[quote=deekay][quote=army13A]

  I don't usually post during the day and was going to respond to all of the other posts over the weekend but I had to clear this one up.  Deekay, you have a lot of knowledge but that is flat out wrong because I just showed THAT EXACT scenario the other day.  You can show negative returns.  And as for counting on 6-7% over the long period, that's a bet I'll always take.  Even after last years market thumping, large and small caps have beat that since the inception of the market.  If an individual can't get a client 6% return over the long haul (20 to 30 years and beyond), they shouldn't be in this business.  [/quote]   Interesting.  I stand corrected.  Can they show maximum insurance charges and investment charges while showing those down years?  In other words, can they really illustrate a worst-case senario?  [/quote]   I believe army works for the same company as me, and all our VUL illustrations have the "worst case scenario" feature on the signature page.  We have 3 columns, 1 that shows year by year cash value if the policy grows by your assumed rate with guaranteed expenses, 1 that shows year by year cash value if the policy grows by your assumed rate with maximum expenses, and year by year cash value if the policy grows at 0% gross with guaranteed expenses.  Now whether or not the advisor spends much time on that 3rd column is that advisors perrogative, but it is there.

deekay:

Ahh, so you’re saying that the investment returns will be illustrated based on a straight line, say 8%, 5%, and 0% gross return?  Can you illustrate how a negative year will impact the illustration? 

  You can't, per se, show one negative year.  You can, however, show a distribution from the cash value as a one time distribution, which will pretty much have the same effect. 

army13A:

[quote=deekay]Ahh, so you’re saying that the investment returns will be illustrated based on a straight line, say 8%, 5%, and 0% gross return?  Can you illustrate how a negative year will impact the illustration? 

  You can't, per se, show one negative year.  You can, however, show a distribution from the cash value as a one time distribution, which will pretty much have the same effect.  [/quote]   What if the distribution is taken in a year where the subaccounts are down?  What happens then?    When you explain you can't show a negative return on these illustrations, how does the client react?

deekay:

[quote=army13A][quote=deekay]Ahh, so you’re saying that the investment returns will be illustrated based on a straight line, say 8%, 5%, and 0% gross return?  Can you illustrate how a negative year will impact the illustration? 

  You can't, per se, show one negative year.  You can, however, show a distribution from the cash value as a one time distribution, which will pretty much have the same effect.  [/quote]   What if the distribution is taken in a year where the subaccounts are down?  What happens then?    When you explain you can't show a negative return on these illustrations, how does the client react?[/quote]   I apologize for not being clear.  When you show 0% gross return every year, the net return is negative because of the expenses.  The question I thought you were asking is can you show ONE negative year out of the entire time the policy is in force and I said you would have to show that as a distribution to simulate that.  So for example, we show a 6% average return but in year 10 of the policy, there is a bad year for the market, let's just say 50% market loss.  We just put in a distribution for that year for 50% of the cash value and that depletes the cash value.  It sounds  a lot more complicated than it really is.    Again, I just did an illustration with a client the other day and showed them close to a negative 3% net return EVERY YEAR and how long the policy would last.  Even with that, the policy lasted a pretty decent time but they chimed in with the "well the market is not going to be negative every year for the next 30 years". 

It would be interesting to see if an insurance company could base the policy’s performance on the past results of an index or the actual performance of a porfolio of subaccounts.  I’m kind of suprised they haven’t been able to put that kind of analysis together.

  Also, is it possible to show a withdrawal and a down year at the same time?  Or would that just be adding the two percentages together.  Like, a 4% withdrawal + a 20% downturn = -24%?

[quote=deekay][quote=army13A]

  I don't usually post during the day and was going to respond to all of the other posts over the weekend but I had to clear this one up.  Deekay, you have a lot of knowledge but that is flat out wrong because I just showed THAT EXACT scenario the other day.  You can show negative returns.  And as for counting on 6-7% over the long period, that's a bet I'll always take.  Even after last years market thumping, large and small caps have beat that since the inception of the market.  If an individual can't get a client 6% return over the long haul (20 to 30 years and beyond), they shouldn't be in this business.  [/quote]   Interesting.  I stand corrected.  Can they show maximum insurance charges and investment charges while showing those down years?  In other words, can they really illustrate a worst-case senario?  [/quote]   Why is it prudent to show something that's never happened and has a .001% chance of ever happening?  Do you really want to be running around telling prospects that in the future people will start dying early in life and in large numbers?

