Variable Universal Life Insurance

[Impromptu]

I have a variable universal life insurance policy. Many of you will have used Larson Financial, and this was a product that they pushed. I think signing up for this product was a little like signing the consent form for surgery. I thought I had an understanding of it, but really didn't. Could I go back in time I likely wouldn't repeat the deal, but continuing with this product won't turn out too poorly. I am youngish, a high earner, will likely have a high income in retirement, am an excellent saver, max out my 401(k) and roth IRA, have a well stocked emergency fund, fund my child's 529, live a modest lifestyle, have a long term horizon, hope to have a large estate for my heirs, and would rather pay a private company commissions than the government more taxes. (I already pay the fair shares of many taxpayers. I began making an attending level salary after the current administration raised taxes and phased out nearly all of the deductions previously available.)

My advisor did let me know that I wouldn't break even for 8-10 years. But when I read the quarterly statements I was surprised all over again, so I called him up and had him walk me through it once again. The first year had the highest fees. The next 9 years had smaller fees. Years 11-20 have very small fees. After 20 years of payments the cash value would have built up enough that I would no longer have to pay any premiums, yet it will continue to accumulate. While my financial advisor received a commission for the product, he did not get to bill me any account under management fee for this money, which would have been much more lucrative long term.

My VUL is through John Hancock.

More recently I have begun managing my own investments and shed the complicated asset allocation recipe of his company by switching to a 3 fund version, with Total US 40%, Total Foreign stocks 40%, and US Bond 20%. I have my reasons for being so aggressive. Within the VUL I have a nice S&P 500 index fund 0.25 ER (in lieu of total US which had a much higher expense raio). A total foreign stock market fund with 0.36 ER. And finally a total US bond fund with a 0.25 ER. This raises my average ER to only 0.17 when accounting for my 401(k) and roth IRA.

The part of the VUL that gives me the most angst is long term nature of this relationship. In order for this to not have been a waste of money I need to remain a high earner for 18 more years.

The most comforting part is also the long term nature of this relationship. I have a vehicle for transferring wealth to my heirs without concern for taxes (just fees and commissions).

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[Ignatius J]

You must have a lot of wealth to transfer. The unified credit is $5.4 million per person in 2015, indexed for inflation. That means you and spouse can give away/pass on $10.8 million without incurring of estate/gift taxes. Not to mention that each person can give $14,000 per year to a many people as he or she chooses without affecting these limits. (also indexed for inflation) This means that for wealth transfer, the vast majority of docs won't need anything more than the government gives you for free anyway.

Good info. I don't know a ton about "death tax", but I do know that I feel more secure with a protected bag of money for my fam when I die. Can be about 4 million (non-guaranteed as that includes dividend) after putting in 350K over the 20 years that I pay the policy. As I said above, I'll let you know in 30 years what I think.

 

[deleted126335]

Good info. I don't know a ton about "death tax", but I do know that I feel more secure with a protected bag of money for my fam when I die. Can be about 4 million (non-guaranteed as that includes dividend) after putting in 350K over the 20 years that I pay the policy. As I said above, I'll let you know in 30 years what I think.

I am 25 years out of residency. Did the "term + invest the difference" Would do it again in a heartbeat.

 

[sethco]

Wow. That's ballsy. Love it!

As an aside, that was a somewhat raw deal unless they gave you some good dividends. I pay about $16,500/year for a 1.5 million dollar policy (combined with 500K term). I also get the guaranteed rate of return/cash value build-up and dividend sharing. I am going to look back in 5 years and if I'm only getting the low-set guaranteed RoR I may consider cashing it out.

Just for comparison sake, my 1.5 million 20 year term and 1 million 25 year term (2.5 million total if I Die in 20 years) cost me 600/year COMBINED.
I completely agree with WCI. For most (maybe not all) people in this forum, variable and whole life insurance products are made to be sold, not bought.
I will say that I don't think you need 30-40 years of term life insurance. Seems a little excessive. I am getting a long enough term, so that it gets my kids through college years. By then, kids you should be financially independent of my income and spouse should have a large enough retirement/social security/VA nest egg

 

[BLADEMDA]

Just for comparison sake, my 1.5 million 20 year term and 1 million 25 year term (2.5 million total if I Die in 20 years) cost me 600/year COMBINED.
I completely agree with WCI. For most (maybe not all) people in this forum, variable and whole life insurance products are made to be sold, not bought.
I will say that I don't think you need 30-40 years of term life insurance. Seems a little excessive. I am getting a long enough term, so that it gets my kids through college years. By then, kids you should be financially independent of my income and spouse should have a large enough retirement/social security/VA nest egg

I recommend at least one 30 year term policy for $500K-$1 million. This provides protection in case your portfolio doesn't do as well as you hope. The other policies can be for shorter terms like 15 or 20 years.

