisor, begin the process by interviewing a number of agents/advisors at various firms, but do your homework first! Ask tough questions, and have them prepared in advance. Don’t sit passively through a ‘pitch’ and get duped and then blame an entire company!
    Unfortunately, in this industry, I have learned that there are some really rotten apples and it ruins the reputation of entire firms!
    Just don’t get too jaded. Be on your guard, but there are some good people happy to help you out there!

  37. Darren says

    I have had a $1 million dollar VUL policy for 4 years and currently have $10K in cash value. I have finally decided to do my own research and have come to the conclusion that a VUL is a TERRIBLE idea for the average investor/person. At this point the best action for me to take is to get term life insurance and stop funding the VUL. I would surrender today, but after the next year my surrender penalty starts to decrease up until year 10 when there is no surrender penalty. I am waiting to hear back from Ameriprise to see at what rate the surrender penalty decreases from year 5 to year 10. Once I know that rate I will have to balance the following factors to determine when is the best time to surrender: the rate at which the surrender penalty decreases, thus allowing my surrender value to be a higher percentage of my cash value; the monthly cost of insurance, how that increasing rate (10% year over year) will increase in proportion to the decreasing rate of the surrender penalty; and finally the expected return I have on my cash value and how that will cause the expected surrender value to increase over time.

    So I estimate that at the latest will surrender after year 10 when there is no surrender penalty unless it is better for me to surrender early is the rate at which the surrender penalty decreases from years 5 to 10 and that rate is not great enough to free up current surrender penalty money that can be used to either pay monthly cost of insurance of better yet be returned to me when I surrender. (and I have not looked yet but I am assuming the surrender value is taxed so that would be the last factor to weigh into when I should surrender from now until after year 10)

    Finally, one thing I was not made aware of when I purchased the policy was the rate at which the cost of insurance increases over time. I can only blame myself but I should have also been made aware of this by my Ameriprise Financial Adviser. The monthly cost of insurance increases 10% year over year!!! By the time I am 70 years old my monthly cost of insurance will be $7,000!!! Assuming my current monthly cost of insurance increased every year for inflation at a rate of 3%, my current inflation adjusted monthly cost of insurance at age 70 would only be $298. At that same age if I was paying $7000 a month for term life insurance my benefit would probably be $10 million compared to the $1 VUL policy. What a scam!!!

    These should only be used as a tax shelter for the 0.1% of the richest people who would choose to have the smallest face value and would simply use this to let money grow tax free until they can withdraw the money with no tax-penalty.

  38. Diane says

    Ok – what is fustrating is everyone expects people to GIVE GIVE GIVE & TAKE TAKE TAKE – everyone has a job and should get paid what they are worth. You wouldn’t go to the supermarket and just snatch the food & leave would you? No, because there are costs and fees … sometimes, oh my gosh – hidden costs! Then there is coupons! WOW!! Now you can SAVE $$ on the additional costs.
    I purchased a VUL in 2004. 1mil dealth benefit. BUT I also had a term that I purchased 5-years earlier (under $10 a month for a 30 years! and the company has switched so many times I can’t even tell you. I have been in danger of loosing this “average joe protection policy” each time they transfer it. (term is a $100k policy). I only had under $10k in the VUL and borrowed $5k to help me when I lost my job. I still have the policy and even though we put it on hold for TWO YEARS – it is still benefiting us!! This has been a great policy. I know I am protected, and I don’t expect agents to work for free, so they should get some sort of commission for educating me on more then I knew previous to them talking to me at all. I have referred others to this agent. When my husband & I talked about it we broke it down in terms of a mortgage on your life for lack of words. The market goes up & goes down. We still have a benefit on our lives & we know our wishes will be carried out – worst case, we can liquid the $ after the kids are in college and use it ourselves, still having piece of mind at a lower premium then when we are in our 60’s. We didn’t get a term because we didn’t want to “rent” we wanted to “stay” ….. There is something for everyone .. that is why we have choices, am I right???

  39. Zak says

    I’m sure all of these points were discussed in previous points, but I wanted to throw my 2 cents in. VUL’s (and permanent insurance in general) are neither inherently good or bad. They are just appropriate for certain situations.

    It is correct that they have an upfront load for money on the way into the policy, like an A share of a mutual fund. They also have an M&E charge (typically drops off after 10 years). They also have a surrender charge (like vesting in a 401k… often 5-10 years) as well as the normal cost of insurance charges. They are not “light” on fees by an means. The other thing to keep in mind is that certain fees, such as M&E charges, are typically loaded into the first 10 years of the policy. So combine that with the surrender charge and a bad explanation from a financial advisor on how these thing work and of course you are going to feel jipped.

    Now, one thing to take into account is that regardless of what you plow into the thing in terms of premium, the fees (aside from the upfront load) do not change. They are tied to the death benefit and not the premium. The way you make these things work is you over fund them…. and massively so. If you are plowing as much into it as the IRS will allow you, or at least close to this amount, the fees become a much lower ratio compared to the total premium. Consequently, if you DO get sold one by a shady insurance agent, he may have sold you the biggest death benefit he could, which means the policy is not being effectively overfunded it and your fees, as a ratio to the total premium being put into the policy, are quite high.

    Ignoring for a moment the fact that there is any insurance benefit and analyzing it strictly from an investment standpoint, you are essentially being charged a fee to participate in a Roth IRA. Would you pay money to invest in a Roth IRA? You might if you were phased out of one. Chances are, if you are in a high enough tax bracket and funding it appropriately, the fees will be outweighed by the tax advantages.

    Here are some basic rules of thumb to assist in deciding whether or not a VUL is right for you (from an investment standpoint only):

    – You are in at least the 28% tax bracket (preferably 33 or 35%)
    – You can afford to fund the policy close to guideline (the maximum set by IRS)
    – IMPORTANT: You don’t plan on accessing the funds for at least 15 years, preferably 20-25. These are not short term investments. It takes time for the IRR to ratchet up.

    Of course there are inherent insurance benefits to having permanent insurance, but most folks arguing VUL/Whole Life versus a term/invest the difference strategy are concerned with returns. And I hope I’ve made my point that it just depends on the right situation and an appropriate funding level. People that say they are the worst vehicles ever have a poor understanding of the product (and probably finance in general) and were probably sold an inappropriately large policy by their advisor. People who say they are the best product ever are probably in a higher tax bracket and have an ethical advisor who sold them an appropriately sized policy (and did a darn good job of explaining it).

  40. Zak says


    I’m amazed how many people on these blogs don’t know anything about what they are talking about.

    Regarding Indexed Universal Life:

    No, they are not like equity indexed annuities (which can definitely be terrible products). Indexed Universal Life is a universal life product that has a crediting method which is typically pegged to the performance of the S&P 500. Overtime, has the S&P 500 been severely outperformed by wisely managed mutual funds? Absolutely. So is a policy that is tied to an indexed investment such as an IUL going to be better than an actively managed investment such as a VUL under this definition? Probably not.

    The attractiveness of an IUL has nothing to do with the fact that it is indexed. It has to do with the fact that the insurance company offers a floor and ceiling to the investment returns. For example, you might find a product that offers an indexed return that is guaranteed not to return less than 2% in a given year. To offset this guarantee the insurance company will place a ceiling on the return as well, something probably around 14% or so.

    Will the VUL outperform the IUL over a long time horizon? It very well might. But the IUL will grow with FAR less volatility, and that has inherent value in and of itself. Because cost of insurance charges are withdrawn from the cash value on a monthly basis, you are in essence reverse dollar cost averaging from the account, which makes volatility in permanent insurance plans potentially very dangerous. The IUL can offer a nice medium ground between VUL and Whole Life…. something that has growth potential (like a VUL) but lower volatility (like a Whole Life contract).

    Equity indexed annuities….. please……

  41. Harry Sit says

    I stand corrected for my comment #32 entered on August 24, 2009. Index Universal Life (IUL) is NOT Variable Universal Life (VUL). An IUL does not use a separate account. There is no prospectus. The money invested in an IUL is in the general account of the insurance company. Although IUL crediting is similar to crediting in an Equity Indexed Annuity, there’s no direct relationship between the two products.

    Technicalities aside, these don’t change the general conclusion about IUL. The downside protection remains the selling point of IULs. This protection is always emphasized when the downside already happened. The cost of the downside protection is the limit on the upside. Investors will likely pay a high cost for the downside protection.

    The trick these days is to switch people from a poorly performed VUL to an IUL. The agent gets a new commission. The clock on the surrender charges starts over again.

  42. Erik says

    I am an advisor and have sold probably one VUL in the last two years, but it’s not because I think they’re not worthwhile. It has to be the right situation–the higher the client’s expected future marginal income tax better, the more it makes sense.

    A skeptic by nature, when I got into this field I built a spreadsheet, and you can, too. It’s a little complex to explain every cell and formula, but in a nutshell, I assumed someone with, say, $10,000 of investable cash flow (after they’ve funded their 401(k), which they should do first). If he or she bought a large term life policy for, say, $1000 a year, and then invested the remaining $9000 annually in a non-qualified brokerage account, would he or she be better off or worse off taking that same $10,000 and dropping it into a VUL of the same size as the term policy?

    The way to answer that mathematically is to (1) assign the same assumed gross annual rate of return to both the VUL and the nonqualified investment account, (2) subtract annual investment expenses expressed as a percentage, (3) recognize for annual taxation purposes on the nonqualified account a representative annual distribution of dividends, interest, and possibly short-term capital gains (e.g. in a mutual fund), (4) tax those gains, (5) reinvest the net after-tax distributions, (6) and repeat. Then, at the expiration year of the term policy, calculate the difference between the nonqualified account value and its cost basis, and then apply a long-term capital gains tax to that difference, subtracting that tax from the total. Also don’t forget to tax distributions in that final year. Compare the net to the cash value within the VUL as shown on the illustration. Since that cash value is a potentially tax-free, it is the relevant comparison.

    Doing this, I have found that generally the VUL’s cash value at, say, year 30 is greater than the spendable net value of the nonqualified account. But I acknowledge that if one is a genuinely knowledgeable do-it-yourselfer investor and can thereby knowledgeably control both investment costs and annual taxes on the nonqualified account, the advantage tilts away from the VUL.

    In reality, though, a much smaller percentage of individual investors actually achieve the returns they could in an account prudently managed by a professional. Some will. Maybe most of the posters on this site would. But again and again I see that their confidence proves to have been misplaced hubris. And in the absence of comparable returns to what the gross returns in the VUL would be, these investors are worse off by not being in the VUL.

    The last consideration is this–if I’m in a 30-year term and it reaches the 30-year limit, but I needed a 40-year policy and am now uninsurable, it sure would be nice to have had some portion of my life insurance in a permanent form. And depending on my age when I began the policy, then the question is which permanent form makes the most sense. Oftentimes for younger or more aggressive clients, the VUL is a better choice than a UL or whole life policy.

    Anyway, please try to build a fair spreadsheet that incorporates all the true costs of building a non-qualified (taxable) investment account, and compare that to a VUL illustration. In the out-years — which are the ones that generally matter most — see which has more spendable money. I think some of you will be pleasantly surprised.

  43. JAKE says

    Wow, it’s quite interesting to see where this discussion is headed. In light of people’s different view, allow me to add a different perspective to this entire theme: insurance & financial planning. First off, all products are designed for a market and every case is indeed different. One should evaluate their financial position both on the short term and long term basis. Second, it’s both the agent’s job and the consumer’s responsibility to do their due diligence. This means the consumer should ask questions and agents should do a good job explaining. The problem is that too many consumers lack the financial literacy/language and understanding while the agents, representing the insurance companies, too often than not are incentivize by the commission check.

