Guidance on VUL policy

[justviv]

So I’ve done my reading around here and it seems like VUL policies as an investment vehicle are almost universally (no pun intended) disliked.

However, I’m really trying to understand why and would appreciate an ELI5 if possible.

Basically what’s being proposed to me is a NYL policy with level premium of $350 until the age of 55, with an increasing death benefit that starts at $150k. The interest rate on policy loans is 3%.

I’m currently single and have no dependents. Personally, I’m skeptical because of the complexity of these plans (I feel like there are things I’m missing) and the hypothetical 8% return. FA suggests this is very achievable, and that the taxes I would have to pay from an investment account negates any benefits of avoiding the VUL completely. (Note: I do have an investment account, they’re just suggesting not to completely ignore the VUL because of the potential for tax-free loans.)

I also recently switched from another FA who got me into a bad policy several years ago, so now I have a bad taste in my mouth despite this policy seeming better on paper.

The other reason I’m skeptical is if I were to compound $4200 for the same 28 years at 8%, I’d get ~$400k, which is more than the $314k I’d have in this policy. Compound that for another 11 years and I’d have ~$933k compared to the policy showing I’d have $688k.

Am I looking at things right? Does anything stand out in the attached illustration that I’m missing?

VUL illustration

 

[qity]

@justviv It's the absolute best investment outside of a Roth (which if you're buying VUL you probable can't get outside of an employer)

Check the fees though.

There are no load VULs with super cheap expenses. I know nothing about NYL's but just make sure you're not getting jammed on fees.

 

[justviv]

@qity The premium charge is 4% annually, the monthly contract charge is $120 annually, and the per 1000 charge is $477 annually for the first 10 years.

What I’m seeing is about 22% in fees total for the first 10 years, and about 12.8% ($15,027) over the life of the policy (less the persistency credit).

Here’s the cost summary:

https://imgur.com/a/RR6I7TI

 

[ativyl]

@justviv

I’ve done my reading around here and it seems like VUL policies as an investment vehicle are almost universally (no pun intended) disliked.

Yes I think people on the insurance side mostly don't like probablistic products (i.e. stock heavy) and people on the investing side don't like higher fees. That being said I think VUL tends to be nice bucket for getting more 401k like assets if you are maxing out your 401k or want 401k tax advantages but don't want to lock money up for decades.

Basically what’s being proposed to me is a NYL policy with level premium of $350 until the age of 55, with an increasing death benefit that starts at $150k. The interest rate on policy loans is 3%.

I like but don't love NYL's product. You'll notice the persistency credit which really makes a difference in the out years. OTOH looking at your illustration I'd see if they will do a term blend.

I’m skeptical because of the complexity of these plans (I feel like there are things I’m missing) and the hypothetical 8% return.

The 8% is reasonable, these are stock heavy mutual funds after expenses and fees. The complexity also applies when using it. You aren't missing gotchas but you need to know how to use this policy or it can hurt you badly.

The other reason I’m skeptical is if I were to compound $4200 for the same 28 years at 8%, I’d get ~$400k, which is more than the $314k I’d have in this policy. Compound that for another 11 years and I’d have ~$933k compared to the policy showing I’d have $688k.

The 8% is before fees not after fees. In the non-vul fund you would need to compare taxes. For all stock the taxes won't be much at all, plus you have some cheaper investment options. The VUL won't win. The VUL wins if you go more like 60/40 stocks/bonds, and then the tax drag gets intense. (link to series on these topics:

https://www.reddit.com/r/IncomeInvesting/comments/14j82hw

)

 

[justviv]

@ativyl Appreciate the breakdown.

I’m also hung up on the fact that the illustration shows 8% as the return each year, it in all likelihood that won’t be the case, it’ll be some combination of ups and downs that averages 8% over time, which will give me a much different cash value in the end than what’s being shown.

I’m currently not maxing out my other accounts, so it does feel wrong to start here and take away money from potentially being able to do so.

 

[ativyl]

@justviv

’m also hung up on the fact that the illustration shows 8% as the return each year, it in all likelihood that won’t be the case, it’ll be some combination of ups and downs that averages 8% over time, which will give me a much different cash value in the end than what’s being shown.