I can assure you that age 40 if you want to buy more life insurance the policy will be more expensive than at age 30.

 

[Ignatius J]

I am 25 years out of residency. Did the "term + invest the difference" Would do it again in a heartbeat.

May work for you. Maybe not everyone.

 

[BLADEMDA]

May work for you. Maybe not everyone.

Relax. If you STICK with your policy for 30 years it will be fine with decent returns. But, did you look at your returns after 15 years? 20 years?
Many policies can take up to 8-10 years before they actually make money. That's why I don'y like permanent life insurance; studies show that the majority of people will cash out their policies or stop paying on them within the first 10 years.

Tiaa-Cref allows the policy holder to be in the "black" after just 3 years so while your Mass Mutual policy will earn more money over 30 years the Tiaa-Cref policy is superior for years 1-15 (my best guess as to what point the Mass Mutual policy starts showing higher cash value).

If was a Resident reading this thread I would consider a permanent life insurance policy from Tiaa-Cref ($300-$500K) with the rest being term life insurance. The nice thing about Tiaa-Cref is the lack of pressure from a sales agent and ZERO commission on the sale of the policy.

 

[IlDestriero]

I chose not to buy long term disability. My wife works. When I finished my fellowship I remember the Nirthwestern Mutual guys in suits cornered me at the University hospital and I thought to myself they're probably getting a lot out of this deal. I said No and my wife and I decided to self insure ourselves by living simple, saving like crazy and getting debt free ASAP. It was a good gamble. The chance of needing the long term disability are very remote and not worth the cost. Term life is cheap.

I think this is full on crazy. You're more likely to be disabled than to die young. Do you have no life insurance either? That's easier to self insure for.
You really wouldn't care if you could no longer work as an anesthesiologist making 300+ for 20 more years? What about long term rehab costs or money to retrain in another career for a more minor, but career ending injury?
Perhaps you already have a few million saved?

 

[cincincyreds]

Relax. If you STICK with your policy for 30 years it will be fine with decent returns. But, did you look at your returns after 15 years? 20 years?
Many policies can take up to 8-10 years before they actually make money. That's why I don'y like permanent life insurance; studies show that the majority of people will cash out their policies or stop paying on them within the first 10 years.

Tiaa-Cref allows the policy holder to be in the "black" after just 3 years so while your Mass Mutual policy will earn more money over 30 years the Tiaa-Cref policy is superior for years 1-15 (my best guess as to what point the Mass Mutual policy starts showing higher cash value).

If was a Resident reading this thread I would consider a permanent life insurance policy from Tiaa-Cref ($300-$500K) with the rest being term life insurance. The nice thing about Tiaa-Cref is the lack of pressure from a sales agent and ZERO commission on the sale of the policy.

Blade, I've looked at these VULs and come to the conclusion I can't understand the terms, but I do ask the following question to agents when they magically appear in front of me. Show me a chart from 1-40 years assuming a rate of return of 1-8% and let me know how much I have after each year if I cash out the total price of the policy and pay my tax bracket and fees. It turns out to beat a similar vanguard indexed mutual fund over 40 years I need to wait 4o years and get a CAGR of 8% to beat the vanguard index assuming I'm in the worst retirement tax bracket in retirement.

Everytime I show an agent this they are in total disgust. To me, that is the value of the investment.

 

[BLADEMDA]

Blade, I've looked at these VULs and come to the conclusion I can't understand the terms, but I do ask the following question to agents when they magically appear in front of me. Show me a chart from 1-40 years assuming a rate of return of 1-8% and let me know how much I have after each year if I cash out the total price of the policy and pay my tax bracket and fees. It turns out to beat a similar vanguard indexed mutual fund over 40 years I need to wait 4o years and get a CAGR of 8% to beat the vanguard index assuming I'm in the worst retirement tax bracket in retirement.

Everytime I show an agent this they are in total disgust. To me, that is the value of the investment.

And if you did this with Tiaa-Cref the numbers would be closer to the Vanguard Index fund but still not beat it because of the life insurance component.
Even if you factor in Term life plus Vanguard Index vs VUL from TIaa-Cref the former would win.

But, considering all the scams out there from financial advisers the Tiaa-Cref permanent life insurance is a decent deal just not the BEST deal.

 

[BLADEMDA]

The Great Life-Insurance Temptation
Sales are up for two types of policies that offer exposure to stocks. But potential buyers should be cautious.


http://www.wsj.com/articles/SB10001424052702303847804579477543715047478


Consumers often complain that agents pitch the policies as retirement-income or college-savings plans, according to Finra's arbitration files.

Keith Kriewall, a 51-year-old software developer in the Seattle area, says a financial adviser pitched him a variable universal-life policy as "a new kind of investment vehicle that allowed tax-free growth" and other benefits, with insurance that was "incidental."