    Here’s the different option: buy a cheap term with large enough death benefit (more than you’ll need or the kids) and couple that with a Equity Index Universal Life (EIUL minimum only w/ cash value). You plot this on a graph and you have two products; 1) immediate death coverage (ie., $1M 30yr term) plus 2) long-term coverage without the scrutiny of having to screen at a later age (EIUL). Once your 30-year term drops out you’ll be in a position to have accumulated some cash value in your EIUL while at the same time save $$$ all along which can be better allocate towards other investments. Of course, this is under the assumption that you have time on your side and if you have kids they’d be well off into their adult years by now. Besides, what’s the whole point of having protections for? Oh, and for those who are really interested – I recommend you consider an Irrevocable Life Insurance Trust (ILIT) account. You get the better of both world.

  44. JAKE says

    Life insurance for retirement and college savings?

    My take is that you should consider a 529 plan that will match some of your contributions (there’s a cap per child). If you’re interested, consider looking into MN 529 Plan for they have a very attractive plan to help you reach your savings goal for the kid’s college expenses. Or just run some research online and you’ll find the product that’s best suited for your kid’s needs.

    Equity Index Universal Life Insurace (EILU), on the other hand, can potentially help to not only provide protection but retirement as well. For those who are not familiar with the product you can actually fund your retirement through a cash withdraw or monthly inflow of cash depending on how much you need to supplement retirement. You get both the insurance protection plus cash value built-in as well as the option to receive money at retirement. I think it’s a great product!

    As a side note to my earlier posting about ILIT account you get to protect your estate when you die! Better yet, you get to use your Gift Tax allowance (if you have any to spare) and fund this account. Your kids get your estates without the burden of having to liquidate your assets to pay for the “dead” tax once you’re gone! Best of all, Gift Tax is exempt from being tax and this year’s limit has been raised to $13,000!

  45. Zak says

    Just to clarify on ILIT’s: Do keep in mind NOT to place a policy in an ILIT that has cash value that you plan on using. Once a policy is in an ILIT, it becomes irrevocable and the original owner can no longer have any “incidents of ownership”, which, among other things, means no access to cash value. This liquidity downside is countered by the fact that the proceeds from the policy are now removed from the estate and no longer subject to estate taxes.

    The main thing to keep in mind is that ILIT’s are an estate planning tool and NOT a form of trust that should be mixed with policies which are geared for cash value accumulation. An ILIT policy should typically be structured for maximum death benefits and minimum cash value for your premium. Conversely, policies designed for retirement use should be typically (but not always) geared for minimum death benefit and maximum cash value accumulation.

    I typically would use a 529 plan over a life insurance policy for educational funding, because the time horizon is too short to have the tax advantages of the life policy make any sense. The internal rate of return simply wont be able to get high enough. In addition, the cap on 529 plan contributions is $330,000 (yes, you’ll pay gift taxes over $13K), so there is little risk of “maxing it out”. The only reason I would use a life insurance policy for education would be if you really want permanent insurance as well. Of course 529 plan funds also have to be used for education if you dont want to be penalized.

    The reason that this differs from retirement is that you (a) typically have a longer time horizon until retirement and have time for the IRR to build up and outweigh the insurance costs and (b) the cap on 401(k)’s is $16,500 annually (+$5K over age 50), which most appropriate users of permanent insurance will easily blow through and max out.

    Just remember that this whole issue of permanent insurance versus more traditional investments is pretty complex to make any blanket statements about. It involves a complex analysis of your tax bracket, time horizon, liquidity concerns, estate size, and desire for permanent insurance coverage. But it is a topic well worth investigation and consideration. Just don’t follow the Suze Orman’s of the world like lemmings…. seek actual professional advice. πŸ™‚

  46. Mike says

    What would you do for a child? I’m looking at setting up a VUL for my 8 year old and maxing it out without creating a MEC. I don’t know what tax bracket he will be in at retirement, but he will have 50+ years before he retires and this looks like a great option for him and affordable for me and also gives me a seperate life poilcy on him incase somthing happened.

    I see the Gerber and other whole life products, but I think a more aggressive policy would be better in the long term for a child? Any thoughts?

    He is to young for term and has no income to set up a Roth IRA.

  47. Zak says


    I think this could be a good idea, but I would only do it if you want him to use it later in life (and NOT for education as the time window is just too short). I would personally agree on the VUL over Whole Life in someone that young’s case, but that is more up to you and your personal risk tolerance.

    Your other option would be an UGMA/UTMA as that will shift money to him in a manner that is irrevocable and move it (except for amounts where it would generate a certain amount of passive income and trigger the “kiddie tax”) out of your tax bracket and into his. You could also set up an inter-vivos irrevocable trust.

    It all depends on what your goals are for the money. But based on the basic info you provided, I think a VUL would be an intelligent option and one that would not require the use of an attorney (such as the trust would). I would consult a local financial advisor in your area that is fully independent (as in they are not purely life insurance or equities focused).

  48. HNW Male says

    @ TFB
    Several have said that the VUL could be a fit for a very small number. What does the ideal VUL candidate look like? I need tax deferral. We max out 401k, do some deferred comp, etc. My plan is to max fund a VUL (without creating a MEC.) The only thing I may consider is a 529 but I could do both. I am 37 with 1st child on the way. My adviser says that I am “ideal”. Thoughts?

  49. SmartMoneyGuy says

    I’ve been an advisor for 35 years, and I’ve sold it all. At this stage of my career, most of my clients are growing older too. The last 10 or 12 year period is a perfect lesson in managing risk. VUL can have it’s place… I’ve sold some over the years, but in the market crash of 2000 / 2002 when the market dropped 48%, many of my clients were hurt. (That’s when I quit selling it) Obviously recovery takes place, but who wants to waste 7 years making up for a 50% drop in value. Fast forward to 2007 / 2009. Here we witnessed a whopping 58% decline in the overall market. Think there might be some desire for a product or a strategy that limits or eliminates downside risk? You bet there is, especially if you are 50 or older and don’t really want to spend the next ten years climbing out of a hole.

    To say that Index Annuities or Index Life is a bad plan because they limit the upside is a poor argument. The really ‘poor’ strategy is investing in Mutual Funds, Variable Annuities, or VUL and watching helplessly as 50% of your nest egg goes up in smoke, while paying fees whether you’re account value is headed up or down.

    Wharton School of Finance recently did an unbiased, university level study of various investment vehicles over a 15 year period, including the S&P500 versus Index Annuities. Son of a gun if the old, boring, ‘high-fee’ Index Annuity didn’t beat everything else! These products have brought returns averaging 6 to 9% over the past 16 years.

    You can’t get around the fact that bear markets (20% losses or greater) appear every 6 or 8 years, where losses average 39% and 5.2 years (on average) is spent in recovery. Avoiding the losses is much more important than chasing the home runs. Just ask Warren Buffet.

    Buy the overall market. Limit your risk by using a tool such as Index Annuities, or Index Universal Life (if you can buy it early enough) and you will do just fine. Enjoy some tax advantages and sleep better every night.

  50. Jaymz says

    A VUL can be the best investment vehicle out there if used properly on the right individual. Some people make too much money to qualify for a Roth IRA. I challenge any of you morons bashing VULs to find the right recommendation for someone with this type of income that wants tax free growth on their money. Furthermore there are high fees in the first 5-10 yrs typically on VULs. Then typically the policy is surrendur free. There is a reason for every fee. The M&E is charged in the 1st 8 yrs of the policy, TO PROTECT THE SOLVENCY OF THE INSURANCE COMPANY. Then fees can be credited back to the policy owner so that recoups some of the cost. Did any of you idiots look at an illustration? Did you look at the policy values and benefits pages. Oh yeah and idiots that think “no load funds” are the way to go, think about it real hard. The company charging the least amonut to manage your money is the best right. hahahahaha. If you were good at doing something would you charge the cheapest price? Hell no. Simply put the better portfolio managers are going to charge more, BECAUSE THEY GET HIGHER RETURNS, SO THE FEE IS WORTH IT BECAUSE YOUR NET GAIN IS HIGHER. No load funds typically track what the major indices do so they are easy to manage hence cheap. You get what you pay for. In a case study I have seen the average return for do it yourselfers is 3%/yr in a 30 yr sample. Wow you people dont need FAs and are doing a great job on your own. I cant stand people who only know a little bit about how something works and the try to advise people on how it works. You people realize that a VUL IS a Wall ST security and you have to be licensed to advise people on it. I challenge all you people to find your financial independence on your own.

  51. William says

    Taking the time to learn on your own about the variety of investment and insurance products available and which ones are suitable for you makes you the opposite of a moron or idiot. The fact is that VUL’s and similar investment/insurance products are sold to the wrong people. These people, after realizing the bad choice they made, will go on their own or be more discerning when choosing a new adviser. There are good, bad and mediocre load funds, no load funds and insurance/investment products. On your own or with an adviser you could end up with either one of them. You need to research before choosing. Even with an adviser. Don’t take anyone’s word. Among the true idiots and morons out there are those who resort to name calling when challenged.

  52. Dan C. says

    I feel sorry that these fees were not explained to you. With a bit more patience, the Cash Surrender value would equal the Market Value of the policy. In other words, you get back all the money you put into after surrender charges and deductions.

  53. Dan C. says

    You don’t withdraw the money! You take out a policy loan, which comes out of the death benefit when you die. You can also use the policy to leverage a third party loan (for a car, mortgage, business loan, or line of credit).

  54. Zak says

    @ Dan C.

    Technically this isn’t entirely true. It can often make more mathematical sense depending on the loan structure of the policy to first make cash value withdrawals in retirement, up to the point of your cost basis (so that the withdrawals remain tax free), and then start taking policy loans after you have hit your cost basis. Or you can take loans right from the start; it’s your choice. But I wouldn’t make a blanket statement about not withdrawing the money.

  55. Dan C. says

    Any withdrawls will just affect the account value of your policy. A small amount could mean a difference of tens of thousands dollars in the years that you go to retire.

    In comparison, if you were to take out a policy loan against the value, it does not have to be paid off until you die. It will be taken out of the death benefit + interest on the owed amount.

    So why would I want to erode the effect compounding interest has on my savings?

  56. Zak says


    “You people realize that a VUL IS a Wall ST security and you have to be licensed to advise people on it.”

    No, a VUL is a life insurance policy, not a security. The sub-accounts are securities. You have some valid points (and some invalid points), but if you are going to bash people and look intelligent while doing it, at least make it sound like you know the subject matter well by using the correct terminology.

  57. Zak says


    Haha, you opened up a can of worms on that one. πŸ™‚ I’m not sure the exact situation where it works best one way vs the other. I think if the loan nets a 0% interest rate (which many do nowadays), it might make more sense to take loans only. Whereas some of the older policies used to charge a fairly high rate (many as high as 8%) and didn’t credit anything back. In that situation, I would think it would make more sense to take withdrawals first.

    Anyways, not saying it isnt better to take loans only. I’m just saying that there are definitely situations where withdrawals first make sense. I think it just depends on the loan provisions of the policy (which has a lot to do with when the poliy was issued). My use of the word “often” may have been strong.

  58. cj sax says

    Maybe I am wrong. And someone please correct me. But in a VUL isnt some money going towards death, some towards cash value, and some to a seperate account. To my limited knowledge the cost to insure you goes up every year. Also more money has to go to the cash value to fund the policy lessening the amount in the sub account. And finally, upon death you get your death benefit less the loand plus sub account. So how much of your overfunding does your family actually see being that the cost goes up and a majority of the money goes to the cash value that you lose when you die? And please do not give me the line that the cahs value is a living benefit and goes towards the death benefit.

