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Author: rossdm Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75378  
Subject: 401K funding vs. variable life Date: 1/8/2000 5:09 PM
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Hey fools, a new fool here. I have reviewed the previous threads regarding funding a 401K vs. a variable life policy and I think I know the answer to my question, but I want to be sure. Here's my situaution:

I am 38, my wife is 33. We are both contributing to our 401Ks at 6% so that we get the employer match (50% up to 6%). We are finally able to start increasing our retirement savings. A former colleague who is now a CFP with Axa/Equitable is pushing their variable life policy instead of more 401k investment. I should also mention the we are very underinsured. Our incomes have increases a good bit lately and we just had a baby, and we never worried much about insurance before. We get 2x annual salary from employer, but I would like to add about 500k on each of us.

After reading up on things here and other places, I am thinking we need to concentrate on the 401k until we max out our ability to contribute, even though we get no more employer contribution dollars. And that we should just purchase term for our insurance needs. (BTW, we are at the income limit for a Roth IRA so we can't do that).

The Axa guys are stressing the tax-free distribution of their variable life after we retire. But my thinking is this: if I can contribute BEFORE TAX dollars to my 401k instead of AFTER TAX dollars to a variable life policy, wouldn't it grow MUCH faster so that by the time I need to start withdrawing the money, the much greater accumulation would MORE than make up for the fact that I must pay ordinary income tax on it? I mean, assuming that I am in a 28% tax situation, if I have $100 to invest monthly in my 401k, that means I would have $72 to invest in the variable life policy. Wouldn't my 401k grow so much faster that I would be better off doing that and then paying taxes on it when I take it out?

In other words, is it ALWAYS better to put more money into my 401k (if I can) that take out one of these variable life policies (assuming the rate of return of each is comparable)? It sounds like a variable life policy might be a good option IF and WHEN we exhaust our other tax-free options and we still have more we can invest. Am I right in thinking this?

Sorry for my very basic question but I just don't want to make a mistake that could end up costing my tens of thousands of dollars down the road. Thanks,

Dave in sunny Florida
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Author: JDWinNOLA One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17543 of 75378
Subject: Re: 401K funding vs. variable life Date: 1/8/2000 5:19 PM
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I think that the only people who ever recommend Variable Life Policies are Insurance SALESMEN. They get a big commission. When you die, your heirs have to pay taxes on the policy as if it were ordinary income. The salesman never tells you that. Stock they get to inherite at the stepped up basis.

Stocks are virtually always a better investment. Go with the 401K in an index fund.

Get rid of your financial planner. He is looking out for himself, not you. Run don't walk.

Jim

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Author: martem Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17548 of 75378
Subject: Re: 401K funding vs. variable life Date: 1/8/2000 9:00 PM
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I agree, max out on the 401k and buy term. But I belive you are mistaking the taxation of life ins. death benefits. I believe the death benefit is income tax free. The death benefit would be included in the total estate for estate taxes, if the insured is also the owner of the policy. Matt

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Author: rjm1 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17550 of 75378
Subject: Re: 401K funding vs. variable life Date: 1/8/2000 10:14 PM
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Hey fools, a new fool here. I have reviewed the previous threads regarding funding a 401K vs. a variable life policy
and I think I know the answer to my question, but I want to be sure. Here's my situaution:

I am 38, my wife is 33. We are both contributing to our 401Ks at 6% so that we get the employer match (50% up to
6%). We are finally able to start increasing our retirement savings. A former colleague who is now a CFP with
Axa/Equitable is pushing their variable life policy instead of more 401k investment. I should also mention the we are
very underinsured. Our incomes have increases a good bit lately and we just had a baby, and we never worried much
about insurance before. We get 2x annual salary from employer, but I would like to add about 500k on each of us.

After reading up on things here and other places, I am thinking we need to concentrate on the 401k until we max out
our ability to contribute, even though we get no more employer contribution dollars. And that we should just purchase
term for our insurance needs. (BTW, we are at the income limit for a Roth IRA so we can't do that).

The Axa guys are stressing the tax-free distribution of their variable life after we retire. But my thinking is this: if I can
contribute BEFORE TAX dollars to my 401k instead of AFTER TAX dollars to a variable life policy, wouldn't it grow
MUCH faster so that by the time I need to start withdrawing the money, the much greater accumulation would MORE
than make up for the fact that I must pay ordinary income tax on it? I mean, assuming that I am in a 28% tax situation, if
I have $100 to invest monthly in my 401k, that means I would have $72 to invest in the variable life policy. Wouldn't
my 401k grow so much faster that I would be better off doing that and then paying taxes on it when I take it out?

In other words, is it ALWAYS better to put more money into my 401k (if I can) that take out one of these variable life
policies (assuming the rate of return of each is comparable)? It sounds like a variable life policy might be a good option
IF and WHEN we exhaust our other tax-free options and we still have more we can invest. Am I right in thinking this?

Sorry for my very basic question but I just don't want to make a mistake that could end up costing my tens of
thousands of dollars down the road. Thanks,



If you qulaify put cash in a ROTH after you get the full company 401k match. Once ROTH maxed out go back to 401k and max out.

