Life Insurance Replacement

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peacock's picture
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Joined: 2004-12-09

As I am doing portfolio reviews with my current clients, I have started discussing their life insurance.  All of my clients are happy to share what they have and most of the time I find an inferior product or something that does not fit their needs (i.e. whole life for young people).  I have done a lot of replacement into variable life.  Clients may not have the guarantee they have in whole life, however if i can't average 6-8% returns in the policies over the long term, then I have done something wrong with their allocations.  I really just want to see if anyone else has worked on replacement of insurance.  Any thoughts?

Mike Damone's picture
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Joined: 2004-12-01

I replace insurance all the time by either buying my client more death benefit for the same premium or saving them money on the premium for the same death benefit.

anonymous's picture
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Joined: 2005-09-29

Any thoughts?
Yes.  You are screwing your clients and don't even know it.  Become an expert in life insurance before you start replacing policies.

blarmston's picture
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Joined: 2005-02-26

"Yes.  You are screwing your clients and don't even know it.  Become an expert in life insurance before you start replacing policies."
So which one are you- the expert in life insurance? Or the expert in investments? The expert in both? Inquiring minds cant wait to know...

anonymous's picture
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Joined: 2005-09-29

Does selling over 200 policies a year qualify me as an expert?
If anyone of us was truly an expert in investments, wouldn't we earn our money from investments instead of selling investment products and investment advice? 

ManagedMoney's picture
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Joined: 2007-01-25

anonymous wrote:
If anyone of us was truly an expert in investments, wouldn't we earn our money from investments instead of selling investment products and investment advice? Not always.  It depends on how you want to live your life.  I earned my living for the past 15 years as a full time S&P trader.  Finally, I decided that I wanted to get away from the endless hours isolated in a dark room in front of a bank of computers and monitors.Now, I'm more than happy to let someone else do that job.

whitewlfz's picture
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Joined: 2006-12-23

I believe an advisor should be a generalist in that area of life insurance and then from there seek out a relationship with someone or a mentor of some sorts..because some carriers (sp?) treat illness' differently .. and subsequently you could do better or worse and not even really know it.. just my experience .. incidentilly I orginated $100k in premium last year so I have some experience..

troll's picture
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Joined: 2004-11-29

anonymous wrote:
Does selling over 200 policies a year qualify me as an expert?
If anyone of us was truly an expert in investments, wouldn't we earn our money from investments instead of selling investment products and investment advice? 

No. It qualifies you as a liar about the number of policies that you sell.

menotellname's picture
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Joined: 2004-12-01

peacock wrote:
As I am doing portfolio reviews with my current clients, I have started discussing their life insurance.  All of my clients are happy to share what they have and most of the time I find an inferior product or something that does not fit their needs (i.e. whole life for young people).  I have done a lot of replacement into variable life.  Clients may not have the guarantee they have in whole life, however if i can't average 6-8% returns in the policies over the long term, then I have done something wrong with their allocations.  I really just want to see if anyone else has worked on replacement of insurance.  Any thoughts?

 
I am confused.  Why isn't whole life a fit for young people?  Isn't variable life a form of whole life?  Why are you replacing a policy with no volitility for one with a great deal of volitiity?  Why would variable life be a better fit for a younger person than traditional whole life?
Unless you can justify your recommendations with empirical data for EACH individual client then blindly preferring variable universal life over traditional whole life or equity indexed universal life is going to get your butt in a sling.

anonymous's picture
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Isn't variable life a form of whole life?
Just about anytime that someone talks about variable life, they are talking about Variable universal life.  Universal life is much closer to term than to whole life.

now_indy's picture
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Joined: 2006-07-28

Here's a scenario:
You meet with a couple in the 40's (prospects) who currently work with Ameriprise. Their IRA's are in Riversource Funds, and OF COURSE they each have a VUL. The VUL's have about $10,000 of cash value in each, but the surrender is about $2,500 on each one.  The VUL's each have a $250,000 death benefit. That is not enough for either spouse, and that's the only insurance they have.
I am recommending liquidating the RVS funds and transferring the IRA's to a fund company, but I'm still not sure about what to do with the VULs.  I am leaning towards selling them term (about $450K) and then cashing out the VUL policies.
They hate the VUL policies, and don't want to fully fund it (a total of about $4200/yr), so they are just paying the minimum.  Generally with VULs, my stance is to fully fund it, or cash it out, but don't just go half way.
What would you do?