  59. Zak says

    @cj sax

    Cash value and sub-accounts are actually the same thing. Sub-account is basically another word for “mutual fund”, except that sub-accounts are held in VUL’s and variable annuities. In a VUL you will typically have a choice of many sub-accounts (15-30) to invest your money in, much like a 401(k) would offer different mutual fund choices. The money in all the different sub-accounts together makes your cash value, just like the money in all the different mutual funds in your 401k makes up the overall value of the 401k.

    Your second question was on cash value vs. death benefit. There are actually 2 ways to structure a UL (whether it is a VUL or regular UL). One is with a level death benefit and one is with an increasing death benefit. With a level death benefit, as you accumulate cash value, the death benefit to your family does not change. With an increasing death benefit, as the cash value grows, so does you death benefit. Which begs the question: Who in the world would do a level death benefit?

    The answer to that lies in the intricacy of how the internal insurance charges operate. With a level death benefit, as your cash value grows, more of the death benefit is actually composed of YOUR cash. That means the insurance company isn’t actually “insuring” as much (they call this the ‘net amount at risk’). As a result of insuring less, the insurance charges drop over times (of course the fact that your aging counteracts this effect and actually just keeps them somewhat level). Imagine your originally had $100,000 of coverage and have accumulated $20,000 of cash value. Well, the insurance company (with a level death benefit) is only charging you for $80,000 of insurance.

    Take that same scenario where you originally had $100,000 of death benefit and then accumulated $20,000 of cash value. Well, your death benefit is actually now $120,000 and they are still charging you for the $100,000 of “risk” that they are taking on.

  60. Zak says

    To clarify, that last paragraph of my comment is referring to an “increasing” death benefit. The scenario in the paragraph prior was referring to a level death benefit. I need to learn to proofread….

  61. cj sax says

    So if I have a 100k VUL and I have 20k in cash value then my wife sees 120k if I die. And are you sure the cash value and sub account are not to different things. I only ask because I was going to get a license and it seemed to me to sell a VUL you need a securities license but for a UL and whole life you didnt? Just asking and by the way this has been a great forum

  62. smartMoneyGuy says

    If you selected the increasing Death benefit, the DB includes the DB you purchased as well as the cash value. In a level DB setup, the 100K VUL and the 20k Cash would provide a 100K DB… the 20k Cash plus the remaining 80K in DB.

    Cash Value and Sub-Accounts. In VUL, you need a securities license because you are selling “mutual fund” type investments inside a life policy. The value of the sub-accounts make up the cash value. In regular UL or IUL, there is no such underlying investment choice… it’s all interest-based accounts with various crediting methods… hence, no securities license required.

  63. Zak says

    You will see the $120K of death benefit if your death benefit is set to be “increasing”. If it is set to be “level”, then you will still only have $100K of death benefit, even with the $20K of cash value.

    Let me try to be more descriptive on the cash value vs. sub-accounts issue. “Cash Value” is simply the amount of money you have built up within a life insurance policy that you have direct access to while living. There is “cash value” in every type of permanent insurance, whether it be Whole Life, Universal Life, Indexed Universal Life, Variable Universal Life, etc….

    Sub-accounts are specific to variable products. On the life insurance side of things (as opposed to annuities), the only type of life insurance with sub-accounts is the VUL. Sub-accounts are the investment options you have in a VUL. For instance, there might be some large/mid/small cap, international, quality/high yield/limited maturity bond, etc. subaccounts. These sub-accounts are often managed by other investment focused firms (T Rowe Price, Goldman Sachs, etc.). You choose your overall VUL investment by mixing and matching these subaccounts to create a blend that is appropriate for your risk tolerance and time horizon.

    So, the sub-accounts are the investment choices you have. The cash value is simply the sum of money that is invested across these different sub-accounts. It is the sum of the money that you would have access to if you chose to remove it from the policy.

    And finally, VUL’s are the only life insurance contract that requires a securities license to sell. Other insurance contracts only require the state insurance license.

  64. Troll says

    There are only THREE kinds of permanent life insurance:
    Term-100, Whole Life, and Universal Life.

    Term-100 does not have a CSV. It is also known as Level Cost of Insurance, because premiums never change.

    Universal Life has three components that are priced separately. Premiums go into an investment account, which is then used to pay the administration cost, and the mortality cost.

    Mortality costs are priced either as YRT (Yearly Renewable Term), or Term-100 (Level Cost of Insurance). YRT costs start dirt cheap but will keep increasing in a ball curve until they are too expensive to pay. LCOI starts out more costly, but you will be paying that same price when you are 65 years old. The benefit of YRT is compounding interest because you are front-loading your investment with more cash value.

    UL premiums need to be invested properly otherwise additional premiums may have to be invested to keep the policy from lapsing. A good insurance company will use an excellent portfolio to keep your investment secure. My Equitable Generation IV policy (Equitable Life) is invested in a Franklin Templeton “Quotential” portfolio, which had very excellent returns last year.

    UL has no spending value for at least 10 years. For instance, you will be charged a penalty if you withdraw any cash during this time. After 10 years, there is no penalty. Also, it takes a while for the CSV to build up, which you can then use to take out a policy loan (from the insurance company) or leverage the policy itself (to get a massive “ATM” loan from the bank).

    This is all I can write for now, but UL has many advantages if you have the knowledge to use them. Speak to a competent advisor before you make any decisions regarding purchasing a policy or getting access to your policy’s worth.

  65. Zak says

    Technically Troll is right about the there only being three types of permanent insurance (although I am not as familiar with the term to 100). VUL, IUL, and the standard UL are all subtypes of Universal Life Insurance. Although insurance companies like to spruce up their products with different names that make them sound unique.

    Although, as I said, I am not as familiar with the term to 100 product, I understand the concept as described by Troll and it basically sounds like a no-lapse funded UL (UL funded for minimum or no cash value that meets the minimum lapse prevention guidelines). One consideration with term to 100 is that the 2001 redrafting of the standardized CSO Mortality Tables required permanent insurance contracts to mature at age 121 rather than 100. The reason for this of course is based on our increasingly older population. This could be a concern with term to 100: a minority (but still good number) of people will live past 100.

  66. Troll says

    There are only three kinds and that is what it is.

    There are no subtypes. What you are thinking of sound like different customizations / products. For instance, Transamerica’s UL product is called “Prosperity”.

    “Mortgage Insurance” is actually decreasing “TERM” (note: Decreasing Term is not a subtype. It is just “term” with a specific customization, whereas the death benefit decreases over time)

    I can write more about UL, Whole Life, and Term-100 later.

    Note: Term is just a “temporary” insurance. Term-100 is just “temporary” insurance where coverage is until age 100, which is why it is grouped with Universal Life and Whole Life. What happens if the life insured reaches age 100? The policy matures and there is a pay out! Either that or the coverage is extended. Pretty neat, eh.

    I’ve heard T100 is the cheapest of the three options, but it is also the cheapest in quality. It is like a Chinatown-style insurance where you get life coverage without any of the bells, whistles, and thrills of Whole Life or Universal Life.

    More on this stuff later!

  67. Richard W. Woody, CLU, ChFC, CFP says

    I have been in the life insurance business for 29 years and have my CLU, ChFC, and CFP designations. I have been a life insurance agent, sales manager, home office executive for one of the top 3 mutuals and a General Agent current position in Kansas City). While my company has a VUL and UL product for sale, I do not allow my reps to sell them. Universal Life Insurance is the worst product on the market. It is sold as permanent insurance and the reps that sell it all know (or should) that unless it is tremendously overfunded, or gets an astounding rate of return year in and year out, that the contract is designed to self-destruct. By overfunding, you may be able to avoid this, however if you had put those same dollars into a good quality dividend paying whole life policy you would have come out wayyyy ahead.
    Secondary Guarantee UL can be a very good product, but I still prefer Whole Life.
    Traditional UL and VUL sales are as close to criminal as I can think of in our business and I wouldn’t sell one to my worst enemy. You just can’t outrun those tremendously increasing internal insurance costs in your senior years. A terrible deal, unless you plan on dying young. Ask yourself, “What are the YRT (yearly renewable term) rates for an 80-something or 90-something year old? Do the math, it makes this pretty simple… Traditional UL and VUL are a HUGE ripoff, especially when you could have so much better (safely!) if you had bought your permanent insurance with a participating Whole Life policy with all of it’s many guarantees and wonderful dividends.
    I have taught classes on this subject for 18 years, however if you think that I am wrong please get an illustration to age 100 and do this simple math. It will show you the real costs of holding this contract every year. Choose a year in the future, say your age 85. Take the cash value from that year and add to it any premium for the year that the illustration shows you paying. Multiply the total by one, plus your assumed rate of return shown. For example a 12% rate of return would be a multiple of 1.12. Next subtract the next years (age 86) cash value. The number that you reached is the actual cost or charge coming out of your cash value for that year. How ugly is your number???

  68. Troll says

    Richard forgot to mention that Participating Whole Life costs a shit load of money just for the chance of getting some shiny “dividends”. These are not the same as stock dividends. They are a return of premiums if the company makes a profit. Most of the time, your future premiums are reduced. It works just like car insurance!

    And that shit load of money is only paying for the chance that the company will overshoot its Quota. What happens if it doesn’t? Your premiums go up! They will charge you more on every month of the year because they did not meet their quota. No gain, more pain.

    Whole Life is more expensive than Universal Life. No wonder Richard wants you to buy it πŸ˜‰

  69. cj sax says

    Ok all of this is confusing. No wonder people dont buy life insurance. I did some research and from what I see Whole life is more expensive; but I sawsomething called an illustration where it said Gaurenteed cash vallue in both but the UL it went up then started going down and eventually the gaurenteed cash value and death benefit read zero. How does that happen? I am 30 years old and I make on average 120 a year. My wife makes 80k a year and is 30 also. We just got quoted 147/month for a 35 year term. We both max out our 401k. What would be the next route for investments and Why? I am still confused about Zaks comments about them insuring me for less and using the cash value as part of my death benefit. If I purchase 500k of insurance isnt that what I wanted. If I get a VUL can I ask them to insure me for what I bought and Leave my cash value for my dependents? Wow makes me wonder should i pursue getting in the industry.

  70. SmartMoneyGuy says

    Lot’s of confusion in the industry… like many others. Properly structured, an overfunded Index Universal Life policy would be an incredible solution for someone at your age and income level. This is just a rough depiction of how these things might work for you. Obviously, a more formal illustration should be carefully reviewed along with the council of a financial professional…

    Say you put 1000 or 1500 a month into a solid IUL policy. (there are good and bad companies out there) Depending on how it was structured, it would purchase somewhere between 1 million and 2 million of ‘death benefit’ to protect the family. You want to set it up to purchase the LEAST amount of insurance possible for the premium you are depositing. This way, more of your deposit goes toward building a tax-free retirement for you and your wife. Fund this contract for 35 years (until age 65) and you’ll probably have 3 million to 5 million of cash value sitting there inside the policy. Then you begin taking $150,000 per year OUT of the contract as a Policy Loan, tax-free – without any requirement to ever pay the loan back. By the time you die at 85 or 90 years of age, you will have pulled 3 to 4 million OUT of the policy tax-free… and your heirs will still receive a tax-free death benefit of a couple million when you pass.

    Properly setup, it can be a beautiful thing. (especially where taxes are probably headed… UP!) Go to http://www.TaxFreeBook.com and order the book Tax Free Retirement and learn about it on your own. A lot of the advice you will hear is “flavored” by a salespersons own belief system, the products they sell, commission levels, etc. (Before anyone asks… NO, I didn’t write the book. I don’t even know the author!)

    Overfunding a IUL contract at your stage of life will absolutely “Rock Your World” and when you’re 65 years old, you will look back and realize that this was probably the smartest financial move you ever made.

