[quote=Big Taco]Ironhorse, what are some of your insights on properly positioning and structing the VUL?[/quote]



I tell clients, is far better than owning life insurance, is owning a stake in a life insurance company.



If you set shares of AIG on a DRIP program they will probably outperform most VUL policies.



More seriously, life insurance is a form of insurance and should
not be confused with any sort of investment. IMHO the main idea of VUL
is that the investments could grow to exceed the death benefit.
However thanks to the higher COI, underfunding, and management fee’s
this rarely happens.



What would be really nice was if some company came out with a WL type policy with a death benefit that is linked to CPI.

I always like the idea of conquering inflation with equities, which predisposes me to the VUL over whole or UL for Permanent life policies. 

The major problem with the VUL policy isn't the "V".  The problem is with the "U".   We can't escape the fact that the insurance for universal life policies is Annually Renewable Term.  ART policies are incredibly expensive if one has to keep the policy forever.  They are designed to be kept for short periods of time.  Not only is one stuck with ART forever with a UL policy, but it is grossly overpriced term insurance. 

Do you have any idea, for example, if your client is now 80 years old and their death benefit is $700,000 more than the CV how much they are paying for insurance?   How about at age 85?   These mortality costs can decimate a policy.

Just for kicks, I ran illustrations for WL and VUL at WL premiums (About $3,500 more than target VUL premiums) for a healthy 30 year old male.  Even when the VUL is run at 8%, it underperforms the WL.   

VUL combines overpriced insurance with high priced investments (think "A" shares without breakpoints).

How about this for a "Did you Know":

and yes, to answer a qestion from earlier, I have seen 20 year old VULs that have done well, and have much higher DBs than originally set up.  They don't all blow up  

Be patient.  The cost of insurance will get them eventually.

[quote=anonymous]

I always like the idea of conquering inflation with equities, which predisposes me to the VUL over whole or UL for Permanent life policies. 

The major problem with the VUL policy isn't the "V".  The problem is with the "U".   We can't escape the fact that the insurance for universal life policies is Annually Renewable Term.  ART policies are incredibly expensive if one has to keep the policy forever.  They are designed to be kept for short periods of time.  Not only is one stuck with ART forever with a UL policy, but it is grossly overpriced term insurance. 

Do you have any idea, for example, if your client is now 80 years old and their death benefit is $700,000 more than the CV how much they are paying for insurance?   How about at age 85?   These mortality costs can decimate a policy.

Just for kicks, I ran illustrations for WL and VUL at WL premiums (About $3,500 more than target VUL premiums) for a healthy 30 year old male.  Even when the VUL is run at 8%, it underperforms the WL.   

VUL combines overpriced insurance with high priced investments (think "A" shares without breakpoints).

How about this for a "Did you Know":

[quote=anonymous]

Just for kicks, I ran illustrations for WL
and VUL at WL premiums (About $3,500 more than target VUL premiums) for
a healthy 30 year old male.  Even when the VUL is run at 8%, it
underperforms the WL.   

VUL combines overpriced insurance with high priced investments (think "A" shares without breakpoints).

How about this for a "Did you Know":
[/quote]

No wonder it is so popular with insurance companies.

Good comment about ART. That really puts things in perspective. So we’re probably back to, VUL may be appropriate for the super rich in some situations and the super flakey any time.

Only problem I potentially see is this-who is responsible for the WL
performance?  I realize this is minimal on the risk scale, but
again, properly servicing a VUL contract can greatly reduce some of the
generally accepted problems.  I am not advocating VUL or nothing,
I think it has many downfalls but sometimes it all comes down to
personal conviction.

Let's assume that the VUL is properly serviced, and properly overfunded.  I'm still having great difficulty understanding how someone can be better off with VUL instead of putting the same amount of money into a term life insurance policy and comparable funds.

Disadvantage of VUL:
1) The insurance component is much more expensive than straight term insurance.*
2) The expenses of the underlying funds are more expensive than if purchased outside of the VUL policy
3) The insurance company tacks on extra expenses (ie. things like m&e, premium expense charge, administrative charge, face amount charge)
4) The insurance component must be kept even when the insurance is not needed (this can be hundreds of thousands of dollars)
5) If policy is canceled, the gain is income and not capital gains
6) The incredibly high mortality charges that are ever increasing make taking money out of a policy a risky proposition, especially if the market goes down. 

* I just did a quick calculation for a healthy 30 year old male who lives to age 100 and funds a $1,000,000 policy at WL premiums and gets 8% a year.  Their total mortality expenses will equal approximately $1,000,000.  It makes it pretty easy to see why it's awfully tough to keep one of these policies in force.

It's the insurance companies who make out on these policies.  They aren't good for the insureds or the agent.  The insured would be better off with term or WL.  The agent gets hurt because even if the client funds at WL premium, they only get full comp on "Target premium" which is significantly lower.  The agent also has nothing to convert in the future.  I don't think that it's any accident that these get sold mostly by stock companies instead of mutuals.

