No. of Recommendations: 4

Seelinger, you asked:

<< Now for the kicker - my investment advisor then recommend a Universal Variable Life, (UVL)insurance policy as another retirement vehicle. The company I am currently working for does not match any monies for their 401K and the general concensus is that it is not a very good program. My adviser explained that the UVL provides a tax shelter for my "investment", (i.e. my premium after the cost of the life insurance and any fees are deducted). To put it in my terms, (that is laymen's terms - which when it comes to financial matters are the terms I prefer), the money is invested by the insurance company >>

NO. Like mutual funds, the investments are invested my the money manager of the investment account. Most often, the money manager DOES NOT work for the insurance company. Often, the money manager is the same money manager of the investment account as it's similarly named mutual fund and fund family.

Except for guaranteed investment accounts, these investment accounts are NOT tied at all to the insurance company's general investment account. All the investment risk is that of the policy owner (just like it would be in a mutual fund). This is good in one sense in that the insurance company's creditors can not go after and attach the assets in these investment accounts.

<< and as you near retirement the insurance comapany "loans" you back the investment you made at a low interest rate to be used as income. >>

Actually, the insurance company uses these investment accounts as security to offer policy loans as prescribed within the individual policy itself. You don't have to be near retirement to avail yourself of policy loans. As long as there is enough cash value in the policy, the insurance company will allow policy loans for whatever reason and at any time. They DO NOT “loan you back” anything. This is a collateralized loan which MUST be paid back with interest due (per the policy provisions). The loan will be satisfied upon death from the Death Benefit or you can pay the loan back while you're still alive (you decide on which as it may best benefit your objectives).

<< Because this is a loan - there are no taxes levied against this "income". >>

This is correct. Loans are not considered to be income by the IRS.

<< The "tax shelter" seems to me to only be a "pay the taxes after I am dead and leave whats left to my surviors" anyway. Bottom line is you will pay taxes at some point right? >>

NO. At death, the outstanding loan plus any accrued interest is paid from the Total Death Benefit resulting in a Net Death Benefit that goes to the named beneficiaries. No income taxes will be paid on the loan amount either while your alive or at your death.

HOWEVER, in order for the loan to maintain it's status as a “loan”, the policy must NEVER, ever lapse. If the policy should lapse before your death, the loan would be considered an “early distribution” of the policy's cash value and therefore would be subject to income tax and early distribution tax penalties. This must be clearly understood so that careful management of distributions and loans from the policy give the benefit you are expecting. You don't want to hit a land mind . . . . especially one you don't know about.

<< This is a very sinple explanation but that was the gist. I have read what is said on TMF's website regarding UVL and the warnings they provide, (very complicated, read the fine print, etc.). >>

Yes, these are indeed very complicated life insurance contracts and as such should be approached with caution. They can work very well. But they are not a “fir and forget” (to use a military phrase) type of insurance product. These are NOT suited to those who are financial neophytes. These policies take regular monitoring due to the nature of combining insurance with investments. It's even MORE so when planning to use such a policy for a supplementary retirement income stream.

<< I am in the process of reading the policy but wanted to get some feedback as I do have several questions and concerns, such as:

1. Should the UVL be used as my primary retirment investment?

NO! A VUL (Variable Universal Life) contract can work very well as PART of a comprehensive retirement and investment plan. It's extremely risky to use a VUL as the “primary retirement investment”.

Ask your “professional” advisor to run a Monte Carlo simulation instead of a “fixed rate” returns during the time you take your income from the policy. You should then be able to better see the risks involved . . . especially when using such a policy as the “primary retirement investment”.

<< From the payment schedule it looks like quite a bit of my money for retirement would be going into this fund which, depending on my income, may prohibit me from investments in other areas. >>

Yes, this is a good point. If you can not afford to high over-fund the policy (especially in the early years of the policy) AND invest in other areas, then you need to rethink what is actually being proposed. Perhaps using the policy can still be a good idea . . . but only as PART of your investment plan where you use a much smaller VUL plus more term insurance (assuming you have a use of some life insurance coverage).

<< 2. As I have yet to read the full policy - the money invested and the payments seem to be a very long term commitment. >>

YES! This is a “very long term commitment”!!! This is another reason it's not a good idea to make it a “primary” vehicle for one's retirement income stream.

<< I do not know yet what the ramifications are if I decied to "bail out" early, (say after 10 years), and decide to put my money elsewhere. Like I said, I will read through the policy to see what the consequenses are, but I do not want to put my money into something that I can not get out of if I so desire or that yields no ROI after 10 years due to penalties for not sticking it out. >>

The earlier you get out, the bigger the short comings. Ten years would be way too soon to “bail out” and would likely be on the expensive side. There are alternatives to “bailing out” but those alternatives would be to keep the policy, but maybe under different arrangements that may then better suit you.