  71. William says

    To cj sax,
    You could each set up an ira in addition to maxing out the 401 k. Depending on whether you file jointly or separately your wife may be eligible for a roth ira. After maxing out the ira you could invest in tax friendly low cost no load mutual funds at Vanguard or another company with low cost no load investments. With this strategy and the term insurance I think your costs are kept to a minimum. I’m no expert but I think you are in the income range where you should maybe avoid insurance as an investment vehicle. Then again I’m biased and in a lower tax bracket.

  72. SmartMoneyGuy says

    Have to disagree with this last comment on several aspects.

    1) Numerous studies will prove that maxing out your 401k is a mistake. There are other, more tax-favorable alternative. Taxes being considered, a properly structured IUL policy will provide a lot more net income for you later in life.

    2) Your income level more than likely will prohibit you from contributing to a Roth IRA

    3) The term insurance will work fine for protecting your family through the growing years, but will be more than likely, unaffordable to keep into your 80s to help pay for probably Estate Taxes.

    4) Your “Income Range” (and tax bracket) is exactly WHY you should consider Life Insurance as a Retirement and investment savings vehicle. At your income, you’ll get killed on Income taxes over the years.

    Again… just an opinion!

  73. Richard, CLU, ChFC, CFP says

    Troll, I’m sure that you are a nice person, however you seem to know just enough about life insurance to be dangerous. Whole Life premiums cannot go up because they are guaranteed in the contract to remain level for your entire life. This is one of the most basic components of the WL contract. Guaranteed premiums, guaranteed cash value, guaranteed death benefit and participation in the company’s profits through dividends. And no, through dividend’s your future premiums are not reduced. They can be, however over 97% of all dividend elections are for “Paid-Up Additions” which increase your cash value and death benefit.
    Also, good mutual companies, like the top 4 (NYL, Mass, Guardian and NML), have paid their dividends every year, year in and year out since the mid-1800’s. Do your research and check their dividend histories… Personally, I wouldn’t buy whole life from any company but one of the top 4 mutuals and I would never buy a non-participating whole life contract. Non-par WL is garbage.
    Whole Life is BUYING your life insurance. Term and UL are like renting your life insurance. WL costs more because you own it and gain equity as well as many other advantages. A simple fact of life is that you get what you pay for. If WL wasn’t well worth the price, they couldn’t sell it.
    Lastly, permanent life insurance should be only a PART of most people’s financial plan. The majority of people cannot afford all whole life anyway, nor do they probably need all whole life. Term insurance and/or SGUL should also be a part of a properly crafted life insurance program. All of this should be implemented after the completion of a thorough needs analysis done by a competent professional from a quality company.
    Remember, Universal Life is basically designed to implode and eat up all of your cah values. A simple COI on net amount at risk analysis proves that easily. Whole lifeis full of guarantees and is designed to get better and better the longer that you hold it. UL gets worse and worse the longer that you hold it.
    I’m teaching a 2 week class on Financial Planning in April. Maybe you should attend…

  74. Zak says

    Wow, this comment section really got busy! πŸ™‚

    I always just like to provide feedback on what others have said, not that my knowledge or opinions are superior to any of yours. But it is very fun to see what everyone is saying!

    @ Richard

    I like your comment on life insurance being a PART of someone’s financial strategy. This is sooo true. It can be a fantastic part, but should never be the whole.

    I disagree with your comments about the fact that VUL’s and IUL’s are garbage. There are many companies that have been around long enough to stabilize insurance charges later in life and, even illustrating a semi-decent return, will stay in force. It is the old VUL’s made in the 80’s and such that have the implosion issues. They have fixed a lot of these with newer products. That being said, Whole Life can also be a great product, but to get decent returns, you STILL need to overfund it with supplemental Paid Up Additions, so it’s really not that different from overfunding a VUL.

    You probably should not mention offering financial classes. That sounds like you are holding yourself out as an advisor and trying to solicit business. To my knowledge, this is not FINRA compliant. Plus, it just doesn’t belong in a discussion forum like this.

    @ SmartMoneyGuy

    I’d like to see this study that says maxing out your 401(k) is bad. If you make a good chunk of money, why wouldn’t you max it out AND do some life insurance? Yes, if taxes skyrocket, you sort of screwed yourself. But even though that is likely, there are still folks that will be in a much lower tax bracket than they are now. My point is you are making a blanket statement. There are too many variable to that equation (although I would be interested in reading your studies, mind posting the link?).

    See my comment below on Roth IRA’s.

    @ William

    This is phrased as a very standard argument against permanent life insurance, but you are partially correct. If they truly make exactly $200,000 joint and contribute $33,000 to their 401K ‘s, they would be at an AGI of $167,000. At $167,000, they would only be $1,000 above the start of the phaseout range ($166K). This means that, together they could contribute $9,000 to a Roth (versus the normal $10,000). You have to be really careful with that though so that you don’t make an illegal contribution on accident. I certainly would only feel comfortable doing that with the go-ahead from a CPA. Turbo tax leaves to much room for error in that department. All that being said, this could be a viable option for them.

    But, you are neglecting to address a couple of issues. What if they want some permanent insurance? In that case, the scales tip. Also, what if their income is growing faster than inflation? They are pretty close to being fully phased out. Do they really want a $9000 Roth IRA floating around out there if they cant ever contribute again?

    @ cj

    I will say that this stuff is VERY complicated. I kind of enjoy it, which is why I comment on here so much. πŸ™‚ From a purchase standpoint, you really want to understand the vehicle before buying it. It sounds like you could be a good candidate for some level of permanent insurance, but keep educating yourself until you feel like you have a good grasp of it all. I enjoyed tax-free retirement as suggested by SmartMoneyGuy. It is definitely salesy, but if you can ignore all that crap, it may help you understand the overall concept a little better.

  75. SmartMoneyGuy says

    Hi Zak,

    Good stuff on here, for sure. Here’s an article that speaks of the negatives on 401ks… the main thing is simply this: they typically charge horrendous fees, usually approaching 5%, and in an overall market that has earned 10 or 11% returns over time (and probably far less going forward), these fees eat up about half your gains. On top of that, you build a big nest egg and it’s all taxable coming out.

    My general advice is to fund whatever you have to in order to get the full ‘match’ from your employer, and then look at other more tax-favorable alternatives such as Life Insurance or Roth IRAs. Roth 401ks would probably provide an attractive alternative as well… just don’t see them very often.

    One of the interesting things in this posting is that considering all the tax money you may have saved over the 20 or 30 year you funded a 401k… the taxes paid in the first few years of 401k withdrawals chew up that savings pretty quickly. If we see 50, 60 or 70% top income tax brackets again, the 401k and other qualified plans will look like big mistakes.

    There’s no shortage of articles on the negative aspects of the 401k plan, from fees, to limited investment options, to the tax structure, and distribution upon death. Dollar for dollar, the same investment in a 401k plan or a properly structured Life Insurance alternative… the Life Insurance will blow the doors of off the 401k… and you’ll have Life Insurance all along to boot.

  76. Richard, CLU, ChFC, CFP says


    thanks for the comments. You seem like a good guy, however no one will ever convince me that UL and VUL are good products. I just saw an illustration from Ameriprise that was unbelievably ugly, so nothing has changed as far as I am concerned. You just don’t want to buy a product that has a YRT chassis – major no brainer! This stuff gives our industry a bad name (as you can tell from the comments above).

    Also, regarding inviting the Troll to my classes. I am not taking new clients right now and my classes are not open to the general public. I was being facetious…

  77. Troll says


    I cannot comment further on the subject of Whole Life. We are from different countries. Furthermore, I don`t have access to the necessary illustration programs to really discuss numbers.

    Univeral Life is a very good product here in Canada. I am on the same exact plan as the person that sold me the insurance, including the branch manager of the office he works out of. They recommend Equitable Life because costs are low and medical denials are a minimum.

    The projection charts estimate an average of 7% after expenses from possible high and lows. The same default fund is in a global growth Franklin Templeton `Quotential` product. Franklin Templeton is worth $600 billion in global assets. They have a proven track record of proactive investing. The return for 2009 was incredible. I have seen the numbers first hand. If Universal Life was so horrible, why would the branch manager insure his own life, the life of his wife, and the life of his child.

    One day, the compound growth on the Quotential plan will be high enough to sustain the expensive premiums we will have to pay later on in life. When they put these plans together, they plan for premiums to eventually be as high as 1400$ because of YRT.

    The risk of negative debits from the investment account is basic knowledge to everyone in the industry. Projections are not guaranteed. That is why investments are done with a competent company with a proven track record.

  78. Zak says


    I did not like that article. He has some good points, but it is SO slanted. And he is just plain wrong in multiple parts. I’ll reference the last few sentences:

    “Hint: Your 401(k) is part of your estate. It will be taxed until your heirs bleed.

    E.I.U.L.s are not part of your estate. The balance transfers to your heirs β€” untouched β€” as in untaxed.”

    OK, that is just flat out wrong. Life insurance proceeds are not exempt from your estate. No assets are automatically exempt from your estate unless you move them into a trust or give them away! And you can put pretty much anything in a trust, not just life insurance, so the ILIT argument isn’t really valid. Also, you can’t put life insurance in an ILIT if you are still pulling income from it. And because it is part of the estate, (unless you put it in an irrevocable trust) it is still subject to estate taxes (and who knows what those will do in the coming years).

    One benefit is that it is not part of probate, because it is a direct contract. However, I’m fairly certain that 401k’s, if beneficiaries are named properly, is also not subject to probate costs.

    Really the only benefit at death of life insurance over a 401K is that the 401k / IRA will be income taxable at death. Or, you could use a stretch IRA to solve that dilemma. πŸ™‚

    Anyways, just a lot of holes in their argument.

  79. SmartMoneyGuy says

    Hey Zak, you don’t have to love the article… the guy writing it is a little abrasive, but for the most part it is a factual article.

    All that estate mumbo-jumbo? Have your spouse be the Owner of the contract and BINGO… the Life Insurance is now out of your estate. Benefits pass direct to heirs – no probate – no estate taxes. Problem solved.

    And if you think there’s not a huge difference in the way 401k & IRA money is treated versus Life Insurance after you pass away… someone – probably your heirs – will be in for a big surprise down the road.

    Add in the fact that half of your Qualified Plan will disappear to taxes while you try to live off the funds versus the tax-free distribution that is available with a properly structured IUL, and I see no real comparison.

    Good luck to you, and Happy Easter!

  80. Richard, CLU, ChFC, CFP says

    Whoa, … having your wife own the life contract on your life does not keep the benefits out of your estate. our estate is her estate. Spousal owned life insurance has not been a taxed advantaged option for several decades. I believe that it was the TRA of 1986 that changed all of that. Also, FYI – Probate proves the validity of a will. (Life insurance, personally or ILIT owned bypasses probate because it is governed by contract law). Since the Marital Deduction was instituted many years ago, your surviving spouse pays no estate taxes upon your death. The estate taxes are due apon the death of the second spouse, thus creating the need for Survivorship life insurance – also known as “Second To Die” life insurance.

    Lot of bad advice floating around out there… You also need to know that most Americans will have no estate tax issues. If you feel that you will, consult an Estate Planning Attorney.

  81. Zak says

    Not to pull the convo way off track into estate-planning land, but even given the marital deduction, with a large estate, it still makes sense to plan around the first spouse. Given the $3 million deduction per person (using 2009 data, not 2010 obviously), with a very large estate, if no planning was done around the first death, the deduction fell from a potential $6 million ($3m on each) to just the $3 million for the surviving spouse. In order to maintain the $3 million credit on the dead spouse, but still allow the living spouse to use the income generated from the assets, they created the Credit Shelter Trust aka AB Trust.

