HNW Individuals & Life Insurance

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spintofish's picture
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I'm choosing between entering fin. svcs. with a mutual life co. such as NYL, etc. vs. entering with an investment firm such as AGE. I'm still struggling with being programmed to think that WL policies are a rip-off when term premiums are so much smaller. The buy term & invest the difference argument. Yes, I've searched and read much of the volumes of postings on the subject. And, yes, there is a TON of great knowledge and wisdom available and I will continue to to think it over. I do find much of it persuasive. I can tell you that I have made a good income as a B2B sales person but all I own is term and I wish I owned at least some WL. (I'm in my 50's) I know in a sense I answer my own question but I am not in the HNW classification. I want to understand how they - HNW'ers - think on the subject of life insurance. I'm wondering if the way I've been thinking is just programming from friends and family who are...essentially broke... no retirement funds to any extent... little equity in their homes... all because as one forum member stated, it's just too easy to get at most money and people have little to no self-discipline. My questions below are just restatements of the basic issue: From the perspective primarily of people who are with a wirehouse can you say whether or not there is a significant portion of HNW individuals who do not/have not "bought" the view point of owning large face amounts of WL? Did the HNW individuals buy term and invest the rest? Did they buy life insurance at all? Do they wish that they owned more WL? Are HNW individuals so focused on building their own businesses or investment portfolios that they even think about life insurance? Do they consider WL throwing money away? I do know from research that some famous HNW's such as Donald Trump & Jerry Jones are big consumers of WL. I'm more interested in garden variety HNW people. For anyone who chooses to respond to my question(s) I would be interested in knowing if you are with a wirehouse, life co., or an indy?

anonymous's picture
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To get good information on this subject, go to top gun producers dot com.
Whole Life policies are not understood by the "Buy Term and Invest the Difference" crowd.  I'll give you a few quick reasons:
1) Over a long period of time, term insurance is actually more expensive than whole life.
2) The money that goes into whole life insurance is not money that should otherwise be invested.  It is money that should be saved.  The better comparison is Buy Term and SAVE the Difference.
3)Too often, what is compared is the cash value.  What should be compared is the after tax death benefit.
4)Owning whole life insurance, or any long term savings vehicle, allows one to safely take more risk with their investment portfolio during their accumulation phase.
5)Owning whole life insurance, or any long term savings vehicle, allows one to safely  take more risk with their investment portfolio during their distribution phase and take out a higher % for retirement.
6)Wealthy people tend to buy lots of whole life insurance.  A very large % of the ones who don't would have been better off financially had they bought it.
7)It's a huge myth that one's life insurance needs decrease as they get older.  To a large extent, one's life insurance needs increase as they age during their working life time.  If you don't believe me, ask any 50 year old if he has more life insurance than he had as a 30 year old. 
8) Many of the arguments in favor of term insurance focus on "needs".  Insurance isn't about "needs".  It is about "wants".   Many people want to leave as much money behind at death (family, charity, etc.) as possible, regardless of age at death.
9) Wirehouse guys tend to ignore the subject because their comp on the sale is only about 25% what other people make on the same sale.
10) People who are struggling should only buy term insurance.
11) The vast number of people who we come into contact with professionally would be best served by owning a combination of term insurance and whole life insurance.
12) Universal Life/Variable Universal Life/Equity Indexed Universal Life should never be confused with whole life.  If you understand these products, you'll see that they are fancy variations of annually renewable term insurance.

shadow191's picture
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Joined: 2007-06-25

You would be surprised at how many HNW individuals do not have life whole life or an estate plan.  A lot of them (especially the ones who are newly rich) just never thought about it.  The big difference I've noticed is that when presented with the option to buy insurance, they are much more likely to say yes.  The money isn't as much of an issue for them.
I work in a wirehouse, so your experience may vary at NYL or another mutual.  They might have many more HNW individuals who have a ton of life insurance.  But here, it's shocking how wealthy some people are who have no life insurance at all.
If you want to focus on insurance, don't join a wirehouse.  Insurance is a nightmare to get through compliance especially for larger policies or any type of complex case.  And as anon said, we don't get paid all that well on it.  At an insurance company, I think you get 90% of your first year commission.  Here we get 70% gross which is then run through the grid, so it does end up around 25% total.  It also takes much longer to get paid on it so many of us don't focus on it.  Many times I refer in a life agent I know.  He's been doing it much longer than me, and since he's not securities licensed, he sends me nice referrals.
spintofish wrote:I'm choosing between entering fin. svcs. with a mutual life co. such as NYL, etc. vs. entering with an investment firm such as AGE. I'm still struggling with being programmed to think that WL policies are a rip-off when term premiums are so much smaller. The buy term & invest the difference argument. Yes, I've searched and read much of the volumes of postings on the subject. And, yes, there is a TON of great knowledge and wisdom available and I will continue to to think it over. I do find much of it persuasive. I can tell you that I have made a good income as a B2B sales person but all I own is term and I wish I owned at least some WL. (I'm in my 50's) I know in a sense I answer my own question but I am not in the HNW classification. I want to understand how they - HNW'ers - think on the subject of life insurance. I'm wondering if the way I've been thinking is just programming from friends and family who are...essentially broke... no retirement funds to any extent... little equity in their homes... all because as one forum member stated, it's just too easy to get at most money and people have little to no self-discipline. My questions below are just restatements of the basic issue: From the perspective primarily of people who are with a wirehouse can you say whether or not there is a significant portion of HNW individuals who do not/have not "bought" the view point of owning large face amounts of WL? Did the HNW individuals buy term and invest the rest? Did they buy life insurance at all? Do they wish that they owned more WL? Are HNW individuals so focused on building their own businesses or investment portfolios that they even think about life insurance? Do they consider WL throwing money away? I do know from research that some famous HNW's such as Donald Trump & Jerry Jones are big consumers of WL. I'm more interested in garden variety HNW people. For anyone who chooses to respond to my question(s) I would be interested in knowing if you are with a wirehouse, life co., or an indy?