Much of his money subsequently "was lost to the 'inconsequential' life insurance premiums, which turned out to be anything but," he says in an email.

He filed a claim against the adviser and his firm, Centaurus Financial. A Finra arbitration panel last year ruled against the adviser and the firm, awarding Mr. Kriewall about $42,000. A lawyer for Centaurus, which denied the allegations in its filings, declined to comment.

James Hunt, an insurance specialist at the Consumer Federation, recommends buying directly from TIAA-CREF, a money manager and life insurer located in New York, or Ameritas Life Insurance, located in Lincoln, Neb. Those options allow consumers to avoid some sales charges typical of the industry.

 

[BLADEMDA]

http://www.insuringincome.com/instant-life-insurance-quotes/

White Coat Investor's dude


DISABILITY- Get a Quote:http://www.insuringincome.com/instant-life-insurance-quotes/

 

[BLADEMDA]

http://www.insuringincome.com/life-insurance-need-calculators/

Based on his Calculators he recommends $4 million of life insurance for a new graduate with a family. That seems like a lot of Term Life.

 

[IlDestriero]

I have 3m spilt 20 and 30. Which will terminate at 52 and 62. And another through work for $200. I used to have more but I dumped it. I won't be working past 62.
If I die my kids still get my generous faculty tuition benefit, between that and my 529s, they'll be fine for school.
My wife can/will still work and the supplemental 200 will pay for nanny services while the kids need one.
With my investments, annuity, and 403b, TSP, etc. she will be in great shape.

I do have to wonder if Blade would still think the whole life product he's recommending was ok if bonds/CDs etc were still paying 4-6%. We won't be in this valley forever.

 

[aneftp]

I just wanted to add, many people forget that social security has what's called "survivor benefits". This is especially important for those with non working spouses with kids under age 18.

Just log into your SSN page, see what your benefits are. Mine are:

Survivors
You have enough credits for your family to qualify for survivor benefits. If you die this year, certain members of your family may be eligible for these benefits:

Your child:


$1,974 a month

Your spouse who is caring for your child:


$1,974 a month

Your spouse (starting at full retirement age):


$2,632 a month

Your total family benefits cannot be more than $4,606 a month.

Your spouse or minor child may be eligible for a special one-time death benefit of $255.

Which means if I die right NOW. Excluding my current life insurance payout of 1 million (term life). My non working spouse will be entitled to close to $2000 for the kids ( this income is tax exempt by the way).

She's also entitled to close to $2000 a month to take care of the kids till they turn 18 years old. (some of that amount is taxable after I think 15K).

So with ZERO life insurance policy, my wife will have around $4000 a month (most of it tax free) for at least the next 14-15 years to raise our children until they hit 18 years old.

And she can take advantage of the Affordable care act for essentially close to "free" private health insurance (after generous subsidies). Because even if she doesn't work while kids are school age, her income will be way below the 400% MAGI for subsidies. Heck it's probably going to be close to 150% which means she'll end up paying almost nothing for health care. FYI: I pay $10K a year in premiums plus a $5000 max out of pocket deductible.

So my wife would be set even without all the fancy universal or variable life insurance ponzi schemes that are sold.

She'll get the simple 1 million payout of term life PLUS social security survivor benefits PLUS all my significant retirement savings and cash accumulation.

So don't forget those survivor benefits from UNCLE SAM!

 

[Taurus]

I recently did a lot of research into life and disability insurance.

Bad, bad idea to buy whole/permanent/variable life insurance for the reasons that have already been expounded. Buy only term life insurance.

I recently purchased a $5M 30 year term life insurance policy for $4500 per year.

 

[The White Coat Investor]

The part of the VUL that gives me the most angst is long term nature of this relationship. In order for this to not have been a waste of money I need to remain a high earner for 18 more years.

While that's an issue, it's also long-term in that you basically married this thing- til death do you part.

 

[deleted126335]

While that's an issue, it's also long-term in that you basically married this thing- til death do you part.

Yes. And in my opinion one is not compensated nearly enough for the lack of access to one's money for decades. You can get it, but with additional fees.

 

[BLADEMDA]

While that's an issue, it's also long-term in that you basically married this thing- til death do you part.

According to your web site if permanent Insurance can meet your criteria (you listed 12 of them) then it would be worth buying. IMHO, the products from Tiaa-Cref come very close to the "perfect" permanent life insurance policy based upon your criteria. I don't have their cost for the life insurance component but assuming that is a reasonable number the rest of the product looks good. Remember, this is a commission free product sold directly to the public so the buyer will have cash basis/value on year 1. In addition, their VUL products offer Vanguard and DFA funds with extremely low expenses.

http://whitecoatinvestor.com/could-there-be-a-good-vul-policy/

"This whole post has been mostly hypothetical to show that a really good VUL could be a good idea for certain investors."

