Can Someone Translate This?

[4star]

marcircus,

I believe you're on the right track with your ideas since you are planning to keep it for very long term. Just be sure that you will be able to keep up the premiums comfortably, which may not be a problem for you if you have a reliable, steady discretionary income coming in. It also sounds like you're going to be using it more for the cash accumulation purpose than the insurance, which this product can be great for because

1.) tax-deferral 2.) tax-free loans and withdrawel as long as you don't violate MEC 3.) tied into securities for a greater potential of return 4.) as you mentioned, better chance of outpacing inflation 5.) the insurance benefit 6.) locking in your children's insurability 7.) providing a great financial start for them 8.) like you said, they cannot start an IRA yet.
Your other alternatives for the long term investing in comparison to VUL?

Savings account or CD's - safe, guaranteed no risk, but very little return and is taxable,

Stocks, bonds, and Mutual funds - same potential for greater returns, more flexible payments, no COI or M & E, but is taxible and no insurance benefit.

UL and WL - safer as long as you keep up with the premiums, costs less, easier to keep up and understand, but lower returns.

College Savings Plan - tax-deferred growth, tax-free withdrawel if used for qualified educational expenses only, tied into securites for potential better returns, but you will only have about 8 years left to save and your goal is to save for longer terms.

So VUL may be a good fit for your goal as long you feel that you understand it and can afford it.

In regards to taking out loans and withdrawels, it can be done with a strategy, but you have to find a good advisor to make illustrations for it and he/she can recommend things like what is the max you can take out and how it will affect your policy. It is not recommended to take loans until many years down the road though after you've built up enough cash value; and thats why its imperitive to keep up with premiums and find a good agent to help you devise a plan

Basically, the three ways you can fail a VUL are 1.) not paying at least the target premium 2.) not keeping track with investments or not having a suitable allocation mix 3.) excessively taking out loans and withdrawels and not keeping up w/ premiums ... which is again why its important to have a good, trustworthy advisor that will keep you informed and updated and remind you to take care of your premiums when needed.

 

[Stevuke]

You're thought to plan for you children in a tax deferred vehicle is right on target and admirable. The idea is great - but you are being exposed to the worst possible products for your goal.

UL and VUL are VERY misunderstood and over-rated products. They look cheaper, but they are hands down the most expensive way to purchase insurance.

They involve 3 things:
1.an insurance policy,
2. a bond-portfolio (or stock portfolio with VUL)
3. duct-tape.

The cost of the insurance goes up every year and eventually erodes the investment portfolio attached to it. In other words, in early years when the costs are low - you over-fund and the excess goes into investments or bonds - the hope is that the investment value will grow and offset the increasing cost of insurance each year. As the cost of insurance increases exponentially each year, the investments will be liquidated to offset what would otherwise be an increasing premium.

That is why ULs and VULs tend to lapse in later years - that's why there is great profit in these products for insurance companies - by the time you die they are typically no longer in force.

I can't tell you how many people have come to me with a UL or VUL that they purchased 20 years ago for $1,000/year and now they want to know why they have to pay $20,000 this year and even more next year or the policy will lapse.

For cash-value that will grow and grow - whole life is really the only product. Cost are always level. That is true for no other product.

Hope that helped.

Hello,

I am in the process of selecting a life insurance policy for my children. The research I have been doing landed me here. My goal is to build up as much tax deferred CV for them as possible to give them a head start in life. As an IRA is not an option for them, I see the potential tax deferred growth of CV in a VUL as an alternative.

I read the following in Wikipedia which I do not understand, and was hoping (praying) someone here could decipher:

[edit] Criticisms of Variable Universal Life
Some general Criticisms

High Costs - VUL's tend to be more expensive than other types of insurance, including Whole Life, Term, and Universal Life (in that order). The total cost of insurance in a VUL policy will be greater over its lifetime than a term policy and therefore more profitable to the insurer (see Buy term and invest the difference).

1. What does it mean that VUL's tend to be more expensive? More COI, More M & E? I do not understand. Less of the premiums go to CV?

2. It says that VUL's are more expensive than WL. Term, UL in that order.
Does that mean UL is the cheapest? How so? Why?

Thank you very much.

 

[4star]

Stevuke,

I respect your opinion. I once was totally against UL and VUL, but that was before I totally understood it. In fact, it can be a horrible product if the owner misuses because of lack of understanding. Now, I see them useful and effective for certain people.

True, cost of insurance does increase every year as you get older and can erode your cash value if not set up correctly and maintained. That is why the the policy relies on consistent premium payments, the potentially greater investment returns of the porfolio, and the wonderful magic of compound interest in the later years to deflect the erosion. Oh, and also the surrender charge will vanish after first xx years.