[quote=deekay]It would be interesting to see if an insurance company could base the policy’s performance on the past results of an index or the actual performance of a porfolio of subaccounts.  I’m kind of suprised they haven’t been able to put that kind of analysis together. I’m sorry if I’m not getting it but isn’t that the same thing? We see what the S&P 500 has done during the last 20 years or so (example 6.54%) and just input that as the hypothetical return? Am I missing something on that?

  Also, is it possible to show a withdrawal and a down year at the same time?  Or would that just be adding the two percentages together.  Like, a 4% withdrawal + a 20% downturn = -24%? Yes, that would just be combining the two.  [/quote]

[quote=BerkshireBull][quote=deekay][quote=army13A]

  I don't usually post during the day and was going to respond to all of the other posts over the weekend but I had to clear this one up.  Deekay, you have a lot of knowledge but that is flat out wrong because I just showed THAT EXACT scenario the other day.  You can show negative returns.  And as for counting on 6-7% over the long period, that's a bet I'll always take.  Even after last years market thumping, large and small caps have beat that since the inception of the market.  If an individual can't get a client 6% return over the long haul (20 to 30 years and beyond), they shouldn't be in this business.  [/quote]   Interesting.  I stand corrected.  Can they show maximum insurance charges and investment charges while showing those down years?  In other words, can they really illustrate a worst-case senario?  [/quote]   Why is it prudent to show something that's never happened and has a .001% chance of ever happening?  Do you really want to be running around telling prospects that in the future people will start dying early in life and in large numbers?[/quote]   I tend to agree with Bull here.  If we are analyzing a clients case and determine that a VUL is the best strategy for the client, why spend a lot of time going over situations in which the product WON'T work and give the client a handful of reasons to not buy the product and go against your recommendation?  Let the client know that you'll work hard to make sure the policy grows at the rate you are planning on according to their goals, but that there may be some bad years like 2008 where it doesn't exactly go as planned.  Why wouldn't you advise them the same way you would a regular brokerage account or retirement plan?  If things don't go as planned and your client averages 5% return per year in their 401(k)instead of the 8% needed to retire, your client ends up needing to work 5-6 more years.  How is that different than a VUL gone bad?  The client doesn't reach their goal and is pissed.  But we don't hear about 401(k) illustrations or Roth IRA proposals. 

[quote=anonymous][quote=army13A] [quote=anonymous]I often call these laboratory products because they work much better in a laboratory than in the real world.  Human nature and VUL don’t go together.

  Let's ignore that and keep it simple.   First of all, you need to understand the basics of VUL.  VUL combines annually renewable term insurance with a side fund of investments.   There are two basic problems with this. 1)Annually renewable term insurance isn't designed for a permanent insurance need. 2)The investments are very expensive.   I am not a fan of buy term and invest the difference.  However, this is exactly what VUL is, but done in one policy.  Whenever I compare VUL to BTID, the term insurance with a side fund blows away the VUL.  This is because the insurance in VUL is overpriced and the investments are overpriced.   I've put the challenge out there for someone to put together a scenario where VUL would beat BTID, but nobody has done it.   If you'd like, we can through a prospectus for a VUL product and you'll quickly see why it's not an appropriate product.[/quote]

Anon, I know you have a lot of knowledge b/c I've read your posts.  But here is where I'm coming from on this. 

With the investments being expensive, that is why I use a majority of index funds inside of a VUL.  I recently consturcted a pfolio with a total expense ratio of 0.34.  Ins companies try to push their asset allocation models but they're too expensive for my taste (1.4 or 1.5). 

When you use BTID, what kind of account are you putting the cash in? Taxable brokerage account without the tax benefits of a side account inside of a VUL.  For the taxable account to beat the VUL with all things being equal, the taxable account has to WAY OUTPERFORM the VUL just to be equal in order to make up for the lacking of tax benefits b/c you have capital gains you're paying along the way.  And let's just pray that the capital gains rate stays at 15% but with Dems in office, that doesn't seem likely. 


[/quote] Instead of arguing, post a prospectus and then let's go from there.  There are a few things to keep in mind.     1) All of the expenses must be examined.  These can include: A) Front end sales charge with no break points. B) Annually increasing cost of insurance C) M&E Charge (same impact as having higher fund charges) D) Miscellaneous charges   2)Index funds are very tax efficient.  In a brokerage account, for the most part, they will be growing tax deferred.  At death, they will receive a step-up in basis.  My point is that the tax drag will be minimal.   When you are looking at real numbers, you are going to see that the side fund doesn't have to outperform at all.  In fact, I'm talking about the term + side fund outperforming using identical funds.  The fees of the VUL are an incredible drag on performance.   Again, instead of arguing with me, post a prospectus, and you'll see that I'm correct.  Even if we can come up with an example where I'm wrong, I'll be wrong by such a little bit that I'll only be wrong in hindsite (person dies at the precise best time) and it doesn't make up for the fact that there is such a strong real world possibility of something going wrong.[/quote]   I'll do better than posting a prospectus.  With any illustration, the costs are already included inside the illustration and the entire illustration can be exported to Excel.  It'll take me some time to put together b/c I have so many other things to do but I will post up an illustration with the VUL case.  Then you can put together the BTID with the costs and taxes and we can compare. 