 

[BLADEMDA]

Surrenders. At any time while the Policy is in force, you may make an Acceptable Request to Surrender your Policy and receive the Cash Surrender Value. The Cash Surrender Value is equal to the Policy Value minus any Outstanding Loan Amount. A Surrender may have tax consequences.

Partial Withdrawals. Subject to certain limits, you may withdraw part of your Cash Surrender Value from your Policy. Partial withdrawals may have tax consequences.

Please see the section entitled “The Policy” for more information on the Right to Cancel and the section entitled “Surrenders and Partial Withdrawals” for more information on Surrenders and partial withdrawals.

http://www.tiaa-cref.org/public/prospectuses/ivul_policy.pdf?fundclass=LI

 

[Ignatius J]

Excellent thread.

I've spent a lot of the weekend running some numbers.

In short, I've come around to the option of possibly canceling my whole life policy (it's actually 2 separate policies bought 6 months apart for various reasons I won't get into). Lots of different ways to crunch the numbers, but here is what I have (Blade- tell me if this passes the smell test):

One policy is a Whole Life Policy for $500,000. I'll use that.

Under current assumptions, at year 20 I will no longer pay premiums and have a cash value at $256,284 at year 20 in cash value with Whole Life. I would like to make a note that this is a non-guaranteed value and factors in dividends that aren't guaranteed.

The current monthly premium is $736.65. Subtract the alternative route of a monthly term policy instead leaves $700 to invest on my own/month.

I've chosen the Vanguard Total Stock Market Index Fund as a good general fund to invest that $700 in. There are a lot of options, but this seems like a good, well-run fund with low expense ratio that follows the trendline of the market and has a diverse array of common stock.

Average 10 year return for this fund is 8.74%, with total return since it's inception in 1992 is 9.58%. I'll choose 9% as my hypothetical annual rate of return

So, if I put the $700 in the Vanguard fund that I would have put into Whole Life every month, I would get the following at 20 years:

$700/month x 12 months x 20 years x 9% annual return (per bankrate)= $471,727.22. Subtracting out capital gains at 20% gives me $377,381.77 at year 20 in cash value with investing the difference.

 

[BLADEMDA]

Excellent thread.

I've spent a lot of the weekend running some numbers.

In short, I've come around to the option of possibly canceling my whole life policy (it's actually 2 separate policies bought 6 months apart for various reasons I won't get into). Lots of different ways to crunch the numbers, but here is what I have (Blade- tell me if this passes the smell test):

One policy is a Whole Life Policy for $500,000. I'll use that.

Under current assumptions, at year 20 I will no longer pay premiums and have a cash value at $256,284 at year 20 in cash value with Whole Life. I would like to make a note that this is a non-guaranteed value and factors in dividends that aren't guaranteed.

The current monthly premium is $736.65. Subtract the alternative route of a monthly term policy instead leaves $700 to invest on my own/month.

I've chosen the Vanguard Total Stock Market Index Fund as a good general fund to invest that $700 in. There are a lot of options, but this seems like a good, well-run fund with low expense ratio that follows the trendline of the market and has a diverse array of common stock.

Average 10 year return for this fund is 8.74%, with total return since it's inception in 1992 is 9.58%. I'll choose 9% as my hypothetical annual rate of return

So, if I put the $700 in the Vanguard fund that I would have put into Whole Life every month, I would get the following at 20 years:

$700/month x 12 months x 20 years x 9% annual return (per bankrate)= $471,727.22. Subtracting out capital gains at 20% gives me $377,381.77 at year 20 in cash value with investing the difference.

Excellent thread.

I've spent a lot of the weekend running some numbers.

In short, I've come around to the option of possibly canceling my whole life policy (it's actually 2 separate policies bought 6 months apart for various reasons I won't get into). Lots of different ways to crunch the numbers, but here is what I have (Blade- tell me if this passes the smell test):

One policy is a Whole Life Policy for $500,000. I'll use that.

Under current assumptions, at year 20 I will no longer pay premiums and have a cash value at $256,284 at year 20 in cash value with Whole Life. I would like to make a note that this is a non-guaranteed value and factors in dividends that aren't guaranteed.

The current monthly premium is $736.65. Subtract the alternative route of a monthly term policy instead leaves $700 to invest on my own/month.

I've chosen the Vanguard Total Stock Market Index Fund as a good general fund to invest that $700 in. There are a lot of options, but this seems like a good, well-run fund with low expense ratio that follows the trendline of the market and has a diverse array of common stock.

Average 10 year return for this fund is 8.74%, with total return since it's inception in 1992 is 9.58%. I'll choose 9% as my hypothetical annual rate of return

So, if I put the $700 in the Vanguard fund that I would have put into Whole Life every month, I would get the following at 20 years:

$700/month x 12 months x 20 years x 9% annual return (per bankrate)= $471,727.22. Subtracting out capital gains at 20% gives me $377,381.77 at year 20 in cash value with investing the difference.

