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Subject:  Re: Pension Maximization Question Date:  10/12/1999  8:56 PM
Author:  JAFO31 Number:  14470 of 102726


<<<<"My financial planner has told me to take the Single Life option (maximum money to me) and invest that $5,000 in a Variable Universal Life (VUL)Policy. He says that if I pay into his policy for about 12 years,
I would not have to pay anymore (policy would be paid
up), and the benefit to my wife (annuitized) should be
more than she would have received (about 30k/year) if I choose the Joint/Survivor option.">>>>

"What I hear is your FP is selling you a product he will make money on and it may not be the best investment for you or your wife.

I would want to know what the cost of the investment (load) is, the cost of the insurance portion, the cost of surrender and time needed before the surrender fee goes away."

I agree.

"I would also like to know the return history of the investment within the VUL. I would like to know if there is any guarantee that after 12 years of $5,000 invested per year that your payout would be $5,000 per year and for how long this stream of $5,000 would continue."

I think that second sentence misses the heart of the question. The issue is not a $5,000 payout after 12 years; it is a $30,000 payout after H dies.

"If I was to invest $5,000 per year, I would select an S&P 500 Index fund. Over the past, an Index fund on average will return about 12% per year and if you invest $5,000/yr, this will grow to $120,000. If your wife then draws 4% per year which is a conservative value, she would receive $4,800 without touching the principle and her draw would grow as the principle grows. If the principle grows at 12%, her 4% draw at the end of the next 12 years would be $12,100 and the principle would be $300,000."

This analysis, IMO, misses the issue of what happens if H dies next year. Wife has $5,000 invested, no pension, and no insurance. Alternative pension choice would have assured W of $30,000 per year.

"I doubt that your FP will be guaranteeing the return."

I agree, and I think that this is a fundamental issue. On the other hand, guaranteeing the W 30k per year would have permanently reduced H's pension while alive, therefore, so long as the insurance cost never exceeds the $5,000 per year increase in H's pension, then H and W are no worse off than if they had elected to guarantee W 30k.

"If he is guaranteeing that your wife would definitely be assured $5,000/year after 12 years of investing $5,000, then this might be a deal that would be worth further evaluation."

I agree, but why this fixation on guaranteeing W 45k per year instead of the 30k per year that is forgone by selecting the higher pension for H?

The other real variable in this equation is how long H and W will each live? If lower pension is selected (guaranteeing W 30k) and W predeceases H, than choice was for nought. If higher pension is elected and H lives long enough to invest 5k, then insurance may have been less valuable than investing. If higher penison is elected and H dies first and quickly (i.e. before investing 5k per year can guarqntee 30k to W), W is SOL.

Just my $0.02. Hope this helps. Regards, JAFO
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