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Author: ortman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 17953  
Subject: Re: My God.... another VUL inquiry? Date: 8/30/2000 11:19 PM
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Pardon the late reply... I just returned to read any replies that might have appeared.

Bold = MikeMatheson, Italic = dbfair

The conclusion? Well, my opinion is that you should forget about mathematical comparisons between Investing and Insurance.

Well, I don't think that's a good idea (bet you didn't see that one coming, huh? :-)).

I would also greatly disagree with your statment.

The investment account attached to the VUL is one more compelling reasons to purchase a policy. I certainly think it's prudent to compare similar investments both inside and outside of the VUL, in an attempt to quantify the benefit that can be added by such a policy.

Without a crystal ball and with only Magic Hindsight Glasses(TM) to guide you, it is almost impossible to project anything realistic for either side.

I agree that it certainly isn't prudent to count on having earned an average rate of return of 11.08% (or whatever your favorite long-term average return is) at some specific future time. In fact, there are some excellent (mathematical) articles which show how wildly a VUL cash balance can fluctuate with historical variations in year-to-year returns, even with overall average returns near the usual 10%-11% number.

I was not attempting to draw a realistic picture of financial results - either with or without a VUL. However, you can still fairly predict the performance of VUL and lone mutual funds during similar circumstances - thereby creating an understanding of what sort of conditions must prevail for such a policy to prove rewarding.

I make no secret of the fact that I want my kid to very wealthy. This WILL happen because I intend to have more money at retirement than I could ever spend (my wife will tell you that's a tall order because I happen to be a spender par excellence!) and my Life Insurance is in place (1) In case I don't make it that far and (2) To pay the taxes in case I do hit some advanced age before death.

Then it seems to me that you're an excellent candidate for a VUL policy :-). I think a VUL policy stands its best chance of beating term + investing when it's your intention to use it to maximize the wealth you can transfer to your heirs when you die. Tax deferred investing becomes tax free investing, and that gives the returns a big boost. If, on the other hand, your family needs (or the family you expect to have will need) insurance in case you die early (i.e., to replace money you would have otherwise earned), and you are looking for the best investment return for money YOU want the flexibility to use in YOUR lifetime, a VUL won't outperform buying term and investing in an index fund. Unless you're relying on superior mutual fund picking...

Mike, this is where you and I differ. I don't want to give my kids a dime. I'll certainly help them obtain a state where they can provide for themselves, but I'm not looking to be a winning lottery ticket on their behalf. I work hard for my money, and I intend to enjoy as much of it as possible. Given that, I would feel as if I failed if I left behind a large sum of money.

My primary goal in investing is to enable a comfortable retirement at the earliest age possible. That's it.

I could see myself needing life insurance - but I don't see a full time need for it. Obviously, I don't need it now. My girlfriend (we'll assume she'll be promoted to wife) is going to law school - and it is expected that we will both earn respectable incomes. Really, the only need a see might be $100k - $200k to provide a recovery period if one of us kicks the bucket. It's really hard to tell.

I certainly don't see a full time need. We'll be living well below our means, will have a large amount of savings, etc. I could see having a policy during the early years of child bearing.. but beyond that?

For the record, ortman, your reasoning seems sound to me. I'm also in a situation where I might benefit from a low-load VUL policy some time in the future, with the intention of using it primarily to transfer wealth to my heirs. I'm also comfortable risking future insurability, so I'll put off the decision until my circumstances are clearer. If you decide future insurability is more of an issue than you thought, I think both libc and MikeMatheson have pointed to a good alternative - renewable and (if you want the option for “permanent” insurance) convertible term insurance for now.

I really didn't see future insurability as being an issue - particularly at my age. If it turns out to be an issue, then I'll most likely have bigger problems to worry about. =]

I sent an e-mail to my financial advisor, telling him that I no longer had an interest in the VUL policy. I outlined why I was not interested, and recieve the following reply (I'm paraphrasing to an extent.):

1. While it is true that your life insurance needs are relatively small at this time... those needs are bound to grow in the future... such as when you buy a house or have a family. To purchase life insurance while you are young and healthy is always a good decision. You are able to lock in the cost of insurance at the lowest possible rate for the rest of your life ....... There is no guarantee that your health will remain as it is today.

As Mike and libc stated earlier, there are ways to work around this issue if I'm concerned with it. Currently, I am not concerned with future insurability. Should I be?

2. It is true that you have term insurance .... through your employer. However, that insurance is probably not portable and may not go
with you should leave.......


This is pretty close to item number 1. I don't need the insurance I currently have... should I be concerned about losing it when I leave? Should I be concerned with ALWAYS having a life insurance policy?

3. A VUL enables you to invest into excellent funds on a tax-deferred basis. It is true that you can invest in tax efficient funds outside of a VUL... but tax efficient cannot out-perform tax deferred. Also, a VUL offers liquidity without IRS penalty... and even if you borrow out of a VUL contract,
the effective interest rate is substantially lower than your capital gains tax rate that you may pay upon the sale of tax efficient funds.


The tax deferrment is a big plus - and I played with the math for a little while. At first, I used very tax efficient funds both inside and outside the VUL - and found that lone mutual fund to be favorable (as I was investing 100% of my funds). In this scenario, I had no insurance. I have a hard time placing value on an item that I don't CURRENTLY need. What if I need it later? Who knows?

Obviously, comparing some more aggressive funds showed the VUL to yield quite an advanatage due to the tax deferrment.

4. In your email you mentioned the possibility that the government may change the structure of a life insurance contract and remove the loan option as a way to bring money out of a policy. In this business we call that "legislative risk." ... none of us can predict what the government may or may not do... all we can do is operate within the rules and guidelines we have presently.

5. With your income level and tax status... the ways to create future tax-advantaged income are limited.

He does have a point here.

I still find that myself leaning towards the "VUL is not for me" camp. However, I am not positively sure. Obviously, I'm the only person that can answer that. I'm tyring to give the idea honest consideration. My financial advisor seems on the up and up, and I don't suspect he would attempt to sell my something I truly didn't need. But it is possible that we simply have differing opinions. Either way, I want to make sure that whatever decision I make is well grounded.

The policy he recommended was a $200k VUL. With complete overfunding, the premium would be around $4,800/year. The policy would not represent a financial burden, if that matters.

Given that I'm leaning towards a "no", can anyone say "I personally think you're doing the wrong thing?"

I apologize for the long post.... I just realized how long it had gotten. I commend you for reaching this point on the page.

Thanks,
-Ortman
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