So I see this product as having potential with a strategy from a good advisor for the right purpose for the right people. Their flexibility can also play a key role vs. whole life's fix structure. As long as the client understand the risk / reward involved and is comfortable about it.

Most of the people that do lapse it, it is due to the fact that they misunderstood it and didn't pay the suffecient premium OR misused the loan/withdrawel option and therefore had to increase their premium because they took out way too much or did not have a good amount of CV to start off with OR misused the flexibilty benefit and skipped too many payments.

This lies in the advisor's role to make sure the clients understand it, set up a good policy with the right amount of premium, make sure this product is suitable for clients, keep up with the clients, and advise on a allocation and strategies.

That is how I feel about it, you're entitled to yours.

 

[Stevuke]

I appreciate your response.

I especially appreciate the politeness or your tone - We are all entitled to our opinions and i feel that candid debate will ultimately lead us to truth and clarity.

I agree that VUL can be useful. When we work with high net worth individuals who invest in high tax-cost vehicles like hedge funds - the power of a Private - Placement VUL to defer the tax cost can be powerful.

That being said - you must always have the out-of-pocket cash to
1. Over fund the policy
2. Offset market dips

The moment you cease to over-fund - the policy cannibalizes itself.

I agree with you that VUL has a place - but only for a wealthy person who can afford to keep the policy economical.


The moment your cash-flow can no longer keep up with exponentially larger costs - all of your hard earned and grown investment savings will be gin to collapse - it will be as if the policy is flushed down the toilet. You speak of the magic of compounding - the mortality charges also compound and grow exponentially.

This is a very high risk strategy. One must also consider that unlike Whole Life - if you liquidate or borrow from a VUL - you are pushed into a different dividends scale.

Also - if you touch the cash value - you usually nullify your guarantees.


That being said - if a client understands all of this and the adviser is competent, as I am sure you are - a VUL can be a useful tool in ones portfolio.

But it is neither a safe and general savings strategy nor a strong "insurance" strategy.


Cheers!

Stevuke,

I respect your opinion. I once was totally against UL and VUL, but that was before I totally understood it. In fact, it can be a horrible product if the owner misuses because of lack of understanding. Now, I see them useful and effective for certain people.

True, cost of insurance does increase every year as you get older and can erode your cash value if not set up correctly and maintained. That is why the the policy relies on consistent premium payments, the potentially greater investment returns of the porfolio, and the wonderful magic of compound interest in the later years to deflect the erosion. Oh, and also the surrender charge will vanish after first xx years.

So I see this product as having potential with a strategy from a good advisor for the right purpose for the right people. Their flexibility can also play a key role vs. whole life's fix structure. As long as the client understand the risk / reward involved and is comfortable about it.

Most of the people that do lapse it, it is due to the fact that they misunderstood it and didn't pay the suffecient premium OR misused the loan/withdrawel option and therefore had to increase their premium because they took out way too much or did not have a good amount of CV to start off with OR misused the flexibilty benefit and skipped too many payments.

This lies in the advisor's role to make sure the clients understand it, set up a good policy with the right amount of premium, make sure this product is suitable for clients, keep up with the clients, and advise on a allocation and strategies.

That is how I feel about it, you're entitled to yours.

 

[NHB_MMA]

Obviously, the cost of insurance is going up every year and will eventually get to be an outrageous premium, but of course the anticipation is that the separate account will grow at a rate to more than cover it. From what I understand about the policies, if a person opposes a VUL, I can't understand why they would ever advocate a UL. There is some extra expense in the VUL due to management expenses of tying the separate account, but I can't imagine they're significant enough to where a WL or UL will outperform a properly managed VUL.

The key is certainly that a VUL has to be done right. You cannot put it in highly speculative, volatile funds, particularly in the later years. If you pay the minimum premium...forget it. It's almost guaranteed to lapse at some point. Now I would be interested to know how many people that got burned by UL and VUL policies were paying the minimum...and how many months they decided to not pay premiums at all, when the policy was growing. You need to pay the target premium, at least, and most people would say you should pay just enough to avoiding MECing the policy.

Theoretically, if you can achieve the return you enter in the illustration, things should end up kosher. You would certainly have to have realistic planning. You can't enter say 18% as an assumed rate of return for the life of the policy. But if you feel you can achieve 8%, 9%, 10%, or even 11% and you do in fact do it, then the results should be relatively similar to the illustration. Again, who cares about the particulars such as how much is the cost of insurance, administrative costs, etc.? If those fees are figured in the illustration and the illustration is reasonably attainable, then so what?

