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  Of course the cost basis can be withdrawn without problems; any gains are taken out as a policy loan.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.

[quote=anonymous]

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.

[quote=shadow191]

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.

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. 

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.

[quote=joedabrkr] [quote=shadow191]

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.

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.

All, thank you for these posts. Much appreciated.

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.

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.

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. 

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

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.

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. 

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.

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”?

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.

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.

This forum software turns "a$$umption" into "bumumption".

 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. 

[quote=anonymous]

 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.

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 $1,000,000
BTID 30 years: Cash $1,153,278

VUL 40 years: Cash Value $1.5 mill, DB 1.7 mil
BTID 40 years: Cash $2.6 mill

VUL 50 years: Cash Value $3.1million, DB  3.3million
BTID 50 years: Cash 5.7 million

VUL 60 years: Cash Value 6.2million  DB 6.2
BTID 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.