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:
- Keep paying into the policies and get plucked by high fees (not good); or
- Cancel the policies now and receive nothing back (not good); or
- 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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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.
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.
Thanks
Zak says
NP,
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.
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)
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. 🙂
NP says
Zak–thanks for taking the time to help me think through all this.
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 ‘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.
Thanks,
Me
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 🙂 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!
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!
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.
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???
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
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?
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)
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.
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.
RWW, CLU, ChFC, CFP says
Anonymous,
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?
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.
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.
RWW
Anonymous CFP says
RWW
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.
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.
Zak says
Great post David. Good points made all around.
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.