1. Did you pay the first year's policy already? If so, that was your biggest hit and cancelling now may not be a good idea.
2. I would use 7% annual returns for the stock market and not 9%
3. Long Term Capital gains could be 20% plus 3.9% for Obamacare if you earn over $250K annually

My numbers show $359,993 if you buy term and invest the difference earning 7% annually. Subtracting out capital gains at 23.9% gives you roughly $273,955 at year 20.

Your Whole life: $256,284

Term plus Invest the Difference: $273,955

If a Resident hadn't purchased the policy yet then I would recommend term life plus invest the difference or a small whole life from Tiaa-Cref ($250-$300K policy) plus term life.

If you have already paid the first year's premium I would stick it out for 25 years as I have done with my policies (they are fine after 20 years but they really suck until after year 10)

 

[BLADEMDA]

While that's an issue, it's also long-term in that you basically married this thing- til death do you part.

I don't think 25 years is as long as you think it is. The time has gone by quickly and the Cash value is fully available to me without penalty. The other issues you raise are valid concerns but the long-term commitment issue isn't a big deal.

 

[Ignatius J]

1. Did you pay the first year's policy already? If so, that was your biggest hit and cancelling now may not be a good idea.
2. I would use 7% annual returns for the stock market and not 9%
3. Long Term Capital gains could be 20% plus 3.9% for Obamacare if you earn over $250K annually

My numbers show $359,993 if you buy term and invest the difference earning 7% annually. Subtracting out capital gains at 23.9% gives you roughly $273,955 at year 20.

Your Whole life: $256,284

Term plus Invest the Difference: $273,955

If a Resident hadn't purchased the policy yet then I would recommend term life plus invest the difference or a small whole life from Tiaa-Cref ($250-$300K policy) plus term life.

If you have already paid the first year's premium I would stick it out for 25 years as I have done with my policies (they are fine after 20 years but they really suck until after year 10)

1. First year policy is 9months old or so paid monthly. Second policy is 4 months old and paid the same.
2. Understand the unpredictability of the market but that fund has enough of a sample size to say 9% is a good expectation. Even the last 10 years factoring in the collapse in 2008 the fund returns at 8.7% in accordance with the trend of the historic timeline of the S&P.
3. Yeah, I didn't factor in the Obamacare tax. Could make things different.

This is only to year 20. I'll likely keep until retirement in 35 years or so. And I also have to remember that the dividend is not guaranteed. These numbers are with about the best performance of the Whole Life versus the average of the Vanguard in investing the difference.

Hmm....decisions, decisions.....

 

[BLADEMDA]

1. First year policy is 9months old or so paid monthly. Second policy is 4 months old and paid the same.
2. Understand the unpredictability of the market but that fund has enough of a sample size to say 9% is a good expectation. Even the last 10 years factoring in the collapse in 2008 the fund returns at 8.7% in accordance with the trend of the historic timeline of the S&P.
3. Yeah, I didn't factor in the Obamacare tax. Could make things different.

This is only to year 20. I'll likely keep until retirement in 35 years or so. And I also have to remember that the dividend is not guaranteed. These numbers are with about the best performance of the Whole Life versus the average of the Vanguard in investing the difference.

Hmm....decisions, decisions.....

Keep the older policy and cancel the second policy which is 4 months old. Split the proverbial baby in half. The biggest hit with Whole/Permanent Life is the initial 12 months. If one could avoid that 100% upfront commission/sales charge the policies wouldn't be bad (IMHO).
Others on SDN like White Coat Investor and Doze would tell you to cancel both policies; again, if I was in your situation I would cancel only one of the two policies.

We will agree to disagree about the stock market returning 9% over the next 20 years. I'm assuming a 6% return for my retirement (stocks) and 2.5% for bonds/fixed income for an overall rate of return of 4.25% minus inflation of 2.25% which leaves a 2% real rate of return.

 

[deleted126335]

As has been previously pointed out, Cancelling an existing cash value policy is a different animal entirely from choosing whether or not to purchase one in the first place. The fees are very front loaded, thus it is often less distasteful to keep an existing policy than to cancel. It is beyond my ability to analyze these things. I am sure that you can find a fee only person that can give you unbiased advice and evaluate your policies.

 

[BLADEMDA]

As has been previously pointed out, Cancelling an existing cash value policy is a different animal entirely from choosing whether or not to purchase one in the first place. The fees are very front loaded, thus it is often less distasteful to keep an existing policy than to cancel. It is beyond my ability to analyze these things. I am sure that you can find a fee only person that can give you unbiased advice and evaluate your policies.