[quote=anonymous]

It's the insurance companies who make out on these policies.
...
I don't think that it's any accident that these get sold mostly by stock companies instead of mutuals.

[/quote]

Now you know why the AMP broker sings.

The different types of insurance argument for different needs, properly

structured, rules the day. I bought on my own life a $50k policy which is

owned by a charity I support. I donate the premium each year to the

charity and deduct the amount paid. The policy I selected was whole life

because I want it to last the whole of my life and dividend growth is

positioned to pay the premium in my retirement. VUL would not give me

the guarantees I needed. For my personal needs years ago I purchased

two VULs with $250k death benefit each. When I retire I may elect to roll

the cash from one VUL into the other VUL, therefore leaving at least one

policy with enough cash to (hopefully) keep it going. Plus, since life

insurance is taxed FIFO, I retain the option to take significant withdrawals

in retirement tax free if the death benefit is no longer a compelling

matter. Another great argument for the value of cash value in life

insurance is that the cost basis of life insurance is premium(s) paid PLUS

cost of insurance. Great product when the sales rep knows the drill.

[quote=theironhorse]Only problem I potentially see is this-who is responsible for the WL
performance?  I realize this is minimal on the risk scale, but
again, properly servicing a VUL contract can greatly reduce some of the
generally accepted problems.  I am not advocating VUL or nothing,
I think it has many downfalls but sometimes it all comes down to
personal conviction.
[/quote]

If you own a REAL WL policy that is a participating policy you are an OWNER of the issuer and they are obligated to pay any excess profits back to you, just as they would pay dividends to a shareholder.

yeah, I know, that was my point.  excess profits is the key. 
it is an insurance company and the odds someone like NML does not have
excess profits is next to nil, probably lower, but you (the client)
better realize the illustrated dividend is based on the insurance
company performance.  i think whole life, gaul, vul all have uses
and are good products when they are used correctly, not as a
replacement or “better option” to a roth or something else more
suitable.

[quote=theironhorse]yeah, I know, that was my point.  excess profits is the key. 
it is an insurance company and the odds someone like NML does not have
excess profits is next to nil, probably lower, but you (the client)
better realize the illustrated dividend is based on the insurance
company performance.  i think whole life, gaul, vul all have uses
and are good products when they are used correctly, not as a
replacement or “better option” to a roth or something else more
suitable.
[/quote]

You should sell WL for protection, and use the guaranteed premiums as your baseline…if you emphasize the dividends too much you’re creating the wrong expectations IMHO.

[quote=joedabrkr] [quote=theironhorse]yeah, I know, that was my point.  excess profits is the key.  it is an insurance company and the odds someone like NML does not have excess profits is next to nil, probably lower, but you (the client) better realize the illustrated dividend is based on the insurance company performance.  i think whole life, gaul, vul all have uses and are good products when they are used correctly, not as a replacement or "better option" to a roth or something else more suitable. [/quote]

You should sell WL for protection, and use the guaranteed premiums as your baseline...if you emphasize the dividends too much you're creating the wrong expectations IMHO.
[/quote]

MM quotes the gurantee, a midpoint which is 1/2 of the current dividend and the current dividend (which has average7 1/2% over the last 20 years), not a bad return for life insurance and a death benefit on top of the cash value buildup. 

try to explain the dividend % to a client.  NML quote 8+% and yet
it has nothing to do with ror on the cv of the policy.  it is an
incredibly misleading “rate of return.”  

[quote=theironhorse]yeah, I know, that was my point.  excess profits is the key. 
it is an insurance company and the odds someone like NML does not have
excess profits is next to nil, probably lower, but you (the client)
better realize the illustrated dividend is based on the insurance
company performance. [/quote]



Life Insurance companies have gone bust in the past, notably Conseco.



And there were some very nervious life reinsurer’s on Sept 12, or when the SARS/Bird Flu scare was going around.

Cougzz, I am going to ask you a question and I'm willing to bet that you don't know the answer.  

What is the cost of your insurance at age 70? At age 80? At age 81? 82? etc?  I am asking about the cost of insurance and not your premium.

The reason I say this is because if people knew the answer to this question, I believe that VUL would never be purchased.  It's interesting that this information is not in the prospectus or in an illustration.

You won't be able to take significant withdrawals without running into a great chance of the policy lapsing.  Did you know that if you pay WL level premiums for your VUL, you'll need 9% to come out ahead...assuming that you don't take money out of the policy and based upon current WL dividend scale? 

Another great argument for the value of cash value in life
insurance is that the cost basis of life insurance is premium(s) paid PLUS cost of insurance. 

Incorrect.  Cost basis is only premium paid. Ex. Client buys UL policy.  Pays $1,000/year for 10 years for a total of $10,000.  During that time, the cost of insurance is a total of $5,000.  The cost basis is $10,000, not $15,000.  Cost basis is total premium paid including cost of insurance.