I have been reading through the forums here and have found much
information regarding this topic of term vs VUL. Mostly I buy into the
idea of buy term for insurance only, invest the rest (which I am likely
to do). However I am not 100% sure if I am not overlooking the
potential benefits down the line of VUL.
I am early 30s, married, one kid, probably one more in the future. I am
receiving the "preferred plus" rate right now for both term and VUL. I
am looking at a $1M policy. The VUL policy premium is approx 5.5x
higher than the 30-year term. I pretty much max out my 401k right now
(both my wife and I) and put some money into a 529 for daughter. My
wife and I both work right now, but there is a chance with a second
child that my wife would quit work.
I do understand that after 30 years and inflation, that $1M which seems
like much today, will be less than half that in present value. Also I
hope that my kids, when older, can take care of themselves and I am out
of the home-debt. I pretty much hate any debt where I pay interest
higher than returns I can get, so I don't expect to be in debt when I
retire (but who can tell the future).
What are your thoughts?
I think that a commitment to put that amount of money aside in this
'investment' each year is a big one. When the wife isn't working, I'd
want the flexibility to tap every dime of income, meaning the mortgage
is 30 years, not shorter, and that I'm not obligated to fund a VUL.
Do you also fund IRAs? For both of you? If you do it now, when she's not
working and you have the nth child, that's the time to convert to Roth.
I say this because your mention of 401(k) implies you like the VUL for
the long term perceived tax benefits. I can't judge the product itself
as I don't know the fees involved. 1%/yr up or down from average can
make an individual product worth looking at, or a complete dud.
I've been impressed by the idea Jefferson National has put forward, a
$20/mo fee for their VA offering and reasonable fees on underlying
securities. Not a VUL, but a product that has me reconsidering my
I see three yellow flags regarding JN's Monument VA:
- Very low insurance co. rating (good insurers put their ratings on or
near their home pages; try to find JN's). It's B- from Best, not rated
In itself, not a red flag, since VA subaccounts are segregated
(cannot be tapped by insurer or its creditors). Just don't buy any
add-ons, since they're no more sound than the insurer.
- Not available in NYS. New York holds insurers to higher standards,
which is why insurers often create separate subsidiaries for NYS
offerings. JN doesn't offer its VA in NY.
- skimming fees from underlying funds. Like NTF funds that are more
expensive than TF funds at a brokerage (because the brokerage skims
12b-1 fees or otherwise gets money from the NTF funds), the underlying
VA funds also pay to play. "The amount of the fee that [an underlying
fund] pays [JN] is negotiated ... aggregate fees ... may be as much as
0.50%. ... A portion of these payments may come from revenue derived
from ...12b-1 fees." From prospectus. (For many funds, you do get the
lowest cost shares, for many others, you don't.)
Take a look at TIAA-CREF's VA also. It charges 0.35% for an annuity
with $100K to $500K in it; and after 10 years, that drops to 0.10%
(independent of the value of the annuity). It seems to offer lower cost
shares for some families (e.g. PIMCO, Franklin Templeton). And it's
offered by a New York insurance company (so customers in all states are
benefit from NYS insurance regulation), by a AAA-rated insurer.
Agree with Joe Taxpayer on bumping up 401k to max for both of you.
Beyond that, buy term and use rest of discretionary cash flow in this
order - keep emergency fund at comfortable level, pay off consumer
debt, save for next car, any college ed and something for fun. Beyond
that, invest in a good S&P 500 Index fund like Vanguard and reinvest
dividends. Anything else is Ok as long as you stay on a cash basis
(no debt) and continue saving as above.
First, let me tell you a story - when I was first married, in 1981, I met
with an insurance agent who suggested UL (I don't think VUL was around back
then, but I'm not sure as I was NOT in the business back then). The premium
was WAY more than for a similar death benefit with term insurance. Everyone
said "buy term and invest the difference, permanent insurance is a lousy
investment, don't waste your money). So I bought a 10-year term policy for
$450K. That was April 1983 - a whole week AFTER my daughter was born. In
April 1984 I got cancer, the first time. My second fight with cancer was in
1992. The 10-year term expired in April 1993 and the premium skyrocketed,
because that is what term policies do - not because of my health issues.