    Also, in 2011 the credit is set to fall back to $1 million per person. Granted, $6 million estates are not “commonplace” in the U.S. But I’d be willing to bet there are a good number of $2 million estates.

  82. smartMoneyGuy says

    Hi Richard, I was confused by your comment about spouse-owned Life Insurance. I’m not a CLU or an attorney, but I’ve been making the spouse the owner of a Life policy whenever there was real money involved and where Estate taxes might be an issue.

    So I did a little research… I suggest you do the same. Tried to post links here but the site rejects the posting as spam. Check out lawyers dot com and other estate planning sites and you’ll see that this is still being done… even though the attorneys would rather charge you $1000 for an ILIT.

    Apparently, the estate planning attorneys agree that this is still done… and if you don’t own or never owned your the Life Insurance policy on your own life (having your spouse or children own it for instance) it will remain OUTSIDE of your estate and therefore incur zero estate tax liability.

    Admittedly, those same dollars may be subject to estate taxes upon the spouse’s death… which is one of the drawbacks. But I believe we were speaking about keeping the proceeds out of your own estate.

  83. Richard, CLU, ChFC, CFP says

    In family owned life insurance, almost in every instance, your estate is her estate
    (by law, marriage is considered to be a partnership). Estate taxes are due upon the death of the second spouse, therefore it rarely if ever makes sense to make the spouse the owner of the life insurance.

    ILIT’s are inexpensive to have drafted and are an awesome tool for keeping the money away from Obama…

  84. SmartMoneyGuy says

    With all due respect Richard, in a previous conversation in comparing 401k to Life Insurance, Zak argued that Life Insurance proceeds ARE part of your estate… (just like 401ks are) and I commented back to him that this is not the case if you simply have your spouse OWN the policy, which in effect, is “giving it away”. You would have no ownership and therefore, there is NO ESTATE TAX DUE upon your death. The spouse and the family get 100% of the proceeds, tax-free to use as they see fit, which IS NOT the case with 401k plans.

    Yes, upon the second death, assets currently owned by the spouse, whatever they may be, are subject to Estate Tax laws. (this may or may not include any remainder of the death benefit) This doesn’t necessarily make spousal ownership of Life Insurance a useless exercise… it does still provide an income tax and estate tax-free benefit to the surviving spouse.

    To say that “spousal-owned Life Insurance has not been a tax-advantaged option for several decades” as you pointed out… is a bit of a stretch and at best – a little misleading as it does succeed in keeping your death benefits out of YOUR estate and free from estate taxes at YOUR death.

    Admittedly, not as effective as an ILIT, but a simple and just as effective as far as providing for the remaining family is concerned, IMHO.

  85. cj sax says

    Ok I thought i was done. I saw my first VUL last night and it scared the mess out of me. My friend makes 100k a year and has a 250K policy that he pays $53 for. Seemed cool at first until we started to read the contract. COI said .2002/1000. My assumtion is you take .2002* 250 and that would tell how much his insurance costs($50.05). Now this number on page 3 goes up every year. I was like no big deal until I turned to page 12 where it staed COI is deducted from eac premium. Then there was a 6% policy fee charge deducted($3.18) a face amount charge .0803/1000(.0803* 250=20) then an administrative cost of $25. Then a net assett risk charge of .025%) And a Surrender charge of 100% for 5 years 95% for next 3 then 90for next 2. So. my question is if his payments are only 53 where are they getting the rest of the money for the policy. And if the COI goes up where do they get the money from then. If he does somehow get cash value(or policy value) does it mean he cant get any for first 5 years and if he terminates all the money is gone. And how much is going towards his”investments” His wife has exact same policy except she has option 2(benefit +policy value) she is 7 year younger and pay $7 more

    Someone please explain to me how this makes sense for the client.?

  86. Richard, CLU, ChFC, CFP says

    The COI numbers that you are looking at are the Maximum Rates, per month, per $1,000 of insurance in force. When the COI goes up that addtional expense is taken from the account value. This is the “drain and strain” that UL and VUL place upon the account (cash) values of the policy. As a rule, if the contract has not been seriously overfunded, or has not received a terrific ROR (rate of return), or both, then the contract will eventually be drained of all of the clients cash and it will implode. Great deal huh?…
    If your friend is looking at funding a $250,000 UL policy with $53 a month, he will have a real piece of garbage on his hands. He’d probably (duh) be much better off with a Level Term, SGUL or Participating Whole Life policy.

  87. David says

    Having been in insurance industry for past 20yrs, conceptually VUL designed properly will work to supplement one’s retirement tax-free. Forget the damn fees, if set up properly as a min non-MEC (meaning the least amt COI is being charged) the client is automatically max funding cash value….. That’s the key – case design. Insurance agents and the majority will still set this up in the traditional sense – to have the prem purchase the most coverage possible….screwing the client because they want to get paid commissions based on the higher amt of coverage purchased.

    And let’s remember, it’s not for everyone. It works best for an individual who has already maxed their pre-tax/qualified plans, has the long-term prospective (10+ yrs) to let it compound and primarily isn’t eligible for Roth IRA…. for that individual it’s a good alternative solution (what are they going to put that prem commitment of $20k/yr for next 20yrs into a muni-bond making them 4%?). No income limitations to use VUL, no contribution limitations, no pre-59 1/2 WD penalty & no 70 1/2 RMD requirement….

    Everyone’s going to find adv’s & disadv’s to everything – that’s why you get multiple opinions, but VUL’s shouldn’t be bashed if it’s for the right person….. and you have the right advisor managing it (because you have the flexibility to correct it in the future if things get off track)….. Remember, you use LI as a solution because of the way it’s not taxed, so case design is vital, then just have it managed….FLEXIBILITY people!!

  88. william says

    I wish I had had an advisor like you. What would be the maximum one could contribute annually to the sub accounts of a VUL to maintain the min non mec status for a 250,000 policy? For example. Ball park.

  89. David says

    William – It’s going to be based on diff ages + when I work w/ advisors on this concept w/ their clients, we kind of work in reverse… meaning we work on getting an idea of the prem the client is willing to commit to and then show them the min non-MEC amt of insurance it purchases. This coverage amt again is incidental here because we focus on what the tax-free amt coming out the back end is….. if client wants to see more, there are two variables involved – premium & rate of return (ROR)….. so put more into it and you’ll see more come out tax-free or be more aggressive w/ sub-acct variable investments for better ROR.

    In your example to set it up w/ $250k in coverage, a 45 yr old could put in $11k/yr…. an older individual would have to put in more (because insurance is more costly as you get older)… 55yr old would have to put in $17k/yr for same initial coverage…..

    But again it’s a mute point because once the client understand the concept of using LI to take $$$ out tax-free, we start w/ client’s prem commitment first & show them what it purchases second…. because the client really wants to see what $$$ is coming out tax-free, then they’ll adjust that prem commitment…. And remember with VUL prem is flexible, so good case desgn is important – you could always put less into the contract (but prem + performance has to be good enough to keep the LI
    inforce), but it would have to be built from the beginning case design to accept more $$$/prem… the contract needs to remain a Non-MEC to keep the tax adv’s…. if it becomes a MEC (Modified Endowment Contract), you lose the tax adv’s of LI and it acts just like an annuity (up to cost basis is tax-free, above that distributions/grwth is taxable)….

  90. William says

    Put another way. Say a mid to late 30 something in good health says to an advisor that he can afford a $500 a month premium. What would be the minimum face value /cost of insurance one could purchase to have the highest percentage of the premium be invested in the sub accounts. Again a ballpark. Also, the client approaches the advisor expressing a need to increase retirement savings, not increase life insurance.

  91. David says

    Let me say this, many financial advisors (unless insurance savy) don’t know how to use VUL to this advantage – they’re not insurance experts, it’s not what they do day-to-day…. they tend to focus on investments. And if not careful w/ an insurance agent, they’ll sell it traditionally meaning for that prem to purchase the most LI it can (still will build cash value, just not max fund cash value bucket) because they get paid more when more LI is purchased…. The other thing to consider – is the prem putting in worth the tax-free amt coming out on the back end? Only the client can decide that….

    Let’s say 40yr old male (@ Stand) puts in $500/mnth to age 65….. it’ll purchase $160k of coverage initially… now set up to max the tax-free distributions, the DB option should be set up as Return-of Acct Value (ROA) to last prem pymt (meaning an increasing face amt until last contribution and then level – so coverage will be initial face amt + cash value). Let’s also assume 8% ROR. Now, for example, client takes distributions out from 65 to 85….. approx $30,500/yr tax free…. and when I look at age 85 and see how this solution has done, you can say individual put in total cost basis of $150k ($6k/yr x 25yrs) and took out approx $600k out tax-free ($30,500 x 20yrs)…. Now the key, it has to end as a death benefit/LI or else everything is taxable in one given yr if it lapses…. I like to have at least $100k in LI when distributions stop….. here you’re left w/ only $57k in coverage @ 85. So I would say more of a contribution commitment should be made…. Believe it or not, easier to fund it at h higher level than to say I’ll return 10% vs 8%…..

  92. C.L. says

    I’m a recent college graduate– 22 yrs, female, started a small business on the side, now thinking about seeking employment, and I plan to go to grad school in the next 2-4 years. My parents have already bought life insurance for me a long time ago when I was a child– it should work out in a way that I won’t have to make any payments when I grow old. I was wondering then, if VUL is right for me at this time or when I should invest in a VUL, if i should. I don’t have a ROTH IRA or any other investment vehicles. Also, don’t add in the factor that I will need money for grad school, I will have the funds. (Maybe David, you could answer this, since you are an experienced in the insurance industry and have been detailed in your answers. =D)

    I have done my share of research but have yet to arrive at a conclusion on whether I should get a VUL. [My best friend in college, same age and gender, just recently converted her ROTH that she just opened a few months ago into a VUL and said its a better option. One of the difference in our background is that she will not be working and is going to be in grad school the next five years.] If I should not invest in a VUL, what should I invest in considering my background? I’ll appreciate all responses from people who are truly trying to help me and others out. THANKS!

  93. william says

    If you don’t have children you don’t need more life insurance. I say invest in a roth IRA in no load low cost mutual funds. You could set it up yourself. Just do a little research. If you have more to invest after you have maxed out the ira you can set up a retirement account through your business and save additional thousands a year. The nice thing about the roth is that you can withdraw from the principal amount tax and penalty free after 5 years. I say start reading and educating yourself now on personal finance and the pros and cons of various types of insurance and investment vehicles before you jump in to anything. Start with ” personal finance for dummies”. Good luck.

  94. Me says

    I have been offered a VUL by Metlife for $1.5 Million permanent life insurance for $19K per year. But the ‘good’ thing about it is that I pay the $19K per year for only 7 years. After that I do ‘not’ have to pay anything into the VUL, but I am covered until I am 125 years for $1.5Million [**which basically means my loved once will surely see the $1.5Million some day in the next 50 or so years (I am 35) **.] At the end of the 7 year ‘payment’ period and after the charges and cost, I will be left with a cash value of about $90K based on the 6% yearly return, that will continue to grow in the mutual funds sub-accounts. So basically will ‘lose’ total of $43K [7 times 19K – 90K left] of my investment from year 1 to 7 to fees and (build in) premiums, etc, but this has basically brought me 1$.5Million (plus addition cash value of $90K which will grow with market) of the life insurance for 125 years with nothing else to pay into VUL ‘ever’. I can borrow against the $90K anytime or let it grow at 6 to 9 % per year in that separate mutual fund account. I am already maxing out on 401K and IRA and rest I am paying IRS about 28% tax. Really looks too good to be true and seems like it is good in my situation. What else to ask Metlife before I buy this.

