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Sep 3, 2009 1:39 pm

[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 = 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. 
Sep 3, 2009 10:07 pm


  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.
Sep 3, 2009 11:56 pm

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.

Sep 4, 2009 1:28 am

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.
Sep 4, 2009 2:37 am

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 $3,041,741.00
Sep 4, 2009 2:39 am

Now 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. 

Sep 4, 2009 2:41 am
  Plus this contract has a no lapse guarantee and has nothing to do with paying the premium. 
Sep 4, 2009 3:12 am

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?
Sep 4, 2009 3:23 am

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.
Sep 4, 2009 3:36 am

Is WL ever a suitable recommendation for a BTID guy then? For the conservative dollars?

Sep 4, 2009 3:44 am

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.
Sep 4, 2009 10:02 pm

[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.   
Sep 4, 2009 10:07 pm

And let’s not forget to mention the high likelihood of capital gains rate going to 20%. 

Sep 4, 2009 11:52 pm

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. 
Sep 5, 2009 7:00 pm

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.
Sep 5, 2009 7:28 pm

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.

Sep 5, 2009 7:45 pm

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.

Sep 6, 2009 2:26 am

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.