theironhorse's picture
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My experience with the HNW people is usually about leverage.  They are sitting on a large amount of money, much of which will never be used/spent.  They can take a small fraction of their portfolio and return a great deal to their family.  I do not do a ton of traditional Whole Life.  It is usually a guaranteed UL product.  Most of my clients right now are more concerned with the death benefit guarantee than they are the cash accumulation in the life contract.  They generally have all the "savings" or investments they need.  Now they just want to protect it for their family or charity or make sure it is not eaten up by taxes.
 
And shadow is right.  Insurance is a mess at wirehouses to get approved by compliance.  Many more hoops to jump through.  A $10,000 "commission" or target at a wirehouse will pay $2800 generally.  At an insurance company you are looking at $5000, and indy it will be roughly $8000-$9000.  Both places will limit exactly who you can write as well.

Broker24's picture
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IronHorse echoes my experience. HNW indivudals (generally) use UL
policies to leverage up their assets for tax-free transfer of assets to heirs.
It is not typically used for the traditional "death benefit" such as term or
whole life. However, whole life and UL (and VUL) have distinct
differences, so you should familiarize yourself with the products.

But every situation is different. A mid-lifer (35-50) might need term
insurance to cover their kids and/or spouse. However, someone younger
might actually benefit in the long run by buying something permanent
(after 15-20 years, term becomes more expensive, depending on the
returns of the UL/VUL/WL policy). In a good VUL policy, you could get
your money back, plus a return, on your policy after 20-25 years. Or,
you could utilize it as a retirement funding vehicle through earnings
withdrawals and structured loans. With term, you are pretty much only
using it for the death benefit (other than for other select purposes under
specific circumstances).

Simple term insurance is very easy at wirehouses, though you don't make
much. The more complex stuff is tough (as they said). However, I do
quite a bit of both (relative to others in investment firms), and I will say
that it adds to my bottom line.

deekay's picture
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Broker24 wrote:IronHorse echoes my experience. HNW indivudals (generally) use UL policies to leverage up their assets for tax-free transfer of assets to heirs. It is not typically used for the traditional "death benefit" such as term or whole life. However, whole life and UL (and VUL) have distinct differences, so you should familiarize yourself with the products. But every situation is different. A mid-lifer (35-50) might need term insurance to cover their kids and/or spouse. However, someone younger might actually benefit in the long run by buying something permanent (after 15-20 years, term becomes more expensive, depending on the returns of the UL/VUL/WL policy). In a good VUL policy, you could get your money back, plus a return, on your policy after 20-25 years. Or, you could utilize it as a retirement funding vehicle through earnings withdrawals and structured loans. With term, you are pretty much only using it for the death benefit (other than for other select purposes under specific circumstances). Simple term insurance is very easy at wirehouses, though you don't make much. The more complex stuff is tough (as they said). However, I do quite a bit of both (relative to others in investment firms), and I will say that it adds to my bottom line.
There's no such thing as a good VUL policy.  It's the worst kind of buy term/invest the difference.  It combines expensive annual renewable term and expensive investments.  Under very rare circumstances is a VUL ever appropriate (esoteric defined benefit plans for example).  I've never seen where a VUL for a retail client is appropriate.

anonymous's picture
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Joined: 2005-09-29

Deekay, you are 100% correct.
Theironhorse, Even if we are talking about purely a death benefit sale, I'd go with WL over GUL unless the client is older.   GUL puts the client into a position where they must pay an out of pocket premium forever or else lose the policy.   Ultimately, a participating WL policy is much cheaper than a GUL policy (unless the client is old).

deekay's picture
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Joined: 2007-05-15

Thanks, Anonymous.  You may have noticed I've picked up a thing or two from your insurance knowledge. 

ExPropTrader's picture
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spintofish wrote:I'm still struggling with being programmed to think that WL policies are a rip-off when term premiums are so much smaller. The buy term & invest the difference argument. Yes, I've searched and read much of the volumes of postings on the subject.
Do some more reserach and tell us how many term policies actually are paid out, then tell me how many whole life policies pay.  That should be your answer, I'll give you a hint one pays 100% and any decent policy is going to pay out more than was put in.