anonymous's picture
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Joined: 2005-09-29

Generally with VULs, my stance is to fully fund it, or cash it out, but don't just go half way.
I agree completely.   I've never seen an old VUL that was not in danger of blowing up. 
 In replacement situations, I don't present any options to the clients because you have no idea what is in their best interest until after the new insurance gets approved.  Apply for the new coverage for the necessary death benefit to cover their wants.  After the policy gets approved, you can then decide what is best.  It's premature to talk about options at this point.
Is there a loss on the VUL contracts?  If so, you may make sense to preserve the basis via a 1035 exchange.

peacock's picture
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Joined: 2004-12-09

I look at replacing after assessing the clients situation.  If they have a 15 year old policy and need additional coverage,  or a reduction in coverage I consider replacement.  As far as variable life goes, if an illustration is ran at 6%, I'm confident the client will earn that over the course of their life.  That doesn't mean all clients should use a vul, but it makes sense for many.  If I were a client, I would rather have control over how the cash is invested as opposed to the insurance company.  Just some thoughts. 

anonymous's picture
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Joined: 2005-09-29

If variable VUL makes sense for many people, why don't I ever see an existing policy that isn't in danger of blowing up?
I'm also confident that the client can earn 6%.  The problem is that even if the client earns an average of 6%, the policy can still completely fall apart on them.   The main problem with the policies is that the cost of insurance is based upon attained age.  The backbone of a VUL policy is annually renewable term insurance.  Annually renewable term insurance is meant for temporary insurance needs, not permanent needs.
If I were a client, I would not want my money invested in an insurance policy.  Whole life insurance is a place for long term savings, not long term investments.

theironhorse's picture
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Joined: 2007-03-03

You rarely see properly funded VUL's because they are being sold to
people who have no business owning them but the insurance person
convinced them how great it was.  Don't confuse WHOLE LIFE with a
VUL-totally different animals.  I know there a very reputable
insurance guys/gals out there, but too often someone licensed with a
6/63 sells a VUL with a high death benefit (read high(er) commission)
and only minimally funds it at a level to generate an approval by home
office. 

In your situation I would not hesitate to replace the policy and get
appropriate coverage in place via term.  But make sure the clients
know full well they will not suffer any surrender charges if they wait
x number of years.  You might also look to see what minimum
funding level it takes to keep the policy in force that "x" number of
years until CV=SV.

Big Taco's picture
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I agree, Ironhorse. 
I'm a franchisee of Ameriprise.  I don't sell much VUL.  When I do, I make sure that I've gone through and explained the product, and why it fulfills a need, usually estate planning for older, wealthier clients who want to leave the tax free DB, and are going to fund it. 
I've never really liked the idea of using Cash Value as part of retirement savings/income (from any sort of Life Ins.), even if you can "loan" it to yourself tax-free, and interest free.  any thoughts on this?
I see it as one of the highest service financial products, and yet it gets sold so many times with a poor asset allocation, it may not set up for the COI to be pulled from the fixed account, and it sometimes isn't serviced according to the initial illustration: e.g.:  if it's sold with an illustrated reduction in Death Benefit over the years to reduce COI, then that HAS to be done.  otherwise it will blow up.
VUL can be a great product for the right situation, but if it's just sold to a client for a commission, never to be addressed again, that's when they eat themselves.

Mike Damone's picture
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Big Taco wrote:
I've never really liked the idea of using Cash Value as part of retirement savings/income (from any sort of Life Ins.), even if you can "loan" it to yourself tax-free, and interest free.  any thoughts on this?
I don't like it either.  I recommend life insurance  soley for the death benefit.  If they want an investment, I'll recommend an investment.

