No. of Recommendations: 7
[You were asking about VUL.

Here's some info from a former agent.]

This was my post in which you were referring. Let me say that I still hold active insurance licenses in life, accident, health, variable life and variable annuities. I just don't sell the stuff anymore.

You certainly have to separate what goes on in the homes offices versus the real benefits of a product. Life insurance is complicated enough as it is, and VUL policies are just that more complicated. Most people, including the Motley Fool, do not understand the real pros and cons of this product.

While I cannot stand some of the practices that go on in the insurance industry, I cetrtainly do believe that VUL fills a niche in some people's financial portfolio. In my family, we have 4 VUL policies. They work very well for us because we understand their strengths and limitations.

What I hate is seeing rookie agents being unleashed into the streets to sell VUL policies to the neighborhood McDonald's french fry cooker. As I have posted many times, I have a relatively strict criteria for someone who wants this type of policy. I'll post it again, so here goes:

Variable Universal Life Insurance (VUL) offers premium and death benefit flexibility and is quickly becoming the dominant form of life insurance in the marketplace. It is touted by many as some sort of investment panacea. Because of this, I would like to expound on this type of insurance in more detail.

Variable Universal life offers stock market rates of return on the cash accumulation since you can invest the excess premiums (those premium dollars over and above the internal cost of the policy) in mutual fund-like accounts known as separate accounts. However, with these benefits come some caveats. The insured takes on all the investment risk, which minimizes the guarantees within the policy. As well, these policies are typically very expensive to maintain because of the high internal costs. These policies are niche products and have limited applications in most cases. However, they can be an excellent supplement to your financial portfolio if applied correctly. I would only recommend that you consider a Variable Universal Life Policy if you can answer "yes" to most or all of the following questions:

Do I need life insurance or any additional life insurance? The reason this is important is that a variable life policy is insurance first and foremost, not an investment!

Am I healthy? This is important because your health will determine the internal cost of insurance of the policy. If you are a substandard or poor risk, the internal costs will drastically eat away at your cash accumulation. Therefore, you may only want to consider one of these polices if you can get a standard or better rating from the insurance company.

Have I maximized contributions to my tax-favored plans such as my company 401(k) and IRA? This should be your first priority before you consider investing through a variable life policy. Because of the tax deductibility, tax deferral and the dollar-for-dollar matches many companies make on their retirement plans, these vehicles should be considered first. As well, the Roth IRA offers tax-free growth of assets to everyone who qualifies.

Am I going to be making substantial withdrawals from this policy, and, if so, am I willing to wait at least 10 years to do so? This is important because these policies work best when allowed to accumulate cash over a 10+ year time period. The first years of these policies tend to be expensive, and time is needed in order to allow the cash value to gain some momentum.

Am I willing to fund this policy well above the recommended target premium? The target premium is set by the insurance company and will typically cover the internal costs of running the policy while still allowing some excess dollars to be invested. These policies work best when funded well above target premium and close to the upper limits set by Section 7702 of the Tax Code because every premium dollar placed in the policy over and above the internal costs will be invested on a tax-deferred basis.

Am I willing to keep the policy in-force my entire life? This is important because it is the only way you will be able to enjoy the tax benefits of these policies. They must stay in-force during your lifetime, or you may be subject to ordinary income taxes on your gains, loans and withdrawals.

Are you an aggressive investor willing to place the majority of your premium dollars in the equity-based sub-accounts? This is important because the stock market is about the only place an investor has been able to achieve superior returns. Superior returns will mean excess accumulated cash for the insured. If you are only going to invest in the fixed accounts, you would probably be better off in a non-variable whole or universal life policy.

Hope that helps anyone.

Alan McKnight, CFP

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