troll's picture
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deekay wrote:Broker24 wrote:IronHorse echoes my experience. HNW indivudals (generally) use UL policies to leverage up their assets for tax-free transfer of assets to heirs. It is not typically used for the traditional "death benefit" such as term or whole life. However, whole life and UL (and VUL) have distinct differences, so you should familiarize yourself with the products. But every situation is different. A mid-lifer (35-50) might need term insurance to cover their kids and/or spouse. However, someone younger might actually benefit in the long run by buying something permanent (after 15-20 years, term becomes more expensive, depending on the returns of the UL/VUL/WL policy). In a good VUL policy, you could get your money back, plus a return, on your policy after 20-25 years. Or, you could utilize it as a retirement funding vehicle through earnings withdrawals and structured loans. With term, you are pretty much only using it for the death benefit (other than for other select purposes under specific circumstances). Simple term insurance is very easy at wirehouses, though you don't make much. The more complex stuff is tough (as they said). However, I do quite a bit of both (relative to others in investment firms), and I will say that it adds to my bottom line.
There's no such thing as a good VUL policy.  It's the worst kind of buy term/invest the difference.  It combines expensive annual renewable term and expensive investments.  Under very rare circumstances is a VUL ever appropriate (esoteric defined benefit plans for example).  I've never seen where a VUL for a retail client is appropriate.I understand why you would feel that way about VUL, given the complexity of the product, the annually increasing insurance costs, and the negative outlook that some other boards have towards VUL.I also think that it is a product that is oversold by certain firms(such as Ameriprise and WFG) that have a reputation for not training their folks overly well in terms of product knowledge or managing client expectations.Today, I sat with the "VUL Expert" from a local GA to discuss a case.  I came to get a shot at this one because several years ago the client told me he had set this "VUL investment program" up with a guy he golfed with at his club.  I told him then that is wasn't the greatest product and in general it wasn't a good idea to expect good investment performance from an insurance product.So flash forward a few years and he calls me a few weeks ago and tells me that the guy has left his club and left the business as well, and he's not happy with the "performance" on his VUL policies.So we get in-force illustrations for the VUL policies and I review them on my own and with the "VUL expert" as well.  It's a product on a chassis from a reputable company with some solid subaccounts-from American Funds.Ultimately, I concluded that the reason my client has not been happy with the performance is that the rookie agent buddy of his 1.) didn't manage expectations well, and 2.) didn't encourage my client to fund the policy sufficiently relative to the face value and the COI.  The COI does increase year to year, but from what I understand it is not affected by the amount you invest. Too, the "fund" shares you buy are free of load and 12b-1 fees.Many of you know that American Funds have pretty low expenses and good performance over the last few years.  Ultimately it was pretty clear to me that the reason the "performance" for the client wasn't so good on these policies was because he didn't fund them sufficiently in excess of the COI to take advantage of the tax advantages and the leverage of inexpensive subaccounts for dollars OVER the COI.  In other words-the agent didn't service the policy effectively, to his detriment and that of the client.Truthfully I probably wouldn't have recommended this course of action to the client in the first place, because of the constantly increasing costs due to ART pricing and the difficulty of servicing the product.  Having said that, the clients' disappointing experience was due to failures of the agent, in general, not the client.Plain english...if the COI is a grand a year and you fund these suckers at 100 bucks a month like a DCA plan for a mutual fund, it isn't going to work.  It will probaly blow up in the future.  Your client will most likely be disappointed.  If, OTOH, you fund it heavily in excess of COI(say up towards the MEC limit), and if you have some half-decent investments in there, they can work out pretty good.  That's why they are often used for certain NQDC plans.Just my 2 cents.  Hope that's helpful.

theironhorse's picture
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anonymous-most all of my policies are for ages 70-75.  I will admit I do not look much at a whole life, but I will touch on it again.  I have been so "trained" to use the GAUL that I have not revisited it recently.

anonymous's picture
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GUL is the better product for age 70 and above.  Just make sure to look at WL for your other cases.   Use a mutual company for WL.

anonymous's picture
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Joe,
A little knowledge is a dangerous thing.  Let me try to help you out a little bit.
I understand why you would feel that way about VUL, given the complexity of the product,
It's really not complex.
the annually increasing insurance costs,
It's overpriced annually increasing insurance costs that can't be dropped without causing all gains to be taxed as income.
and the negative outlook that some other boards have towards VUL.
It's tough to not be negative if the product is understood.
So we get in-force illustrations for the VUL policies and I review them on my own and with the "VUL expert" as well. 
To understand the policy, looking at the illustration is not good enough.  You must know what the COI is at older ages.  What is the COI at age 80?  Age 81?  Age 82?  etc.  How much of each premium is disappearing as load of some sort?
Too, the "fund" shares you buy are free of load and 12b-1 fees.
Yes, the fund shares may be load free, but the investor is still paying a load.  What's the difference?  If someone buys an "A" share MF with a 5% load and invests $100, $95 gets invested.  A VUL has a premium expense charge that it levies.  It is often 5%.  Therefore, when one invests $100 more than the cost of the insurance related expenses, $5 goes to the insurance company and $95 gets invested.  The only difference is that the insurance company is charging a load instead of the fund company and  there are no breakpoints. If, OTOH, you fund it heavily in excess of COI(say up towards the MEC limit), and if you have some half-decent investments in there, they can work out pretty good.  
Have you ever seen one work out pretty good?  Me neither.  For it to work out pretty good, you are describing exactly what needs to happen.  Additionally, the client can't take money out of the policy, and if they do, the market needs to go up and not down.
VUL is nothing more than "Buy Term and Invest the Difference" in one policy with the following differences:
1)The term insurance is overpriced2)The investments are overpriced (think "A" shares with no breakpoints)3)The insurance can't be dropped without the investments being taxed as income (ie. One is forced to own term insurance at old ages4)Much more monitoring is needed, but the lack of compensation for the agent doesn't allow for this to happen 
Joe, look at the actual costs involved at older ages and you'll see that the odds are very stacked against a VUL staying in force for someone who lives beyond life expectancy.  Can you give me a single realistic example where VUL would be better than BTID?
(I also don't believe in BTID.  When comparing term to WL, the comparison should be Buy Term and Save the Difference.) 

troll's picture
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Anon thanks for the thoughts.  This is the very reason I posted my opinion, to get some perspective on where I might be wrong.

anonymous's picture
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I refer to VUL as a "laboratory product".  I say this because it might work under very controlled conditions, but it certainly doesn't work in the real world.  I have a bigger problem with the "U" than the "V".  However, combing the "U" and the "V" just makes for a bad combination.
 

