Vul

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Oct 30, 2008 11:03 am

I'm not an FA yet, though I'm about to start working on my licensing.  I've read many negative comments about VUL's.   I have heard from some FA's I know, they can be a decent investment but ONLY for specific situations and clients.    Looking for some insight as to where a VUL might be good for the client.  Just curious.
thanks.

Oct 30, 2008 11:13 am

May be appropriate to fund a buy- sell agreement, key man, or other business application. Possibly for a younger individual who can over fund the heck out of it, otherwise also good for earning high commissions and blowing up clients who don't over fund them.

 
Stok
 
Oct 30, 2008 11:45 am

They work well in theory.  Communism also works in theory.

 
If you want expensive Annual Renewable Term insurance combined with expensive investments, then VUL rocks!  Otherwise, either BTID, or use whole life for permanent coverage (although in certain situations, guaranteed UL works).
Oct 30, 2008 6:53 pm

Sorry, Stok, but I can't think of a single instance where they are appropriate in the real world.  Deekay is 100% correct.

Oct 30, 2008 7:02 pm
anonymous:

Sorry, Stok, but I can't think of a single instance where they are appropriate in the real world.  Deekay is 100% correct.

 
Hate to disagree with you Anon, but on slow production months, they work very well.
Oct 30, 2008 7:56 pm
stokwiz:

May be appropriate to fund a buy- sell agreement, key man, or other business application. Possibly for a younger individual who can over fund the heck out of it, otherwise also good for earning high commissions and blowing up clients who don't over fund them.

 
Stok
 




Oct 30, 2008 8:00 pm
Primo:
anonymous:

Sorry, Stok, but I can't think of a single instance where they are appropriate in the real world.  Deekay is 100% correct.

 
Hate to disagree with you Anon, but on slow production months, they work very well.
 
WL works better AND pays better AND requires less hand holding.  Win-win-win for the agent, client, and insurance company.

 
Business owners take on enough risk.  At least the ones I work with think this way.  Using WL in key person, buy-sell, and executive benefits gives them protection, promises, and guarantees that you cannot find in VUL.  One less thing to worry about versus worrying about the market, worrying if it's max-funded (and can it be max-funded in the future if the CSV goes down), and worrying about the COI in the future.
Oct 31, 2008 11:38 am

gvf, the commission comment was sarcasm. I personally despise VUL, the original question was how would one use one.


 
Stok
Oct 31, 2008 12:49 pm

ok, i hate to admit this, but when i started way back when it was with an insurance company.  i realized after a short time (18 months or so) that my sales pitch of VUL for all was way wrong.  to this day, i wish i had not sold a single VUL.   stay away from them completely.

 
i have not sold a VUL in 8 or 9 years.
Oct 31, 2008 2:25 pm

Why are you ashamed you worked for an insurance company, ironhorse?  Most veteran insurance guys I know run planning circles around investment guys.  And they make more money, too.

Oct 31, 2008 2:33 pm

deekay, I think he's ashamed of the VUL pushing.

Oct 31, 2008 3:28 pm

Personally, I think he's ashamed of both but he definitely should be ashamed for the VUL pushing.

Oct 31, 2008 3:35 pm

I ran across some younger advisors in my area that are pushing VUL's very hard...saying the tax-free growth and withdrawals will outperform anything you put against it.

 
Personally, I'm not a fan.
 
I know they are selling this stuff pretty hard, as well as VA's, and are definitely looking for the big commish.  I don't have a problem with commission, but when I think it's done for the wrong reason, it is a problem.
 
I wish I had the education of some of you regarding the subject so that I could make a good point to them, but alas, I don't.
 
I also believe they are funding VA's, taking income right away to fund a VUL policy.  Doesn't sound like the smartest thing to do, but they believe they are, in effect, beating the insurance companies at their own game.
 