Then in November 1993 my wife and I separated. At this point I became
uninsurable. I had two very simple, though not inexpensive, choices - KEEP
the term which now had a premium very similar to the UL quote I got back in
1983 and which was going to increase every year from now on OR have no life
insurance. The thought of a continually increasing premium AND my
acrimonious divorce led me to drop the policy. Now, had I bought the UL
product in 1983 things would have been a bit tight BUT I'd have a policy
that would have a fixed premium until I died or canceled it.
Everyone, well most everyone here, generally says NEVER buy permanent
insurance because its a lousy investment. I agree with that statement, when
taken by itself. It is a lousy investment. What you have to decide is WHY
you're buying insurance to start with. If you want an investment, buy an
investment. If you want insurance buy insurance. FIRST, you need to
understand what you want, what you need and how you'll fund it.
Some investments, like VAs (which I am a BIG fan of), are sold through an
insurance company and have an insurance component, but they are NOT life
insurance, they will NOT pay a death benefit that is several multiples of
your investment in the contract. Some insurance products have an investment
component, but these are NOT really investments. It can be difficult,
especially with the media and the marketing information out there, to tell
Generally, I advise my clients to first determine how much life insurance
they NEED for the foreseeable future. THEN consider buying between 10%-25%
of that need in some form or permanent insurance and funding the remainder
of the need in term insurance. This gives you some coverage that you can
keep as long as you live and you have the security of a set premium that you
know won't change. Using term to cover the remainder of you need gives the
flexibility to increase or decrease coverage as you need it to - assuming
your health remains good. Just keep in mind that all else being equal,
annual renewable term premiums increase annually based on your age - the
older you are the more likely you'll die, the higher the premium.
Additionally, I would NOT recommend funding your kids 529 plans. Your
retirement is more important and you need to keep in mind how 529 plans
work. Money goes into a 529 plan with no tax deduction (though some states
have an adjustment to state income). It grows, tax deferred (NOT tax free
because if you take it out improperly you'll pay tax on the distribution).
If your kids don't go to school or you use the money for something other
than school you pay tax AND a penalty. I'd rather see you use the 529 money
to fund an IRA (maybe even a ROTH IRA) or maybe some permanent life
Roth IRAs work backwards from regular IRAs, the money you take out comes
from your nondeductible contributions FIRST, your earnings come out later.
AND the penalties get waived if you use the money for tuition for you, your
spouse or a dependent.
Permanent insurance can be borrowed against so you can get to this money tax
free to pay tuition costs (or buy a car or second home or go on vacation).
And the money you put in WILL buy you several multiples of your investment
as an immediate benefit when you die.
Those are my thoughts,
Gene E. Utterback, EA, RFC, ABA
Bear in mind that there are other consequences to this and
their VA, as cheap as it may be, may still cost one more
in the long run.
In particular, remember that a VA turns capital gains into
ordinary income. If you've maxed out your 401(k) and any
IRA options, especially Roth ones, and still need to find
a place to put investing money, consider carefully exactly
what you plan on putting in there. I'd probably rather see
an equity index fund in a taxable account than in that VA.
The dividends are probably mostly "qualified" and the cap
gains are both deferred until you sell and taxed at LTCG rates
(and may be used against other cap losses if you have them).
OTOH, if you've got your full slate of equities and are looking
for a tax-efficient place to buy bonds or maybe even REITs,
that VA may make sense.
(And bear in mind that the JeffNat VAs, while having nice
low capped $240/yr insurance fees, also charge transaction
fees for the low cost funds they include. The total package
is still probably about the cheapest way to go out there,
especially for larger accounts, but that $240 is no the
Plain Bread alone for e-mail, thanks. The rest gets trashed.
Ron Rosenfeld writes:
The whole point of the JeffNat (or other ultra-low-cost) VAs
is tax deferral. You'd never buy such a thing in a Roth.
There may be a place for a VA in an IRA if you are buying it
for some of the guarantees and insurance components because
then the tax deferral is just a small part of the reason you
are buying it (and the tax deferral, as I noted, is completely
wasted since it's already in an IRA). We recently had a few
discussions about what some of the guarantees on certain VA
products mean (ie. GMIB, GMWB) - worth reading up on if you
have an interest in that kind of thing. But if you're purely
looking for tax deferred investing, you should almost certainly
be maxing out your IRA (Roth or traditional) and your 401(k)
(or equiv.) before even glancing in the direction of VAs.
