VUL Insurance
As part of my team we have assigned some duties and my part will entail becoming the insurance specialist. I have to admit after almost 20 years in the business this is an area that I know little about. We have done a little, but are seeing more and more opportunities with our higher net worth clientele and business owners. We currently use an outside “wholesaler” for lack of a better word that we open the door, they close the deal and in the end we split the commissions. These guys appear to be very solid and have an internal knowledge that I do not have.
I guess my question is two parts. First of all since I have been handling the financial planning aspect in the past how do I become the "expert" in insurance? Normally I would think you work under a person who has done it for a long time, but no one in my firm has really specialized in this area either. I have no interest in changing firms or working for an insurance company as we already have our business running. Secondly, many have posted that VUL contracts are like the plague and I am not sure I understand that. If you run hypotheticals with reasonable returns, say 6% I don't think they have much chance of blowing up (OK I get the past 9 years). Could someone explain to me why these are bad vehicles or at least point me in the right direction. Thanks you in advance!I rarely use them because the hypotheticals most likely show the client contributing the same amount or increasing amounts for 20-30+ years. The odds of a client not stopping contributions in order to increase savings for the next down payment on a house, paying kids college tuition, paying down recently acquired credit card debt, etc. at some point during that period is extremely slim. Clients aren't stupid, if you tell them to decrease savings in their 401(k) instead they'll think you're an idiot. So many things have to go right in order for a VUL to act as it is intended that the risk isn't worth it for me. Now, capital transfers are another thing. I've seen them work beautifully several times.
VULs are not the plague, they are not unsuitable, and they do not always blow up. For the clients we work with, we are not a huge fan of them simply because people already have so much of their net worth in the market, why tie their cash value LI to the market as well? If you have business owners with 80% of their net worth in their business, then a VUL may be a good way to get some exposure to the market and get the temporary death benefit needed. I have seen old VULs work excellent as accumulation vehicles but rarely as something that will a provide permanent death benefit. If you have clients that need the life insurance, don’t have a lot of stock market exposure, and don’t plan to die with the full face amount in place then a VUL could be a nice option for them.
this out to be a good thread. save yourself some time and headache cashflow and steer clear of vul’s. it is not worth the time and effort and there is maybe, just maybe a 5% chance the policy works the way you want and say it will and the client is satisfied in the end. i would also have some qualms being the life specialist if you don’t really have the credentials/experience.
they are bad vehicles for many reasons, and i suggest you do a search of the forum for previous discussions concerning this topic.
[quote=theironhorse]this out to be a good thread. save yourself some time and headache cashflow and steer clear of vul’s. it is not worth the time and effort and there is maybe, just maybe a 5% chance the policy works the way you want and say it will and the client is satisfied in the end. i would also have some qualms being the life specialist if you don’t really have the credentials/experience.
they are bad vehicles for many reasons, and i suggest you do a search of the forum for previous discussions concerning this topic.
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What are bad vehicles for many reasons? VUL or insurance in general? I’m not an investment expert and I am not an insurance expert either but I do know a little bit more about insurance. Are VUL’s for everybody? No, no product is for everybody. Can they be another vehicle for the right person? Absolutely it can be.
The tax advantages found inside of a life insurance policy are unmatched to any other type of product. The problem is when people don’t understand them or they are oversold without the proper explanation. If someone wants a guaranteed death benefit without any risk, VUL’s are obviously not the tool for it. I have used it for the individual who can’t contribute to a Roth anymore because of income and maxed out on qualified plans. We pick an amount they want to throw into a VUL on a monthly basis (example $1000/month) and we buy the smallest death benefit possible without triggering the MEC rules so that only a small portion is coming out for the insurance portion. I usually put it in low cost investment options (combination of index funds and actively managed to keep overall expense ratio down). Cash value grows tax deferred, you can access all of your cost basis without tax consequence and beyong cost basis, you access a majority of the cash through a loan and don’t pay tax on it either. The caveat is that you can’t let the policy lapse by taking too much cash value b/c it still has to run but it’s still an awesome benefit.
Here’s an example that I did recently (I’m estimating for simplicity purposes). This individual funded this policy for about 25 years and over the years, his premiums out of pocket are 100K. At average rates of return, by the time he was 65, it was about 1 million with about 900K of gain (again, I’m just estimating b/c I can’t remember all of the numbers). At this point, he can take an easy 100K without any question b/c it’s a return of basis, so he has 900K left and 800K gain left. If he wants at this point, he can take a loan of let’s say 750K and there is no tax consequence for that b/c it’s a loan and it doesn’t need to be paid back. He spends it all the next day and then dies, his beneficiaries receive $150K income tax free. So out of the 900K of gain, he spent 750K without any tax consequence and the rest went to his beneficiaries income tax free. This is the way that VUL’s are supposed to work and can be done if done properly.
Are there costs in the policy? Yes but I’ll take a $5 dollar monthly policy charge and pay insurance costs so I can legally screw the IRS out of taxes.
I often call these laboratory products because they work much better in a laboratory than in the real world. Human nature and VUL don’t go together.
Let's ignore that and keep it simple. First of all, you need to understand the basics of VUL. VUL combines annually renewable term insurance with a side fund of investments. There are two basic problems with this. 1)Annually renewable term insurance isn't designed for a permanent insurance need. 2)The investments are very expensive. I am not a fan of buy term and invest the difference. However, this is exactly what VUL is, but done in one policy. Whenever I compare VUL to BTID, the term insurance with a side fund blows away the VUL. This is because the insurance in VUL is overpriced and the investments are overpriced. I've put the challenge out there for someone to put together a scenario where VUL would beat BTID, but nobody has done it. If you'd like, we can through a prospectus for a VUL product and you'll quickly see why it's not an appropriate product.Look at all the internal expenses and you'll see that it will lose to BTID and it has much more risk because if the policy lapses all gains are taxed as income. In your example of dying the next day, he better, or else, he's in danger of the policy ultimately lapsing.[quote=theironhorse]this out to be a good thread. save yourself some time and headache cashflow and steer clear of vul’s. it is not worth the time and effort and there is maybe, just maybe a 5% chance the policy works the way you want and say it will and the client is satisfied in the end. i would also have some qualms being the life specialist if you don’t really have the credentials/experience.
they are bad vehicles for many reasons, and i suggest you do a search of the forum for previous discussions concerning this topic.
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What are bad vehicles for many reasons? VUL or insurance in general? I’m not an investment expert and I am not an insurance expert either but I do know a little bit more about insurance. Are VUL’s for everybody? No, no product is for everybody. Can they be another vehicle for the right person? Absolutely it can be.
The tax advantages found inside of a life insurance policy are unmatched to any other type of product. The problem is when people don’t understand them or they are oversold without the proper explanation. If someone wants a guaranteed death benefit without any risk, VUL’s are obviously not the tool for it. I have used it for the individual who can’t contribute to a Roth anymore because of income and maxed out on qualified plans. We pick an amount they want to throw into a VUL on a monthly basis (example $1000/month) and we buy the smallest death benefit possible without triggering the MEC rules so that only a small portion is coming out for the insurance portion. I usually put it in low cost investment options (combination of index funds and actively managed to keep overall expense ratio down). Cash value grows tax deferred, you can access all of your cost basis without tax consequence and beyong cost basis, you access a majority of the cash through a loan and don’t pay tax on it either. The caveat is that you can’t let the policy lapse by taking too much cash value b/c it still has to run but it’s still an awesome benefit.
Here’s an example that I did recently (I’m estimating for simplicity purposes). This individual funded this policy for about 25 years and over the years, his premiums out of pocket are 100K. At average rates of return, by the time he was 65, it was about 1 million with about 900K of gain (again, I’m just estimating b/c I can’t remember all of the numbers). At this point, he can take an easy 100K without any question b/c it’s a return of basis, so he has 900K left and 800K gain left. If he wants at this point, he can take a loan of let’s say 750K and there is no tax consequence for that b/c it’s a loan and it doesn’t need to be paid back. He spends it all the next day and then dies, his beneficiaries receive $150K income tax free. So out of the 900K of gain, he spent 750K without any tax consequence and the rest went to his beneficiaries income tax free. This is the way that VUL’s are supposed to work and can be done if done properly.
Are there costs in the policy? Yes but I’ll take a $5 dollar monthly policy charge and pay insurance costs so I can legally screw the IRS out of taxes.
[quote=anonymous]I often call these laboratory products because they work much better in a laboratory than in the real world. Human nature and VUL don’t go together.
Let's ignore that and keep it simple. First of all, you need to understand the basics of VUL. VUL combines annually renewable term insurance with a side fund of investments. There are two basic problems with this. 1)Annually renewable term insurance isn't designed for a permanent insurance need. 2)The investments are very expensive. I am not a fan of buy term and invest the difference. However, this is exactly what VUL is, but done in one policy. Whenever I compare VUL to BTID, the term insurance with a side fund blows away the VUL. This is because the insurance in VUL is overpriced and the investments are overpriced. I've put the challenge out there for someone to put together a scenario where VUL would beat BTID, but nobody has done it. If you'd like, we can through a prospectus for a VUL product and you'll quickly see why it's not an appropriate product.[/quote]Anon, I know you have a lot of knowledge b/c I've read your posts. But here is where I'm coming from on this.
With the investments being expensive, that is why I use a majority of index funds inside of a VUL. I recently consturcted a pfolio with a total expense ratio of 0.34. Ins companies try to push their asset allocation models but they're too expensive for my taste (1.4 or 1.5).
When you use BTID, what kind of account are you putting the cash in? Taxable brokerage account without the tax benefits of a side account inside of a VUL. For the taxable account to beat the VUL with all things being equal, the taxable account has to WAY OUTPERFORM the VUL just to be equal in order to make up for the lacking of tax benefits b/c you have capital gains you're paying along the way. And let's just pray that the capital gains rate stays at 15% but with Dems in office, that doesn't seem likely.
Look at all the internal expenses and you'll see that it will lose to BTID and it has much more risk because if the policy lapses all gains are taxed as income. In your example of dying the next day, he better, or else, he's in danger of the policy ultimately lapsing.[/quote][quote=army13A] [quote=theironhorse]this out to be a good thread. save yourself some time and headache cashflow and steer clear of vul’s. it is not worth the time and effort and there is maybe, just maybe a 5% chance the policy works the way you want and say it will and the client is satisfied in the end. i would also have some qualms being the life specialist if you don’t really have the credentials/experience.
they are bad vehicles for many reasons, and i suggest you do a search of the forum for previous discussions concerning this topic.
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What are bad vehicles for many reasons? VUL or insurance in general? I’m not an investment expert and I am not an insurance expert either but I do know a little bit more about insurance. Are VUL’s for everybody? No, no product is for everybody. Can they be another vehicle for the right person? Absolutely it can be.
The tax advantages found inside of a life insurance policy are unmatched to any other type of product. The problem is when people don’t understand them or they are oversold without the proper explanation. If someone wants a guaranteed death benefit without any risk, VUL’s are obviously not the tool for it. I have used it for the individual who can’t contribute to a Roth anymore because of income and maxed out on qualified plans. We pick an amount they want to throw into a VUL on a monthly basis (example $1000/month) and we buy the smallest death benefit possible without triggering the MEC rules so that only a small portion is coming out for the insurance portion. I usually put it in low cost investment options (combination of index funds and actively managed to keep overall expense ratio down). Cash value grows tax deferred, you can access all of your cost basis without tax consequence and beyong cost basis, you access a majority of the cash through a loan and don’t pay tax on it either. The caveat is that you can’t let the policy lapse by taking too much cash value b/c it still has to run but it’s still an awesome benefit.
Here’s an example that I did recently (I’m estimating for simplicity purposes). This individual funded this policy for about 25 years and over the years, his premiums out of pocket are 100K. At average rates of return, by the time he was 65, it was about 1 million with about 900K of gain (again, I’m just estimating b/c I can’t remember all of the numbers). At this point, he can take an easy 100K without any question b/c it’s a return of basis, so he has 900K left and 800K gain left. If he wants at this point, he can take a loan of let’s say 750K and there is no tax consequence for that b/c it’s a loan and it doesn’t need to be paid back. He spends it all the next day and then dies, his beneficiaries receive $150K income tax free. So out of the 900K of gain, he spent 750K without any tax consequence and the rest went to his beneficiaries income tax free. This is the way that VUL’s are supposed to work and can be done if done properly.
Are there costs in the policy? Yes but I’ll take a $5 dollar monthly policy charge and pay insurance costs so I can legally screw the IRS out of taxes.
