No. of Recommendations: 1

That was probably one of the best thought out posts I've ever seen from a non-professional on VUL. Congratulations on learning and understanding so much about a product that is entirely oversold and even less understood by those who sell it.

Don't get me wrong though. I do think that this product has its place in one's portfolio if set up properly. I have prurchased 2 VUL policies in the last 2 years, one on myself and one on my wife. They are small policies relative to the total amount of life insurance I have in-force on my life. The vast majority of my insurance is level term.

Again, here is my criteria for VUL suitability:

1. Do you need life insurance? If you don't this can be a very expensive way to save on a tax-deferred basis. Remember, VUL is first and foremost insurance, not an investment vehicle. And with insurance comes costs.
2. Are you in good health? The reason for this is that the internal cost of the policy become very prohibitive if you get a standard or rated policy. These costs will easily eat up the tax savings. If you can good a non-smoker or preferred rating, the internal costs will be less which will make you investment dollars more efficient.
3. Are you willing to keep the policy in-force your entire life? If not, then you will never be able to enjoy the tax benefits this type of policy gives you. Once the policy is lapsed or surrendered, taxes are due on any borrowed amount. And it is not taxed at capital gains; it is taxed at ordinary income tax rates which are going to be higher.
4. Are you willing to overfund the policy? This means not simply putting the minimum or target level premium but the maximum allowed by law. These things only work well when they are overfunded.
5. Are you willing to invest aggressively in the equity based sub-accounts? If not, you are wasting your time, and you might as well be in another vehicle. You will need the returns only found in equities to overcome the costs of this policy.
6. Have you maxed out you 401(k), IRA's etc? If not, you should do that first. This is especially true if you qualify for a Roth IRA or if your 401(k) matches.
7. If you are planning to withdraw money from the policy, are you willing to wait 10 years or so? Again, these policies take a lot of time to build up momentum. Once they do, they are very good. If you are planning on taking money out early in the policy, forget it.

One misconception is that these policies are totally tax free at death. Wrong! Sure the death benefit is tax free, but the death benefit will be included in your gross estate and used to calculate your estate taxes. So they will not necessarily escape estate taxes.

If you are going to buy one of these policies, go to Ameritas and buy their no-load/low load product.

Best wishes!

Alan McKnight, CFP
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