I don't get it.  
Oct 31, 2008 7:50 pm

i am in no way ashamed of working for an insurance company.  i feel it did in fact give me a leg up on many investment guys who are neglecting to bring up ltc, di, and what not, i feel comfortable addressing these issues thanks to my insurance training.

i did not decide to heavily pursue any sort of "investment" practice until my 2nd and 3rd year of business.  i got my 7 in that 3rd year and quickly changed my practice.  i started this right out of college, mainly followed the advice given to me by 20+ year vets and modeled my practice after them.  this was all i knew, and assumed they were doing what was right.  i decided i did not agree with them, but by then i had sold maybe 20 VUL's.

for the new advisor asking about them, just realize they are about the easiest piece of business for your competition to tear apart.  the conversation is pretty simple, and your soon to be ex client will not look at you too favorably.

Oct 31, 2008 7:53 pm

snags-i have heard of this practice, but not in a mass market situation.  a wholesaler explained it to me when i asked him about annuity arbitrage.  not sure if this is what they are doing.  essentially it involved buying an annuity, arguing for a better annuitization based on poor health, then buying a life insurance contract with the proceeds, while arguing better health to the life carrier.  beyond that i do not have more info.

seems like something which would be suitable in a very small number of cases but is pushed to everyone.

Oct 31, 2008 8:19 pm

For clients already maxing their 401k and who make too much for a Roth, where would you advise putting their money?  This is where I heard a VUL might make sense since you can dump cash into and later access it tax free through a "loan" from the policy.  Again, I'm not even licensed yet so may be getting things mixed up. 

Oct 31, 2008 9:14 pm

 "I ran across some younger advisors in my area that are pushing VUL's very hard...saying the tax-free growth and withdrawals will outperform anything you put against it. " 

 
"This is where I heard a VUL might make sense since you can dump cash into and later access it tax free through a "loan" from the policy"
 
First of all, we need to get rid of that notion that it's tax free.  It's not.  It's tax deferred.   Outside of the laboratory, what happens if someone takes money out of a VUL policy?  It greatly increases the chance that the policy will lapse.  When the policy lapses, all gains are taxed as income. 
 
Anyway that we slice it, VUL doesn't make much sense.  We can use virtually any made up situation that we want and any made up numbers, and I still can't figure how it can be in a client's best interest. 
 
We have to understand that VUL is nothing more than annually renewable term insurance and a side fund.  Therefore, to make a fair comparison, let's compare it to a term policy and a separate investment account.  The insurance is more expensive by a wide margin and the investments are more expensive by a wide margin.  No matter how I do this comparison, the VUL always loses.
 
It cracks me up how people always talk about overfunding a VUL policy to keep the amount of insurance at a minimum to keep the COI cost down and how great it is that all of the money is going into the cash that is growing "tax free".    
 
Let's compare, for example, 2 policies that both have a $500,000 death benefit.  Policy #1 is currently being funded with $1,000 and has a cash value of $1000.  Policy #2 is currently being funded with $10,000 and has a cash value of $200,000.   Look at fairly typical costs.
 
The major costs consists of 1) Sales load (5%) 2)M&E  (1%) 3)COI ($2 per thousand) 4)ER of funds  (I'll ignore this since it will exist in outside investments.)
 
Policy #1 (minimally funded)
Sales load: $50
M&E: $10
COI: $998
Total Costs: $1058
 
Policy #2 (over funded)
Sales load: $500
M&E:  $2,000
COI: $600
Total Costs:$3,100
 
Overfunding a policy reduces the amount of insurance at risk which lowers the insurance cost, but increases the M&E cost.   M&E is a scam in how it's charged.  In my example, the insurance company has lowered their amount at risk from $499,000 to $300,000, so it only makes sense that the M&E charge would decrease.  Instead, it increased from $10 to $2000!
 
By the way if we were comparing this to BTID, the investor/insured would have an M&E of $0 and they would have no sales charge on the insurance premium and the COI would be significantly cheaper, and the investment portion would have lower sales charges (or no sales charges) and probably a lower ER. 
 
I call VUL a laboratory product because it could make sense for someone in a laboratory.  If we took human nature out of the equation, it could make sense.  The policy would stay in force forever and all of the gains would end up being tax free.  The problem is that even if this happens, it still doesn't make sense because the internal expenses makes BTID always a better alternative.
 
(I am not arguing for BTID and in fact, I don't think that conceptually it makes sense.  It's just that it's better than VUL.)