You are right, it does have costs associated with these but I strongly believe the tax shelter you receive far outweigh the costs. Obviously I made that loan example to prove a point b/c if you tried to take a loan out for that much, the ins company would probably throw up a flag and say the policy has a chance of lapsing. So instead of taking a 750K loan, take out 500K loan and let the rest of the cash value still accumulate and when it accumulates more, take out another loan. The goal is to keep enough to keep funding the policy w/o lapsing the policy but try to draw down the cv as much as possible. Is it foolproof? Absolutely not but it has to be done right and IF done right, can be beautiful.
Anonymous, almost all VULs sold today carry some type of lapse-guard rider so saying they in the distribution phase they will lapse and the gains become taxable is not a fair statement to make. If you surrender the policy at some point we know that may or may not trigger a tax event.
Of course what we do know will happen with most of these VULs is that the policyholder will not understand what they purchased and 10 years in when the policy is underwater and finally getting to the point where they have built enough cash value to outweigh the loads and policy fees being charged and will start to show a decent return, a new agent will come in and show them how they will 1035 the CV into a VA and then offset the first $X,XXX of gains they will earn in the new agent’s VA by using the loss they are showing in the VUL, and of course sell them another life policy to replace the VUL they 1035 exchanged.
[quote=BerkshireBull]Anonymous, almost all VULs sold today carry some type of lapse-guard rider so saying they in the distribution phase they will lapse and the gains become taxable is not a fair statement to make. If you surrender the policy at some point we know that may or may not trigger a tax event.
Of course what we do know will happen with most of these VULs is that the policyholder will not understand what they purchased and 10 years in when the policy is underwater and finally getting to the point where they have built enough cash value to outweigh the loads and policy fees being charged and will start to show a decent return, a new agent will come in and show them how they will 1035 the CV into a VA and then offset the first $X,XXX of gains they will earn in the new agent’s VA by using the loss they are showing in the VUL, and of course sell them another life policy to replace the VUL they 1035 exchanged.
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Berkshire, you are absolutely right. Most of them have the rider that if they pay the min premium, the DB is guaranteed and the policy will not lapse, regardless of CV.
A major issue is no matter how big the cash value gets, there is no breakpoint. Is there any company out there that has a VUL that doesn’t have the 5% “premium expense charge”?
why does it have to be so difficult really? you want the trouble and headache of convincing a client that this vul is actually going to work, year after year. if it IS an appropriate product for a specific client, i am assuming this will be a high(er) net worth client, yes? and likely someone other advisors want to take from your book. why make it easier? as anon said, show a scenario where a vul betters a btid scenario. and as previously stated, real clients are not willing to wait 30 years for the whole thing to “work.” they will get impatient and jump ship the minute the opportunity presents itself.
all i am saying is this, it is not wort the extra headache and potential-notice i said potential-problems down the road.
The challenge that proponents of VUL face is they all talk in terms of “if”. “If” the investments return 6-7% every single year, it looks awesome. “If” the expenses don’t get jacked up by the insurance company, it won’t blow up. “If” the client can afford to continue to fund the policy to the max, it will be a great retirement supplement. Like anonymous has stated numerous times, these are labratory experiment ideas, not real world. If any of these factors goes against us, a VUL turns into a ticking time bomb.
As we all know, investments don't go up in a straight line. Given the economic climate, insurance companies are scaling back on guarantees and could raise expenses on existing policyholders. Moreover, clients are feeling the pinch and are scaling back on many household items. Some of which involve investing, savings, and insurance costs. And as far as I can tell, not one of us has the foresight to predict where our clients will be next year, much less 20 years from now. For me, I would rather take some uncertainty out of my clients' lives. Sure, a lot take on risk in many aspects of their lives (investing, owning businesses, occupations), but they don't feel the need to take on risk in every part of their financial world. Hence, I use WL. Sure, they may end up with more money in the end, but if my clients retire in an environment like we're in today, they're gonna be thanking me for having a safety net in place. Finally, one aspect that has been severly overlooked with VUL is the idea of minimizing the death benefit. My perspective is that the higher the death benefit, the more powerful permanent life insurance becomes. Why? One can leverage the death benefit to provide a client more income options at retirement. When you minimize the DB, you're fractionally (at best) better off than one who buys term and invests the difference. Things like pension maximization, CRTs, reverse mortgages, and asset spend-downs are not viable options when one has a small, or no DB at retirement. I see it regularly, 65-70 year old client, small WL policy, big QP, house paid off, some securities and a rainy day fund, but nothing else. We look into the aforementioned concepts, but to purchase a WL or GUL policy big enough to maximize these ideas are not feasible. There's not enough cash flow available. When we're planning for a retirement for our clients, it's important to understand that it's not how much wealth we can create, it's how much income we can generate that makes a difference. And when we have non-correlating income options at retirement, we give our clients the greatest chance of accomplishing the three goals everyone has: 1) Maximize income; 2) Never run out of money; 3) Pass along the biggest net estate possible. Ultimately, I haven't been able to figure out how VUL will fit into this equation. In order for it to work, it's proponents are suggesting a small face amount to maximize accumulation. But it doesn't take into account that we then can only rely on assets for income. And that, in my opinion, is less than optimal.[quote=army13A] [quote=anonymous]I often call these laboratory products because they work much better in a laboratory than in the real world. Human nature and VUL don’t go together.
Let's ignore that and keep it simple. First of all, you need to understand the basics of VUL. VUL combines annually renewable term insurance with a side fund of investments. There are two basic problems with this. 1)Annually renewable term insurance isn't designed for a permanent insurance need. 2)The investments are very expensive. I am not a fan of buy term and invest the difference. However, this is exactly what VUL is, but done in one policy. Whenever I compare VUL to BTID, the term insurance with a side fund blows away the VUL. This is because the insurance in VUL is overpriced and the investments are overpriced. I've put the challenge out there for someone to put together a scenario where VUL would beat BTID, but nobody has done it. If you'd like, we can through a prospectus for a VUL product and you'll quickly see why it's not an appropriate product.[/quote]Anon, I know you have a lot of knowledge b/c I've read your posts. But here is where I'm coming from on this.
With the investments being expensive, that is why I use a majority of index funds inside of a VUL. I recently consturcted a pfolio with a total expense ratio of 0.34. Ins companies try to push their asset allocation models but they're too expensive for my taste (1.4 or 1.5).
When you use BTID, what kind of account are you putting the cash in? Taxable brokerage account without the tax benefits of a side account inside of a VUL. For the taxable account to beat the VUL with all things being equal, the taxable account has to WAY OUTPERFORM the VUL just to be equal in order to make up for the lacking of tax benefits b/c you have capital gains you're paying along the way. And let's just pray that the capital gains rate stays at 15% but with Dems in office, that doesn't seem likely.
[/quote] Instead of arguing, post a prospectus and then let's go from there. There are a few things to keep in mind. 1) All of the expenses must be examined. These can include: A) Front end sales charge with no break points. B) Annually increasing cost of insurance C) M&E Charge (same impact as having higher fund charges) D) Miscellaneous charges 2)Index funds are very tax efficient. In a brokerage account, for the most part, they will be growing tax deferred. At death, they will receive a step-up in basis. My point is that the tax drag will be minimal. When you are looking at real numbers, you are going to see that the side fund doesn't have to outperform at all. In fact, I'm talking about the term + side fund outperforming using identical funds. The fees of the VUL are an incredible drag on performance. Again, instead of arguing with me, post a prospectus, and you'll see that I'm correct. Even if we can come up with an example where I'm wrong, I'll be wrong by such a little bit that I'll only be wrong in hindsite (person dies at the precise best time) and it doesn't make up for the fact that there is such a strong real world possibility of something going wrong.
Once again guys you are providing some excellent feedback so with that I say thank you.
Our team has made a decision to expand and grow our business over the next 20 years so yes I have very little experience in life insurance, but I have the skills to learn this world. Like investing you learn from those that know and the trick is in finding someone who can train you the right way where you have a client centered practice. I don't expect to be the "expert" by next week, but I do anticipate getting pretty good at this over the next 5 years. We have the book, fee based business and high net clientele to venture off into this world, but I want to make sure we do it right for them. Here is a current example I have just started working on. Client, male age 49 high net worth and in a senior position of a decent size small business. Has a UL policy set up in 1989 with 200k cash value that the company has been funding at an annual premium of $9500 and a death benefit at $719,000. Policy is paying 4% and has for a while. When I got in front of him we re-negotiated the company contribution and they have agreed to now make contributions for him of $20,000. His priority is cash value accumulation with a tax efficient income upon retirement (62-65 depending on health) and has little interest in a death benefit. Ran an analysis for a VUL which at 6% would increase his death benefit to $1.2 million, but more importantly would allow him tax advantaged income of $75,000 for many years if we can maintain some type of return. Again I feel 6% is conservative and understand this doesn't guarantee anything. Too me this plan makes a great deal of sense, but as I said before I am just not sure. I had two different general insurance agency partners quote this for me and both came back with this similar plan. Any thoughts or additional questions? Thanks again for your thoughts as I do value most of you and your insights.What equity-based investment has gone up by 6% every year, year in and year out?
Learn this now before you screw it up: VUL (or any life insurance) illustration is AN ILLUSION. Other than the guaranteed column, nothing is written in stone. As an exercize, ask the insurance companies you're looking at to run an illustration that shows a negative return for the next several years. Here's a hint: they won't, nor have the capability of doing so. If they did, they know they'd never be able to sell VUL. Edit: If you stop to think about it, VUL really doesn't make sense. Consider this: Why do insurance companies continually put out new versions of UL and VUL? Yet, WL and term insurance are essentially the same since their inception?[quote=deekay]What equity-based investment has gone up by 6% every year, year in and year out?
Learn this now before you screw it up: VUL (or any life insurance) illustration is AN ILLUSION. Other than the guaranteed column, nothing is written in stone. As an exercize, ask the insurance companies you're looking at to run an illustration that shows a negative return for the next several years. Here's a hint: they won't, nor have the capability of doing so. If they did, they know they'd never be able to sell VUL. Edit: If you stop to think about it, VUL really doesn't make sense. Consider this: Why do insurance companies continually put out new versions of UL and VUL? Yet, WL and term insurance are essentially the same since their inception?[/quote] I don't usually post during the day and was going to respond to all of the other posts over the weekend but I had to clear this one up. Deekay, you have a lot of knowledge but that is flat out wrong because I just showed THAT EXACT scenario the other day. You can show negative returns. And as for counting on 6-7% over the long period, that's a bet I'll always take. Even after last years market thumping, large and small caps have beat that since the inception of the market. If an individual can't get a client 6% return over the long haul (20 to 30 years and beyond), they shouldn't be in this business.i think we all agree army, but that usually means 8-9% gross in a vul to achieve the 6% net.
[quote=army13A]
I don't usually post during the day and was going to respond to all of the other posts over the weekend but I had to clear this one up. Deekay, you have a lot of knowledge but that is flat out wrong because I just showed THAT EXACT scenario the other day. You can show negative returns. And as for counting on 6-7% over the long period, that's a bet I'll always take. Even after last years market thumping, large and small caps have beat that since the inception of the market. If an individual can't get a client 6% return over the long haul (20 to 30 years and beyond), they shouldn't be in this business. [/quote] Interesting. I stand corrected. Can they show maximum insurance charges and investment charges while showing those down years? In other words, can they really illustrate a worst-case senario?[quote=deekay][quote=army13A]
I don't usually post during the day and was going to respond to all of the other posts over the weekend but I had to clear this one up. Deekay, you have a lot of knowledge but that is flat out wrong because I just showed THAT EXACT scenario the other day. You can show negative returns. And as for counting on 6-7% over the long period, that's a bet I'll always take. Even after last years market thumping, large and small caps have beat that since the inception of the market. If an individual can't get a client 6% return over the long haul (20 to 30 years and beyond), they shouldn't be in this business. [/quote] Interesting. I stand corrected. Can they show maximum insurance charges and investment charges while showing those down years? In other words, can they really illustrate a worst-case senario? [/quote] I believe army works for the same company as me, and all our VUL illustrations have the "worst case scenario" feature on the signature page. We have 3 columns, 1 that shows year by year cash value if the policy grows by your assumed rate with guaranteed expenses, 1 that shows year by year cash value if the policy grows by your assumed rate with maximum expenses, and year by year cash value if the policy grows at 0% gross with guaranteed expenses. Now whether or not the advisor spends much time on that 3rd column is that advisors perrogative, but it is there.Ahh, so you’re saying that the investment returns will be illustrated based on a straight line, say 8%, 5%, and 0% gross return? Can you illustrate how a negative year will impact the illustration?