I still wouldn't cancel the one policy which is 75% paid up through the year. I would, however, cancel the other one but that is just one opinion.

 

[BLADEMDA]

This is how they sell these policies; the agents are very slick at what they do. Even some who SWEAR never to buy Universal/Whole life can be suckered into buying a policy. I was one of those suckers more than 20 years ago. Never buy anything than the cheapest term policy without a thorough analysis of the worst case scenarios. Look at all the fees and the guaranteed rate of return. It may take 20 years before your whole life policy actually returns the 5% RoR they promise you. Once you pay for these policies initially (first 12 months) the damage has mostly been done as the commission eats into your returns.

 

[BLADEMDA]

http://www.evaluatelifeinsurance.org/

I did my own calculations on the rate of return buying term life and investing the difference. If you buy a low cost ETF of the S and P 500 the total tax hit and expenses would not exceed 0.5 percent. This means your return would be 8 percent per year (based on an average pretax return of 8.5 percent).

My calculations show that at year 20 you would have $40,000 more in cash value than if you purchased that indexed variable life product. Term life plus invest the difference beat the illustration I linked from YouTube.

 

[Impromptu]

That youtube video contained a questionable comparison. Why would the gentleman who was making $40,000/year invest his retirement money into a taxable account? A roth IRA might be a much better choice, even if it limited him to $5,500/year.

Like was said, these salesmen are very slick.

 

[Ignatius J]

http://www.evaluatelifeinsurance.org/

I did my own calculations on the rate of return buying term life and investing the difference. If you buy a low cost ETF of the S and P 500 the total tax hit and expenses would not exceed 0.5 percent. This means your return would be 8 percent per year (based on an average pretax return of 8.5 percent).

My calculations show that at year 20 you would have $40,000 more in cash value than if you purchased that indexed variable life product. Term life plus invest the difference beat the illustration I linked from YouTube.

Yes, since 1992 that Vanguard index fund has returned 9%. That correlates pretty well with the S&P over that time. With an expense ratio of 0.17 (or none at all if you do it through a Vanguard brokerage account), that's very cheap. And any agent that says you are subject to market volatility is correct, but as they also say, you should be looking at the longer term. If I was going to retire within 10 years, I can always switch to bonds or safer investment vehicles.

I meet with my agent on Saturday. I'll definitely be canceling one. The big question is if I cancel the other after having put a lot into the account. Live and learn I guess.

 

[BLADEMDA]

Yes, since 1992 that Vanguard index fund has returned 9%. That correlates pretty well with the S&P over that time. With an expense ratio of 0.17 (or none at all if you do it through a Vanguard brokerage account), that's very cheap. And any agent that says you are subject to market volatility is correct, but as they also say, you should be looking at the longer term. If I was going to retire within 10 years, I can always switch to bonds or safer investment vehicles.

I meet with my agent on Saturday. I'll definitely be canceling one. The big question is if I cancel the other after having put a lot into the account. Live and learn I guess.

You should keep the policy which has been paid up through 9 months. That policy can act as a portion of your fixed income/bond allocation. In addition, you get the insurance component for decades at a fixed price. Right now you are not happy buying the policy but in 20 years you will be LESS UNHAPPY about the decision because you will need that bond/fixed income allocation.

Honestly, I own a Whole life policy and its performance has been average at best. My Variable Annuity has done much better but I still wish the VUL was from Tiaa-Cref as I'd have another $40k in that policy due to the lower fees and load charges. I just couldn't justify the sales commission (entire first year of the policy), expenses (high), annual loads (high) and lack of low cost, passive investments to buy another VUL . Buy Term Life and Invest the difference is the way to go for 99% of the population. For the 1% who want a permanent life insurance policy look at Tiaa-Cref for a Variable Annuity and USAA, State Farm, Met Life or Mass Mutual for Whole life.

 

[BLADEMDA]

 

[BLADEMDA]

These Insurance guys from my previous post have setup the Permanent Life policy better than most. They over-fund the policy years 1-10 which allows Cash Value in year 1. The commission is about $3K for years 1 and 2. But, due to the over-funding of the policy the Cash Value at least exists years 1 and 2. While Whole life isn't a good deal the Video above is at least DECENT compared to most Whole Life policies.

 

[Scotty_G]

I respect all of your opinions and always follow this board for advice. As a graduating resident what kind of disability policy do you recommend? I already figured a term life insurance policy would be the best for my family and I. My second question is I will be a fellow next year, so should I wait until I start full-time attending or just get the policies now? I will be doing part-time attending work next year too.

 

[BLADEMDA]

I respect all of your opinions and always follow this board for advice. As a graduating resident what kind of disability policy do you recommend? I already figured a term life insurance policy would be the best for my family and I. My second question is I will be a fellow next year, so should I wait until I start full-time attending or just get the policies now? I will be doing part-time attending work next year too.