Big Taco's picture
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Joined: 2006-11-16

I want to clarify that I don't place that much life insurance, period.  (I'd like to do more...) but when I do, it's either term or VUL.
If you want PERMANENT Life Ins., that's when I suggest VUL.  I just make sure that we compare "term & invest the difference", and VUL so the costs of holding permanent ins. are comprehended. 
there's a lot of uninsurable people out there that wish they could've gotten something placed when they were healthier.  at least w/ VUL it can be flexible, and when done properly, you can stuff more money into it later, or reduce the DB.  But it's There.  for those who sell a lot of perm insurance, I'm sure you've used the line: "97% of term policies never pay out".
I don't like fixed annuities, and I don't like fixed interest rates in UL and Whole Life.  If there's money that's being saved longterm, i feel it should be invested according to appropriate asset allocation.

now_indy's picture
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Joined: 2006-07-28

Those are some good thoughts and viewpoints, I appreciate it.

anonymous's picture
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I've never really liked the idea of using Cash Value as part of retirement savings/income (from any sort of Life Ins.), even if you can "loan" it to yourself tax-free, and interest free.  any thoughts on this?
You can't take a loan interest free.  You pay interest on the loan, but at the same time, the policy continues to earn the dividend. 
First and foremost, life insurance is for the death benefit.  However, that doesn't change the fact that it is a great source of cash.   I look at the cash value of a life insurance policy as long term savings.   It is my belief that having this accessable cash can really help someone's retirement savings. 
Ex. Client has $1,000,000 invested and needs $50,000 year, increasing with inflation.  Will this money last?  The answer is "maybe".  However, I believe that if the person has whole life insurance with substantial cash value, or any other source of long term savings, they have a much greater likelihood of not running out of money.  Why?  When the market goes down, they can leave their investments alone.
I don't know of a better long term savings vehicle than whole life insurance.  This is especially true once you factor in the after tax rate of return and the income tax free status of the death benefit + the money not spent on term insurance.

anonymous's picture
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Big Taco, VUL is buy term and invest the difference. 
The problem with buying VUL for someone who wants to "buy term and invest the difference" is that inside of a VUL policy, the cost of insurance is more expensive than other term policies, the investments are more expensive and limited, and when the policy falls apart, the money will all be taxed as income instead of capital gains.
When it comes to investment dollars, a person is much better off with investments than a VUL policy.

troll's picture
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anonymous wrote:Big Taco, VUL is buy term and invest the difference. 
The problem with buying VUL for someone who wants to "buy term and invest the difference" is that inside of a VUL policy, the cost of insurance is more expensive than other term policies, the investments are more expensive and limited, and when the policy falls apart, the money will all be taxed as income instead of capital gains.
When it comes to investment dollars, a person is much better off with investments than a VUL policy.The big issue as I understand is not so much the cost of the insurance initially within the VUL.  As I understand it the internal COI is based on the cost of annually renewable term, and if/when you are relatively young and healthy when you purchase the VUL policy, that cost is not overly high.  Where the whole scenario starts to fray at the edges is as you age.  The cost of ART climbs faster than any other type of LI product, and then the internal COI of the VUL also climbs quickly, so what seemed like a good idea 10 years ago when you bought the policy may not be so clever as the internal cost of your policy climbs and climbs and climbs.The other issue at hand is largely one of human nature/behavior-that many clients simply will not have the discipline to keep dumping in extra funding over and above the minimum premium(and not use the VUL cash value as a "bank" to dip into now and then).  If you don't get the extra CV in to grow tax deferred the whole exercise is futile.I don't claim to be an expert on the topic, but I'm learning and this is the opinion I've formed so far.

EDJ4now's picture
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Disclaimer - I'm not an expert on insurance, and want opinions from people not trying to get me to sell insurance.
My understanding is that an overfunded VUL can be a very good investment for a relative young high income individual.  He is able to save another 30-40k per year (or whatever) and have it grow tax deferred (this is only after we max out the 401k).  As long he keeps the policy funded, when he retires he can pull out $$ as loans and return of premium tax free. 
I have a couple of clients I have discussed this with, but neither one is quite there yet (new doctors earning 300-500m per year, but still in first couple of years out of school so big debt and catching up on the house, boat, etc they feel they deserve but haven't bought yet!).
I realize one big pitfall is that we have to commit to approx 10 years to stuff the policy full of cash, and 15 or 20 would be better.  Otherwise, what are the flaws with this strategy?Thanks for input.