You can't, per se, show one negative year. You can, however, show a distribution from the cash value as a one time distribution, which will pretty much have the same effect.Ahh, so you’re saying that the investment returns will be illustrated based on a straight line, say 8%, 5%, and 0% gross return? Can you illustrate how a negative year will impact the illustration?
You can't, per se, show one negative year. You can, however, show a distribution from the cash value as a one time distribution, which will pretty much have the same effect. [/quote] What if the distribution is taken in a year where the subaccounts are down? What happens then? When you explain you can't show a negative return on these illustrations, how does the client react?[quote=deekay]Ahh, so you’re saying that the investment returns will be illustrated based on a straight line, say 8%, 5%, and 0% gross return? Can you illustrate how a negative year will impact the illustration?
You can't, per se, show one negative year. You can, however, show a distribution from the cash value as a one time distribution, which will pretty much have the same effect. [/quote] What if the distribution is taken in a year where the subaccounts are down? What happens then? When you explain you can't show a negative return on these illustrations, how does the client react?[/quote] I apologize for not being clear. When you show 0% gross return every year, the net return is negative because of the expenses. The question I thought you were asking is can you show ONE negative year out of the entire time the policy is in force and I said you would have to show that as a distribution to simulate that. So for example, we show a 6% average return but in year 10 of the policy, there is a bad year for the market, let's just say 50% market loss. We just put in a distribution for that year for 50% of the cash value and that depletes the cash value. It sounds a lot more complicated than it really is. Again, I just did an illustration with a client the other day and showed them close to a negative 3% net return EVERY YEAR and how long the policy would last. Even with that, the policy lasted a pretty decent time but they chimed in with the "well the market is not going to be negative every year for the next 30 years".[quote=army13A][quote=deekay]Ahh, so you’re saying that the investment returns will be illustrated based on a straight line, say 8%, 5%, and 0% gross return? Can you illustrate how a negative year will impact the illustration?
It would be interesting to see if an insurance company could base the policy’s performance on the past results of an index or the actual performance of a porfolio of subaccounts. I’m kind of suprised they haven’t been able to put that kind of analysis together.
Also, is it possible to show a withdrawal and a down year at the same time? Or would that just be adding the two percentages together. Like, a 4% withdrawal + a 20% downturn = -24%?[quote=deekay][quote=army13A]
I don't usually post during the day and was going to respond to all of the other posts over the weekend but I had to clear this one up. Deekay, you have a lot of knowledge but that is flat out wrong because I just showed THAT EXACT scenario the other day. You can show negative returns. And as for counting on 6-7% over the long period, that's a bet I'll always take. Even after last years market thumping, large and small caps have beat that since the inception of the market. If an individual can't get a client 6% return over the long haul (20 to 30 years and beyond), they shouldn't be in this business. [/quote] Interesting. I stand corrected. Can they show maximum insurance charges and investment charges while showing those down years? In other words, can they really illustrate a worst-case senario? [/quote] Why is it prudent to show something that's never happened and has a .001% chance of ever happening? Do you really want to be running around telling prospects that in the future people will start dying early in life and in large numbers?[quote=deekay]It would be interesting to see if an insurance company could base the policy’s performance on the past results of an index or the actual performance of a porfolio of subaccounts. I’m kind of suprised they haven’t been able to put that kind of analysis together. I’m sorry if I’m not getting it but isn’t that the same thing? We see what the S&P 500 has done during the last 20 years or so (example 6.54%) and just input that as the hypothetical return? Am I missing something on that?
Also, is it possible to show a withdrawal and a down year at the same time? Or would that just be adding the two percentages together. Like, a 4% withdrawal + a 20% downturn = -24%? Yes, that would just be combining the two. [/quote][quote=BerkshireBull][quote=deekay][quote=army13A]
I don't usually post during the day and was going to respond to all of the other posts over the weekend but I had to clear this one up. Deekay, you have a lot of knowledge but that is flat out wrong because I just showed THAT EXACT scenario the other day. You can show negative returns. And as for counting on 6-7% over the long period, that's a bet I'll always take. Even after last years market thumping, large and small caps have beat that since the inception of the market. If an individual can't get a client 6% return over the long haul (20 to 30 years and beyond), they shouldn't be in this business. [/quote] Interesting. I stand corrected. Can they show maximum insurance charges and investment charges while showing those down years? In other words, can they really illustrate a worst-case senario? [/quote] Why is it prudent to show something that's never happened and has a .001% chance of ever happening? Do you really want to be running around telling prospects that in the future people will start dying early in life and in large numbers?[/quote] I tend to agree with Bull here. If we are analyzing a clients case and determine that a VUL is the best strategy for the client, why spend a lot of time going over situations in which the product WON'T work and give the client a handful of reasons to not buy the product and go against your recommendation? Let the client know that you'll work hard to make sure the policy grows at the rate you are planning on according to their goals, but that there may be some bad years like 2008 where it doesn't exactly go as planned. Why wouldn't you advise them the same way you would a regular brokerage account or retirement plan? If things don't go as planned and your client averages 5% return per year in their 401(k)instead of the 8% needed to retire, your client ends up needing to work 5-6 more years. How is that different than a VUL gone bad? The client doesn't reach their goal and is pissed. But we don't hear about 401(k) illustrations or Roth IRA proposals.[quote=anonymous][quote=army13A] [quote=anonymous]I often call these laboratory products because they work much better in a laboratory than in the real world. Human nature and VUL don’t go together.
Let's ignore that and keep it simple. First of all, you need to understand the basics of VUL. VUL combines annually renewable term insurance with a side fund of investments. There are two basic problems with this. 1)Annually renewable term insurance isn't designed for a permanent insurance need. 2)The investments are very expensive. I am not a fan of buy term and invest the difference. However, this is exactly what VUL is, but done in one policy. Whenever I compare VUL to BTID, the term insurance with a side fund blows away the VUL. This is because the insurance in VUL is overpriced and the investments are overpriced. I've put the challenge out there for someone to put together a scenario where VUL would beat BTID, but nobody has done it. If you'd like, we can through a prospectus for a VUL product and you'll quickly see why it's not an appropriate product.[/quote]Anon, I know you have a lot of knowledge b/c I've read your posts. But here is where I'm coming from on this.
With the investments being expensive, that is why I use a majority of index funds inside of a VUL. I recently consturcted a pfolio with a total expense ratio of 0.34. Ins companies try to push their asset allocation models but they're too expensive for my taste (1.4 or 1.5).
When you use BTID, what kind of account are you putting the cash in? Taxable brokerage account without the tax benefits of a side account inside of a VUL. For the taxable account to beat the VUL with all things being equal, the taxable account has to WAY OUTPERFORM the VUL just to be equal in order to make up for the lacking of tax benefits b/c you have capital gains you're paying along the way. And let's just pray that the capital gains rate stays at 15% but with Dems in office, that doesn't seem likely.
[/quote] Instead of arguing, post a prospectus and then let's go from there. There are a few things to keep in mind. 1) All of the expenses must be examined. These can include: A) Front end sales charge with no break points. B) Annually increasing cost of insurance C) M&E Charge (same impact as having higher fund charges) D) Miscellaneous charges 2)Index funds are very tax efficient. In a brokerage account, for the most part, they will be growing tax deferred. At death, they will receive a step-up in basis. My point is that the tax drag will be minimal. When you are looking at real numbers, you are going to see that the side fund doesn't have to outperform at all. In fact, I'm talking about the term + side fund outperforming using identical funds. The fees of the VUL are an incredible drag on performance. Again, instead of arguing with me, post a prospectus, and you'll see that I'm correct. Even if we can come up with an example where I'm wrong, I'll be wrong by such a little bit that I'll only be wrong in hindsite (person dies at the precise best time) and it doesn't make up for the fact that there is such a strong real world possibility of something going wrong.[/quote] I'll do better than posting a prospectus. With any illustration, the costs are already included inside the illustration and the entire illustration can be exported to Excel. It'll take me some time to put together b/c I have so many other things to do but I will post up an illustration with the VUL case. Then you can put together the BTID with the costs and taxes and we can compare.
[quote=anonymous]
2)Index funds are very tax efficient. In a brokerage account, for the most part, they will be growing tax deferred. At death, they will receive a step-up in basis. My point is that the tax drag will be minimal. [/quote] You're absolutely right that index funds are very tax efficient but I think you're wrong when it comes to the brokerage account. When we're talking about socking away high premium dollars a month (over $1,000), it's going into a Single or Joint non-retirement brokerage account. That is not growing tax deferred; they're paying taxes along the way. Yes you are right at death, there will be a step up in basis for the heirs but you can't have both. If an account grows tax deferred, there is no step up in basis at death because it's an IRD (income in respect of a decedant)asset (example IRA, 401k, annuity). If it's a taxable account, you're paying taxes along the way and that's why you're getting a step up in basis. If I'm wrong, please correct me because that is what I was taught.People buy term insurance to remove risk. Few people buy life insurance w/the reasoning "I need to remove market risk from the equation, therefore I need some life insurance". If someone is maxing out their 401(k), can't qualify for a Roth or is already maxing out their Roth, already has plenty of cash reserves in muni bonds, and wants another tax beneficial area to generate long term growth then a VUL wouldn't be considered a "risk remover" as far as the client is concerned. Now as I've stated in prior posts I think there are VERY few situations in which a VUL is the best strategy for a client, so the example I just used is very few and very far between.Here’s a reason:
People get INSURANCE to remove risk. People get INVESTMENTS to take risk. What sense does it make to buy insurance to remove risk, and then go ahead and put risk right back into the equation?
I never said that this should be the SOLE insurance strategy. When I use this, it's for individuals who already have the standard insurance products (30 year level term and guaranteed non-variable permanent insurance) and have little to no need for the insurance portion.Here’s a reason:
People get INSURANCE to remove risk. People get INVESTMENTS to take risk. What sense does it make to buy insurance to remove risk, and then go ahead and put risk right back into the equation?
People buy term insurance to remove risk. Few people buy life insurance w/the reasoning "I need to remove market risk from the equation, therefore I need some life insurance". If someone is maxing out their 401(k), can't qualify for a Roth or is already maxing out their Roth, already has plenty of cash reserves in muni bonds, and wants another tax beneficial area to generate long term growth then a VUL wouldn't be considered a "risk remover" as far as the client is concerned. Now as I've stated in prior posts I think there are VERY few situations in which a VUL is the best strategy for a client, so the example I just used is very few and very far between.[/quote] I want to state that as well. I've sold FAR MORE whole life and term than VUL policies but there have been exact situations like that where it made sense and we did it. A young couple making $500K a year and completely maxed out QP's wanted to put additional money into a tax advantaged vehicle. Also forgot that all the cash inside a VUL is creditor protected as well while a standard brokerage account isn't.[quote=iceco1d]Here’s a reason:
People get INSURANCE to remove risk. People get INVESTMENTS to take risk. What sense does it make to buy insurance to remove risk, and then go ahead and put risk right back into the equation?
Good point...also with parents saving up for kids college, VUL's don't count towards household assets for purposes of determining eligibility for financial aid or grants.Also forgot that all the cash inside a VUL is creditor protected as well while a standard brokerage account isn’t.
Have you ever seen a VUL that has been inforced for 20+ years? I have inheritted some orphans from my company and NONE of them have work. What Anonymous and DHK says is correct, it works well inside a labratory and never in real life. Truth of the matter is that no client ever goes 100% aggressive or aggressively overfunds it in the beginning. IF and even IF they did, this strategy would be a lot more expensive than a “buy term and invest the difference.”
Think about it like this...the cost of insurance inside a VUL is like health insurance, it increases every year. As the client reaches retirement or death, the cost of insurance goes up so high that it starts eating away at your cash value (look at the guaranteed column side). Well what if the market performs at 6-8% and that guaranteed column never happens? Well when has the market ever CONSISTENTLY year in and year out done a +6-8%? What if the market takes a nose dive and goes -40% when the client is now 68 years old? What's the cost of insurance of a 68 year old? What if the client needs to take a withdraw then? I agree, there might be some very rare cases where a VUL might work, but there will most likely never be a case where it's the BEST strategy for a client. In the end, insurance companies are a business and they need to generate profit. The reasons why VULs are so cheap is because they don't anticipate the death benefits being paid for most of the policies. Even if the death benefit ends up getting paid, the insurance company would of made profits off the fees that they tacked onto your mutual fund over the years. You don't think an insurance company will hesistate to increase your cost of insurance inside a VUL? Think twice, look at what has happened to the variable annuity rider fees over the years...[quote=theironhorse]i think we all agree army, but that usually means 8-9% gross in a vul to achieve the 6% net.[/quote]
8-9% gross for a 6% net? That again depends on the investment options inside. If you choose an emerging market or commodoties fund and even then, I haven’t seen a 3% expense ratio. S&P 500 index fund, 0.17% ER, so you need 6.17% gross.