Broker24's picture
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VUL's can be very effective tax-free retirement vehicles.  We typically use some as death benefit in the early years (primarily for people over the ROTH income limits, or who want to exceed contr. limits), and begin over-funding in the early years.  Using just a 7% assumption, the IRR is pretty good compared to funding after-tax/taxable investments.  I agree, it is not the best product for pure death benefit, and it is not the best investment vehicle (although with the right sub-accounts it is pretty competitive).  But if someone either needs death benefit beyond 20 years, or a tax-efficient retirement vehicle (long-term), it is a good option.

Broker24's picture
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anonymous wrote:
I refer to VUL as a "laboratory product".  I say this because it might work under very controlled conditions, but it certainly doesn't work in the real world.  I have a bigger problem with the "U" than the "V".  However, combing the "U" and the "V" just makes for a bad combination.
 

This speaks to one of the previous posts, in that this needs to be managed.  You can't just set the premiums and investment mix and forget about it.

anonymous's picture
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Broker24, please use real numbers to show that it is better than BTID.  
You will only be able to do so if you assume that you can get to the cash tax free.  One can't get to the cash tax free, because it will very likely lead to the policy ultimately lapsing causing the gain to be taxable as income.

anonymous's picture
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This speaks to one of the previous posts, in that this needs to be managed.  You can't just set the premiums and investment mix and forget about it.
This is very true, but it is precisely what happens.  I'll give you the benefit of the doubt that you are a great guy and you give wonderful service even if you aren't getting compensated for it.  You sell a VUL policy to a 40 year old and service it for the next 20 years.  20 years from now, you retire.  It makes no financial sense for anybody to properly service this client.
How often do you run across someone who has a VUL policy that is getting proper service?  We know that the answer is not very often if it isn't a fairly new policy and never if the original agent isn't still around.

deekay's picture
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Broker24 wrote:VUL's can be very effective tax-free retirement vehicles.  We typically use some as death benefit in the early years (primarily for people over the ROTH income limits, or who want to exceed contr. limits), and begin over-funding in the early years.  Using just a 7% assumption, the IRR is pretty good compared to funding after-tax/taxable investments.  I agree, it is not the best product for pure death benefit, and it is not the best investment vehicle (although with the right sub-accounts it is pretty competitive).  But if someone either needs death benefit beyond 20 years, or a tax-efficient retirement vehicle (long-term), it is a good option.
Don't confuse money with math.  You're assuming a straight-line 7% ROR which does not happen in real life.  For example an $10000 investment grows by 30%.  Investment value = $13000.  Second year, investment goes down by 15%.  New account value is $11,050.  Third year up 30%, new balance is $14,365.  Fourth year, down 15%, balance is $12,231.  Now, your average rate of return is 30+30-15-15/4, or 7.5%.  Hell, I even gave you 50 bps!  But $10,000 at 7.5% should've grown to $13,355. 
Now, this may not seem like much, but consider this is only over 4 years.  Combine that with the fact that your COI has gone up every year.  One of two things will happen.  Either the CSV will be eaten into (assuming you even have any after 4 years) or the client will have to add additional premium dollars to keep it afloat.  Either way, not a good situation.  Like anon said, VUL works great in a vacuum and nowhere else for the common investor.

shadow191's picture
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How do you feel about LIRP's?  The general agents that come to our branch have been talking about it like it's the greatest thing since sliced bread.  It's a new concept to me, but essentially what it is is a VUL policy overfunded almost to the point it becomes a MEC. 
The agents refer to it as being equivalent to a Roth without the income limits.  Of course the cost basis can be withdrawn without problems; any gains are taken out as a policy loan.  The loans are basically interest free since they move the funds from the investments to the general account.  The interest is 5% and the general account earns 5% so it all evens out.  There is also a automatic rider that prevents the policy from lapsing.  When the policy is almost out of money, it converts to a paid up policy with a minimal death benefit.
It sounds intriguing because I deal with quite a few people who have maxed out their tax deferred retirement accounts.  But recently I've had to pull people out of unsuitable UL and VUL policies that were on the verge of implosion, so I'm trying to find the catch.
 
anonymous wrote:
Broker24, please use real numbers to show that it is better than BTID.  
You will only be able to do so if you assume that you can get to the cash tax free.  One can't get to the cash tax free, because it will very likely lead to the policy ultimately lapsing causing the gain to be taxable as income.

troll's picture
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shadow191 wrote: But recently I've had to pull people out of unsuitable UL and VUL policies that were on the verge of implosion, so I'm trying to find the catch.
 Youi already did.  See above.

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What is "LIRP"?
The problem with any UL policy is still that you have overpriced ART that is being used as a permanent solution to a permanent problem.   
ART should be used as a solution to a temporary problem or it should be used as temporary solution to a permanent problem.
In case you didn't follow that, Annually Renewable Term insurance is not appropriate for a life long insurance want. 

shadow191's picture
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That's the thing, this product isn't being pushed for life insurance needs.  It's being branded almost as a Roth IRA without the contribution limits.  I can see that in later years, the cost of insurance is way up.  But at that point, the account value should be pretty big also.  It's also designed not to lapse.  At the end, the policy automatically converts to a paid up when the money runs out.  So the client wouldn't be responsible for the withdrawals/loans.
I can see that the cost of insurance is a drag on performance.  But compared to a taxable account, the numbers show that the client would be ahead.  Of course this is all an illustration, so the numbers don't mean too much.
 
 
joedabrkr wrote: shadow191 wrote:
But recently I've had to pull people out of unsuitable UL and VUL policies that were on the verge of implosion, so I'm trying to find the catch.
 Youi already did.  See above.

anonymous's picture
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Stay away from people who are pushing life insurance as an investment.
How expensive are the investments?  (Is someone paying a 5% load on every dollar that they put in regardless of whether the money is going to insurance or investments?  Probably.)
What happens when the client can't/doesn't fund it at close to MEC levels forever?
What happens when the client wants to take money out and they don't want their insurance to decrease?
What happens when you compare it to BTID with the same rate of return?
What's the insurance company?
They're trying to put lipstick on a pig.

spintofish's picture
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All, thank you for these posts. Much appreciated.