Disability could cost you $2K now and up to $5K per year as an attending. Can you afford $2K per year now? Or, buy the policy next year with let's say $200K worth of own occupation coverage per year.

It couldn't hurt to get quotes as a fellow (make sure the agent knows your real income is 1-2 years down the road) and then decide whether to pull the trigger this year or next.

 

[BLADEMDA]

I respect all of your opinions and always follow this board for advice. As a graduating resident what kind of disability policy do you recommend? I already figured a term life insurance policy would be the best for my family and I. My second question is I will be a fellow next year, so should I wait until I start full-time attending or just get the policies now? I will be doing part-time attending work next year too.

http://www.insuringincome.com/request-quote-disability-insurance/


Click on the link at the top of the page for Disability Insurance. This person is who White Coat Investor recommends on his web site. It can't hurt to get a quote from him and your local agent as well. I think one should get 3 quotes for disability from top rated companies. You must make sure it is own occupation specific disability.

 

[The White Coat Investor]

I don't think 25 years is as long as you think it is. The time has gone by quickly and the Cash value is fully available to me without penalty. The other issues you raise are valid concerns but the long-term commitment issue isn't a big deal.

If the long-term commitment isn't a big issue to you, then feel free to commit to a product for the long term. When you run the numbers, cash value life insurance policies that you've already had for a decade or two work out best if you hold them until death. Many of them are only breaking even at 15 years and at 25 years still have sub-inflation returns. I'm not surprised anymore when I see policies that were seemingly designed to maximize the seller's commission rather than the purchaser's return.

 

[cincincyreds]

My question is for whitecoatinvestor. Could you find a VUL and make a chart comparing one's return each year assuming a CAGR of 1-8.5% for 40 years and then pay tax to cash out the policy and compare that to investing in a vanguard total market stock mutual fund assuming a CAPR of 1-8.5% for 40 years and then pay the lower capitol gains rate and assume the worst tax situation in the US and let's see at what point a VUL would be better than a stock indexe mutual fund.

I would love to see the answer to this. This makes the comparison apples to apples.

 

[BLADEMDA]

The Insurance salesman claims a 5.30% rate of return on average each year for 30 years; that's not bad for a life insurance policy with an increasing death benefit. Of course, he isn't using the guaranteed rate of return for the analysis but rather the "hoped for" rate of return.

The break even point for the illustrated policy is year 6; that is, at the end of year 6 the cash value slightly exceeds the premiums paid.

 

[BLADEMDA]

I bet a policy from Tiaa-Cref would do even better because there is NO SALES COMMISSION; however, you would be stuck buying a Variable Life Insurance instead of the whole life type product illustrated previously. Tiaa offers Vanguard and DFA mutual funds with low expenses. Tiaa will disclose all fees, expenses openly to the prospective policy buyer. Depending on market return the Tiaa policy would likely break even at year 3 or 4 depending on the over-funding of the policy.

 

[fakin' the funk]

I think this is my first post in this forum.

We're not worthy, WCI.

 

[The White Coat Investor]

My question is for whitecoatinvestor. Could you find a VUL and make a chart comparing one's return each year assuming a CAGR of 1-8.5% for 40 years and then pay tax to cash out the policy and compare that to investing in a vanguard total market stock mutual fund assuming a CAPR of 1-8.5% for 40 years and then pay the lower capitol gains rate and assume the worst tax situation in the US and let's see at what point a VUL would be better than a stock indexe mutual fund.

I would love to see the answer to this. This makes the comparison apples to apples.

It's easy enough to run the numbers. The issues comes down to what assumptions you use. It's a garbage in, garbage out phenomenon.

But the gist of it is this, the VUL will be way behind for a long time unless you die early (and thus get the death benefit instead of the cash value.) If you can invest and divest tax-efficiently, the VUL may never catch up. For example, I give a fair sum to charity each year. So I never pay capital gains taxes. I just flush the appreciated gains out of my portfolio by donating them to charity instead of cash. I can still tax-loss harvest, and of course when I keel over, my heirs will get the step-up in basis. Plus, I know how to invest in very tax-efficient investments like broad market index funds and muni bond funds. So the tax benefit of VUL is very, very low for me. Thus, the costs of the insurance will almost surely eat up more than the tax benefit indefinitely for me. However, if you're not able to be as tax-efficient as I am, it's quite possible that your tax costs can be higher than your insurance costs after a few decades. It is also possible you are in a state that provides substantial asset protection to your VUL, if that matters to you.

And this all assumes, of course, that you're using the same high quality investments inside and outside the VUL. If it's like most VULs, you're stuck with crap investments, in which case there's no way the VUL will ever catch investing in good investments in taxable.

There are a lot of moving parts, and it only takes changing your assumptions a little bit to change the conclusion. But here's a basic way to look at it.

