Term vs VUL

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?
Reply to
sfbayarea
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 anti-VA stance.
Reply to
JoeTaxpayer
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 by others:
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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.
Reply to
Mark Freeland
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.
Reply to
HW "Skip" Weldon
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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 the difference.
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 insurance.
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
Reply to
Gene E. Utterback, EA, RFC, AB
JoeTaxpayer writes:
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 whole picture).
Reply to
BreadWithSpam
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.
Reply to
BreadWithSpam
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.
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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.
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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.
Reply to
Mark Freeland
Mark,
Thank you for that information, and especially for the link! These ratings are certainly important.
The company that has been recommended to me was Jackson National, which seems to have pretty solid ratings.
Reply to
Ron Rosenfeld
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 outcomes.
Reply to
Don
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 guarantees!
Reply to
BreadWithSpam
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 nowadays.
Reply to
bo peep
No, Aurora National Life Assurance Company took over those obligations, and continues to make the payments. See
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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 honored.
Reply to
bo peep

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