Big Taco's picture
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No offense, anon and deekay, I've enjoyed many of your posts, but from what I can see, you two can't sell VUL (or you can?), and work for mutuals, so you have an inherent predisposition to push WL, and hate VUL and UL.  I applaud your understanding of the VUL product, but notice that you've closed your minds to some of the pros, but none of the cons. 
I'm sure you'll say the same (but opposite) about me as I'm a franchisee of Ameriprise: that I have a predisposition toward VUL.  Not true, I don't sell nearly as much LI as I would like to, and of that, not much is VUL.  I sell term, VUL & GUL, the latter 2 for estate planning primarily.  I also don't just sell prop.  I shop it, and clients appreciate this.
Anyway, I didn't see anyone mention that you can take a funded VUL, 1035exchange the CashValue to an annuity AND carry over the cost basis (as long as you follow up, and make sure the insurance company and annuity company are communicating and doing this.  They'll likely screw it up if you don't care enough to keep on them). 
So, lets say Client A is 65, wants to spend the money in his VUL, doesn't care about leaving a tax free DB (because he wants to spend his CV), so you 1035xchg the CV into an annuity (throw in Living Benefits, whatever), and make sure the Cost Basis carries over.  Let's say the cost basis is $110K, the CV is $100K (yes, in my example, the COI over the years is more than the CV, but it doesn't matter, insert whatever numbers you like).  Now Client A has a VA that has a higher cost basis than CV.  He should probably park an extra 10K in, if he's got it.  Now he can spend this money tax free.  There's no more cost of LI (other than M&E from the annuity, if it's variable).  It's tax-free income from a retirement annuity.
Of course, we RRs and IARs aren't supposed to dispense tax advice, so this is a strategy you want to make sure your client's CPA is aprised of and understands.
Also, Deekay and Anon, I like the idea of WL from a mutual, as I've had clients who owned it, and then their company demutualized, giving them a nice bonus in stock.  I always tell clients to keep those policies when they tell me about them.

anonymous's picture
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Big Taco,
Your assumption is incorrect.  I can sell VULs.  What big mutual doesn't have a UL and VUL product?  I believe that they all do.  I sell lots of GUL at older ages.  Like you, I can sell them from any company.
Anyway, I didn't see anyone mention that you can take a funded VUL, 1035exchange the CashValue to an annuity AND carry over the cost basis
Sure you can.  I'm not sure how this would fit into the category of an advantage of VUL since it can be done with any life insurance with cash value.
It doesn't change my argument that VUL has overpriced annually renewable term insurance and overpriced investments and a client would be better off with BTID.   
Let's talk about your example. 
So, lets say Client A is 65, wants to spend the money in his VUL, doesn't care about leaving a tax free DB (because he wants to spend his CV),
1) I don't meet too many older people who have a prefence not to leave money behind. 2) If someone doesn't want money behind, we know (in hindsight) that VUL and/or WL was an inappropriate sale.
so you 1035xchg the CV into an annuity (throw in Living Benefits, whatever), and make sure the Cost Basis carries over.  Let's say the cost basis is $110K, the CV is $100K (yes, in my example, the COI over the years is more than the CV, but it doesn't matter, insert whatever numbers you like).  Now Client A has a VA that has a higher cost basis than CV.  
1) This means that the VUL really sucked or it was way underfunded or a combination of the two.  Either way, the client got screwed because he really doesn't have any option except to pay very high insurance rates going forward or cancel his policy.  This client most likely can't keep his insurance even if he wanted to do so.
He should probably park an extra 10K in, if he's got it. 
Why?  This will do nothing for him.  As it is, his Cost basis is $110,000 and his CV is $100,000.  When he parks in the extra 10K, the numbers changen to $120,000 and $110,000.  I'll assume that you were tired when you wrote that.
Now he can spend this money tax free.
Of course he can.  It's because his VUL stunk and he had no gain.  If he took $100,000 out  of his bank account to fund the VA, he could also spend that money tax free.  The advantage of the 1035 in your example is that the client can have $10,000 of "free" gain. If he's just going to take the money and spend it, it would also be tax free if he didn't put it in a VA.  Everything is tax free if there is no gain.  I'm having trouble envisioning this as a positive.
What happens if the VUL has a gain?  The money gets 1035d into the VA and all gains must come out first (unless the contract is annuitized) and taxed as income. 
Don't forget that when life insurance proceeds go into an annuity, it really goes from an excellent "investment" to leave behind to a terrible one since annuities don't have a step up in cost basis.   The client has to really not care what happens when he dies.
 