You can ask them to do something like +30%, -10% which is a volatile compounding of 8.16%. (or +29, -11 to account for expenses).

I’m currently not maxing out my other accounts, so it does feel wrong to start here and take away money from potentially being able to do so.

Unless you need the money for something taxable it probably is. 401k, Roth... are better than VUL for most circumstances. You don't need death benefit, you can wait till later in life to do VUL.

 

[nehsewokayydocyelad]

@justviv They are more risky because there's no floor or cap so you can lose all your cash value or it can do very well. For some individuals it may be a great product, but for others that want peace of mind it might not provide that.

 

[bandan]

@justviv If you’re single with no dependents, don’t get life insurance. I am all for well designed accumulation life insurance products for the right fit, but it’s unlikely you’re the right fit. Are you maxing 401k? IRA? Contributing to taxable brokerage? If answer isn’t yes to all 3, you have better places to put your money for now to accumulate.

 

[trappermike1]

@justviv If your agent designs this well it will do well but it will need regular checkups and could over or underperform expectations. A great choice if you’re already maxing out a roth

 

[justviv]

@trappermike1 FWIW, I’m not currently maxing out my 401k and haven’t contributed to a Roth IRA in a few years. Thinking I should see where I am after I contribute to those.

 

[trappermike1]

@justviv I’d say maxing the Roth should be priority but I’m not your agent and don’t know your tax situation. Priority should probably go Roth>VUL>Trad IRA.

 

[clewis]

@justviv High chance that it will become a MEC or cannabalize itself. What is your goal with your policy? They never perform as illustrated. So they look good but they don’t perform nearly as good

 

[justviv]

@clewis The strategy seems to be to have 3 buckets - tax free, tax now, tax later. Apparently this policy would fall into my tax free bucket. However, FA didn’t want me contributing after 55 because they believe there will be better ways to allocate my money at that point.

 

[clewis]

@justviv Cash value whole life with a mutual insurer is also tax free and you have guarantees associated with it. Significantly less risk, if any at all and the policy is not designed to MEC

 

[isohyeoh]

@clewis Ehh I would rather invest in the snp than a fixed interest rate. How do you invest your retirement assets? Would you take a guaranteed 4 or 5% every year or roll the dice with index investing. That’s at least how I look at it.

 

[clewis]

@isohyeoh I’ll take guarantees over “rolling the dice any day” my insurance company just paid a 5.75% for the second year in a row and that makes 175 consecutive years of paying a dividend(aka above the guaranteed rate). So I’d rather take that and have complete access to my money where I can put it towards other investments like PML. All while my “borrowed” money is still earning interest. Making money three ways with no risk of loss

 

[isohyeoh]

@clewis Right and subtract the policy fees and then the inflation rate and the money is barely growing. I’ll take the snp 500 returns all day. Do you invest your retirement in a guaranteed rate, and if you did would you run the chance of not growing your assets enough?

 

[clewis]

@isohyeoh Your lack of knowledge about the product is showing. The guaranteed rate, which they’ve paid above for 175 years is after fees. One bad year in the Snp and you’ve lost more than any fees inside a policy. Imagine a down year in the snp plus inflation eating at your dollars. Not recoverable in a life time. And while your money is in the snp you can’t borrow without worrying about having to repay. Sure you can borrow against the snp assets but you risk margin call. When borrowing inside of a whole life there is no repayment schedule although you should but you don’t have to. Also the snp doesn’t guarantee me a death benefit passed on Tony beneficiaries tax free

 

[isohyeoh]

@clewis Right so all your retirement assets are in fixed rate guarantees? We all know the answer. Also, I am not against cash value life insurance, I would rather invest my dollars inside of a policy into the snp, not an underperforming fixed rate.

 

[clewis]

@isohyeoh How is it underperforming if it’s guaranteed to grow and never a year where you have to put more in than your first payment? Also it is more of a safe haven for my money. Let it accumulate in there and when an opportunity arises I can access the money, while it’s earning interest and use it for other investments that will generate a return. Money working in different places at the same time without the stock market risk