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.

[quote=anonymous]

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.

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.

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.

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.

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?

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.

so you figure withdrawals from a VUL are taxable as income?

It depends.  Basis tax free.  Gains taxable as income.

[quote=theironhorse]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. 

[/quote]

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?

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.

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.

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.

"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. 

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.

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.

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. 

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. 

[quote=theironhorse]
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.
[/quote]

Perfection.