Traditional IRAs *also* perform the black magic of turning
capital gains into ordinary income, but offer other advantages
and, usually, no additional costs.
Plain Bread alone for e-mail, thanks. The rest gets trashed.
If one is buying an annuity for its guarantees (as opposed to its
underlying investments, which are segregated and thus protected from the
insurer's creditors), then one should look into the soundness of the
insurer. This matters because the guarantees are only as safe as the
insurer, you're paying extra for them, and you're betting on the insurer
being able to pay off decades down the road.
As of a year ago, Jefferson National was rated B- by A.M. Best, and
unrated by the other majors. That's well below the other insurers in
the table, q.v.
Just this week, A.M. Best upgraded JeffNat to B, which would still rank
it below any other insurer on the table linked to above.
You'll notice that unlike other insurers, you won't find mention of its
ratings on its web site. JeffNat doesn't even mention this upgrade on
its PR page.
Thank you for that information, and especially for the link! These ratings are
The company that has been recommended to me was Jackson National, which seems to
have pretty solid ratings.
Like other financial products, insurance is a double gamble. You
gamble on the length of your life, but you also gamble on the
soundness of the insurance company. In the case of some financial
products you also gamble on the honesty and integrity of the person
recommending and/or selling the product. Perhaps not enough attention
is given to those secondary pitfalls and uncertainties. I suspect they
loom larger than commonly recognized in determining investment
Mark Freeland writes:
[discussion of JeffNat as an ultra-low-cost annuity provider -
which doesn't offer any guarantees on their product - the only
reason to but it, then, is the tax deferral]
This shouldn't be an issue, since the JeffNat standard guarantee
is only equal to contract value (ie. equal to the value of the
investments you've bought within it). JeffNat could completely
fail and, in theory, investors should still be okay, right?
(This is all theory for me - I haven't read their prospectus
in detail, nor, of course, have I invested in nor recommended
to anyone to invest in a JeffNat annuity. Glancing over the
prospectus now, though, it's pretty nicely written and about
as straightforward an annuity prospectus as I've seen).
By comparison, there are other "ultra-low-cost" annuity
providers which, similarly, are mainly intended for folks
to get the tax deferral. Without adding any of the optional
guarantee riders, their death benefit is, just like this one,
equal to the contract value (ie. the value of the underlying
investments). Examples: Vanguard with a 0.20% M&E and a 0.10%
admin expense. On a $10,000, that's $30/year - *very* cheap,
but once you get above $80,000, the JeffNat one starts to
be cheaper (excluding the transaction fees for buying the
funds within the program - which depend on how many buys you
make and which funds you buy, so it's impossible to peg the
actual breakeven cost, but it's probably somewhere in the
area of $150,000).
Fidelity's equivalent one is 0.25%/yr, but the investment
options within Fidelity's retirement annuity are probably
carrying higher investment management expense ratios)
(as an aside, I find it a little disingenuous that the fees
associated with these are still called "M&E" fees. If the
death benefit is exactly the value of the investments in your
contract, there is no insurance component at all and your
fees are nothing but administrative, no "M" about it)
That all said, in my experience, it's the rare person who
needs such a product - folks generally ought to be maxing
out their 401(k), their IRAs (including non-deductible
traditional ones if necessary) and seriously considering
tax-efficient equity funds (if appropriate for their asset
allocation) before looking into these products.
Self-employed folks, especially, have huge opportunities
via SEP-IRAs and/or solo 401(k)s - up to $49000/yr (more
if over 50) before mucking about with this stuff.
And again, of course, if you're concerned about the guarantees,
you're looking at basically a whole different product.
Thanks for bringing up the importance of ratings for
insurance companies, especially when relying on their
Plain Bread alone for e-mail, thanks. The rest gets trashed.
How often have insurance companies died in modern times such that life
insurance payments and immediate annuity payments have not been
honored by a successor company? I have read that this *never* happens
No, Aurora National Life Assurance Company took over those
obligations, and continues to make the payments. See
Don described life insurance as a "gamble", implying that if the
insurance company goes belly up, the benefits won't ever be paid. I
don't believe this is true, based on what I have read. The various
state guaranty associations exist to take care of situations like
this. I'm just looking for an example of where the payments were never