Insurance should be term. Insurance is to provide cash for your dependents if you die, not for investments if you live. Keep investing and insurance seperate. Both will do better.

Depending on the potential size of your estate you might want to look at an insurance trust to keep the insurance out of yours and your spouces estates.

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Author: FoolWAM One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17562 of 75378
Subject: Re: 401K funding vs. variable life Date: 1/9/2000 8:19 AM
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Dave:

You've got the idea! How could your insurance salesman tell you in good faith to fund a VUL when you are getting a free 50% return on your 401(k) contribuitons? The tax free withdrawals of the VUL are a nice element but at what costs? You are right to only consider the VUL after you have at least contributed to your 401(k) at a matching level and maxed your IRA's. Then and only then should the VUL be considered as an investment tool, and it should be overfunded then. Your AXA agent is a fool. Besides there are better policies than Equitable's if you ever decide to go that route. Does he only represent one company?

By the way, I think it was Jim that said your death benefit on a VUL is income taxed to your heirs. WRONG! They will receive the basic policy value less any previous withdrawals income tax free. However, if you own the policy it will be included in your gross estate for estate tax purposes, but so will everything else you own. I think Jim was confusing Variable Life with Variable Annuities. They are two totally different animals.

Good luck!

Alan McKnight, CFP

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Author: rossdm Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17572 of 75378
Subject: Re: 401K funding vs. variable life Date: 1/9/2000 11:22 AM
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Alan,
My wife and I are both contributing to our 401k at 6%, which is all our employer will match. Also, our AGI is right at the Roth limit, so that isn't an option for us. Do you think it is better to contribute more to our 401k, even though we wont get any more employer matching dollars, or start into a VUL policy? What I'm hearing is to TOTALLY max out the 401ks since they are pre-tax contributions and tax deferred accumulation (even though they are taxable on distribution) before going to an after-tax contribution vehicle. Do you agree?

Dave

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Author: FoolWAM One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17583 of 75378
Subject: Re: 401K funding vs. variable life Date: 1/9/2000 2:33 PM
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First of all, make sure you have figured how much life insurance you really need to cover your family in the event of yours and your wife's death.

IMHO, most people should use level term insurance to cover their survivor needs assuming that the needs are to the most extent temporary, but you are heading into the realm of possibly qualifying for a VUL policy.

Let me tell you what I decided to do in my own situation. I have a wife who is a stay at home mom. We have a 5 month old and a 3 year old. I have about $1.25 Million in insurance on myself and about $250K on my wife. $1 Million of my total is in level term insurance that is convertible to permanent if need be. The other $250K is in Variable Universal Life Insurance. This policy is being used not only as life insurance but as a tax-deferred wealth accumulator. I too will probably not qualify for the Roth IRA many years, so I maximum fund my SIMPLE, get the employer match then dump the remainder in the VUL policies. These policies do work well when you buy small face values and over fund the daylights out of them. I can easily put about $10K per year in mine and my wife's policies without incurring any punitive tax consequences.

It's hard for me to tell you exactly what to do, but I would have a tendency to put you maximum into your 401(k) plan. The contributions reduce your current tax burden approximately by your marginal income tax bracket, and the money does grow tax-deferred. Then if you have enough to properly set up and fund a VUL, I would consider it. Term is so inexpensive now, and you can get great coverage from A rated companies so make sure you don't buy from a captive agent. Your agent should be able to shop the market through Compulife and get you some very competitive rates.

Remember, a VUL policy is not only a long-term commitment but a life long commitment. Many people forget this fact and get screwed. The tax goodies are only good as long as the policy stays in-force your ENTIRE lifetime!

Good Luck!

Alan McKnight, CFP


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Author: ZZFly One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17603 of 75378
Subject: Re: 401K funding vs. variable life Date: 1/10/2000 11:12 AM
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The decission to max out the 401(k) is a good idea. When considering the issue of life insurance one should first determine the amount needed. This is expecially the case if you have small children or dependents who rely on your income.

After you determine the amount of insurance you then may wish to determine the length of time you will need the coverage. If it is simply income portection - then you may take the youngest child's age and project forward through college.

If you have a high income or income potential and anticipate building an estate of any size you may have a second need for life insurance, estate tax funding.

If you determine that you have a long term need for live insurnace then term insurance may not be your most economical alternative.

One other issue not discussed thus far is a risk management tool provided by a cash value policy. If one practices the buy term and invest the difference and also owns disability insurance they often feel very good about their situation.

However, if the individual were to become disabled yet live continue to live into retirement the buy term and invest the difference strategy would be at risk. There would no longer be an income sufficent to invest.

Whole life insurance provides a waiver of premium option which would pay the insurance as well as the investment portion of the premium in the event the insured is disabled. Thus, the individual in the earlier example would have a cash value from which to draw on during his/her retirement.

Inconclusion, the individual should purchase the correct amount of insurance on the most economical basis given their time horrizon and utilize the most efficent savings tool available. At the same time their is a place for cash value insurance for certain situations and to manage specific risk.

I hope this helps

Don

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