 

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Anon, Yes, I was incorrect about the cost basis with adding the $10K.  Must have been sleepy last night. 
I'm aware that you can 1035 any cash value policy.
I still think that you'll usually push a worst case scenario for VUL, and a best case scenario for WL.  That's my opinion.  I've seen VUL policies work as proposed, it just takes periodic upkeep, like most investment accounts.
And I'm sure that you've ran into clients who were sold an inappropriate LI product before, be it WL or VUL.  I sure have.  One comes to mind that involved WL from a mutual.  1 client had 5 small WL policies from NWM, all had loans on them, and the meter was running on them.  Obviously this guy lived longer than he thought he was going to, and just needed more income.  It would have made much more sense long before he met me to have enacted the 1035 strategy I described above, instead of having the loan interest and COI meters running on all of these policies for years, especially after him effectively ruining the DB of the policies for his younger wife anyway by borrowing so much against them.
What we'd like to see happen (people get older, realize they have more than enough money, realize that they want to leave a tax free DB, buy insurance), doesn't always happen.  Some people get older, already have the funded life insurance that someone sold them years ago as a "tax-free retirement income vehicle", don't have enough money to live as comfortably as they'd like, and want to spend the CV.  They can do this by spending it directly out of the policy or 1035 exchanging it to an annuity.  If they plan on spending all of the money before they die, then why leave it in an insurance policy where the cost of life insurance will most likely be much higher than the M&E/expenses of a VA?  Just on the chance that they don't outlive most of this money?  Oh well. 

troll's picture
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Big Taco and Anonymous,
This is good stuff. If you haven't done so, please join the new forum and continue this conversation in the insurance section. We need guys like you over there.
http://registeredreps.s10.forumsplace.com/index.php

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First of all, I don't like comparing WL to VUL because it is comparing an investment vehicle to a savings vehicle.
Secondly, I definitely don't do a best case scenario with WL.  Is this even possible since one can't illustrate better than the current dividend scale?  Also, I do most of my selling without illustrations.  I also don't do a worst case scenario with VUL.  I don't bring up the subject.  If somebody asks, I explain how it works.  
Go ahead and look at the best case scenario for VUL.  How does this compare with BTID?  Use whatever investment rate of return that you would like.  It can't compete because the insurance + other costs inside of the VUL are much higher than what would be paid in a stand alone policy.  The investments will all have a substantial front end load.  Additionally, all of the gains will ultimately be taxed as inwine when in the BTID scenario, much of the gains will be capital gains.
  
I've seen VUL policies work as proposed, it just takes periodic upkeep, like most investment accounts. 
I don't doubt that you've seen plenty working as proposed.  The problem is the long term.   With a UL/VUL the COI simply can crush people when they get older.  Combine this with a policy that hasn't been overfunded and/or money has been removed at an inopportune time and it's a recipe for lapse.  Ultimately, what happens when somebody buys a VUL is that they usually end up with overpriced term insurance.
Anyway, for your own edification, you need to be able to show a scenario where VUL beats BTID.

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Anyway, for your own edification, you need to be able to show a scenario where VUL beats BTID.
2 different animals, Anon.  The biggest difference, in my mind, the client could outlive the term insurance.  That's why it's so inexpensive, right? 
Actually, most of the life insurance I sell is term.  I steer my clients that way usually because I think it's a better value for a lot of scenarios.  But if permanent insurance is important, then it's GUL or VUL.  Which then usually boils down to:  is a guarantee important?  Is accessing cash value at some point important?
I don't doubt that you've seen plenty working as proposed.  The problem is the long term.
If the VUL policy is tracked & funded correctly over the years, it should endow when it's supposed to, so it gets to the point where the client is almost self insured which makes COI less of a drag (and as you know, in LI, the client can't be 100% self-insured in a policy).  And if the client wants to start spending money out of the policy (take net-zero loans), not 1035 into annuity, then it will usually make sense to start dropping down the DB?  This helps to reduce the drag of COI. 

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VUL and BTID are not two different animals.  They are both term insurance with a side fund.  The difference is that the side fund grows tax deferred in the VUL, but the insurance and the investments are more expensive.
The client can't outlive the term insurance any more than they can outlive the VUL.    
Ex. Client buys $1,000,000 VUL policy.  10 years from now, the CV is $500,000.  The client is paying for $500,000 of insurance.  If the client dies, the beneficiaries will get $1,000,000.  
 Client buys $1,000,000 of term insurance and invests the difference.  10 years from now, the side fund is worth $500,000.  The client has reduced his term to $500,000.  If the client dies, the beneficiaries will get $1,000,000 ($500,000 from the insurance and $500,000 from the investment). 
The difference is that the client with the VUL can never stop paying for the term insurance.
Big Taco, please compare for yourself.  I really can't see any advantage using real scenarios where a client would be better with VUL over BTID.
If the VUL policy is tracked & funded correctly over the years
That is such a gigantic "If".  Human nature gets in the way.  There is also no reason to suspect that the policy will get serviced properly when you are gone since there will be very little compensation to the new rep.  Regardless, it still doesn't beat BTID.
None of this addresses the fact that one's insurance need usually increases over most of one's life and their insurance wants rarely decrease.

Devils Advocate's picture
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Isn't BTID a fallacy? When you look at WL vs Term, side by side, the term premiums will add up to a higher number than WL. Why don't we say "BWLID"?