[quote=ChrisVarick]Have you ever seen a VUL that has been inforced for 20+ years? I have inheritted some orphans from my company and NONE of them have work. Chris, correct me if I’m wrong but you joined a mutual insurance company correct? And I believe NWM from your prior postings? I’m just curious about your comment b/c I interviewed with NWM before and I believe it’s an awesome company. I sat with a managing partner of one of the local agencies where I live and I told him about how I sold some VUL cases and he looked shocked. He said he spent over 15 years in the biz and never sold one in his life b/c he didn’t need to b/c of NWM dividend and then he said that NWM just recently came out with a VUL.
Truth of the matter is that no client ever goes 100% aggressive or aggressively overfunds it in the beginning. Again, the point I have made before is that IF DONE PROPERLY. When I do it with my clients, it is with individuals who are over funding the policy. I explain all the risks and go into intricate detail.
IF and even IF they did, this strategy would be a lot more expensive than a “buy term and invest the difference.” I’ve already offered to show up an illustration and compare it to a BTID, so we can compare all the benefits/negatives of both theories.
Well what if the market performs at 6-8% and that guaranteed column never happens? Well when has the market ever CONSISTENTLY year in and year out done a +6-8%? It's not about doing 6-8% year in and year out. This is no different than when we tell clients to invest in brokerage accounts with us because over the long haul, the market AVERAGES well over 6% if invested properly. Some years the market does 20-30%, some years it does negative returns but it's the average that counts. Somebody else has mentioned this already as well.
What if the market takes a nose dive and goes -40% when the client is now 68 years old? What if a client's retirement account takes a nosedive at age 68? What is our typical answer usually when clients or prospects ask us this? Mine is that if they're with an Advisor and their account drops 40% when they're 68, they should start looking for an Attorney b/c they overly invested in equities or in emerging markets and tech stocks and taking too much risk at that age. If a client is properly allocated and that is our job, this should not happen. Again, this is no different than with regular investment accounts.
I agree, there might be some very rare cases where a VUL might work, but there will most likely never be a case where it's the BEST strategy for a client. In the end, insurance companies are a business and they need to generate profit. Insurance companies make profit off of every product they manufacture, whether it's term, whole life, universal life, etc. So I don't know where you're going with this. [/quote]
Check out my replies above. I really no mean offense to anyone. I'm an independent rep and I get paid the same whether I sell whole life, UL, VUL, variable, etc. I have no financial incentive when occasionaly recommend these to my clients. I'm just trying to show another point of view. I used to work at a company that sold nothing but non-par whole life policies. It was my first company and they taught me how to sell well b/c the product itself was garbage. I love WL but only participating whole life policies. They taught me every thing in their "kill book" to defeat par WL, UL, VUL and even TERM! Chris, some of the arguments you made were the exact same things I said and I'm saying me, personally, I didn't know better and I did what I knew. When your only tool is a hammer, everything looks like a nail and that was the case for me. I'm not saying this for anybody else so please don't take offense again.
Well, after a year with the company, they started bringing in new products and they finally brought on a UL and a VUL and we had a wholesaler talk to us about VUL. He knew our company well b/c we did some term through them (the few who actually sold term). He knew our "kill book" really well as well. He just started disecting our objections and our selling points for our non-par WL: "Never mix investments with insurance"; "Costs will eat up the policy" and etc. The guy was a ChFC and granted, he was a wholesaler. I knew what his intentions were but he went through the whole thing of overfunding a VUL and tax treatments. It opened my eyes but I wasn't convinced b/c again, he was a wholesaler and the senior guys in my office were knocking his idea so I didn't know what to believe.
At the same time, I started taking CFP courses (I'm not a CFP, just took the coursework for the knowledge) and a little while later during my income tax course, my instructor talked to us about the same concept and said it's an awesome tool for young people who are making good money. Now this guy was a CPA, CFP and a JD and he ran his own estate planning firm. So he had no "dog in the hunt" personally and why would he care what we did with our clients? He was really trying to teach us and he went through it in details. We all asked him the same questions and he addressed it one by one for about an hour. After that, I started looking more into it with open eyes and here I am. The fact that a CFP instructor who was an Attorney and a CPA might not mean much to some people but this guy was extremely smart and has tons of experience, so I listened to his advice.
So again, I do not use this as the SOLE insurance strategy. When I do do it, it's for individuals who are already properly insured with a combo of perm and term and are looking for other options to invest and have little to no need for the insurance piece of the pie. That is why we do the minimum death benefit, max investment scenario where with the x dollars a month, we buy the smallest life policy possible w/o triggering the MEC rules.
Uh-oh. I'll try to take the time to respond to lots of this thread later, but for now, this tells me there is a huge problem in your understanding of the product. If you invest in an S&P index fund with an ER of .17% and the fund gets 6.17%, you will have a net return of 6.17% and not 6%. This is because the net return of the fund includes the ER. However, if the underlying fund gets 6.17%, the gross return in a VUL can't be 6.17%. In order for that to happen, the administration costs would have to be $0, the COI would have to be $0, the M&E would have to be $0, the premium charge (sales load) would have to be zero. In terms of a comparison, it is not relative whether expensive or cheap funds are used because we will compare the exact same funds. The point is that all of the costs of the VUL can easily be a 2% drag on performance. Over a long period of time, this can easily cut the amount of money that one would have by 50%. Heck, let's use an example where all of the expenses are only a 1% drag. Jim and John invest $10,000 a year for 40 years. Jim gets 6%. John gets 5%. Result: Jim: $1,640,000 John:$1,268,000 (with a 2% drag, he'd have $988,000)[quote=theironhorse]i think we all agree army, but that usually means 8-9% gross in a vul to achieve the 6% net.[/quote]
8-9% gross for a 6% net? That again depends on the investment options inside. If you choose an emerging market or commodoties fund and even then, I haven’t seen a 3% expense ratio. S&P 500 index fund, 0.17% ER, so you need 6.17% gross.
[quote=army13A][quote=deekay]What equity-based investment has gone up by 6% every year, year in and year out?
Learn this now before you screw it up: VUL (or any life insurance) illustration is AN ILLUSION. Other than the guaranteed column, nothing is written in stone. As an exercize, ask the insurance companies you're looking at to run an illustration that shows a negative return for the next several years. Here's a hint: they won't, nor have the capability of doing so. If they did, they know they'd never be able to sell VUL. Edit: If you stop to think about it, VUL really doesn't make sense. Consider this: Why do insurance companies continually put out new versions of UL and VUL? Yet, WL and term insurance are essentially the same since their inception?[/quote] I don't usually post during the day and was going to respond to all of the other posts over the weekend but I had to clear this one up. Deekay, you have a lot of knowledge but that is flat out wrong because I just showed THAT EXACT scenario the other day. You can show negative returns. And as for counting on 6-7% over the long period, that's a bet I'll always take. Even after last years market thumping, large and small caps have beat that since the inception of the market. If an individual can't get a client 6% return over the long haul (20 to 30 years and beyond), they shouldn't be in this business. [/quote] Getting a client a 6% return has nothing to do with our abilities as advisors. It has everything to do with what the market does. If the market returns 4% over the next 20 years, my clients won't get 6%. It is no safe bet that one can get 6-7% inside of a VUL once all expenses are included. Once money is being pulled out, it's no longer about the rate of return, but much more so about the sequence of these returns.[quote=CashFlow]Once again guys you are providing some excellent feedback so with that I say thank you.
Our team has made a decision to expand and grow our business over the next 20 years so yes I have very little experience in life insurance, but I have the skills to learn this world. Like investing you learn from those that know and the trick is in finding someone who can train you the right way where you have a client centered practice. I don't expect to be the "expert" by next week, but I do anticipate getting pretty good at this over the next 5 years. We have the book, fee based business and high net clientele to venture off into this world, but I want to make sure we do it right for them. Here is a current example I have just started working on. Client, male age 49 high net worth and in a senior position of a decent size small business. Has a UL policy set up in 1989 with 200k cash value that the company has been funding at an annual premium of $9500 and a death benefit at $719,000. Policy is paying 4% and has for a while. When I got in front of him we re-negotiated the company contribution and they have agreed to now make contributions for him of $20,000. His priority is cash value accumulation with a tax efficient income upon retirement (62-65 depending on health) and has little interest in a death benefit. Ran an analysis for a VUL which at 6% would increase his death benefit to $1.2 million, but more importantly would allow him tax advantaged income of $75,000 for many years if we can maintain some type of return. Again I feel 6% is conservative and understand this doesn't guarantee anything. Too me this plan makes a great deal of sense, but as I said before I am just not sure. I had two different general insurance agency partners quote this for me and both came back with this similar plan. Any thoughts or additional questions? Thanks again for your thoughts as I do value most of you and your insights.[/quote] Cashflow, what happens when he is taking out $75,000 a year and the market has a major downturn at the same time and he's not fortunate enough to die? I'll answer the question for you. The policy is going to lapse and to the extent that he borrowed more money than he paid, he will have to pay a tax on what was previously a loan. VUL illustrations make zero sense when one is removing money because averaging 6% is very different than getting 6% every year.[quote=3rdyrp2][quote=deekay][quote=army13A]
I don't usually post during the day and was going to respond to all of the other posts over the weekend but I had to clear this one up. Deekay, you have a lot of knowledge but that is flat out wrong because I just showed THAT EXACT scenario the other day. You can show negative returns. And as for counting on 6-7% over the long period, that's a bet I'll always take. Even after last years market thumping, large and small caps have beat that since the inception of the market. If an individual can't get a client 6% return over the long haul (20 to 30 years and beyond), they shouldn't be in this business. [/quote] Interesting. I stand corrected. Can they show maximum insurance charges and investment charges while showing those down years? In other words, can they really illustrate a worst-case senario? [/quote] I believe army works for the same company as me, and all our VUL illustrations have the "worst case scenario" feature on the signature page. We have 3 columns, 1 that shows year by year cash value if the policy grows by your assumed rate with guaranteed expenses, 1 that shows year by year cash value if the policy grows by your assumed rate with maximum expenses, and year by year cash value if the policy grows at 0% gross with guaranteed expenses. Now whether or not the advisor spends much time on that 3rd column is that advisors perrogative, but it is there.[/quote] Since when is 0% the worst case scenario? I won't take issue with 0% being a worst case scenario long term while a policy is growing, but in the spending phase, it is easy for it to be much worse than 0%.You can't, per se, show one negative year. You can, however, show a distribution from the cash value as a one time distribution, which will pretty much have the same effect. [/quote] Army, can you illustrate someone in the distribution phase who is taking $50,000 of income at the same time that the market goes down 40% one year and then 20% the next year.[quote=deekay]Ahh, so you’re saying that the investment returns will be illustrated based on a straight line, say 8%, 5%, and 0% gross return? Can you illustrate how a negative year will impact the illustration?