  95. Harry Sit says

    Me – Your proposed use of VUL is exactly the opposite of how it should be used. If a VUL is to be used at all, it should be for minimum life insurance and maximum funding allowed by law. Read the comments under this post.

  96. Me says


    Appreciate your input.

    I was illustrating how this can benefit me (or think how this can benefit me) by showing the losses upfront and then taking advantage of the tax benefit after that. Let ,me take care of my ‘obligations’ first and then I will worry about the benefits. Let us say – it is like trying the eat a cake with the crust/bottom portion first and finally reaching the top creamy layer.
    I was impressed with my numbers, because it:
    1. I never have to pay for any life insurance for life after I complete these 7 years. Keyword – “never”.
    2. My loved ones are guaranteed a minimum of $1.5 Million [plus some cash – if I do not use it up everything] whenever the inevitable happens (say within next 50 to 60 years when I will be 85 to 95 years – hopefully not sooner.) – Keyword – “guaranteed”.
    3. Now the most important point. I can invest as much or as little as possible into the sub accounts tax free up to 30K to 72K a year any year within the next 7 years OR until I am 65 years, depending on my income at that time. Keyword – “tax free investment”
    4. No part of the investment ‘above’/after the $133K (7 times 19K) will go towards my life insurance premiums after 7 years, because the it was paid off in the first 7 years, and the rest investment goes straight to my sub account tax fee. It is with no load and less than 1% expense. The pain or loss is actually $43K [7 times 19K – 90K left in cash.] Keyword – “7 years of pain then lot of gain”
    5. When I withdraw I pay at the tax rate at the applicable bracket when I retire which will be minimum (plan to withdraws only the amount you need, after using say 401k or IRA or social security [please feel free to ignore the last one, but I think I may get at least some after 40 years]) or at no tax if I take a loan against my account which according to Metlife is 0% interest. Keyword – “0% interest to myself”
    So what I intended to show in my first post was the minimum amount that I “need” to part with or give away, but once I do that I will have a excellent tax free sub-accounts where I can invest as much as I can. Thanks…

  97. Zak says


    I tend to agree with TFB’s comment, but I’ll give a little bit more feedback as to why. I’m not saying this agent or advisor has necessarily proposed a bad solution. Often times things get lost in translation between an advisors recommendation and a prospects retranslation. But the important thing is that YOU understand all the aspects of what you are getting into, so here is my feedback:

    Issue 1 – The Guarantee

    You have used the word “guarantee” a number of times. Typically the death benefit for a VUL is not guaranteed past about year 20. The assumption that the death benefit will be there at age X is based on the projected market returns on your subaccounts. You had mentioned a 6% return, which I personally think is pretty conservative and a fairly safe assumption. BUT, what if over an extended time horizon the market (or your specific sub-accounts) do not earn 6% annually? Are you comfortable having that policy potentially lapse? If you are truly looking for a guaranteed death benefit for legacy and estate planning purposes, I would go with some type of Whole Life or Universal Life policy that has an extended no-lapse provision…. one that you could extend up until whatever age you would consider your absolute maximum life expectancy.

    On a side note, I think your 125 number may be off as well. To my knowledge, when the CSO tables were redrawn in 2001, the maximum endowment age was set to 121, but I could be wrong on that.

    Issue 2 – The Investment

    You mentioned being able to invest for the next 7 years or until 65. Neither of these numbers has any relevance; they are simply the numbers that the agent chose to use. You can invest into the policy whenever you want and at whatever age as long as you do not fund it too much annually (this will create something called a modified endowment contract and the policy will lose its tax benefits).

    You also mentioned a “tax free” investment. While the investment benefits of a permanent life insurance policy do lie in the tax ramifications, the benefits are tax deferral, tax free policy loans (income), and tax free death benefit. They are NOT tax free investments. Because the money is coming from your bank account, you will have already been taxed on the money, just as you would have been investing into any other non-tax-deductible investment vehicle.

    Issue 3 – The Growth

    No part of the investment after year 7 will go to your insurance costs? No way. That is absolutely false. What he is probably showing you is that the “expected” growth may be far more annually than your insurance costs. That would be a fair statement. But insurance costs come out each and every year. That is the very reason WHY permanent insurance even has cash value…. so that insurance costs can drip out of it every year until you die. Eventually, this morphed into the investment reasons we see today.

    You were correct in that you will not see a premium load. That usually only occurs on new premiums into the policy, often somewhere in the realm of 5-6%. But that is only on money as it enters the contract.

    Issue 4 – The Income & Withdrawals

    Most of what you said about the income stage is true, except for one thing. Your loans are tax free, but your withdrawals can also be tax free, to a certain extent. You are able to withdraw up to your cost basis without taking taxes. You also may not have to take any withdrawals. If that 0% net interest rate is guaranteed, why not just take loans?


    I would really clarify in your mind why you are doing this. If the primary purpose is to acquire an investment vehicle with tax efficiencies and to leave some form of death benefit to your beneficiaries, a VUL can be a good vehicle. But you need to make sure you are overfunding it (and should probably do so for more than 7 years). If one of your goals IS leaving a sizable death benefit, you don’t necessarily need to fund it to the MEC limits, but you should at least overfund it. My guess is that your agent is already recommending this. I would just do it for longer than 7 years.

    If you are super-set on that $1.5 million death benefit, I wouldn’t do a VUL, because you can’t be sure its going to be $1.5 million, especially if you are drawing income.

    Hopefully that clarified some things. I know my comments tend to run long…

  98. Harry Sit says

    Zak – I thought @Me was describing a paid-up life insurance inside a VUL. That’s why he/she said it would be 7 years and done with the insurance part. I’ve never seen that kind of arrangement.

  99. Me says

    Zak and TFB, you are all amazing, giving Me your valuable time.

    I would restate what I said.

    Issue 1 – The Guarantee, the $1.5 Million is guaranteed from day 1 until I reach the age of 125 [or until death.] Nothing happens to that guarantee at the end of the 7 years. At the end of 7 years – the only thing that happens is that – premium is paid off – and I just do not have to invest anything ‘extra’ into the account. But if I chose to (and I will – that was the whole point of going this route) I can invest into the account with no part going towards premiums. Between now and my (Posthumous) 125th birthday, whenever I die the life insurance benefits to my family is $1.5 Million. If the $90K cash remains, it will be $1.590 Million. If it grows at 6% per year it will be $1.590 + what even the tax free growth is. If I use up the $90K, the guaranteed benefit is $1.5 Million. If the market collapses and the $90K becomes 0K, the guaranteed benefit is $1.5 Million In other words $1.5 Million is guaranteed, unless I take a loan against the death benefit and not just the cash value of $90K that is in my sub account.

    Issue 2 – The Investment, You are right the 7 years or up to 65 years ahs no relevance, but the point was – I can invest anytime I have income to invest and this is what I find attractive also. Regarding the tax free investment, I though just like an IRA account the $5000 come out of my bank account – but my 1040 reduces the taxes on these. I was hoping something like this is also allowed for the VUL. If this is not the case – it is a great eye-opener for me that I need to check – thanks for this.

    Issue 3 – The Growth – No part of the investment after year 7 will go to your insurance costs? This is true – the insurance does not send me an invoice after 7 years to continue the coverage, because the premium has been paid off in the first 7 years. If I β€˜plunder’ the $90K cash by taking loan, the coverage is still effective, because the premium has been paid of in the first 7 years and I get no invoice. If I invest more, the new investment will directly flow into the sub accounts [it has the expense ratio of 1% but no load.)

    Issue 4 – The Income & Withdrawals. Agree.

    I will draw the income on the $90K, plus its growth, plus and additonal investment that I add between now and 65 years and its growth, but not on the death benefit of $1.5 Million, so the death benefit is going to stay from what I heard from the agent.

    Sounds too good to be true – but after your feedback, need more of your help as to which ones do I need to get clarified.


  100. YW says

    Hi, My friend’s friend introduced VUL to me. When I saw your post, I am going to give up the VUL plan. Also they draw me into their teams to sale VUL. Heeee, strange to me. I intended them to give me some good investment help, but they don’t, just for sale VUL. Good thing is I have read this post. no more loss. Thank you.

  101. NP says

    I have an adviser trying to sell me a VUL and, given the horror stories I’ve seen online, I’m a bit nervous. However, the plan he is pushing seems pretty reasonable and it seems as if he’s being upfront about the fees. Here’s the basics for the 250K (minimum) policy:

    *Minimum investment per year is $1500, max is $5467.
    *Fees get more than reimbursed via loyalty credits within 10-14 years. This includes cost of insurance component and all other account fees (not the management fees for the funds themselves)
    *Investment management fee is the same ~1% fee (depending on fund) I would pay if investing in their mutual funds separately.

    If the adviser is not blatantly lying or somehow misinformed, this seems like a relatively decent plan.

    Does anyone have any input to provide/additional questions I should ask? I can send the entire plan document via PDF if anyone is curious.


  102. Zak says


    A few hugely relevant issues that you left out are your age, marital status, and tax bracket. Judging from the difference between the no-lapse and guideline/MEC premium, I’m going to guess you are in your upper 20’s to early 30’s.

    First off, I have never heard of a “loyalty credit” in a VUL. Auto insurance, yes. Permanent life, no. To me, this sounds like a positive way of couching surrender charges, but I could be totally wrong. Just a guess… Either way, you shouldn’t be overly concerned with the first 10-14 years. A VUL is a 20 year minimum investment. If you have substantial liquidity needs before that, it’s probably not the best investment.

    As I stated a couple comments ago, don’t get tied up on the investment fees. Look at historical 3, 5, and 10 year performance figures (which are reported NET of fees). If the funds have competed respectably against their various indexes (and keep in mind, only large cap growth can be compared with the S&P 500), then you can probably build a pretty competent portfolio from the options.

    The main goal of a VUL from an investment standpoint is simple: gain tax advantages that outweigh the insurance costs (over the long run, NOT the first 10 years). For the tax advantages to matter to you, you really need to be in a high tax bracket. If you are 33 or 35%, great. 25 or 28%, still probably good. Below 25%, probably not worth it. The other thing to look at is whether or not you are also utilizing other available tax vehicles. Are you making a substantial contributions to your Traditional or Roth 401K or IRA. If you can make a Roth IRA contribution, you are really getting the same tax advantages as a VUL, just no insurance costs. The only benefits to a VUL over a Roth are (1) a permanent insurance benefit if that matters to you and (2) pre 59 1/2 liquidity if you make enough money to retire early.

    Basically, you are probably a good candidate for a VUL if:
    – You are in a high tax bracket
    – You are maximizing any available Roth vehicles (401K or IRA)
    – You have fully built out your emergency reserves
    – You are over-funding the policy (so closer to the maximum limit)
    – It also helps if you actually need the insurance

    Out of curiosity, who is your advisor with? Does he work for company that specializes primarily in life insurance (like Northwestern Mutual) or your typical money management (like Charles Schwab)? That can give you a hint as to whether or not the advisor has a jaded opinion. Not that you shouldn’t buy life insurance from a life insurance agent…. it just might tell you what “product” you would expect him to recommend.

  103. NP says

    Hi Zak,

    Thanks for the quick reply, Sorry I was a bit half-assed in my question–I wasn’t really sure if people were watching this thread. I’m 26, married, and in the 25% bracket. Will probably stay in that bracket since we’re more inclined to work less rather than take home much 100-125K.

    As for the loyalty credit, I’m looking at the pages with the details of charges/credits and it’s showing the loyalty credit starting at year 9. Over the next several years it eventually pays back all the premium, admin, and COI charges, plus $13K (year 40). So, a little different than what I said at first but the charges are still getting more than paid back (not taking into account inflation).