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VUL and BTID are not two different animals.  They are both term insurance with a side fund.  The difference is that the side fund grows tax deferred in the VUL, but the insurance and the investments are more expensive.
You pointed out a difference after you wrote that they're not different.  Also, don't forget, the VUL is permanent.  That's a big difference.  So even if you have renewable term, and a 30yr term, and you outlive that 30yrs, you'll may be shocked at how much they'll renew a term contract for you.  It won't be cheap.
 Client buys $1,000,000 of term insurance and invests the difference.  10 years from now, the side fund is worth $500,000.  The client has reduced his term to $500,000.  If the client dies, the beneficiaries will get $1,000,000 ($500,000 from the insurance and $500,000 from the investment). 
What happens if the client drops the $1mm to $500K, and the sidefund's value drops to $400K and then the client dies.  The heirs get $900K, while the $1mm VUL pays $1mm.  All these bumumptions can go eitherway.
That is such a gigantic "If".  Human nature gets in the way.  There is also no reason to suspect that the policy will get serviced properly when you are gone since there will be very little compensation to the new rep.  Regardless, it still doesn't beat BTID.
The BTID scenario you presented should take just as much work or more for an advisor over time who is meeting with a client, making sure the "side fund" is being allocated appropriately and rebalanced.  BTID is not the maintenance-free alternative.  Advisors worth their salt, and clients who care at all should meet regularly regardless.  Yes, it doesn't always happen that way.

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Devil's Advocate,
I'm comparing BTID to VUL.
I agree that BTID in a comparison against WL is a fallacy.  You are correct that term insurance is more expensive.  Additionally, we should be looking at money that is saved, so the more accurate comparison should be "buy term and save the difference" which you've already shown to be incorrect since term is more expensive than WL.

Big Taco's picture
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This forum software turns "a$$umption" into "bumumption".

anonymous's picture
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 Also, don't forget, the VUL is permanent.  That's a big difference.
The underlyng insurance is annually renewable term insurance.   It's permanent just like ART is permanent.  With both, the insured is paying ART rates which is the most expensive way to own insurance for the rest of one's life.
What happens if the client drops the $1mm to $500K, and the sidefund's value drops to $400K and then the client dies.  The heirs get $900K, while the $1mm VUL pays $1mm.  All these bumumptions can go eitherway.
That is a valid concern.   The problem with both is that the death benefit is not increasing.  Go talk to twenty 50 year olds and ask if they have more or less insurance than they had when they were 30.  Almost all of them will have more.  Also keep in mind that with a VUL with a level death benefit, all that the client has if they die prematurely is overpriced term insurance.
The BTID scenario you presented should take just as much work or more for an advisor over time who is meeting with a client, making sure the "side fund" is being allocated appropriately and rebalanced. 
It doesn't take as much work, but even if it did, the lack of monitoring on this doesn't carry the same danger.  When a VUL doesn't get monitored properly, the client ends up with no insurance and no cash.
Advisors worth their salt, and clients who care at all should meet regularly regardless.   
Yes, but we are talking about life insurance.  If your clients aren't substantially older than you, you will retire while these policies are in force, thus leaving many of them with poor or no service.
Big Taco, you're a smart guy.  Don't waste time arguing with me.  Compare VUL to BTID. 

Big Taco's picture
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anonymous wrote:
 Also, don't forget, the VUL is permanent.  That's a big difference.
The underlyng insurance is annually renewable term insurance.   It's permanent just like ART is permanent.  With both, the insured is paying ART rates which is the most expensive way to own insurance for the rest of one's life.
Depends on how long that person's life is, I suppose.  I thought we were comparing VUL to BTID.  You used an example of 1mm term policy.  Let's say it's a 30yr term, and the client has outlived the term and is now 75yrs old, in decent health.  How much is a new 30yr term policy (providing he can automatically renew) going to cost him?  It's not going to be cheap.  The last year of the term is priced into the first years' premium.  But, as your example illustrated, He'll probably get much less DB, so that will help with costs...  A VUL does this every month--factors in how much is in the "side fund" and charges for the uninsured amount (with level option).
What happens if the client drops the $1mm to $500K, and the sidefund's value drops to $400K and then the client dies.  The heirs get $900K, while the $1mm VUL pays $1mm.  All these bumumptions can go eitherway.
That is a valid concern.   The problem with both is that the death benefit is not increasing.  Go talk to twenty 50 year olds and ask if they have more or less insurance than they had when they were 30.  Almost all of them will have more.  Also keep in mind that with a VUL with a level death benefit, all that the client has if they die prematurely is overpriced term insurance.
No offense, but I'm seeing a red herring here about the hypothetical need for increasing DB:
1) Okay, so choose option 2, increasing DB.
2) Do you realize that even if option 1 is utilized, if the VUL is funded and monitored correctly it will eventually "corridoor" anyway (to avoid MECing), and begin increasing its DB?
 
The BTID scenario you presented should take just as much work or more for an advisor over time who is meeting with a client, making sure the "side fund" is being allocated appropriately and rebalanced. 
It doesn't take as much work, but even if it did, the lack of monitoring on this doesn't carry the same danger.  When a VUL doesn't get monitored properly, the client ends up with no insurance and no cash.
Any more, insurance companies that issue VUL are providing asset allocation subaccounts, or a service to allocate the subaccounts according to risk tolerance.  In your scenario, you have to change the DB of the term policy in year ten.  In mine, you don't even have to do that.  So which scenario is more "automated"?
Advisors worth their salt, and clients who care at all should meet regularly regardless.   
Yes, but we are talking about life insurance.  If your clients aren't substantially older than you, you will retire while these policies are in force, thus leaving many of them with poor or no service.
Most of my clients are older than me.  I don't have a lot of VUL on the books.  Any of my successors will (I really hope) be an excellent advisor who realizes how crucial excellent client service is to ongoing advisor success, and I warn clients not only about VUL, but about all variable investments:  It's important that we get together and review periodically, rebalance, stay on top of changing needs and goals, you know the drill. 
I will SELL my practice one day.  I would hope that someone motivated to pay me for my clients will do what it takes to keep them happy (service them).
Big Taco, you're a smart guy.  Don't waste time arguing with me.  Compare VUL to BTID. 
I'm not against BTID.  Most of my LI sales are BTID.  VUL is a valid product, though, as is WL, GUL, whatever else the state insurance commissioners decide will service our population.
 