Again, this is another reason why it's NOT a good idea for this to be a “primary retirement investment”.

<< 3. I know that my investment advisor does not provide his services for free. I will be meeting with him this week and will ask him exactly what his compenesation is when/if he does sell a policy of this type. Is this appropriate? >>

Yes, you should ask. You should ask as it relates to what you feel is a fair charge for the services YOU expect to receive from this “professional”. If all of this is about “retirement planning” and you have certain expectations, make sure BOTH of you are clear on the issues. Expected services should be put in writing for you so that you can monitor and evaluate whether your getting what you feel you're paying for. If this “professional” objective is to sell you an insurance product and expects a commission, that's fine as along as your getting good advice accordingly . . . as YOU would expect.

<< Obviously, I need to know if there is perhaps a conflict of interest if the "sale" of this type of policy yields him the most money in his pocket compared to other investments they offer. Trust is built over time - he was recommended by a friend but I have only known him for 3 - 4 weeks. >>

Then have a good talk with your friend and see how things have REALLY been going. Let your friend know what is being proposed and see it this was what was done for your “friend”. You friend could be your best source of information about this “professional” and how well he does or doesn't come through with what's being proposed.

<< 4. I feel the yearly amount to be invested is pretty high, (over 10% of my gross income). While I do not have a problem investing that kind of money, I do have a problem investing that much all in one area - the UVL policy. Additionally, I wish to purchase a house in the next year, (this is considered by me to be an investment - I am currently renting), and I need to save up some money for a down payment, (was recently divorced). >>

Only you're advisor has the necessary detail to say what's really best for YOU or not. But it DOES sound like there is quite a stretch in suggesting a VUL as being appropriate for your circumstances. One DOES have to consider priorities in such decisions. If you're really going to try and buy a house in the next year, it doesn't sound like you should be committing yourself to something else that will also stretch your budget on a very long term commitment.

<< 5. My "gut" tells me that this UVL is the wrong move. >>

Given what you've been saying and in the way it's being proposed, I have the same “gut” feeling (and that one's from an expert in the field). A VUL may still work well as PART of your planning. But there's really no way to tell without a detailed analysis. You don't HAVE to make the decision(s) right away. Take your time and make sure the plan you have for yourself is one you can live with and follow through with.

<< I asked a lot of questions, such as would investing in other funds which have the potential of providing a higher yield offset the "tax shelter" of the UVL, (he said no). >>

This is true with comparing comparative taxable investments and depending on just what YOU mean my “yield”. One can generate more spendable income that with a comparable taxable investment. But, there are other factors for consideration, much of which we've touched on above.

<< I also asked what happens if I get laid off and can not make the monthly premiums for six months? He said that once you have put some money into the plan you can make it up later or use some of the returns on your investment to pay the premiums, (yes - I will be reading the policy regarding this as well). >>

Yes, what he said is true. As long as there's enough money in the investment accounts to pay the expenses, fees and cost for insurance, the policy will stay in force. Whether or not the investment accounts have enough money to do this is a factor of just how much is being taken out, how much your put in AND how well the investments you've selected do. Like any investment, there are times when they are not doing well and you need other resources to keep from shrinking the investment(s) further.

<< I have rambled on here but need some feedback. If UVL is not the way to go should I just stick more money into the brokerage account? I was thinking of going to my tax accountant, whom I have had a professional relationship with for the past 5 years, to see if she could put me in touch with someone who could provide a second opinion. >>

Consulting with your tax accountant would probably be a good idea. But when you do it, do it along with this person making the proposal. The tax accountant most likely knows very little, if anything, about a VUL and how they might or might not work. But this “professional” making the recommendations should have NOT reservations on meeting with your tax accountant and should be able to easily explain the proposal to the account so that account can render a good professional opinion.

<< If I was about to have a life threatening surgery I would certainly get a second opinion. As my retirement will be my life some day why not do so for this? >>

Given that this “professional” is not someone you know very well, yet . . . . it would seem a good idea to get a good second opinion or a second source of information for such a decision on such a LONG TERM commitment. As I said before, this is not something you have to RUSH into, nor should you feel rushed. You need to feel comfortable and confident the you can meet BOTH your short term AND long term objectives. Just keep in mind that there's more than one way to skin a cat. ;-)

<< Can anyone provide some guidance!?!? >>

I hope this has been helpful.
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