    We wouldn’t plan on taking any money out of this for at least 18 years (assuming we use some of it to help our newborn w/ college expenses).

    We are already maxing out our Roths. However, we are not currently contributing above 401k match. What I’m trying to decide is if our extra investment money should go mostly to 401Ks or VUL. Your reply brings up an interesting point–I need to see if my company offers a Roth 401K. I had just assumed it was traditional only.

    As far as your other questions:
    -Yes, we have emergency reserves
    -Yes, we would plan on overfunding
    -Yes, early retirement is a possibility and we would be interested in having a more liquid account we can dip into earlier
    -Yes, we need the insurance, but probably not more than the next 10-20 years
    -The advisor is with AXA (life insurance and money management but seems like most of the money is in insurance)

  104. Zak says

    Hi NP,

    It sounds like you could be a good candidate. AXA is in my opinion typically pretty fair in their recommendations (although they do usually charge a flat fee for plan development).

    Definitely keep maxing out those Roths and meeting the 401k match. As far as funding past the match vs. funding a VUL, that depends on a couple of things. One, does the 401K have a Roth component (which I believe you were going to look into)? If there is no Roth component, what are your expectations for taxes in the future? You are only 26 years old. My guess is that taxes will be significantly higher in 30 years, which could make the VUL a better option than the 401K even with the insurance. And, the VUL is going to be the only option out of those options that will give you pre 59 1/2 no-penalty access.

    Just try to look at things holistically. πŸ™‚

  105. Me says

    I have to clarify my posting I made on August 29, 2010 and August 30, 2010. I did not buy the VUL yet, but got lot of clarifications and facts when I went back to the agents:

    >>Issue 1 – The Guarantee, the $1.5 Million is guaranteed from day 1 until I reach the age of 125 [or until death.] Nothing happens to that guarantee at the end of the 7 years. At the end of 7 years – the only thing that happens is that – premium is paid off – and I just do not have to invest anything β€˜extra’ into the account.

    The above that I claimed is not true, the premium comes out of the account every year until age 125. The Premium is about $500 the first year and goes to $4,000 per year when I am 65 and then goes to $10,000 and more per year at later stages.

    >> Issue 3 – The Growth – No part of the investment after year 7 will go to your insurance costs?

    False, False, False – the premium comes out from my cash value, if there is no cash value it comes out of my new investments. Or I may get an invoice from the insurance company asking me to pay the premium to avoid cancellation of the policy.

    My apology for claiming big things without understanding the whole policy. But I am still planning to as it does benefit me based on my circumstances.


  106. Zak says

    Me, both of those statements are right on, although I am willing to bet you meant 121 instead of 125, but at that age it doesn’t really matter πŸ™‚ Sounds like you have a pretty firm grasp of the vehicle at this point. They are pretty complex, so congrats on putting in the leg work.

    NP, no problem. Good luck!

  107. RWW, CLU, ChFC, CFP says

    All this discussion of VUL is silly. VUL is a terrible product if you are looking for permanent life insurance. Because of the increasing internal costs, this contract will eat you alive in your later years, wiping out the gains from the earlier years. The best bet is an over-funded whole life policy from a good mutual (there are essentially 4…) company. Find the company that has a history of paying the highest dividends and overfund it up to (just short of) the MEC limits.
    Northwestern Mutual just declared their 2011 dividend to be 6%. New York Life is 6%, Mass Mutual is somewhere in the 6% range and Guardian Life is at 7%.

    The only decent UL product is a Secondary Guarantee product and should be considered to basically be “Permanent Term”. Stay away from companies that only sell UL products, like AXA and Ameriprise. They’ll try to sell you on VUL and Ul because that’s all that they have to offer!

  108. Zak says

    You know what RWW? You make yourself sound really unknowledgeable by slanting your argument so much against one product. I would expect a more unbiased argument with all of your designations. My guess is, even with your ChFC, that you still aren’t securities licensed, which is one of the main reasons you have been brainwashed into hating securities based products. Of course I could be way off; it’s just a guess.

    Whole Life is a fantastic product if funded as you describe and from a good mutual company. That doesn’t make it better or worse than a VUL; it just makes it better for the right person. Now, we need to get something straight on “declared dividend rates”. A dividend is simply a return of overcharged premium to the customer and reflects a number of components, including an insurance company’s efficiency (basically selling more big policies than small ones), market earnings (on their bond portfolios), and mortality experience (how many of their customers dies that year and had to be paid out).

    So, aside from those 3 items, what is one way to get a higher dividend? Charge more than your competitors for the insurance! That way, you can easily return more of the premium! The appropriate way to analyze a whole life policy has nothing to do with the declared dividend, it is by looking at the policy’s guaranteed and current internal rates of return (IRR) on cash value. Interestingly enough, I have a report comparing these across the industry and I can tell you Guardian ranks 3rd, Mass Mutual 4th, Northwestern Mutual 6th, and New York Life 7th for current cash values. The numbers switch up for guaranteed cash values a bit, but they still all range from 3rd to 7th. And 1st and 2nd place are other mutual companies with lower declared dividends but higher internal rates of return. Weird, huh?

    One other thing to consider. You should read FINRA regulatory notice 10-06 about the use of social media sites (including blogs) by those holding a securities license (which again, maybe you don’t). Granted you didn’t use your name and aren’t really “holding yourself out for business”, but don’t jump on this forum touting your designations. Let your knowledge speak for itself, which it doesn’t.

  109. RWW, CLU, ChFC, CFP says

    Zak, I have been licensed to sell securities since 1983. Possibly since before you were born. I sold VUL back in the 1980’s and have seen how ugly and totally devastating that it can be for a client. I vowed back then never to sell it again. How can you put your clients at risk by selling them a product that you know has an overwhelming possibility to self-destruct, taking their insurance and cash with it? Ul is a terrinble permanent product and by adding the variable aspect to it, you add further danger for your client. Our job should be to reduce risk for our clients, not increase it exponentially.

    VUL is garbage as a permanent product and it’s ridiculous to even discuss it further. I’m sure that you own some of it, I hope a lot of it! Good luck down the road with that Zak…

    FYI, I lead my agency in securities sales by about triple over the next closest rep in the agency this year.

    As far as an overcharged goes, ALL companies overcharge for their insurance. They have to because they have to be profitable! In the event of a disaster or adverse event like Aids or 9-11, the insurance companies have to have adequate reserves and surplus in order to pay claims that might be much higher than were originally actuarilly anticipated. Did someone tell you that your company doesn’t overcharge? If they did, they lied to you. All companies have toovercharge because they have to be profitable, otherwise they take the chance of not being able to pay claims, which is what they are in business to do.

    Mutual companies pay a dividend. This dividend is a distribution of not only the overcharge that was not needed, but also of their other profits. Mutual companies return their profits to their permanent policyholders essentially providing the insurance at “cost”. Stock companies pay their profits to their stockholders. Which deal is better for the client???

    You may be interested to know what the four major factors are that impact a company’s performance:
    1. Mortality and morbidity
    2. General expenses
    3. Persistency
    4. Investment results

    These four factors account for the majority of a life insurer’s profitability. Once these profits are made, do you want those millions or billions in profits to be distributed to stockholders or to your clients?

    As far as your internal rates of return go, you CANNOT look at guaranteed and current. There have been “hot illustrators” for decades. This is an old trick by insurance companies whereas they illustrate lower anticipated costs by crunching the numbers and assuming lower mortality, etc. You need to look at actual policy histories and compare products from varying companies. History will not predict the future but it should give you a good idea of who has the best product. All good mutuals underwrite tough and have relatively the same claim experience. The dividend makes the difference and is one way to gauge how well a company is doing and how well your client might do in one of their products.

    As far as my designations are concerned, I am not holding myself out for business so what is your point? I added the designations to my name so that people reading this would know that my writings are not an uneducated opinion. I have almost 30 years in this business and have the 3 major designations which each required exhaustive education and tesing to achieve. Do you have even one designation, or are we just getting your opinion???

  110. David says

    RWW & Zak,

    I’ve made some posts earlier in this thread….. You’re always going to have people who believe “for or against” diff products. It’s my belief that all products have advantages & disadvantages – like I mentioned long before, I think it’s a matter of “choice.” As a wholesaler, I give the financial advisors I work with the opportunity to provide their clients with CHOICE.

    Based on what a client is looking to accomplish, one should be able to provide the right insurance solutuion – keep in mind it could be a combination of product. Personally, I think that whole life is expensive and is for the clients that are willing to pay for those “guarantees.” A big issue is proper case design – a properly designed VUL can reflect CV grwth over the long haul of 3x what the whole life contract reflects. Yeah, the market fluctuates but dividends are not guaranteed either….. and remember VUL is a flexible prem paying contract whereas whole life contractually has to have prem’s paid to age 95/98/100 based on insurer (how do you want those prem’s paid in your 80’s & 90’s?).

    Yes I’ve seen many VUL’s that have issues, but it came down to the product not being managed…. and I’ve seen plenty of whole life contracts w/ huge loans on them (based on the vanishing prem concept their still being sold on after 25+yrs)….. so guess what, under those scenarios no one is taking out $$$ in the tax advantaged/tax-free manner they were set up to…… CHOICE

  111. RWW, CLU, ChFC, CFP says

    David, CHOICE is fine, however it should be the job of the professional (Rep) to make solid recommendations for the client. The best planners that I know help their clients to reduce risk and transfer risk to the insurance companies. I have never seen a VUL that can outperform a good dividend paying whole life policy, provided that the return assumptions are realistic. There are still agents out there showing 10% and 12% returns for their VUL. I believe that practice to be very misleading at best and almost criminally deceptive at worst.

    You questioned how a whole life policy could be paid when the client is in his/her 80’s and 90’s. Perhaps you are not familiar with mutual companies products… Because a dividend is being paid, the dividend should be more than adequate to pay the premium. By this point, after how many years, the dividend may be 5 or 10 times as much as the premium. A good whole life policy should be able to be self-sustaining after about a dozen years.

    Many say that the dividend is not guaranteed. This is true however the top 4 mutual have paid their dividends every year, year in and year out, since the late 1800’s. With the hundreds of billions that they have to invest, it would be almost impossible for them to make a profit and thus pay dividends. I wish that the stock market was as dependable.

    So now that we know that we can pay the whole life premium throughout our life, let’s look at the cost of the VUL and UL policies. You asked how we could pay premiums when the clients are in their 80’s or 90’s? I have run a UL illustration for a male (preferred non-smoker) age 35 for a $1 million policy. The first year internal costs are $1,291. By age 80 the same costs have risen to $19,471 a year and by age 90 the costs have gone up to $29,520 a year.

    Please note that these are based on current and not guaranteed charges. If you look at the guaranteed charges the costs double and the policy self-destructs well before these ages. Whole life is a little pricier, but you get what you pay for – quality and solid guarantees. Do our clients deserve anything less?

  112. David says

    RWW – I’ve been in the industry for 20yrs and am well aware of mutual co’s vs stock co’s…. Yes the market fluctuates, but guess what dividend rates fluctuate also (especially over the past 15yrs & after 9-11). The stmt you made about dividends I run into everyday in the field talking with advisors and their clients – Yes Metlife, Hancock, Guardian, etc have never missed a dividend pymt, but can you tell me their dividend in 1985 was the same as it was in 2005 – NO.

    So the issue is will the dividend cover the prem? Yes probably at some point in the future, when who knows – one looks at the illus based on “current dividend assumptions” just like the VUL illus is based on current charges & ROR assumptions…. I used to work for one of the co’s I mentioned & know how whole life is (& has been) sold. Unfortunately, I’ve reviewed hundreds of whole life policies where clients were led to believe the dividend would cover prem in yr 18…. and since dividend rates have declined since the policy inception, a new inforce reflects that day has been pushed back to yr 25+….