[quote=anonymous]

  2)Index funds are very tax efficient.  In a brokerage account, for the most part, they will be growing tax deferred.  At death, they will receive a step-up in basis.  My point is that the tax drag will be minimal.  [/quote]   You're absolutely right that index funds are very tax efficient but I think you're wrong when it comes to the brokerage account.  When we're talking about socking away high premium dollars a month (over $1,000), it's going into a Single or Joint non-retirement brokerage account.  That is not growing tax deferred; they're paying taxes along the way.  Yes you are right at death, there will be a step up in basis for the heirs but you can't have both.  If an account grows tax deferred, there is no step up in basis at death because it's an IRD (income in respect of a decedant)asset (example IRA, 401k, annuity).  If it's a taxable account, you're paying taxes along the way and that's why you're getting a step up in basis.    If I'm wrong, please correct me because that is what I was taught.         

iceco1d:

Here’s a reason:

People get INSURANCE to remove risk.  People get INVESTMENTS to take risk.  What sense does it make to buy insurance to remove risk, and then go ahead and put risk right back into the equation? 

  People buy term insurance to remove risk.  Few people buy life insurance w/the reasoning "I need to remove market risk from the equation, therefore I need some life insurance".  If someone is maxing out their 401(k), can't qualify for a Roth or is already maxing out their Roth, already has plenty of cash reserves in muni bonds, and wants another tax beneficial area to generate long term growth then a VUL wouldn't be considered a "risk remover" as far as the client is concerned.  Now as I've stated in prior posts I think there are VERY few situations in which a VUL is the best strategy for a client, so the example I just used is very few and very far between.

iceco1d:

Here’s a reason:

People get INSURANCE to remove risk.  People get INVESTMENTS to take risk.  What sense does it make to buy insurance to remove risk, and then go ahead and put risk right back into the equation? 

  I never said that this should be the SOLE insurance strategy.  When I use this, it's for individuals who already have the standard insurance products (30 year level term and guaranteed non-variable permanent insurance) and have little to no need for the insurance portion. 

3rdyrp2:

[quote=iceco1d]Here’s a reason:

People get INSURANCE to remove risk.  People get INVESTMENTS to take risk.  What sense does it make to buy insurance to remove risk, and then go ahead and put risk right back into the equation? 

  People buy term insurance to remove risk.  Few people buy life insurance w/the reasoning "I need to remove market risk from the equation, therefore I need some life insurance".  If someone is maxing out their 401(k), can't qualify for a Roth or is already maxing out their Roth, already has plenty of cash reserves in muni bonds, and wants another tax beneficial area to generate long term growth then a VUL wouldn't be considered a "risk remover" as far as the client is concerned.  Now as I've stated in prior posts I think there are VERY few situations in which a VUL is the best strategy for a client, so the example I just used is very few and very far between.[/quote]   I want to state that as well.  I've sold FAR MORE whole life and term than VUL policies but there have been exact situations like that where it made sense and we did it.  A young couple making $500K a year and completely maxed out QP's wanted to put additional money into a tax advantaged vehicle.  Also forgot that all the cash inside a VUL is creditor protected as well while a standard brokerage account isn't. 

army13A:

Also forgot that all the cash inside a VUL is creditor protected as well while a standard brokerage account isn’t. 

  Good point...also with parents saving up for kids college, VUL's don't count towards household assets for purposes of determining eligibility for financial aid or grants. 

Have you ever seen a VUL that has been inforced for 20+ years? I have inheritted some orphans from my company and NONE of them have work. What Anonymous and DHK says is correct, it works well inside a labratory and never in real life. Truth of the matter is that no client ever goes 100% aggressive or aggressively overfunds it in the beginning. IF and even IF they did, this strategy would be a lot more expensive than a “buy term and invest the difference.”