BteamBomber's picture
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Ok, tell me whats a better deal,
500000 term life 30 year coverage- $22 monthly premium, also invest $250 monthly DCA into a G&I mutual fund with a 12% historical return
OR
500000 VUL policy- $322 monthly premium where some of the money might earn between 7-9%?
The idea of adding poor insurance coverage with a poor investment topped with higher expenses is never a good idea to package to a client you actually want to do right by. I won't ever use VUL.
 

anonymous's picture
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Joined: 2005-09-29

EDJ4now, have you ever met someone who has had a VUL policy for a long time and it's working the way that it should?  I never have.
What happens when someone takes money out of an investment and the investment goes down at the same time?  It's nearly impossible to recover.  If this happens inside of a VUL policy, the policy ends up lapsing and the person gets hit with a huge tax bill.
Once you fully understand that the cost of insurance in a VUL is annually renewable term insurance, it becomes pretty to easy to see why these policies don't work outside of a laboratory.   Here's a challenge for you.  If you are going to sell the product, you must read the contract.  Inside the contract is the cost of insurance.  If you assume for example, that the insurance component is $500,000, how much is the Cost of Insurance at age 50?  Age 60? Age 70? Age 80? Age 81? etc. 
Investments make lousy insurance.  Insurance makes lousy investments.  Why take investment risk with your insurance?  Again, whole life works as a savings vehicle for people with a permanent insurance need.  VUL simply combines overpriced term insurance with limited investment choices that ultimately end up taxed as income instead of capital gains unless you are "lucky" enough to die young.

theironhorse's picture
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Saying you will never use a VUL limits the scope of clients you can
work with.  Show a 40 year old making 250,000 how to put away an
extra 30-40 grand a year in a PROPERLY structured VUL and see what
he/she says.  Too often people simply refuse to look at life
insurance because they have been told it is a bad investment,
period.  If positioned correctly (which most often it isn't), it
can be a great product.

And buying the insurance ONLY for the death benefit is not
correct.  It is the biggest and most important factor in 99% of
all cases, but not always.  Problem is we all see the wrong crap
day in and day out that we start to believe it is a bad product. 
When you find the affluent people, minimizing the DB and maximizing the
CV (so as to avoid a MEC) comes into play more so than just selling it
for the DB.  Again, I realize this is relevant for a very small %
of the population, but it has it's place.

Also, VUL is not "permanent" insurance unless you are funding it to the
guaranteed levels, which I don't see very often.  If all VUL's
were "permanent" insurance, none of them would ever blow up, right?

anonymous's picture
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Why would that 40 year old put the money into a VUL instead of investing the money?  The only reason that I can think of is tax deferral.  However, I look at tax deferral as a negative when it means trading capital gains for income tax and very possibly higher taxes in the future.

theironhorse's picture
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so you figure withdrawals from a VUL are taxable as income?

anonymous's picture
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It depends.  Basis tax free.  Gains taxable as income.

troll's picture
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theironhorse wrote:Saying you will never use a VUL limits the scope of clients you can
work with.  Show a 40 year old making 250,000 how to put away an
extra 30-40 grand a year in a PROPERLY structured VUL and see what
he/she says. 

It sounds to me like you're considering the wrong insurance product.  If you want something for long term supplemental tax advantaged savings, consider a VARIABLE ANNUITY.Then again, I know the commissions are better on an overfunded VUL.  That wouldn't have anything to do with your stance, would it?

theironhorse's picture
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It depends.  Basis tax free.  Gains taxable as income.

Only if you do it wrong.  Generally withdrawals to basis, then policy loans at a net zero cost.

Big Taco's picture
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anonymous, you had me questioning myself for a minute...
No, in VUL (at least Riversource) there is no interest charged on any "loans" from the CV, if taken after the policy's been in force for 10yrs.  Surrender to basis, switch to loans.  the loans actually come from the insurance company's coffers.  the cash value is collateralized.  it is charged 3%, but it earns 3%, making a 'net zero' loan.  This is done to be compliant with some law or taxcode, i'm sure.  you can spend as much as 90% of the CV, all tax free.  during that time, you would want to reduce the DB accordingly, of course, so the policy doesn't eat itself, and then keep it afloat (or die) so that you don't incur the large tax bill if it lapsed.
I agree, Iron Horse, this can be a great income tax strategy if properly executed, for individuals in high brackets.  it's just that all the service that goes along with this product over a persons entire LIFETIME makes me just want to sell VUL to my older, wealthy clients to leave heirs tax free inheritence, if that's a goal of theirs.
my fear is always that if I'm not around to service these VUL policies, who else is gonna do it correctly?  If you sell an older client a VUL w/ a large "dump in", it's likely going to last the rest of their life.  but if you start a good earner putting funds into one at a younger age (30s), and then the client moves, or their income decreases, etc. etc.... there's a lot of variables.  I guess I'm saying it works if the client has a reasonable understanding of the product, and knows that it has to be assessed annually with an advisor that's knowledgeable.
Ironhorse, what are some of your insights on properly positioning and structing the VUL?
One that I do is set aside a year or two of COI in the Fixed Account, and have it pulled monthly from there.  This way, the subaccounts are not being negatively DCA'ed, and I also consider the fixed account as sort of the Cash Equivalents part of the asset allocation.