[quote=3rdyrp2][quote=BerkshireBull][quote=deekay][quote=army13A]
I don't usually post during the day and was going to respond to all of the other posts over the weekend but I had to clear this one up. Deekay, you have a lot of knowledge but that is flat out wrong because I just showed THAT EXACT scenario the other day. You can show negative returns. And as for counting on 6-7% over the long period, that's a bet I'll always take. Even after last years market thumping, large and small caps have beat that since the inception of the market. If an individual can't get a client 6% return over the long haul (20 to 30 years and beyond), they shouldn't be in this business. [/quote] Interesting. I stand corrected. Can they show maximum insurance charges and investment charges while showing those down years? In other words, can they really illustrate a worst-case senario? [/quote] Why is it prudent to show something that's never happened and has a .001% chance of ever happening? Do you really want to be running around telling prospects that in the future people will start dying early in life and in large numbers?[/quote] I tend to agree with Bull here. If we are analyzing a clients case and determine that a VUL is the best strategy for the client, why spend a lot of time going over situations in which the product WON'T work and give the client a handful of reasons to not buy the product and go against your recommendation? Let the client know that you'll work hard to make sure the policy grows at the rate you are planning on according to their goals, but that there may be some bad years like 2008 where it doesn't exactly go as planned. Why wouldn't you advise them the same way you would a regular brokerage account or retirement plan? If things don't go as planned and your client averages 5% return per year in their 401(k)instead of the 8% needed to retire, your client ends up needing to work 5-6 more years. How is that different than a VUL gone bad? The client doesn't reach their goal and is pissed. But we don't hear about 401(k) illustrations or Roth IRA proposals. [/quote] A VUL gone bad is very different than getting a lower return on one's investment. When one gets a lower return on their investments, they have less money. A VUL gone bad often means that the person ends up with no insurance and no investments. When a VUL goes bad, the charges eat up the cash surrender value which simply leaves someone overpriced annually renewable term insurance that they can't afford. Hasn't anybody ever noticed that you virtually never run into somebody with a 25 year old VUL policy?[quote=army13A][quote=anonymous][quote=army13A] [quote=anonymous]I often call these laboratory products because they work much better in a laboratory than in the real world. Human nature and VUL don’t go together.
Let's ignore that and keep it simple. First of all, you need to understand the basics of VUL. VUL combines annually renewable term insurance with a side fund of investments. There are two basic problems with this. 1)Annually renewable term insurance isn't designed for a permanent insurance need. 2)The investments are very expensive. I am not a fan of buy term and invest the difference. However, this is exactly what VUL is, but done in one policy. Whenever I compare VUL to BTID, the term insurance with a side fund blows away the VUL. This is because the insurance in VUL is overpriced and the investments are overpriced. I've put the challenge out there for someone to put together a scenario where VUL would beat BTID, but nobody has done it. If you'd like, we can through a prospectus for a VUL product and you'll quickly see why it's not an appropriate product.[/quote]Anon, I know you have a lot of knowledge b/c I've read your posts. But here is where I'm coming from on this.
With the investments being expensive, that is why I use a majority of index funds inside of a VUL. I recently consturcted a pfolio with a total expense ratio of 0.34. Ins companies try to push their asset allocation models but they're too expensive for my taste (1.4 or 1.5).
When you use BTID, what kind of account are you putting the cash in? Taxable brokerage account without the tax benefits of a side account inside of a VUL. For the taxable account to beat the VUL with all things being equal, the taxable account has to WAY OUTPERFORM the VUL just to be equal in order to make up for the lacking of tax benefits b/c you have capital gains you're paying along the way. And let's just pray that the capital gains rate stays at 15% but with Dems in office, that doesn't seem likely.
[/quote] Instead of arguing, post a prospectus and then let's go from there. There are a few things to keep in mind. 1) All of the expenses must be examined. These can include: A) Front end sales charge with no break points. B) Annually increasing cost of insurance C) M&E Charge (same impact as having higher fund charges) D) Miscellaneous charges 2)Index funds are very tax efficient. In a brokerage account, for the most part, they will be growing tax deferred. At death, they will receive a step-up in basis. My point is that the tax drag will be minimal. When you are looking at real numbers, you are going to see that the side fund doesn't have to outperform at all. In fact, I'm talking about the term + side fund outperforming using identical funds. The fees of the VUL are an incredible drag on performance. Again, instead of arguing with me, post a prospectus, and you'll see that I'm correct. Even if we can come up with an example where I'm wrong, I'll be wrong by such a little bit that I'll only be wrong in hindsite (person dies at the precise best time) and it doesn't make up for the fact that there is such a strong real world possibility of something going wrong.[/quote] I'll do better than posting a prospectus. With any illustration, the costs are already included inside the illustration and the entire illustration can be exported to Excel. It'll take me some time to put together b/c I have so many other things to do but I will post up an illustration with the VUL case. Then you can put together the BTID with the costs and taxes and we can compare. [/quote] That's fine, but link the prospectus also. Have you noticed that the prospectus doesn't include the cost of insurance charges? Isn't this pretty important information to not include? When you sell a policy, do you know the cost of insurance at age 70? 71? 72? I bet that you don't. It's pretty important information. I bet that your clients don't know this information. Am I correct?
[quote=army13A][quote=anonymous]
2)Index funds are very tax efficient. In a brokerage account, for the most part, they will be growing tax deferred. At death, they will receive a step-up in basis. My point is that the tax drag will be minimal. [/quote] You're absolutely right that index funds are very tax efficient but I think you're wrong when it comes to the brokerage account. When we're talking about socking away high premium dollars a month (over $1,000), it's going into a Single or Joint non-retirement brokerage account. That is not growing tax deferred; they're paying taxes along the way. Yes you are right at death, there will be a step up in basis for the heirs but you can't have both. If an account grows tax deferred, there is no step up in basis at death because it's an IRD (income in respect of a decedant)asset (example IRA, 401k, annuity). If it's a taxable account, you're paying taxes along the way and that's why you're getting a step up in basis. If I'm wrong, please correct me because that is what I was taught. [/quote] You are wrong, sort of. One will be paying taxes along the way. However, index funds are very tax efficient. Therefore, there is very little tax on an index fund until the fund is sold. If it isn't sold and death occurs, it will get the step up in basis, thus resulting in very little tax ever being paid. Think, for instance, of an individual stock. As the value of the stock grows from $10 a share to $11 to $20, etc., no tax is paid. It's only paid upon the sale of the holding. If death occurs, there is no tax because it is getting a step-up in basis.Good point...also with parents saving up for kids college, VUL's don't count towards household assets for purposes of determining eligibility for financial aid or grants. [/quote] That's true, but income is much more important than assets. Someone who can afford a VUL isn't getting any need based money other than some loans at best.[quote=army13A]Also forgot that all the cash inside a VUL is creditor protected as well while a standard brokerage account isn’t.
We should be able to agree that VUL can only make sense if it beats BTID with the same investments. I'm pretty sure that it won't. Someone will post real numbers and we'll find out. When ever I've done it, there has been no comparison. VUL has gotten crushed.
If VUL does come out ahead, we can then move into all of the real world "outside of the laboratory" situations. However, I don't think that we'll get there because it's going to lose to BTID. Army, please prove me wrong. I have no problem changing my mind. My experience is that the internal expenses combined with the ever increasing COI combined with the huge front end load makes this a product that simply doesn't work well. P.S. I happen to think that term insurance is best in some situations. Whole life is the best in some situations. Universal Life is the best ins some situations. Variable Life can even be the best in some situations. I'm just waiting for someone to show me a situation in which Variable Universal Life is the best.[quote=anonymous][quote=3rdyrp2][quote=deekay][quote=army13A]
I don't usually post during the day and was going to respond to all of the other posts over the weekend but I had to clear this one up. Deekay, you have a lot of knowledge but that is flat out wrong because I just showed THAT EXACT scenario the other day. You can show negative returns. And as for counting on 6-7% over the long period, that's a bet I'll always take. Even after last years market thumping, large and small caps have beat that since the inception of the market. If an individual can't get a client 6% return over the long haul (20 to 30 years and beyond), they shouldn't be in this business. [/quote] Interesting. I stand corrected. Can they show maximum insurance charges and investment charges while showing those down years? In other words, can they really illustrate a worst-case senario? [/quote] I believe army works for the same company as me, and all our VUL illustrations have the "worst case scenario" feature on the signature page. We have 3 columns, 1 that shows year by year cash value if the policy grows by your assumed rate with guaranteed expenses, 1 that shows year by year cash value if the policy grows by your assumed rate with maximum expenses, and year by year cash value if the policy grows at 0% gross with guaranteed expenses. Now whether or not the advisor spends much time on that 3rd column is that advisors perrogative, but it is there.[/quote] Since when is 0% the worst case scenario? I won't take issue with 0% being a worst case scenario long term while a policy is growing, but in the spending phase, it is easy for it to be much worse than 0%.[/quote] Assuming 0% growth (-2 to -2.5% net after expenses) is more than a good description of a worst case scenario over a 25-30 year period. You say there are no -25% years included in there but you're also not including periods like 03-07 or 96-99 in there where there is significant accumulation. Again, I don't even sell the things because they cause too much of a headache for me to want to put up with, but I hardly think one of the fundamental problems is that not enough illustrations include years in the withdrawl phase with significant market decline.There is a cost of insurance section in the illustration that will tell you each year what the cost of insurance will be every year. Again, this is one of those things that is up to the advisor as to whether they actually show this to the client or not.That’s fine, but link the prospectus also. Have you noticed that the prospectus doesn’t include the cost of insurance charges? Isn’t this pretty important information to not include? When you sell a policy, do you know the cost of insurance at age 70? 71? 72? I bet that you don’t. It’s pretty important information. I bet that your clients don’t know this information. Am I correct?
Read my post again. I did say that I wouldn’t take issue with 0% being the worst case during accumulation. I’m talking about what can happen to the policy during the distribution phase when there is a large down year.
There is a cost of insurance section in the illustration that will tell you each year what the cost of insurance will be every year. Again, this is one of those things that is up to the advisor as to whether they actually show this to the client or not.[/quote] Isn't it interesting that this info is not included in the prospectus? I do believe that most people who buy it don't know about the COI, nor do most sellers.[quote=anonymous]That’s fine, but link the prospectus also. Have you noticed that the prospectus doesn’t include the cost of insurance charges? Isn’t this pretty important information to not include? When you sell a policy, do you know the cost of insurance at age 70? 71? 72? I bet that you don’t. It’s pretty important information. I bet that your clients don’t know this information. Am I correct?
Uh-oh. I'll try to take the time to respond to lots of this thread later, but for now, this tells me there is a huge problem in your understanding of the product. If you invest in an S&P index fund with an ER of .17% and the fund gets 6.17%, you will have a net return of 6.17% and not 6%. This is because the net return of the fund includes the ER. However, if the underlying fund gets 6.17%, the gross return in a VUL can't be 6.17%. In order for that to happen, the administration costs would have to be $0, the COI would have to be $0, the M&E would have to be $0, the premium charge (sales load) would have to be zero. In terms of a comparison, it is not relative whether expensive or cheap funds are used because we will compare the exact same funds. The point is that all of the costs of the VUL can easily be a 2% drag on performance. Over a long period of time, this can easily cut the amount of money that one would have by 50%. Heck, let's use an example where all of the expenses are only a 1% drag. Jim and John invest $10,000 a year for 40 years. Jim gets 6%. John gets 5%. Result: Jim: $1,640,000 John:$1,268,000 (with a 2% drag, he'd have $988,000)[/quote][quote=army13A] [quote=theironhorse]i think we all agree army, but that usually means 8-9% gross in a vul to achieve the 6% net.[/quote]
8-9% gross for a 6% net? That again depends on the investment options inside. If you choose an emerging market or commodoties fund and even then, I haven’t seen a 3% expense ratio. S&P 500 index fund, 0.17% ER, so you need 6.17% gross.
The variable products we use actually have take the expenses out before it hits the investment account. All of the expenses are taken out of each premium before the remainder goes into the variable account. So for example, a 30 year old is doing a minimum face policy with a $10000 premium a year. When the premium goes into the policy, let's just say $100 covers all expenses the entire $900 goes into the side account and the only expense in the side account once the $ hits is the expense ratio. So when I run an illustation with a $10K premium, what it shows in the investment account for the first year is $8855 and that takes into account all of the expenses including an initial death benefit of about $390K. That $8855 is what is illustrated at a 6% gross, 5.83 net based on the S&P index. So that is what I meant by the gross versus net return; sorry if I wasn't clear.
When we do an apples to apples comparison of BTID and VUL, we need to compare cash value and take into account the death benefit as well.
You should be able to start to see the problem just from what you are telling me. If he's in excellent health, he can buy the insurance for about $330 and have that rate guaranteed for 30 years. He would be able to invest $9,670. BTID allows him to invest $815 additional. The cost of the insurance increases every year in the VUL, so the difference gets bigger and bigger.