  Think about it like this...the cost of insurance inside a VUL is like health insurance, it increases every year. As the client reaches retirement or death, the cost of insurance goes up so high that it starts eating away at your cash value (look at the guaranteed column side). Well what if the market performs at 6-8% and that guaranteed column never happens? Well when has the market ever CONSISTENTLY year in and year out done a +6-8%? What if the market takes a nose dive and goes -40% when the client is now 68 years old? What's the cost of insurance of a 68 year old? What if the client needs to take a withdraw then?   I agree, there might be some very rare cases where a VUL might work, but there will most likely never be a case where it's the BEST strategy for a client. In the end, insurance companies are a business and they need to generate profit. The reasons why VULs are so cheap is because they don't anticipate the death benefits being paid for most of the policies. Even if the death benefit ends up getting paid, the insurance company would of made profits off the fees that they tacked onto your mutual fund over the years. You don't think an insurance company will hesistate to increase your cost of insurance inside a VUL? Think twice, look at what has happened to the variable annuity rider fees over the years...

[quote=ChrisVarick]Have you ever seen a VUL that has been inforced for 20+ years? I have inheritted some orphans from my company and NONE of them have work. Chris, correct me if I’m wrong but you joined a mutual insurance company correct? And I believe NWM from your prior postings? I’m just curious about your comment b/c I interviewed with NWM before and I believe it’s an awesome company.  I sat with a managing partner of one of the local agencies where I live and I told him about how I sold some VUL cases and he looked shocked.  He said he spent over 15 years in the biz and never sold one in his life b/c he didn’t need to b/c of NWM dividend and then he said that NWM just recently came out with a VUL.  

Truth of the matter is that no client ever goes 100% aggressive or aggressively overfunds it in the beginning. Again, the point I have made before is that IF DONE PROPERLY.  When I do it with my clients, it is with individuals who are over funding the policy. I explain all the risks and go into intricate detail. 

IF and even IF they did, this strategy would be a lot more expensive than a “buy term and invest the difference.” I’ve already offered to show up an illustration and compare it to a BTID, so we can compare all the benefits/negatives of both theories.

  Think about it like this...the cost of insurance inside a VUL is like health insurance, it increases every year. As the client reaches retirement or death, the cost of insurance goes up so high that it starts eating away at your cash value (look at the guaranteed column side). Where are you getting this from? No offense but have you ever run an illustration on a Variable policy? When I run illustrations, I show returns based on 6% gross because I try to be super conservative with client's expectations.  Under the MAXIMUM CONTRACTUAL CHARGES (which others have pointed has a .001 chance of ever happening), the CV doesn't start going down till they're age 93.  So even if the scenario did happen of max charges, my clients will not be in this heavily anymore at age 93 because I usually show them funding to age 60 or 65 and then start taking distributions over their life expectancy. 

Well what if the market performs at 6-8% and that guaranteed column never happens? Well when has the market ever CONSISTENTLY year in and year out done a +6-8%? It's not about doing 6-8% year in and year out.  This is no different than when we tell clients to invest in brokerage accounts with us because over the long haul, the market AVERAGES well over 6% if invested properly.  Some years the market does 20-30%, some years it does negative returns but it's the average that counts.  Somebody else has mentioned this already as well.
 What if the market takes a nose dive and goes -40% when the client is now 68 years old? What if a client's retirement account takes a nosedive at age 68? What is our typical answer usually when clients or prospects ask us this? Mine is that if they're with an Advisor and their account drops 40% when they're 68, they should start looking for an Attorney b/c they overly invested in equities or in emerging markets and tech stocks and taking too much risk at that age.  If a client is properly allocated and that is our job, this should not happen.  Again, this is no different than with regular investment accounts.  
  I agree, there might be some very rare cases where a VUL might work, but there will most likely never be a case where it's the BEST strategy for a client. In the end, insurance companies are a business and they need to generate profit. Insurance companies make profit off of every product they manufacture, whether it's term, whole life, universal life, etc.  So I don't know where you're going with this.   [/quote]

Check out my replies above.  I really no mean offense to anyone.  I'm an independent rep and I get paid the same whether I sell whole life, UL, VUL, variable, etc.  I have no financial incentive when occasionaly recommend these to my clients.  I'm just trying to show another point of view.  I used to work at a company that sold nothing but non-par whole life policies.  It was my first company and they taught me how to sell well b/c the product itself was garbage.  I love WL but only participating whole life policies.  They taught me every thing in their "kill book" to defeat par WL, UL, VUL and even TERM! Chris, some of the arguments you made were the exact same things I said and I'm saying me, personally, I didn't know better and I did what I knew.  When your only tool is a hammer, everything looks like a nail and that was the case for me.  I'm not saying this for anybody else so please don't take offense again. 

