What are the pros and cons of a Variable Universal Life Insurance policy for young investors?
I am 24 years old and I was introduced to a Variable Universal Life Insurance policy by a financial advisor. He explained some of the pros and I researched some of the cons. Some articles recommend "buy term, invest the difference," while others note the value of combining life insurance with a cash component. I'm skeptical because I've never heard of a VUL, and I'm having trouble understanding why I would choose this over a more traditional investment vehicle. What are some advantages and disadvantages of a VUL for young investors and how do they compare to other investment vehicles?
Soundsl like you are not dealing with a Fiduciary Financial Advisor, and most likely an insurance salesman. There may be a placen in your financial plan for a VUL once you have maxed out your other tax favored accounts like an IRA, ROTH IRA, or 401k.
To give you a better insight into the benefits of what I all the "RICH PEOPLE ROTH" give this post a read....but from you question and age I'm guessing it wouldn't quite the right time to start this type of plan.
A VUL would only really make sense if you actually need the underlying life Insurance. If you don't put this type of plan off until you've maxed out your other available options.
DAVID RAE, CFP®, AIF® is a retirement planning specialist with DRM Wealth Management. He has been helping people reach their financial goals for over a decade. He is a regular contributor to the Advocate Magazine as well as Huffington Post, and is an on demand Financial Expert on TV and Radio. For more information visit his website at www.davidraefp.com or the Financial Planner LA blog.
Variable universal life insurance can be an excellent product to accumulate cash, because of the tax advantages in permanent life insurance. When properly managed, you can grow cash on a tax-deferred basis, and distribute it on a tax-free basis. This cash is liquid, and if you use a loan to access it, the interest rate is comparatively low. The cash is generated from an account that is separate from the insurance, so you can be less concerned about carrier viability. You can go high or low on the payments, and also drop in lump sums. When you die, the survivor benefit can replenish the cash for use by your spouse or business partner.
Having said this, there are very specific circumstances under which the product can work well. Here is my “make sure” list for reviewing a VUL. I suggest you huddle up with your advisor and get satisfactory answers, which is what you really should do before you make any serious financial commitment.
1. Make sure you qualify for a low rate. Get prequalified and see what the premium would be before you submit an application. The lower the cost of insuring you, the larger the portion of your payments that will go towards cash. If you pose any high underwriting risk at all, medically, or maybe an adventurous hobby, or due to your lifestyle, the cost of insurance may be too high to yield a decent profit for you.
2. Make sure the cost is guaranteed for the life of the policy. You don't want the expenses of the policy to go up as you get older. That will simply eat away at your profits. You also don't want them to surprise you with a huge rate increase if they suddenly need more cash from their policyholders.
3. Make sure you know how to manage the money inside the policy. As with every other investment, you need to employ a strategy and change that as time goes by. Will you do that? Do you know how? Will your broker? Does he know how?
4. Make sure you know how to take distributions without triggering taxable events. This can be done through proper communication with your broker and the insurance company. They should be able to advise you of the rules, and how to work within them.
5. Make sure you don't jeopardize the survivor benefit. The function of life insurance is first and foremost to take care of your heirs. Money you take out of the policy could adversely impact that benefit. You don't want to shortchange your family, your business, or whoever else is the beneficiary. You need to make sure they'll get what they’ll need when you die.
If you have trouble understanding it, then you should not buy it. This is a simple rule of thumb practiced by none other than Warren Buffet. Life insurance products including VUL do not fall under the preview of the SEC since insurance companies spent big money to lobby that they are not investment products, therefore, should not be regulated by the SEC, but they turn around and sell them as investment products. The result of which is that these products have horrible disclosure. You would never know your costs, you would never understand their clauses unless you are an attorney yourself. Some of the worst gotcha clauses are hidden deep inside pages. "Buy term, invest the difference," is a solid advice when you get married and have children.
Buy a life insurance contract if you need life insurance (do you need to replace your income for a dependent in the event of your death? Do you have debts you would like to have paid at death? Do you have goals you would like to have funded at death?
If you don't, buy/invest elsewhere. If you do need life insurance., first and foremost, get the amount you need/want, even if it’s all term. In fact, if term allows you to get the coverage you need/want, buy term only. If your cashflow is strong, then you can consider a permanent policy, or a combination of term and permanent. Buy term and invest the difference is a marketing campaign, hence its inclusion in your question. There is some merit to the strategy, but if your cashflow is strong, permanent life insurance WILL play a very significant role in wealth creation, management process. Somewhat similar to “why rent, when you can own.” This said, strong cashflow means different things to different people, and these permanent life insurance strategies typically require ability to save 10% to 20 % of take home income, prior to retirement contributions.
If you go permanent, traditional whole life is better, because of its guarantees. More cash flow is needed. A lower cash flow permanent option is Universal Life, similar to VUL, without the "market" style investing or exposure. Cash value of UL’s grow at fixed rates, and peg somewhat to bond type rates of return credit. You can also look to an indexed UL where cash values get capped market type credit, without losing value in any given year (can't earn less than 0%).
VUL's can be dangerous, if used or acquired for the wrong reasons. These contracts are very powerful contracts that can yield great output in super high cash flow situations when also used as supplements to other wealth building strategies. In my experience, they are not to be taken lightly, or to be used as “primary” vehicles to wealth creating strategies.
If you are looking for an investment, get an investment. Life insurance is not necessarily an apple to apples comparison How you incorporate these concepts, options, and money flows into your life requires a personal holistic game plan.
Segregating your insurance from your investments is a good idea. It really depends on the purpose of you spending money.
If you have a family and need the life insurance, then this maybe a good purchase. Rarely does a young person have enough cash flow to pay for a variable universal life insurance policy (VUL). There are so many things you need money for in your life, VUL just doesn't make sense.
Life insurance salesman see the world as a nail because the only tool they own is a hammer. VUL does have a niche. Unfortunately, it is sold as the panacea of financial products.
The primary reason it is sold so commonly is because the commission is so large. If you read the paperwork that came with your policy, your cash value is non-existent for many years. That is because the commission can be higher than your first year premium.
I will not condemn VUL. There is a place for it. Unfortunately, it is over sold by many.