I'm sure that you are keeping the death benefit level for as long as possible. This means that BTID will certainly yield a higher payout if death occurs within 30 years. In other words, for the privilege of being able to use a VUL, he is paying $1,145 in upfront costs instead of $330. VUL is BTID and invest the difference, but in one vehicle. You are going to have a hard time showing that combining it is worth an extra $815 more in expenses this year and more the following year and more the year after and more the year after that, etc.[quote=anonymous][quote=army13A][quote=anonymous]
2)Index funds are very tax efficient. In a brokerage account, for the most part, they will be growing tax deferred. At death, they will receive a step-up in basis. My point is that the tax drag will be minimal. [/quote] You're absolutely right that index funds are very tax efficient but I think you're wrong when it comes to the brokerage account. When we're talking about socking away high premium dollars a month (over $1,000), it's going into a Single or Joint non-retirement brokerage account. That is not growing tax deferred; they're paying taxes along the way. Yes you are right at death, there will be a step up in basis for the heirs but you can't have both. If an account grows tax deferred, there is no step up in basis at death because it's an IRD (income in respect of a decedant)asset (example IRA, 401k, annuity). If it's a taxable account, you're paying taxes along the way and that's why you're getting a step up in basis. If I'm wrong, please correct me because that is what I was taught. [/quote] You are wrong, sort of. One will be paying taxes along the way. However, index funds are very tax efficient. Therefore, there is very little tax on an index fund until the fund is sold. If it isn't sold and death occurs, it will get the step up in basis, thus resulting in very little tax ever being paid. Think, for instance, of an individual stock. As the value of the stock grows from $10 a share to $11 to $20, etc., no tax is paid. It's only paid upon the sale of the holding. If death occurs, there is no tax because it is getting a step-up in basis.[/quote]Not to get caught up in semantics but what you wrote here is completely different before. Being tax efficient is a completely different thing than being tax deferred. As you scroll up, you wrote being tax deferred. You are absolutely correct that they are tax efficient but index funds do pay out dividends and on occasion pay out capital gains. If it's in a brokerage account, you're getting a 1099DIV at the end of the year. Tax deferred is no taxes at all regardless of amount of capital gains and dividends. If an account is tax deferred, there is no step up in basis at death because the govt will not allow that. If you have a before tax 401K and it's sitting at 1million at death, the beneficiaries are not receiving a cost basis of 1million because grandpa died. Their cost basis is 0 and they're paying ordinary income taxes because there has been no taxes paid on it.
I wasn't talking about unrealized gain from the share price going up. You are right, stock bought at 10, goes to 11 and you die, beneficiaries receive basis of 11 and no tax was paid. But if the individual received a dividend while he was alive, he did pay tax on that dividend. I'm looking at the Vaguard S&P 500 index fund and it pays a quarterly dividend and the most recent one was $0.43500 per share.
I'm enjoying this debate, we're keeping it civil. I will post an illustration and you can post your numbers and we can spot check each other. Mine is going to be straight from the software and will be straight forward.
[quote=anonymous]
You should be able to start to see the problem just from what you are telling me. If he’s in excellent health, he can buy the insurance for about $330 and have that rate guaranteed for 30 years. He would be able to invest $9,670. BTID allows him to invest $815 additional. The cost of the insurance increases every year in the VUL, so the difference gets bigger and bigger.
I'm sure that you are keeping the death benefit level for as long as possible. This means that BTID will certainly yield a higher payout if death occurs within 30 years. In other words, for the privilege of being able to use a VUL, he is paying $1,145 in upfront costs instead of $330. VUL is BTID and invest the difference, but in one vehicle. You are going to have a hard time showing that combining it is worth an extra $815 more in expenses this year and more the following year and more the year after and more the year after that, etc. [/quote]With taxes going up in the future regardless of who is President, I feel very confident. However, I can be convinced as well. I will listen and take in everything.
Army, read what I wrote again and read the whole sentence. I didn’t say that they are tax deferred. I wrote, FOR THE MOST PART, they will be growing tax deferred. The share price is around $95. A $.435 dividend is well less than 2%.
This isn't exactly a fair example, but somebody who bought it in March will have had a $30 gain with less than $1 of this gain being taxable.[quote=army13A] [quote=anonymous]
You should be able to start to see the problem just from what you are telling me. If he's in excellent health, he can buy the insurance for about $330 and have that rate guaranteed for 30 years. He would be able to invest $9,670. BTID allows him to invest $815 additional. The cost of the insurance increases every year in the VUL, so the difference gets bigger and bigger.
I'm sure that you are keeping the death benefit level for as long as possible. This means that BTID will certainly yield a higher payout if death occurs within 30 years. In other words, for the privilege of being able to use a VUL, he is paying $1,145 in upfront costs instead of $330. VUL is BTID and invest the difference, but in one vehicle. You are going to have a hard time showing that combining it is worth an extra $815 more in expenses this year and more the following year and more the year after and more the year after that, etc. [/quote]With taxes going up in the future regardless of who is President, I feel very confident. However, I can be convinced as well. I will listen and take in everything.
[/quote] What taxes are going up? What if taxes go up via life insurance not being income tax free? What if income taxes and capital gains taxes both go up? Since most VULs lapse, won't this impact the vast majority of VUL policies? If the step-up in basis doesn't change, taxes on the index fund won't matter to much because most of it still won't be paid. One of the problems with most VUL vs. BTID comparisons is that they make three assumptions. 1)Taxes on the side fund will be much higher than what happens in reality. 2)The VUL will be held to death and death will occur at an older age, but not too old. 3)The market won't crash when someone is trying to take money out of their VUL policy.
[quote=anonymous][quote=army13A] [quote=anonymous]
You should be able to start to see the problem just from what you are telling me. If he's in excellent health, he can buy the insurance for about $330 and have that rate guaranteed for 30 years. He would be able to invest $9,670. BTID allows him to invest $815 additional. The cost of the insurance increases every year in the VUL, so the difference gets bigger and bigger.
I'm sure that you are keeping the death benefit level for as long as possible. This means that BTID will certainly yield a higher payout if death occurs within 30 years. In other words, for the privilege of being able to use a VUL, he is paying $1,145 in upfront costs instead of $330. VUL is BTID and invest the difference, but in one vehicle. You are going to have a hard time showing that combining it is worth an extra $815 more in expenses this year and more the following year and more the year after and more the year after that, etc. [/quote]With taxes going up in the future regardless of who is President, I feel very confident. However, I can be convinced as well. I will listen and take in everything.
[/quote] What taxes are going up? What if taxes go up via life insurance not being income tax free? What if income taxes and capital gains taxes both go up? Since most VULs lapse, won't this impact the vast majority of VUL policies? If the step-up in basis doesn't change, taxes on the index fund won't matter to much because most of it still won't be paid. One of the problems with most VUL vs. BTID comparisons is that they make three assumptions. 1)Taxes on the side fund will be much higher than what happens in reality. 2)The VUL will be held to death and death will occur at an older age, but not too old. 3)The market won't crash when someone is trying to take money out of their VUL policy.[/quote]
Point taken about the taxes. I was thinking about an article I just read about proposed legislation to increase capital gains to 20% in 2010 from my CPA. We don't know what is going to happen. These are the parameters I think we should base it off:
30 year old male, perfect health, 10K of cash per year (not a penny more or less), not a huge need for life insurance, investing in an S&P 500 index fund with 5.83 net returns (which includes expense ratio). We'll compare my scenario where 10K a year buys a minimum face policy with increasing DB and we'll look at cash value after 30 years.
BTID will be a term policy for 30 years for the same min face and invest the rest at 5.83% rate of return. We'll ignore dividends and cap gains along the way and just tax the gain in the account at current capital gains rate and see what's left. And I'm assuming this is for a do-it-yourself investor so we'll ignore transaction costs and assume it's in a vanguard account.
Anything else relevant I missed?
[/quote]
Cashflow, what happens when he is taking out $75,000 a year and the market has a major downturn at the same time and he's not fortunate enough to die? I'll answer the question for you. The policy is going to lapse and to the extent that he borrowed more money than he paid, he will have to pay a tax on what was previously a loan. VUL illustrations make zero sense when one is removing money because averaging 6% is very different than getting 6% every year.[/quote]What happens when someone takes $75,000 out of their equity funds in an IRA and the market has a major downturn at the same time? They're going to run out of money. This story isn't unique to VULs...
[quote=BerkshireBull][/quote]
Cashflow, what happens when he is taking out $75,000 a year and the market has a major downturn at the same time and he's not fortunate enough to die? I'll answer the question for you. The policy is going to lapse and to the extent that he borrowed more money than he paid, he will have to pay a tax on what was previously a loan. VUL illustrations make zero sense when one is removing money because averaging 6% is very different than getting 6% every year.[/quote]What happens when someone takes $75,000 out of their equity funds in an IRA and the market has a major downturn at the same time? They're going to run out of money. This story isn't unique to VULs...
[/quote] I'm editing simply to make my response clear: It's very unique to VUL's. If it happens in their IRA, they run out of money quicker. If it happens in their VUL, they run out of money, they lose their insurance protection, and what was once tax free loans, is now taxable income to the extent that they received more than they paid.
I’m bumping this because every couple of months we get into these VUL conversations. I always issue the challenge for someone to use real numbers so that we aren’t dealing in the abstract. Unfortunately, nobody ever takes me up on the challenge.
Someone, please do so. I don't care if I'm shown to be wrong. Heck, I'd like to see some real numbers that get me to believe that there are circumstances that VUL makes sense. If I can make money while helping a client, I'm all for it.Anon, I think the problem with VUL (and you’ve stated this) is not so much in the accumulation phase, but rather in the income phase. Surely most sellers of VUL are using it to provide a retirement supplement for their clients. However, as we’ve seen over the last couple of years, when you take withdrawals from an account that is getting hammered by a declining market, you’re exponentially running the risk of running out of money. When you combine this with increasing costs of insurance in the policy, that speeds up the process. One may say that the account will need to be allocated to the fixed account to avoid this. However, when you’ve been running illustrations at 8% and you switch to 3%, how is that going to affect withdrawals? Without a proper amount of systemic growth in the portfolio to outpace inflation and COI, how will this affect the policy?
I'm with you, anonymous, if someone can show me how this won't be a problem in the future, I'll reconsider VUL's usefulness. For now, I can't wrap my head around this. So, I'm going to stick with term and WL and KISS.You guys aren’t understanding how the no-lapse riders on these contracts work. You cannot blow these policies up and lapse them unless it’s done on purpose. In a down market you may have to choose between continuing to pull money out of the policy or maintaining the death benefit, but they are not simply going to lapse out of the blue for no reason.
BB, it’s more than just a no-lapse guarantee. You still have to show how this will beat the same dollars going into a term policy and the difference getting invested in the same manner.
As for the no-lapse guarantee, sure, if someone puts in $X a month and doesn't take loans or remove money, they may have a guarantee. Can you tell me about the guarantee that they have in year 40 when they skip their premium payment in year 9 and then in years 20-25, they take out some pretty big loans? They lapse because one can't afford the ever increasing COI.Anon...you reference a lot of hypotheticals in which people are taking out large sums in down years and large sums in general during their later years. This isn't what VUL's were designed for. For retirement income scenarios they are recommended to be best used after maxing out 401(k)'s/TSP's, Roth's (if they qualify) and have a good chunk in non-qualified investments. This means that VUL's shouldn't be used as a primary retirement strategy and there shouldn't be an instance in which over 25% of a persons annual retirement income comes from the VUL. People should take a chunk out if it keeps them from moving up a tax bracket or if income taxe rates are higher than usual given the current president. But if someone needs $100,000 to live off in retirement, they shouldn't take $100,000 from their VUL.
[quote=3rdyrp2]
Anon...you reference a lot of hypotheticals in which people are taking out large sums in down years and large sums in general during their later years. This isn't what VUL's were designed for. For retirement income scenarios they are recommended to be best used after maxing out 401(k)'s/TSP's, Roth's (if they qualify) and have a good chunk in non-qualified investments. This means that VUL's shouldn't be used as a primary retirement strategy and there shouldn't be an instance in which over 25% of a persons annual retirement income comes from the VUL. People should take a chunk out if it keeps them from moving up a tax bracket or if income taxe rates are higher than usual given the current president. But if someone needs $100,000 to live off in retirement, they shouldn't take $100,000 from their VUL.
[/quote] blah, blah, blah. Sorry about that. I'm not trying to be disrespectful. Just post the a link to a dang prospectus. I'm happy to use any scenario. If you want to use a scenario where somebody buys a VUL at age 30 and then dies at age 80 before they had a chance to take a penny out, that's fine with me. Also, include something that has the cost of insurance. This is much easier said than done since the insurance companies don't want people knowing how much they are actually paying when they get older. If I'm wrong about that, why don't they include this information in the prospectus? They don't want their 497 page document to become 498 pages?I’m not here to argue VUL’s are better than Term and invest the difference because I’d recommend Term and invest the difference 99% of the time. Just saying that some of the hypotheticals used as earlier examples are a little crazy.