I'm not a chef and I'll never be a chef. I don't care about the ingredients that go into my meal. I don't care about how much flour, butter, wine, oil, etc. was put into my food as long as I get the meal I want at a price I like. Agents are chefs. Their job is to know the particulars and know how to set up a good plan, but the end result seems to be the important thing.

Again, I am an agent in training and currently studying for my 6 & 63. Maybe I'm not seeing something here and would appreciate anything I'm missing, but it just seems like why focus on details rather than end results?

 

[Stevuke]

I agree, UL is no better and probably usually worse than a VUL in most vases.

UL is really only useful if the cash value is 100% ignored and you use it just to purchase guaranteed permanent insurance at a lower cost than WL and have no need for the investment aspect.

WL on the other hand will almost always outperform a VUL in the long run unless the VUL is constantly over funded; over funded both in terms of costs and market dips.

You say,

Obviously, the cost of insurance is going up every year and will eventually get to be an outrageous premium, but of course the anticipation is that the separate account will grow at a rate to more than cover it.

Let's say that's true - and the policy is sufficiently funded.

Even if the gains offset the premium successfully -

Is that where you want your investment gains to go?? - to the insurance company???

I agree with avoiding the recipe and focusing on the end - when I refer to cost, I mean total cost of the product - I don't care what it's made up of.
But your key mistake is when you say,

Theoretically, if you can achieve the return you enter in the illustration, things should end up kosher. ...... If those fees are figured in the illustration and the illustration is reasonably attainable, then so what?

The problem with the illustrations is that if you illustrate 10%, that is 10% every year.

That is not equal to an average of 10% in terms of funding a VUL. If you base the policy's success on 10%, then
30% the first year and negative 10% the second year, which averages 10%, wont cut it.
neither will 20% one year and 0% the next.

You need 10% each year.

no one gets 10% every year in equity over time - the market is fraught with ups and downs - but the illustration can't show that.

To be safe you either have to illustrate 6-7%, or be prepared to fund the dips out of pocket. But no one does that because that isn't sexy any more. - and a VUL has no interest if it can't be sexy.

But the truth is so much less fun....

Obviously, the cost of insurance is going up every year and will eventually get to be an outrageous premium, but of course the anticipation is that the separate account will grow at a rate to more than cover it. From what I understand about the policies, if a person opposes a VUL, I can't understand why they would ever advocate a UL. There is some extra expense in the VUL due to management expenses of tying the separate account, but I can't imagine they're significant enough to where a WL or UL will outperform a properly managed VUL.

The key is certainly that a VUL has to be done right. You cannot put it in highly speculative, volatile funds, particularly in the later years. If you pay the minimum premium...forget it. It's almost guaranteed to lapse at some point. Now I would be interested to know how many people that got burned by UL and VUL policies were paying the minimum...and how many months they decided to not pay premiums at all, when the policy was growing. You need to pay the target premium, at least, and most people would say you should pay just enough to avoiding MECing the policy.

Theoretically, if you can achieve the return you enter in the illustration, things should end up kosher. You would certainly have to have realistic planning. You can't enter say 18% as an assumed rate of return for the life of the policy. But if you feel you can achieve 8%, 9%, 10%, or even 11% and you do in fact do it, then the results should be relatively similar to the illustration. Again, who cares about the particulars such as how much is the cost of insurance, administrative costs, etc.? If those fees are figured in the illustration and the illustration is reasonably attainable, then so what?

I'm not a chef and I'll never be a chef. I don't care about the ingredients that go into my meal. I don't care about how much flour, butter, wine, oil, etc. was put into my food as long as I get the meal I want at a price I like. Agents are chefs. Their job is to know the particulars and know how to set up a good plan, but the end result seems to be the important thing.

Again, I am an agent in training and currently studying for my 6 & 63. Maybe I'm not seeing something here and would appreciate anything I'm missing, but it just seems like why focus on details rather than end results?

 

[James]

If you are selling the VUL as an investment you have to understand most people will assume they can take more out of the policy then they put in, correct? Now this is where the VUL really stinks as in any Insurance Contract, that is once you hit the point of basis of the premium you have placed into the contract. Now you can take loans but sooner or later that will catch up to the policy, if you are going to use the loan feature I don't think you'll beat a good UL or WL. Yet though, if the poster wants to really understand the value of any Insurance contract there are places he can send any contract to have it indepently examine by expierence Insurance/Investment Advisors or Counselors to have it graded.

I'm not sure I understand what you're saying.

