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Intercst writes:

<<Perhaps you can comment on FoolWAM's post below. I have two questions.

(1)FoolWAM says, "Have your planner run illustrations at 10%-11% gross return, not net, and use that as your guide." Question: Would it make more sense to calculate returns "net" of the expenses of the VUL contract and use that as a camparison to alternative investments?

(2)FoolWAM says "That comparison is irrelevant because taxes will never be due on VUL withdrawals and loans if done properly." Question: This sounds too good to be true. What are the tax consequences if withdrawals and loans are done "improperly?" Also, is it possible/likely that a big drop in the asset value of the VUL subaccounts, or an increase in mortality expenses could force the policyholder into an adverse tax situation? It there a chance that the policyholder would have to pay increased premiums, or reduce the balance of an outstanding loan against the VUL policy to avoid these tax consequences?>>

This is an interesting thread. I liked the posts you made after this one along with those from everyone else to include FoolWAM and Peppermint Patty. I think Alan McKnight is correct in his philosophy, and I would differ only in terms of emphasis. He said:

<< It sounds like you are a good candidate for a VUL. Let me outline the criteria I use for deciding whether someone qualifies. Do you need life insurance or
additional life insurance; are you in good health; are you willing to overfund the policy well over target premium; are you willing to place all your premium dollars in the equity subaccounts; are you willing to wait at least 10 years to make withdrawals of cash, are you willing to keep the policy in force your entire life, and have you already maximum funded your 401(k) and IRA's? If you answered yes to all or most of these questions, you are probably a good candidate.>>

I believe most strongly that you buy life insurance first and foremost because you need it. IMHO it should never be purchased as a primary investment. Alan seemed to me to gloss over that in his initial post. But he certainly corrected it later when he said, "…Insurance is certainly a viable tool in estate planning. I don't think that any financial advisor worth his or her salt would disagree with that. Insurance can be an alternate investment vehicle if set up properly. I would certainly never offer it to a client as a primary investment vehicle." (Emphasis added.) I also agree that insurance plays a vital role in estate planning for high net worth individuals. For those folks, VUL seems appropriate. For most others, though, I don't think it is.

Where I would disagree (and it's minor) is the comment that VUL seemed appropriate for the original poster. Quite honestly, I see nothing in the original post save maxed-out 401ks and IRAs to indicate that for sure. I also believe the tax deferral on VUL gains ain't everything nor is the ability to withdraw your basis "tax free" at a later time. By keeping those withdrawals under the policy basis, you can do so. Touch the earnings, and there's ordinary income tax to pay. Don't touch the earnings, and your kids will be able to remember you fondly. While those features are definitely attractive and not to be ignored, who says I can't do better in a taxable alternative? And that includes leaving the kids happy. Potential estate taxes can be offset with term insurance in a trust. In the VUL I get a choice of mutual fund-like sub-accounts with their commensurate returns. In a taxable account I get the world. However, that's just my natural bias regarding fund investing coming through.

In short, I think VUL, like an annuity, has its place and usefulness in the financial life of some. I just don't think either product is a good choice for the many. The articles you discovered pointed out one reason, and Alan pointed out some others in his initial post (need, health, time and continuation for a lifetime). To me, those caveats make them an appropriate product for a distinct minority. Even then, I would certainly want everything else exhausted first.

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