I have no problem agreeing with you that they are crazy. I'm trying to figure out if there is ever a case in which VUL wins. I'm willing to use ANY realistic parameters. Does VUL ever win? I'm not sure that it ever does. I just want someone to show me with real numbers, a situation where VUL is the best. Does this scenario exist? I don't know. I think that it does if the numbers really get massaged, but otherwise, I'm not so sure.I’m not here to argue VUL’s are better than Term and invest the difference because I’d recommend Term and invest the difference 99% of the time. Just saying that some of the hypotheticals used as earlier examples are a little crazy.
C’mon guys. I’m champing at the bit for someone to post some real VUL information. How about the PAC Life Select Exec IV? It seems to be a popular one.
Look at a 45 year old standard male paying $10,000 for a $300,000 death benefit. Does anybody have a guess how much money is disappearing in the first year for various charges? It's $2500! approximate costs: $595 sales charge $90 admin charges $288 COI (increases annually on a per/thousand basis, but isn't disclosed in the prospectus) $1476 coverage charge (remains for 10 years, and then changes. I have no idea how this changes because they don't disclose this cost in the prospectus.) Total Charges =$7551 Additionally, there is an asset based charge which lowers the return by .45% on the first $20,000 and .05% on all additional money. Those aren't some obscene first year charges that disappear in the future. Can someone please explain how someone can lose 25% off of the top and still come out ahead? If we use fairly tax efficient investments, BTID will crush it both from a tax standpoint and a death benefit standpoint any year that the person wants the cash or dies. Ex. Comparing against 10 year term and assuming that the investment expenses are the same and the investments get 6%. VUL: CSV $103,000 (less income taxes on gain) DB $300,000 (tax free) BTID: Side Fund $126,000 (a little less because of some taxes and then capital gains...total = more than the $103,000 less the taxes on the gain) DB $426,000 (tax free: will be slightly less due to some taxes on dividends, but still a huge difference) At 30 years, with the VUL, the side fund will be $619,000 (assuming the expenses never go up and we know that they do) With BTID, the side fune will be $759,000 and the death benefit will be $1,059,000 and then the next day will be $759,000. These numbers aren't right, but they are dang close. Go with a 20 year term instead, and BTID still always wins, but by a bigger margin if death occurs in years 1-20 or years 30 +. With a 30 year term, BTID gets both the side fund + the death benefit if death occurs within 30 years which gives it a huge advantage. After 30 years, with BTID, there is no insurance costs and the VUL costs are very high, which simply magnifies the advantage. Anyway, somebody, anybody, show me where I'm wrong. I just don't know how a product can lose 25% off the top and still end up being the best option.I think everybody knows I’m not a VUL proponent, but I’ll play Devil’s Advocate.
Anon, what happens in year 31 when the VUL client still has a DB and the BTID client has an outrageous bill if they choose to renew their term insurance? My guess is VUL will actually look better than BTID if the client chooses to keep the life insurance in force.[quote=deekay]I think everybody knows I’m not a VUL proponent, but I’ll play Devil’s Advocate.
Anon, what happens in year 31 when the VUL client still has a DB and the BTID client has an outrageous bill if they choose to renew their term insurance? My guess is VUL will actually look better than BTID if the client chooses to keep the life insurance in force. [/quote] I like the devil's advocate. The VUL won't look better because there is no reason to renew the term insurance. The "side fund" of the $300,000 30 year level term insurance policy is over $700,000.[quote=anonymous]C’mon guys. I’m champing at the bit for someone to post some real VUL information. How about the PAC Life Select Exec IV? It seems to be a popular one.
Look at a 45 year old standard male paying $10,000 for a $300,000 death benefit. Does anybody have a guess how much money is disappearing in the first year for various charges? It's $2500! approximate costs: $595 sales charge $90 admin charges $288 COI (increases annually on a per/thousand basis, but isn't disclosed in the prospectus) $1476 coverage charge (remains for 10 years, and then changes. I have no idea how this changes because they don't disclose this cost in the prospectus.) Total Charges =$7551 Additionally, there is an asset based charge which lowers the return by .45% on the first $20,000 and .05% on all additional money. Those aren't some obscene first year charges that disappear in the future. Can someone please explain how someone can lose 25% off of the top and still come out ahead? If we use fairly tax efficient investments, BTID will crush it both from a tax standpoint and a death benefit standpoint any year that the person wants the cash or dies. Ex. Comparing against 10 year term and assuming that the investment expenses are the same and the investments get 6%. VUL: CSV $103,000 (less income taxes on gain) DB $300,000 (tax free) BTID: Side Fund $126,000 (a little less because of some taxes and then capital gains...total = more than the $103,000 less the taxes on the gain) DB $426,000 (tax free: will be slightly less due to some taxes on dividends, but still a huge difference) At 30 years, with the VUL, the side fund will be $619,000 (assuming the expenses never go up and we know that they do) With BTID, the side fune will be $759,000 and the death benefit will be $1,059,000 and then the next day will be $759,000. These numbers aren't right, but they are dang close. Go with a 20 year term instead, and BTID still always wins, but by a bigger margin if death occurs in years 1-20 or years 30 +. With a 30 year term, BTID gets both the side fund + the death benefit if death occurs within 30 years which gives it a huge advantage. After 30 years, with BTID, there is no insurance costs and the VUL costs are very high, which simply magnifies the advantage. Anyway, somebody, anybody, show me where I'm wrong. I just don't know how a product can lose 25% off the top and still end up being the best option. [/quote] Anon, I said I will post an illustration on one of the products I use but you have to give me some time. I promise that I will have it up by next weekend; is that fair?Whenever you’d like. An illustration is fine, but a prospectus along with the charges is much more valuable.
What VUL products do you use?[quote=anonymous]Whenever you’d like. An illustration is fine, but a prospectus along with the charges is much more valuable.
What VUL products do you use?[/quote] I have no problem with an illustration b/c it can be "any company" but posting a prospectus, I'm not so hot on b/c of the forum rules. We're not supposed to post anything that doesn't "belong to us". Plus the illustration has all of the expenses taken into account, so there is no fibbing on it. And for me to post any company prospectus without the company logo is just too much work. I'm at an indy B/D, so I can sell any.Army,
If you post which VUL you use, we can do some legwork on your behalf. TIA.You don’t have to post a prospectus. Most of them are available on-line. They aren’t proprietary hidden information. Just name the product so that I can look up the prospectus.
I completely know that they are public info but I’m concerned with my identity. I’ve divulged enough information about myself on this forum and I use one company more than any other for VUL sales and I just don’t want to take the risk of being pinned down. Sorry guys but that’s the military paranoia in me.
Again, if I post an illustration that shows the cv with ALL OF THE COSTS taken into account, what difference does it make? We're just trying to see if someone does 10K a year into a VUL policy and 10K a year into BTID, who makes out better in the long run, right? On the illustration I will use, it will show cash value, surrender value and db in force at whatever year we want to make a comparison.Army, nobody wants to mess with your anonymity. If you don’t want to use your favorite one, use your second one. Use any VUL that you might possibly use.
I want real numbers to go with an illustration. I'm not sure that you understand the importance of the wizard behind the curtain in a VUL policy. Illustrations are very limiting in terms of good information. For instance, take two policies. One has a higher front end sales load, but lower on-going asset charges. 30 years into the future, they have performed identically. If the client stops making out of pocket payments, the policy with a higher sales load and lower on-going asset charges will outperform a policy with a lower sales load and higher on-going asset charges. This kind of stuff is easy to see if one understands the numbers behind the illusion (illustration), but very hard to see based upon the illustration. Let me give you a specific reason why an illustration isn't good enough. Let's assume that we are using an S&P 500 index fund as the investment and we are assuming that it will return 6% net. Inside of the VUL it costs .18% + a .25% managerial fee for a total of .43%. Outside of the VUL, the same S&P fund can be purchased for .18%. That means that if the VUL is getting 6% net. The side fund will actually get 6.25%. The prospectus helps us to see what is actually happening.Army??
[quote=army13A][quote=anonymous]C’mon guys. I’m champing at the bit for someone to post some real VUL information. How about the PAC Life Select Exec IV? It seems to be a popular one.
Look at a 45 year old standard male paying $10,000 for a $300,000 death benefit. Does anybody have a guess how much money is disappearing in the first year for various charges? It's $2500! approximate costs: $595 sales charge $90 admin charges $288 COI (increases annually on a per/thousand basis, but isn't disclosed in the prospectus) $1476 coverage charge (remains for 10 years, and then changes. I have no idea how this changes because they don't disclose this cost in the prospectus.) Total Charges =$7551 Additionally, there is an asset based charge which lowers the return by .45% on the first $20,000 and .05% on all additional money. Those aren't some obscene first year charges that disappear in the future. Can someone please explain how someone can lose 25% off of the top and still come out ahead? If we use fairly tax efficient investments, BTID will crush it both from a tax standpoint and a death benefit standpoint any year that the person wants the cash or dies. Ex. Comparing against 10 year term and assuming that the investment expenses are the same and the investments get 6%. VUL: CSV $103,000 (less income taxes on gain) DB $300,000 (tax free) BTID: Side Fund $126,000 (a little less because of some taxes and then capital gains...total = more than the $103,000 less the taxes on the gain) DB $426,000 (tax free: will be slightly less due to some taxes on dividends, but still a huge difference) At 30 years, with the VUL, the side fund will be $619,000 (assuming the expenses never go up and we know that they do) With BTID, the side fune will be $759,000 and the death benefit will be $1,059,000 and then the next day will be $759,000. These numbers aren't right, but they are dang close. Go with a 20 year term instead, and BTID still always wins, but by a bigger margin if death occurs in years 1-20 or years 30 +. With a 30 year term, BTID gets both the side fund + the death benefit if death occurs within 30 years which gives it a huge advantage. After 30 years, with BTID, there is no insurance costs and the VUL costs are very high, which simply magnifies the advantage. Anyway, somebody, anybody, show me where I'm wrong. I just don't know how a product can lose 25% off the top and still end up being the best option. [/quote] Anon, I said I will post an illustration on one of the products I use but you have to give me some time. I promise that I will have it up by next weekend; is that fair? [/quote] I'm still here. Weekend remember? lol, I know you're itching man.Anonymous,
I'm not a big fan of VULs either, but I'm trying to think of a situation that does fit...What about a 60 year old aggressive investor that is looking to maximize a death benefit for estate planning purposes? Whole life has too conservative of a death benefit growth, UL has a leveled DB, and BTTID is not possible because of his age.If the client understands he could lose the CSV and the DB and have any withdrawals/loans taxed at ordinary income, then VUL could be a good choice. If he wants the DB guaranteed, it’s not going to be an option. In my experience, in estate planning cases the DB must be guaranteed, even if it doesn’t increase in size.
Army, I didn’t think that it would take more than 12 seconds to post the name of the product. A fair comparison can’t be done without seeing a prospectus.
Chris, there is no reason that BTID can't be done with a 60 year old. Whether it is better or not, depends on the expenses involved. We would have to look at a prospectus to know which is better along with seeing the COI. That being said, it's hard to imagine too many people wanting a variable product for estate planning. They typically are primarily concerned with a specific death benefit for the least amount of money. However, there are certainly exceptions. For those exceptions, does VUL win? Maybe. Let's look at the actual expenses. I can tell you that if this done for a 60 year old and death occurs before age 80, VUL will get smoked.Here’s a product for you: Lincoln Life Asset Edge VUL. Check out that prospectus.
