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

June 28, 2007 by TFB

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? If you'd like to read the full pitch, here's an example: Variable Universal Life: Flexibility at Its Best by New York Life, whose slogan is "the company you keep." 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. Here's the 80-page prospectus (PDF, 476kB) of their NYLIAC Variable Universal Life 2000 product. Fees and expenses start on page 9.

  • 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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Comments

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

  1. Ted Valentine on June 29, 2007 | permalink
    2.  

    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 on July 8, 2007 | permalink
    3.  

    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 on September 16, 2007 | permalink
    4.  

    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. TFB on September 17, 2007 | permalink
    5.  

    Anonymous,

    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 on November 21, 2007 | permalink
    6.  

    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. TFB on November 24, 2007 | permalink
    7.  

    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 the prospectus from Ameriprise, here's the link:

    RiverSource Variable Universal Life IV and RiverSource Variable Universal Life IV – Estate Series

    Fees start on page 8.
    * 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 on January 10, 2008 | permalink
    8.  

    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. TFB on January 10, 2008 | permalink
    9.  

    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 on February 12, 2008 | permalink
    10.  

    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.

    http://www.consumerfed.org/releases2.cfm?filename=022403ror.txt

    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
    http://www.consumerfed.org/pdfs/fpaghv_2006_second_revision111306.pdf

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

    http://www.evaluatelifeinsurance.org/

  10. Anonymous on June 19, 2008 | permalink
    11.  

    Sir:

    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. Raj Kumar on September 8, 2008 | permalink
    12.  

    I have the VUL policy. I need to get out of this mess. Can you provide any advise?

    Raj

  12. anonymous on September 21, 2008 | permalink
    13.  

    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

  13. TFB on September 21, 2008 | permalink
    14.  

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

  14. yh on November 9, 2008 | permalink
    15.  

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

  15. Zork Dude on November 11, 2008 | permalink
    16.  

    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.

  16. Brad on November 21, 2008 | permalink
    17.  

    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.

  17. brian on November 26, 2008 | permalink
    18.  

    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

  18. TFB on November 30, 2008 | permalink
    19.  

    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.

  19. Scott on January 8, 2009 | permalink
    20.  

    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?

  20. Dan on January 23, 2009 | permalink
    21.  

    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

  21. Dan on January 23, 2009 | permalink
    22.  

    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.

  22. William on January 25, 2009 | permalink
    23.  

    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.

  23. Justin on February 9, 2009 | permalink
    24.  

    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.

  24. J on February 23, 2009 | permalink
    25.  

    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.

  25. FatN Happy on June 15, 2009 | permalink
    26.  

    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.

  26. Faclon99 on July 23, 2009 | permalink
    27.  

    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!!

  27. captain of my ship on July 23, 2009 | permalink
    28.  

    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.

  28. aldo on August 6, 2009 | permalink
    29.  

    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.

  29. aldo on August 6, 2009 | permalink
    30.  

    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.

  30. TFB on August 6, 2009 | permalink
    31.  

    @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.

  31. Max on August 23, 2009 | permalink
    32.  

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

  32. TFB on August 24, 2009 | permalink
    33.  

    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.

  33. Lory on August 26, 2009 | permalink
    34.  

    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?

  34. anonymous on August 31, 2009 | permalink
    35.  

    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.

  35. TFB on September 1, 2009 | permalink
    36.  

    @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

  36. William on September 4, 2009 | permalink
    37.  

    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.

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