theironhorse's picture
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Saying you will never use a VUL limits the scope of clients you can
work with.  Show a 40 year old making 250,000 how to put away an
extra 30-40 grand a year in a PROPERLY structured VUL and see what
he/she says.  It
sounds to me like you're considering the wrong insurance product. 
If you want something for long term supplemental tax advantaged
savings, consider a VARIABLE ANNUITY.Then
again, I know the commissions are better on an overfunded VUL. 
That wouldn't have anything to do with your stance, would it?

Maybe I am looking for something I can access before 59 1/2 and do not
want all of the earnings distributed to me as taxable income.  How
much do you think is paid on funding over target on a VUL, 2.5%. 
Same $ in a VA can make me 6-7% often.  Factor that in, assuming
you haven't jacked up the death benefit too high (which I mentioned
earlier not to do) and the commissions are not near as far off as you
think.

theironhorse's picture
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Big Taco-first as I previously said, it is way oversold and used
incorrectly way too often.  But I also feel those who fall into
the niche and need it are the clients you want for life, so service is
ongoing with them anyway.  Using it to fund 2nd to die policies
(do you use VUL's for that?) is a great strategy, but I think most
appropriate would be to use a guaranteed UL, so the product cannot
"blow-up."  It is a GREAT way to leverage $ for those older,
wealthier clients.  Saying you refuse to do life insurance,
meaning perm/VUL/UL, to me shows me you are not doing much estate
planning, which is where many great clients are.

anonymous's picture
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"Only if you do it wrong.  Generally withdrawals to basis, then policy loans at a net zero cost."
Yes, you can take out the basis and then policy loans.  The problem is that when you do this, especially if combined with a bear market at a bad time, or a long life, you are looking at a policy that will require much greater premiums or lapse which will cause all of the gains to be taxable as income.
A zero interest loan and a net zero loan are not the same thing.
my fear is always that if I'm not around to service these VUL policies, who else is gonna do it correctly? 
Bingo!!  You have hit the nail on the head.  This is why this is a product that only works in the laboratory.  These products can work if they are overfunded and properly monitored.  This never happens.   If you sell a lot of these policies, you can't afford to spend the time servicing them.  And nobody else will service them.  When you see an existing VUL isn't it always underfunded and the owner hasn't seen the agent in years?
Regardless, the COI still makes these products overpriced term insurance with limited investment options. 

anonymous's picture
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so service is ongoing with them anyway.
Good point.  Just make sure that the clients are older than you, so that you'll be around to service them.

theironhorse's picture
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I never said zero interest loan.  They are a net zero loan, I
completely agree with that.  Generally speaking, you reduce the
face as well, lowering the chance of lapse.

Your second point it partly correct.  They are often underfunded
and the agent is gone because they were never properly sold, and sold
to the wrong person, from the get go.  If they were sold to people
who needed them, we would likely all gladly "service" those clients
because they would be the high net worth affluent people.  We meet
with those people yearly, minimum (much more usually), so monitoring
their policy would not be that tough.  Now, doing service work on
the $150/month, 250K policy owned by someone making $60,000 with no
ROTH, no other life insurance, and net worth <100K sucks, I
agree.  It should never have been sold in the first place, but it
is.