    To say a single product fits all is too narrow-minded…… not to say I’d like to hear those advisors answer the compensation question of why only present whole life when there are alternatives….. Yes whole life fits, but so does VUL & UL (guaranteed UL and traditional UL)

  113. RWW, CLU, ChFC, CFP says

    Pushed back to year 25??? What company are you dealing with? It might be that you are dealing with stock companies. Please note that two of the dividend paying companies that you mentioned are stock companies (Met and Hancock). I would never buy permanent insurance from a stock company. The master that they serve is not the policyholder, it is the stockholder and Quarterly Earnings Reports to Wall Street. Their WL products cannot compete with those of a good mutual.

    I realize that you wholesale UL and VUL. No offense, but I wouldn’t sell those to my worst enemy. They are dangerous and should be heavily regulated if not outlawed. I have never met a person that had one of those products that ever had been told that the product was engineered with increasing internal mortality charges. Charges that eventually skyrocket on the unsuspecting owner of the contract. Clients are always amazed to find this out and invariably ask how it is legal to sell something this bad. If it’s such a great product why do reps never explain how the contract really works?

    Whole Life and Secondary Guarantee UL (basically permanent term) are the only permanent life insurance products that I will sell. Period.

  114. Anonymous CFP says

    The problem here, in this debate, is that we are generalizing the pro’s and cons of a certain vehicle vs. other vehicles/strategies, without really knowing what’s on the playing field. Any good CFP knows that different vehicles perform better or are better suited based on what your trying to do and what’s available to you. You may need to use certain vehicles based on numerous different problems you’re trying to solve.

    This argument is really out of place and will ultimately give the uninformed public the wrong idea for either argument. There’s more to financial planning than “this product sucks”, or “you’re better off just doing etc. etc.” It’s the job of the financial planner to dig into the details and find out what picture needs to be painted. How much capital do we have to work with, what’s the life insurance need, time horizon, current tax bracket, projected tax bracket, estate tax issues, is the insurance being held in a trust or qualified, and on and on. VUL’s absolutely have their place, but they are definitely complicated and need to be monitored and manipulated to serve the purpose they are being used for. Comparisons are not always term+ side fund vs. VUL. Those also need to be looked at based on the whole picture. If we want to argue the reasons for and against, we can be here and run around in circles. Every case is different. Find a good experienced Financial Advisor or Financial Planner that you trust and let them do their job for you. I know that my clients who trust me and work with me because of my experience, end up getting the most out of me, because I can focus on what I get paid to do instead of having them confused because they read a bunch of information thrown at the fan, like in here.

    And after all is said and done, experts will agree and disagree & argue all over again. It’s like medicine and cancer treatments. Every expert has their own preferences based on the diagnosis, and their patients end up working with their Dr. because they trust that the Dr. will try his/her best, not because the cure is guaranteed. Find someone you trust and don’t always believe everything you read on the internet.

  115. RWW, CLU, ChFC, CFP says


    I guess that you think that we are not doing the full planning for our clients??? That was not the discussion nor the point of this thread. This thread is about VUL.

    My stance is that it is a dangerous product sold to an underinformed public, rarely monitored by people that sell this stuff who often times never see their clients again. They may leave the business, retire or move away. We all know that about 10% of recruits amke it in our business, so who is servicing and monitoring all of the business that was sold by those agents who are now gone?

    None of this presents a pretty picture with something as volatile and dangerous as VUL. There are just much better options out there. Why would we put our clients into a risky product? Isn’t it our job to reduce their risk, not increase it. Don’t most people have the bulk of their money (401(k)’, SEP, IRA’s, Roth’s, etc) in the market? Does it make sense to put ALL of it in and just say “Damn the torpedoes”? Where’s the balance and asset allocation in that?

  116. Zak says

    RWW, I agree with your asset allocation comment. Whole Life can be a great substitute for the bond portion of a portfolio. Particularly for someone who would like to use municipal bonds but is subject to AMT.

    But what about the 45 year old surgeon who makes $450,000 and maxes out his 401(k) at $16,500 and cannot participate in a Roth IRA? Would you suggest he put the remaining surplus appropriated for retirement, say $60,000 per year, into a Whole Life policy? That is probably not an appropriate asset allocation mix for his age. Plus, what about using an IUL where there is market participation but also a floor and ceiling to the returns. I think the standard right now in the industry is a 0-2% floor and a 10-14% ceiling. Most of those products have yielded 7.5-8% 20 year IRR’s, even with the last 2 market dips, which certainly beats even the most overfunded whole life product. As Anonymous CFP was saying (although I agree that his criticism was a bit harsh…. this is a comment thread on VUL’s after all) there are situations in which different strategies make sense and others where they do not.

    By the way, I totally agree with your statement about the main threat inherent in VUL’s being improper servicing by the agent or advisor (as well as inappropriate selling tactics). That’s just always going to be one of the flaws of the industry and the reason advisors get such a bad rap. Doesn’t change my opinion that they can be a good product. Yes, VUL’s were terrible in the 1980’s, but they were also a pretty new product. When you take a poorly designed (new) product along with 1980’s era interest rate assumptions and typically strategies that didn’t involve overfunding, of course you are going to have policies self-destructing all over the place. Also, I have the same designations that you do. I just don’t like broadcasting it. Everyone should be free to comment, but I think the facts presented should speak for themselves, rather than designations, sales, or experience. This is a personal finance blog, not a competitive forum. That type of stuff just dilutes and changes the tone of the discussion and the typical person reading this type of a blog just doesn’t care.

  117. RWW, CLU, ChFC, CFP says

    Zak, I respect your opinion as an educated professional. As I mentioned, I have included my designations merely because I want readers to know that I have the education to speak on these subjects and that I am not a first year agent spewing back what his manager told him…
    One thing that you might find interesting is that we can take an overfunded WL contract and outperform many very inefficient assets such as 401(k)s. Depending on the assumptions of the 401(k) returns, you can double the client’s spendable income in retirement. Our new software does an incredible job of showing how great the WL contract can be. I was amazed when I first saw it.

    Give the WL a try, it’s pretty awesome and reduces our clients risk.


  118. Anonymous CFP says

    I agree with you 100% that if these are sold by new recruits or even experienced professionals who do not monitor them or look at the entire picture, they can be very dangerous. My comment was not directed at you.

    I also agree that that a well structured WL policy can really do wonders for the bond portion of the portfolio.

  119. David says

    The Finance Buff said:

    “Brian – I’m sorry to see the same happening to you. You basically have the same three choices as I outlined in the post: (1) Keep paying into the policies and get plucked by high fees (not good); or (2) Cancel the policies now and pay the surrender charge (not good); or (3) Stop paying premiums and let the policies wind down by themselves (not good). There is no good option. Depending on how far out the surrender charge period lasts, one option might be slightly better than the other two.”

    To the finance buff and to all other people having trouble with their VULs–I’m very sorry that a financial “professional” did not help you and instead (apparently) used a product in lieu of an actual solution . I’ve no idea of the date of this posting, but if anyone else finds this post hopefully this helps. There are some very good points in the comments section and some not so good points.

    First, to the Finance Buff: This is the problem I have with some self-proclaimed experts. Your analysis of VULs is just not complete, and somewhat misleading. I’m not a huge fan of these policies, and there are many instances when they’re not appropriate. Still, I have seen some policies which provide really interesting ways to minimize fees and other expenses. Mainly, this comes from Ameritas but they haven’t cornered the market on low-cost VULs. Secondly, as someone pointed out, it really depends on how a person uses a VUL. If an agent minimizes the death benefit and maximizes the cash value (a particular way of funding the product, also called “overfunding”), they will pay premiums to the policy in excess of the “target premium”. This really minimizes the costs associated with the death benefit (annual renewable term) portion of the policy. It doesn’t do much for the mutual funds in the policy, but there might not be anything that can be done there. Some policies just aren’t that great, and I’d say most of them do carry significant costs for the sub-accounts.

    Your 3 solutions don’t really help anyone. In fact, one of your solutions involving cashing out the policy might actually put them in a WORSE position by creating a huge tax liability on all of the gains in the policy. After, taking a hit on their gains from a surrender penalty, that’s some salt in the wound.

    There is a solution which you are either not aware of or neglected to mention. Clients may perform a 1035 exchange into an annuity, either fixed or variable (probably fixed, if they didn’t like the variable life insurance product). They may also use a 1035 exchange to purchase a different type of life insurance policy, either a nice paid up whole life policy or a guaranteed universal life or something suitable for their situation. That’s a real solution that relieves the “pain” being felt by your readers. I hate to say this, but when you start talking about a subject which you clearly don’t have expert knowledge in, it’s misleading to call yourself a “buff”, particularly because other people are relying on you for accurate and complete information to help them…and you’re not giving it to them. You’re ignorance can actually hurt people.

    Incidentally, it is the kind of advice you’d get from a friend, a non-knowledgeable one. I hate to be so harsh, but the reality is that your advice doesn’t help them anymore than the abusive agent who improperly sells products before figuring out a client’s goals first. I’m sure you really are trying to help, but you really need to understand the issue in full before you start giving an analysis and posting about “$10,000 mistakes”.

    To clients and commenters: VULs aren’t the devil, but you’d be hard-pressed to find a decent contract in the marketplace. Cash value insurance, in general, is a touchy subject and bad math (and poor assumptions) abound on both sides of the argument as to which is better (term vs cash value) are commonplace. I would recommend that you do not throw the baby out with the bathwater here and write off all permanent life insurance, because I know there is a tendency–after someone gets burned by a life insurance salesman–to find the “anti-life insurance” in the investment world. But, the same thing happens in the mutual fund/equities world as well. People get burned by mutual funds, stocks, whatever, and try to find the safest investment in the world or the “anti-mutual fund”.

    This approach, in general, is bad practice. Your best bet is to try to find good sources of information for leaning about how insurance works prior to buying a policy. Amazon has some very good books written by actuaries and the “mother” of all life insurance books would probably be “Life Insurance” by Kenneth Black, Jr. and Harold D Skipper, Jr. Nothing less than comprehensive education will help you out.

  120. Harry Sit says

    We have had over 100 comments on this already. I think everybody had a chance to express their opinion. It’s still interesting to note that the only people who defend VULs are agents who sell VULs. Sure, because they sell them they understand them, but it’s still interesting we don’t have a single client come here and say “I have a VUL and I love it. Here’s how it’s helping me.”

    Agent commentators say the horror stories on VULs are caused by other bad agents selling VULs to the wrong clients who are not in the best position to take advantage of VULs, or that the VULs aren’t configured correctly. I agree. The sad reality is that too many badly configured VULs are sold to the wrong clients who shouldn’t be in any VUL in the first place — they haven’t maxed out their 401ks and IRAs; they don’t have the extra cash to overfund their policies. I trust all of you are working in your clients’ best interest, that you are doing it right. The bad agents outnumber you ten to one. They are giving you a bad rep. Please be mad at them, not at me.

    I will address the specific point David in comment #121 raised. I outlined the options to a policyholder still in the surrender period. Doing a 1035 exchange is part of Option 2, since in a 1035 exchange the surrender fee will still have to be paid. David also said it would be best if clients read some books and understand it before buying a policy. That’s great, but people only Google VUL after they are sold a bad policy and locked into a long surrender period.

    I stand by my original thesis. For the policyholders who got into a policy they shouldn’t have, and that’s the vast majority of VUL policyholders, the premiums paid in the first year are gone, no matter what they do. That is still the $10,000 lesson on VUL. VUL itself may still be good, when it’s correctly configured, sold to the right clients, but to the policyholders not meeting these conditions, that fine distinction makes little difference to them.