I've also attached an illustration from another product with the comparison you did before: 45 Year old male, 10K a year, 6% gross investment growth. As you can see in this illustration, the costs are illustrated if you just see the accum value in the first year. This is a minimum face policy b/c this is when I use it: when the need for life insurance is minimal. I will gather the relevant pieces of the prospectus with regards to cost and post that over the weekend for this particular product. But this will generate enough convo till then. Gross Rate 6 Net Rate 5.83 Year Age Premium Outlay NetOutlay Accum Value Srdr Value Death Benefit 1 45 $10,000.00 $10,000.00 $8,880.00 $3,899.00 $217,541.00 2 46 $10,000.00 $10,000.00 $18,227.00 $13,246.00 $226,888.00 3 47 $10,000.00 $10,000.00 $28,065.00 $23,084.00 $236,726.00 4 48 $10,000.00 $10,000.00 $38,429.00 $33,449.00 $247,090.00 5 49 $10,000.00 $10,000.00 $49,347.00 $44,366.00 $258,008.00 6 50 $10,000.00 $10,000.00 $60,843.00 $56,858.00 $269,504.00 7 51 $10,000.00 $10,000.00 $72,945.00 $69,957.00 $281,606.00 8 52 $10,000.00 $10,000.00 $85,679.00 $83,687.00 $294,340.00 9 53 $10,000.00 $10,000.00 $99,075.00 $98,079.00 $307,736.00 10 54 $10,000.00 $10,000.00 $113,161.00 $113,161.00 $321,822.00 11 55 $10,000.00 $10,000.00 $129,146.00 $129,146.00 $337,807.00 12 56 $10,000.00 $10,000.00 $146,011.00 $146,011.00 $354,672.00 13 57 $10,000.00 $10,000.00 $163,805.00 $163,805.00 $372,466.00 14 58 $10,000.00 $10,000.00 $182,590.00 $182,590.00 $391,251.00 15 59 $10,000.00 $10,000.00 $202,417.00 $202,417.00 $411,078.00 16 60 $10,000.00 $10,000.00 $223,335.00 $223,335.00 $431,996.00 17 61 $10,000.00 $10,000.00 $245,387.00 $245,387.00 $454,048.00 18 62 $10,000.00 $10,000.00 $268,618.00 $268,618.00 $477,279.00 19 63 $10,000.00 $10,000.00 $293,083.00 $293,083.00 $501,744.00 20 64 $10,000.00 $10,000.00 $318,847.00 $318,847.00 $527,508.00 21 65 $10,000.00 $10,000.00 $345,977.00 $345,977.00 $554,638.00 22 66 $10,000.00 $10,000.00 $374,550.00 $374,550.00 $583,211.00 23 67 $10,000.00 $10,000.00 $404,652.00 $404,652.00 $613,313.00 24 68 $10,000.00 $10,000.00 $436,367.00 $436,367.00 $645,028.00 25 69 $10,000.00 $10,000.00 $469,787.00 $469,787.00 $678,448.00 26 70 $10,000.00 $10,000.00 $504,978.00 $504,978.00 $713,639.00 27 71 $10,000.00 $10,000.00 $542,022.00 $542,022.00 $750,683.00 28 72 $10,000.00 $10,000.00 $580,960.00 $580,960.00 $789,621.00 29 73 $10,000.00 $10,000.00 $621,888.00 $621,888.00 $830,549.00 30 74 $10,000.00 $10,000.00 $664,910.00 $664,910.00 $873,571.00 31 75 $10,000.00 $10,000.00 $710,120.00 $710,120.00 $918,781.00 32 76 $10,000.00 $10,000.00 $757,617.00 $757,617.00 $966,278.00 33 77 $10,000.00 $10,000.00 $807,475.00 $807,475.00 $1,016,136.00 34 78 $10,000.00 $10,000.00 $859,763.00 $859,763.00 $1,068,424.00 35 79 $10,000.00 $10,000.00 $914,545.00 $914,545.00 $1,123,206.00 36 80 $10,000.00 $10,000.00 $971,915.00 $971,915.00 $1,180,576.00 37 81 $10,000.00 $10,000.00 $1,031,938.00 $1,031,938.00 $1,240,599.00 38 82 $10,000.00 $10,000.00 $1,094,740.00 $1,094,740.00 $1,303,401.00 39 83 $10,000.00 $10,000.00 $1,160,430.00 $1,160,430.00 $1,369,091.00 40 84 $10,000.00 $10,000.00 $1,229,088.00 $1,229,088.00 $1,437,749.00 41 85 $10,000.00 $10,000.00 $1,300,786.00 $1,300,786.00 $1,509,447.00 42 86 $10,000.00 $10,000.00 $1,375,588.00 $1,375,588.00 $1,584,249.00 43 87 $10,000.00 $10,000.00 $1,453,575.00 $1,453,575.00 $1,662,236.00 44 88 $10,000.00 $10,000.00 $1,534,844.00 $1,534,844.00 $1,743,505.00 45 89 $10,000.00 $10,000.00 $1,619,515.00 $1,619,515.00 $1,828,176.00 46 90 $10,000.00 $10,000.00 $1,707,725.00 $1,707,725.00 $1,916,386.00 47 91 $10,000.00 $10,000.00 $1,799,777.00 $1,799,777.00 $2,008,438.00 48 92 $10,000.00 $10,000.00 $1,895,840.00 $1,895,840.00 $2,104,501.00 49 93 $10,000.00 $10,000.00 $1,996,076.00 $1,996,076.00 $2,204,737.00 50 94 $10,000.00 $10,000.00 $2,100,643.00 $2,100,643.00 $2,309,304.00 51 95 $10,000.00 $10,000.00 $2,209,716.00 $2,209,716.00 $2,418,377.00 52 96 $10,000.00 $10,000.00 $2,323,723.00 $2,323,723.00 $2,532,384.00 53 97 $10,000.00 $10,000.00 $2,442,859.00 $2,442,859.00 $2,651,520.00 54 98 $10,000.00 $10,000.00 $2,567,326.00 $2,567,326.00 $2,775,987.00 55 99 $10,000.00 $10,000.00 $2,697,330.00 $2,697,330.00 $2,905,991.00 56 100 $10,000.00 $10,000.00 $2,833,080.00 $2,833,080.00 $3,041,741.00Now we can run a similar comparison: 45 year old male, spending 10K a year doing BTID. Buy a policy that is similar in the first year and invest the rest in a side account. Ignore taxes and transaction charges until we compare at year 30 or whenever and then we’ll compare the taxes in the BTID as well.
Army, please explain how it has a no-lapse guarantee that has nothing to do with paying the premium. I don’t understand.
The difference between the premium and the accumulation value in the first year would not be the costs. This is because the premium is at the beginning of the year. The accumulation value is the end of year one. This means that $8,390 got invested. $8390 x 1.0583= $8880 In order to do a valid comparison, I need to know how they determined 6% gross and 5.83 net. In other words, if an S&P index fund is getting 5.83% inside of this investment, is it getting 5.83% outside of this investment or would it be getting more?Assuming that the investment would do the same inside and outside, here are the numbers:
Year CV DB 5 $57K $274 10 $132 $349 20 $364 $581 30 $772 $999 40 $1,500 $1,500 50 $2,782 $2,782 Without tax considerations, the BTID wins for all years for available cash and for death benefit. With tax considerations, the numbers will be very close from a death benefit standpoint, but the BTID will blow it away from a cash standpoint. All of this assumes that an investment that gets 5.83% inside of the product will also get 5.83 outside. The illustration also assumes that all costs are current costs and no costs ever increase.Is WL ever a suitable recommendation for a BTID guy then? For the conservative dollars?
You can’t really compare WL to BTID because in general, it is an apples to oranges comparison. However, with your second question, it is a much more valid comparison.
When conservative dollars are diverted to WL insurance, to the extent that someone cares about leaving money behind at death, regardless of when death occurs, WL will make lots of sense and will beat BTID. By the way, there really isn't such a thing as BTID, it's simply a sales pitch designed to sell term insurance.[quote=anonymous]Assuming that the investment would do the same inside and outside, here are the numbers:
Year CV DB 5 $57K $274 10 $132 $349 20 $364 $581 30 $772 $999 40 $1,500 $1,500 50 $2,782 $2,782 Without tax considerations, the BTID wins for all years for available cash and for death benefit. With tax considerations, the numbers will be very close from a death benefit standpoint, but the BTID will blow it away from a cash standpoint. All of this assumes that an investment that gets 5.83% inside of the product will also get 5.83 outside. The illustration also assumes that all costs are current costs and no costs ever increase.[/quote] Anon, when I ran the numbers, my numbers came pretty close to yours so no disagreement on that standpoint. But here is the conundrum we run into with the BTID scenario versus doing a VUL. If we were comparing your client versus my client, we ignored a couple of factors. If you're a broker like myself, how would you have implemented a plan like that except for the term insurance? In a brokerage account, we ignored trading costs. In a fee based account, we ignored the mgmt fee. We ignored the tax ramifications as well. For simplicity sakes, I said we can ignore dividends and cap gains along the way and worry about it at the time of distribution. You said "With tax considerations, the numbers will be very close from a death benefit standpoint, but the BTID will blow it away from a cash standpoint." How is that so? Let's look at year 30 for example. His cost basis, at that time if we ignore any taxes paid along the way is 285K, making a taxable gain of $486K and with a 15% LTCG (assuming it is all long term) tax of $73K, leaving $699K. This is far from crushing the VUL which has a cash value of $664K. Now, I'm not a CPA so any accountants out there don't cream me but this is what I remember from a tax course I took. The only way you can really implement this is if you're a TRUE fee only, meaning you're not managing assets or charging commissions and you're doing the "oversight" on the plan. If we're truly telling them to do this, we're telling them and letting them do it on their own. I'll give it to you that the numbers come out SLIGHTLY better with BTID with real world implications but with the VUL, I'm doing it all versus them doing it in BTID and managing it on their own. How many studies reveal that most fund managers can't outperform the index but are advisors telling their clients to not invest with them and do it on their own? Anon, I know what you were trying to get at and I think having this debate was good. I don't think that BTID crushes VUL at all when we take into account taxes because that is real world scenario.And let’s not forget to mention the high likelihood of capital gains rate going to 20%.
Army, I’m not arguing in favor of BTID. I think that it’s stupid. It’s a sales tool to sell term insurance, so I don’t want to defend it. What I’m trying to say with it, is that in order for VUL to be considered it must be better than BTID. This is because VUL is BTID.
Anyway, let's get back to the comparison. First of all, I do need to see a prospectus because it is the only way that I'll know how they are getting to 6% gross and then 5.83% net. I don't know if there are expenses coming out that wouldn't be coming out if the money was invested separately, but for now we'll assume that it's the same. You generously calculated that the BTID would be worth $699,000 after tax at that point. I say generously because CG rates may go up, and 100% of it won't be tax deferred, so let's lower the figure to the $650,000 range. The VUL has a cash SURRENDER value of $664,000. In order to actually get this money, the policy has to be surrendered which means that income taxes are going to be paid on the gain. If the person tries to borrow a large portion out instead, the reality is that this will probably lead to the policy lapsing at some point which means that the money pulled out will be taxed to the extent that is a gain. The BTID cash AFTER TAX roughly equals the VUL cash BEFORE TAX. That's why I say that the BTID crushes the VUL on an after tax cash basis. Even if VUL wins in the laboratory, it still loses in the real world. You make a valid point that nobody is going to manage the side fund for free. The same is true for a VUL policy. VUL policies really need monitoring. The problem is that there isn't compensation. After a while, VUL/UL policyholders end up orphaned or ignored.I looked at the Lincoln product. It has the following charges:
Sales Charge 3.5% (can be raised to 5%) COI .2% per thousand per month (increases every year) M&E .1% of assets for 20 years (can be doubled and charged every year) Admin Fee $10/month for all months + .33% per thousand per month for 10 years S&P 500 fund .33% expense ratio Assumption to make it possible to do calculation: Combination of COI + Per thousand fee part of admin fee will stay equal to .53/month/thousand for 20 years. This means that when $10,000 goes into the policy, only $8150 gets invested. $350 goes to the sales charge, $979 goes to admin fees, $520 goes to COI. If the S&P returns 6%, the investment portion will return 5.57%. The Cash surrender value will be about $111,000 after 10 years and $302,000 after 20 years. Those numbers shouldn't be too far off. Anything beyond that point would be a pretty big guess since we don't know the future COI, nor do we know what will happen to the admin fees or sales charges. That's another pretty big problem with VUL. If costs change, it can easily go from possibly making sense to not making sense which, with hindsite, makes it a really bad decision since getting out means income taxes on all gains.I could be wrong (I don’t have a financial calculator in front of me), but I’m pretty sure anonymous is assuming $10,000 per year going into the policy, not just one time.
Yep. That’s $10,000 a year and is making an assumption that the S&P will return 6% every single year. I think that you’d rather stick with an EIA.
army-have you had the chance to look at an annual statement of a VUL? not an illustration, but an in force policy annual statement? i only ask because i have been doing this long enough to have compared at least 25 illustrations (which are still IN the actual policy the client owns) which were created when the agent sold the policy, and never has the illustration come close to replicating the actual performance. too many unforeseen factors come into play. the annual policyholder statement will show just how incredibly high the annual costs really are.
it is simply not worth the hassle. you will spend alot of time re-selling the policy each time they get an annual statement.
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