Big Taco's picture
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Yes, 2nd to die if married.  I've used the Guaranteed UL once.  I like the VUL because, as you've mentioned, if you keep it lean enough, it will grow.  That way if the client using the product for the DB and that client lives much longer than "expected", the CV may grow to provide a much larger DB than originally expected. 
I always like the idea of conquering inflation with equities, which predisposes me to the VUL over whole or UL for Permanent life policies. 
and yes, to answer a qestion from earlier, I have seen 20 year old VULs that have done well, and have much higher DBs than originally set up.  They don't all blow up  
and joe, although you didn't insinuate this to me, VUL isn't about the commish to me.  it's a COMMITMENT!  when it's all said and done, most policies aren't worth the distant memory of commish and trails when you're properly steering them through the years, and you have a relationship with the client, IMO.  Actually, probably another reason I don't focus on insurance.  What a pain.  people are unhealthy, they get rated, then you Finally get a commish check and forget about it.  why arent there more "fee based" life policies?  I've always liked to be paid as I go. 
 

anonymous's picture
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It's more fun to disagree, but theironhorse, I agree with everything in your post.  I will also concede that it is possible for VUL to be appropriate under the right conditions.  The problem is that these conditions usually don't exist, but reps try to sell the product anyway. 
It sounds like you are one of the very few who is selling VUL in an appropriate manner. 

Big Taco's picture
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theironhorse wrote:Your second point it partly correct.  They are often underfunded and the agent is gone because they were never properly sold, and sold to the wrong person, from the get go.  If they were sold to people who needed them, we would likely all gladly "service" those clients because they would be the high net worth affluent people.  We meet with those people yearly, minimum (much more usually), so monitoring their policy would not be that tough.  Now, doing service work on the $150/month, 250K policy owned by someone making $60,000 with no ROTH, no other life insurance, and net worth <100K sucks, I agree.  It should never have been sold in the first place, but it is.
Perfection.

AllREIT's picture
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Big Taco wrote:Ironhorse, what are some of your insights on properly positioning and structing the VUL?

I tell clients, is far better than owning life insurance, is owning a stake in a life insurance company.

If you set shares of AIG on a DRIP program they will probably outperform most VUL policies.

More seriously, life insurance is a form of insurance and should
not be confused with any sort of investment. IMHO the main idea of VUL
is that the investments could grow to exceed the death benefit.
*However* thanks to the higher COI, underfunding, and management fee's
this rarely happens.

What would be really nice was if some company came out with a WL type policy with a death benefit that is linked to CPI.

anonymous's picture
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I always like the idea of conquering inflation with equities, which predisposes me to the VUL over whole or UL for Permanent life policies. 
The major problem with the VUL policy isn't the "V".  The problem is with the "U".   We can't escape the fact that the insurance for universal life policies is Annually Renewable Term.  ART policies are incredibly expensive if one has to keep the policy forever.  They are designed to be kept for short periods of time.  Not only is one stuck with ART forever with a UL policy, but it is grossly overpriced term insurance. 
Do you have any idea, for example, if your client is now 80 years old and their death benefit is $700,000 more than the CV how much they are paying for insurance?   How about at age 85?   These mortality costs can decimate a policy.
Just for kicks, I ran illustrations for WL and VUL at WL premiums (About $3,500 more than target VUL premiums) for a healthy 30 year old male.  Even when the VUL is run at 8%, it underperforms the WL.   
VUL combines overpriced insurance with high priced investments (think "A" shares without breakpoints).
How about this for a "Did you Know":
 

anonymous's picture
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and yes, to answer a qestion from earlier, I have seen 20 year old VULs that have done well, and have much higher DBs than originally set up.  They don't all blow up  
Be patient.  The cost of insurance will get them eventually.

troll's picture
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anonymous wrote:I always like the idea of conquering inflation with equities, which predisposes me to the VUL over whole or UL for Permanent life policies. 
The major problem with the VUL policy isn't the "V".  The problem is with the "U".   We can't escape the fact that the insurance for universal life policies is Annually Renewable Term.  ART policies are incredibly expensive if one has to keep the policy forever.  They are designed to be kept for short periods of time.  Not only is one stuck with ART forever with a UL policy, but it is grossly overpriced term insurance. 
Do you have any idea, for example, if your client is now 80 years old and their death benefit is $700,000 more than the CV how much they are paying for insurance?   How about at age 85?   These mortality costs can decimate a policy.
Just for kicks, I ran illustrations for WL and VUL at WL premiums (About $3,500 more than target VUL premiums) for a healthy 30 year old male.  Even when the VUL is run at 8%, it underperforms the WL.   
VUL combines overpriced insurance with high priced investments (think "A" shares without breakpoints).
How about this for a "Did you Know":
 Thank you for taking the time to do what I should have done for myself.  That is some interesting insights!