It has been argued to me that over an entire lifetime, let's say 50 years, of holding a VUL, you can get the insurance costs down to 1% a year. I'm skeptical, but I'd certainly buy 2% a year. So, if you are investing in an 8% return investment, $20K a year for 30 years, then let it ride, then you would end up with the following after 50 years:

In a Roth IRA: $11.4M
In a taxable account paying 15% on a 2% annual distribution, followed by 15% on all gains in year 50: $8.7M (actually slightly better, but I'm too lazy to calculate it)
In a VUL with 1% a year cost of insurance: $7.8M
In a VUL with 2% a year cost of insurance: $5.4M

So as you can see, getting that cost of insurance down is key. Even at 1% a year, you're still coming out behind in my example. But boost the capital gains rate to 23.9% and you may have a different answer at 1% a year costs, but probably not at 2% a year costs.

You can also make VUL look better by adding in the cost of a term policy to the comparison, but since most people don't need life insurance after retirement, I think that's lame, and term insurance up to retirement is so cheap it doesn't move the needle much.

 

[cincincyreds]

Thank you for the comparison. So what one really needs to do is ask their insurance agent what the yearly cost is after 30 years as that appears to be the major hurdle. Lastly, when you say you end up with 7.8M with a VUL, does that assume you cash out the entire policy and pay tax? I mean, in this scenario I see no point for a VUL. I've run this scenario with a few insurance agesnt and this is pretty much the conclusion we have come to. So if they do raise capitol gains rates to 30% the scenario might be different, but you have to wait so many years.

 

[The White Coat Investor]

It might be better to describe the person for whom it might make sense.

This is someone who cares a lot about the asset protection, is in a very high bracket now and expects to be in retirement, has limited retirement account options but saves a lot (i.e. is already investing a ton in taxable every year), might have an estate tax problem, wants to invest in less tax efficient assets, is in a state that provides significant asset protection to VUL etc. That is a fairly rare doc.

 

[Vaporized]

I am a current resident and I am trying to get my way through WCI website and then recommended books. Just opening up a RothIRA with 5500 this week. Anyways, glad to see you posting. I have a minor thread derailment. I plan on investing 20% into retirement accounts, question is that my wife will have a pension as a teacher to the tune of 60k per year when I retire. would you recommend just maximize tax deductable retirment , HSA, back door IRa which would be around 15% and use the rest for other investments. Or stick to 20% and the pension is just gravy on top ?

 

[cincincyreds]

It might be better to describe the person for whom it might make sense.

This is someone who cares a lot about the asset protection, is in a very high bracket now and expects to be in retirement, has limited retirement account options but saves a lot (i.e. is already investing a ton in taxable every year), might have an estate tax problem, wants to invest in less tax efficient assets, is in a state that provides significant asset protection to VUL etc. That is a fairly rare doc.

So basically someone worth more than 10 million might benefit from the VUL? That's tough for a doctor to do. If I was a movie actor or professional sports player with a $100 million contract it might make sense.

 

[cincincyreds]

I am a current resident and I am trying to get my way through WCI website and then recommended books. Just opening up a RothIRA with 5500 this week. Anyways, glad to see you posting. I have a minor thread derailment. I plan on investing 20% into retirement accounts, question is that my wife will have a pension as a teacher to the tune of 60k per year when I retire. would you recommend just maximize tax deductable retirment , HSA, back door IRa which would be around 15% and use the rest for other investments. Or stick to 20% and the pension is just gravy on top ?

I would go with the roth ira first because you can use vanguard for the lowest fees in their index funds. if your income is too high, then a backdoor roth ira. I think i would do the hsa next, then the 401k/403b at your hospital.

 

[Wolverines83]

I would go with the roth ira first because you can use vanguard for the lowest fees in their index funds. if your income is too high, then a backdoor roth ira. I think i would do the hsa next, then the 401k/403b at your hospital.

Well, depends on employer match. Even if the investments are garbage... Might as well max out that match... Instant 100% return!

 

[The White Coat Investor]

I am a current resident and I am trying to get my way through WCI website and then recommended books. Just opening up a RothIRA with 5500 this week. Anyways, glad to see you posting. I have a minor thread derailment. I plan on investing 20% into retirement accounts, question is that my wife will have a pension as a teacher to the tune of 60k per year when I retire. would you recommend just maximize tax deductable retirment , HSA, back door IRa which would be around 15% and use the rest for other investments. Or stick to 20% and the pension is just gravy on top ?

Depends on how sure you think the pension is. If very sure, then include it. If not so sure, then don't. But I count all money going toward retirement toward that 20%, whether it comes from you or the employer.

In the distribution phase I use pensions, SS, SPIAs etc to reduce your need for income, rather than trying to fold them into your asset allocation somehow.