As for loans, I wouldn't really recommend anyone borrow from a VUL or even a UL, as the term component really begins to skyrocket and it puts some REAL RISK into the contract, especially with the VUL that depends on a postive performance to keep growing. I would urge clients that start their policies as children to keep them till their retirement years and would strongly encourage that they not borrow, but cash in if needed. I wasn't factoring loans into the equation. To me, it seems borrowing for a life insurance policy is a last resort, IMO, but I could be offbase about that. When I was comparing the three products, I was just looking at illustrations under the assumption that a person would hold the policy until death or a very old age.

Hold them till they are dead or next to death? Then what good is the investment if you can't use it? If a DB is desired a simple WL or UL would be cheaper then the VUL. Plus the loans can be deferred till the DB is paid if you pick the right contract as long as the loans don't surpass the CV which in a WL it can not do, unlike the VUL! In general its always better to take money out via loans then withdrawal of actual cash value. Just pick a contract that has favorable loan structure.

 

[NHB_MMA]

I have very limited time today, and probably this week, but I'll have to try and list the illustration examples I ran when I get a chance.

Hold them till they are dead or next to death? Then what good is the investment if you can't use it?

That was stated very poorly on my part. What I was meaning is a VUL bought as a child or young adult will not really snowball into something pretty big until about age 70. It looks to me like most $100,000 policy illustrations hit the $1M mark around that time. By age 100, they're around $3.5M and I was meaning you'll really miss out the potential if you cash them in too early.

If a DB is desired a simple WL or UL would be cheaper then the VUL.

Again, just judging on the illustrations I've seen, if a person lives into their 80s, 90s, 100s, etc. a VUL with a decent rate of return will eat the UL and WL for lunch. The $100,000 policy illustrations for those two I compared days ago were roughly at $1M at age 100.

Obviously, the WL increases in cash value from almost day one, and the VUL has catching up to do. The WL will undoubtedly pay more at age 50 or 60.

The obvious problem is none of us know when we're going to die, what kind of health our children will have, etc. I freely admit the VUL has some short-term volatily and lacks the guarantees of WL, so a client has to understand that a person needs to live to a decent age to really see it produce the optimal results.

Plus the loans can be deferred till the DB is paid if you pick the right contract as long as the loans don't surpass the CV which in a WL it can not do, unlike the VUL! In general its always better to take money out via loans then withdrawal of actual cash value. Just pick a contract that has favorable loan structure.

The advantages of loans on life policies is something I have little knowledge of and must acknowledge you have far greater expertise here. Guys show them on illustrations with WL at the office all the time, but I haven't got into it much yet.

I was thinking specifically of the VUL. If you borrow too much, you would be in danger of collapsing the policy (same with a UL) and I think those policies are better used with the strategy of cashing out during retirement years.

 

[NHB_MMA]

Stevuke, I have limited time now to respond and give this great thought, but I understand what you're saying.

The problem with the illustrations is that if you illustrate 10%, that is 10% every year.

That is not equal to an average of 10% in terms of funding a VUL. If you base the policy's success on 10%, then
30% the first year and negative 10% the second year, which averages 10%, wont cut it.
neither will 20% one year and 0% the next.

You need 10% each year.

no one gets 10% every year in equity over time - the market is fraught with ups and downs - but the illustration can't show that.

To be safe you either have to illustrate 6-7%, or be prepared to fund the dips out of pocket. But no one does that because that isn't sexy any more. - and a VUL has no interest if it can't be sexy.

I know 10% is kind of the benchmark everyone shoots for. Many guys out there love to throw unrealistic numbers out at people. There is an independent agent that is a long friend of my family who has been real encouraging to me that, IMO, uses inflated numbers. He was talking about getting returns of 16% to 18% for his people, which is very believeable in the short-term, but won't last forever.

As far as dips, I would think the approach would be like anything else. You can handle them early on, but need to shift your focus towards less volatile investments later on. So, in reality, a person will not average 10% in the later years. As I mentioned to James, the $100,000 policy shows about $1M in cash value at age 70 and $3.5M at age 100. The reality is that, at age 70, you're not going to leave your money in the same funds that you would have at age 30, therefore reducing the $3.5M projection. Maybe that is what you're saying--that you can get 10% or so for many years, but not the ENTIRE life of the contract.

As for how realistic 10% is, I remember seeing where the NYSE, as a whole, has return around 12% or so since its creation in one of my old economics books from college. I would think there have to be some indexed products that near the 10% return, but perhaps I'm wrong. Again, an area I'm just learning about.

 

[James]

Once again as Stevuke stated you will not recieve 10% yearly, you may average 10% or even greater in a 20 year period but that will include down years with up years. So let me ask this, exactly what kind of premium is it that you work up those numbers comparing a VUL to a UL or WL?