AllREIT's picture
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Joined: 2006-12-16

anonymous wrote:Just for kicks, I ran illustrations for WL
and VUL at WL premiums (About $3,500 more than target VUL premiums) for
a healthy 30 year old male.  Even when the VUL is run at 8%, it
underperforms the WL.   
VUL combines overpriced insurance with high priced investments (think "A" shares without breakpoints).

How about this for a "Did you Know":

No wonder it is so popular with insurance companies.

shorttoday's picture
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Joined: 2007-05-12

Good comment about ART. That really puts things in perspective. So we're probably back to, VUL may be appropriate for the super rich in some situations and the super flakey any time.

theironhorse's picture
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Joined: 2007-03-03

Only problem I potentially see is this-who is responsible for the WL
performance?  I realize this is minimal on the risk scale, but
again, properly servicing a VUL contract can greatly reduce some of the
generally accepted problems.  I am not advocating VUL or nothing,
I think it has many downfalls but sometimes it all comes down to
personal conviction.

anonymous's picture
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Joined: 2005-09-29

Let's assume that the VUL is properly serviced, and properly overfunded.  I'm still having great difficulty understanding how someone can be better off with VUL instead of putting the same amount of money into a term life insurance policy and comparable funds.
Disadvantage of VUL:1) The insurance component is much more expensive than straight term insurance.*2) The expenses of the underlying funds are more expensive than if purchased outside of the VUL policy3) The insurance company tacks on extra expenses (ie. things like m&e, premium expense charge, administrative charge, face amount charge)4) The insurance component must be kept even when the insurance is not needed (this can be hundreds of thousands of dollars)5) If policy is canceled, the gain is income and not capital gains6) The incredibly high mortality charges that are ever increasing make taking money out of a policy a risky proposition, especially if the market goes down. 
* I just did a quick calculation for a healthy 30 year old male who lives to age 100 and funds a $1,000,000 policy at WL premiums and gets 8% a year.  Their total mortality expenses will equal approximately $1,000,000.  It makes it pretty easy to see why it's awfully tough to keep one of these policies in force.
It's the insurance companies who make out on these policies.  They aren't good for the insureds or the agent.  The insured would be better off with term or WL.  The agent gets hurt because even if the client funds at WL premium, they only get full comp on "Target premium" which is significantly lower.  The agent also has nothing to convert in the future.  I don't think that it's any accident that these get sold mostly by stock companies instead of mutuals.
 

AllREIT's picture
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Joined: 2006-12-16

anonymous wrote:
It's the insurance companies who make out on these policies.
...
I don't think that it's any accident that these get sold mostly by stock companies instead of mutuals.

Now you know why the AMP broker sings.

Cougzz's picture
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Joined: 2005-05-24

The different types of insurance argument for different needs, properly
structured, rules the day. I bought on my own life a $50k policy which is
owned by a charity I support. I donate the premium each year to the
charity and deduct the amount paid. The policy I selected was whole life
because I want it to last the whole of my life and dividend growth is
positioned to pay the premium in my retirement. VUL would not give me
the guarantees I needed. For my personal needs years ago I purchased
two VULs with $250k death benefit each. When I retire I may elect to roll
the cash from one VUL into the other VUL, therefore leaving at least one
policy with enough cash to (hopefully) keep it going. Plus, since life
insurance is taxed FIFO, I retain the option to take significant withdrawals
in retirement tax free if the death benefit is no longer a compelling
matter. Another great argument for the value of cash value in life
insurance is that the cost basis of life insurance is premium(s) paid PLUS
cost of insurance. Great product when the sales rep knows the drill.

troll's picture
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Joined: 2004-11-29

theironhorse wrote:Only problem I potentially see is this-who is responsible for the WL
performance?  I realize this is minimal on the risk scale, but
again, properly servicing a VUL contract can greatly reduce some of the
generally accepted problems.  I am not advocating VUL or nothing,
I think it has many downfalls but sometimes it all comes down to
personal conviction.
If you own a REAL WL policy that is a participating policy you are an OWNER of the issuer and they are obligated to pay any excess profits back to you, just as they would pay dividends to a shareholder.

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