Well, after a year with the company, they started bringing in new products and they finally brought on a UL and a VUL and we had a wholesaler talk to us about VUL.  He knew our company well b/c we did some term through them (the few who actually sold term).  He knew our "kill book" really well as well.  He just started disecting our objections and our selling points for our non-par WL: "Never mix investments with insurance"; "Costs will eat up the policy" and etc.  The guy was a ChFC and granted, he was a wholesaler.  I knew what his intentions were but he went through the whole thing of overfunding a VUL and tax treatments.  It opened my eyes but I wasn't convinced b/c again, he was a wholesaler and the senior guys in my office were knocking his idea so I didn't know what to believe.

At the same time, I started taking CFP courses (I'm not a CFP, just took the coursework for the knowledge) and a little while later during my income tax course, my instructor talked to us about the same concept and said it's an awesome tool for young people who are making good money.  Now this guy was a CPA, CFP and a JD and he ran his own estate planning firm.  So he had no "dog in the hunt" personally and why would he care what we did with our clients? He was really trying to teach us and he went through it in details.  We all asked him the same questions and he addressed it one by one for about an hour.  After that, I started looking more into it with open eyes and here I am.  The fact that a CFP instructor who was an Attorney and a CPA might not mean much to some people but this guy was extremely smart and has tons of experience, so I listened to his advice. 

So again, I do not use this as the SOLE insurance strategy.  When I do do it, it's for individuals who are already properly insured with a combo of perm and term and are looking for other options to invest and have little to no need for the insurance piece of the pie.  That is why we do the minimum death benefit, max investment scenario where with the x dollars a month, we buy the smallest life policy possible w/o triggering the MEC rules. 

army13A:

[quote=theironhorse]i think we all agree army, but that usually means 8-9% gross in a vul to achieve the 6% net.[/quote]

8-9% gross for a 6% net? That again depends on the investment options inside. If you choose an emerging market or commodoties fund and even then, I haven’t seen a 3% expense ratio. S&P 500 index fund, 0.17% ER, so you need 6.17% gross. 

  Uh-oh.  I'll try to take the time to respond to lots of this thread later, but for now, this tells me there is a huge problem in your understanding of the product.   If you invest in an S&P index fund with an ER of .17% and the fund gets 6.17%, you will have a net return of 6.17% and not 6%.  This is because the net return of the fund includes the ER.  However, if the underlying fund gets 6.17%, the gross return in a VUL can't be 6.17%.   In order for that to happen, the administration costs would have to be $0, the COI would have to be $0, the M&E would have to be $0, the premium charge (sales load) would have to be zero.   In terms of a comparison, it is not relative whether expensive or cheap funds are used because we will compare the exact same funds.  The point is that all of the costs of the VUL can easily be a 2% drag on performance.  Over a long period of time, this can easily cut the amount of money that one would have by 50%.    Heck, let's use an example where all of the expenses are only a 1% drag.  Jim and John invest $10,000 a year for 40 years.  Jim gets 6%.  John gets 5%.  Result: Jim: $1,640,000 John:$1,268,000  (with a 2% drag, he'd have $988,000)

[quote=army13A][quote=deekay]What equity-based investment has gone up by 6% every year, year in and year out?

  Learn this now before you screw it up:  VUL (or any life insurance) illustration is AN ILLUSION.  Other than the guaranteed column, nothing is written in stone.  As an exercize, ask the insurance companies you're looking at to run an illustration that shows a negative return for the next several years.  Here's a hint:  they won't, nor have the capability of doing so.  If they did, they know they'd never be able to sell VUL.   Edit:  If you stop to think about it, VUL really doesn't make sense.  Consider this:  Why do insurance companies continually put out new versions of UL and VUL?  Yet, WL and term insurance are essentially the same since their inception?[/quote]   I don't usually post during the day and was going to respond to all of the other posts over the weekend but I had to clear this one up.  Deekay, you have a lot of knowledge but that is flat out wrong because I just showed THAT EXACT scenario the other day.  You can show negative returns.  And as for counting on 6-7% over the long period, that's a bet I'll always take.  Even after last years market thumping, large and small caps have beat that since the inception of the market.  If an individual can't get a client 6% return over the long haul (20 to 30 years and beyond), they shouldn't be in this business.  [/quote]   Getting a client a 6% return has nothing to do with our abilities as advisors.  It has everything to do with what the market does.  If the market returns 4% over the next 20 years, my clients won't get 6%.   It is no safe bet that one can get 6-7% inside of a VUL once all expenses are included.   Once money is being pulled out, it's no longer about the rate of return, but much more so about the sequence of these returns.