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Big Taco,
You seem reluctant to compare, so I took the liberty.  Feel free to use any numbers that you want and the results will be similar.
Assumptions: Healthy 35 year old male, making an annual payment of $10,000 on a $1,000,000 VUL policy earning 8%; cost of 30 year term is $1290.
Results:VUL 30 years: Cash Value $759,000, Death benefit $1,000,000BTID 30 years: Cash $1,153,278
VUL 40 years: Cash Value $1.5 mill, DB 1.7 milBTID 40 years: Cash $2.6 mill
VUL 50 years: Cash Value $3.1million, DB  3.3millionBTID 50 years: Cash 5.7 million
VUL 60 years: Cash Value 6.2million  DB 6.2BTID 60 years: Cash 12.4 million
Notes:
I didn't search to find the best performing VUL or the least expensive term. 
If death would have occurred before thirty years, BTID would have $1,000,000 + the cash
I'm not a fan of BTID.  I like term insurance. I like participating whole life insurance.  My point is that VUL will underperform BTID. 

Big Taco's picture
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My point is that VUL will underperform BTID. 
Very good, Anonymous.  But that is an overgeneralization, and untrue.  I've ran BTID vs. VUL many times, and it is often included in an insurance company's VUL illustration printout.
I like BTID, and usually suggest it to clients.  Sometimes, though, VUL makes sense, or GUL, or WL, or a combo.  We'll have to agree to disagree on this one, I think.

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Big Taco,
Please show me that I'm wrong.   I'd really like to see one example that's not way out of the ordinary that shows me being wrong.  I have an open mind.  Can you do this?
I'd be happy to agree with you, but I do need to see numbers that show VUL being a better alternative than BTID.  I've just never seen it.
For anyone reading this thread, I must point out that I like term insurance.  I like whole life insurance.  I like GUL at older ages.  And, although I keep talking about BTID, I think that it can't be used to compare term insurance to WL insurance.
 

Mike Damone's picture
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Hi anonymous,
Forgive my naive question (I don't know much about life insurance) but if somebody wants to do a one time single premium with a sole objective of maximizing a guaranteed death benefit, wouldn't a G-UL policy have a greater death benefit than say a WL policy?

anonymous's picture
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The answer is "yes" and this would be true even if it wasn't a single premium.  GUL would have a greater GUARANTEED death benefit than whole life. 
However, when we are talking about guarantees, we are ignoring dividends.  Does it make sense to ignore something that has always been paid?

Mike Damone's picture
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anonymous wrote:
The answer is "yes" and this would be true even if it wasn't a single premium.  GUL would have a greater GUARANTEED death benefit than whole life. 
However, when we are talking about guarantees, we are ignoring dividends.  Does it make sense to ignore something that has always been paid?

Thank you for the response.  The very few experiences I've had where we used permanent insurance I used G-UL for maximum death benefit.  Cash value / dividends were not important to the clients.

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If dividends aren't important to a client, it is only because they don't understand dividends.  It would be like a client saying "I want an S&P 500 index fund, but I don't care about it paying dividends."
Do you understand the importance of dividends in a permanent insurance policy?

Mike Damone's picture
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anonymous wrote:
If dividends aren't important to a client, it is only because they don't understand dividends.  It would be like a client saying "I want an S&P 500 index fund, but I don't care about it paying dividends."
Do you understand the importance of dividends in a permanent insurance policy?

I won't lie.  No, I don't.

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Mike, let me give you an example.  What you will learn is that WL (or a WL/term blend) tends to be better for youner ages and GUL for older ages.
In this example, WL is much better than GUL. 
Healthy 35 year old male purchasing $1,000,000 of life insurance:
GUL: Premium $5100; virtually no cash in any year and the death benefit will always be $1,000,000.  GUL is basically lifetime level term insurance.  If the premium ever stops, so does the life insurance.
WL: Premium $10,700; initial death benefit $1,000,000
Age       Cash Value       Death Benefit60          $515,000         1.3 million75          1.5 mil         &nb sp;  2.2 million90          3.7 mil         &nb sp;  4.2 million
WL: same as above, but using the dividends to pay the premium.  This way, we'll compare the same death benefit
Age   Premium       Cash Value      Death Benefit60    -2100         & nbsp;   373,000        &nbsp ; 1 million75   -21000              676,000         1 million90  -47,000        &nbsp ;    902,000         1 million
The premiums above are negative numbers because the insured paid their insurance premium by receiving a check from the insurance company.  By age 75, the insured has received more money from the insurance company than they have paid.
This last one shows WL using the GUL premium of $5100
Age    Cash Value      Death Benefit60      240,000        &nbsp ;    $615,00075      725,000        &nbsp ;    $1,000,000 90      1.7 million        &nbsp ;  $2,000,000
If this was a real case, and the client needed $1,000,000 of life insurance, but could only afford $5100, I would have had them purchase a combination of WL and term. 
 

ExPropTrader's picture
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Anon,
Very well illustrated.

Mike Damone's picture
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Understood.  Thank you for taking the time and explaining that to me.  That makes perfect sense.  Would you mind explaining what the average compensation / gdc difference would be G-UL vs WL. 

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