Term vs VUL


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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
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