Does anyone have some pros and cons for me to weigh about starting a VUL policy? thankschuck
Run away from anyone who offers you one of these things. Pretty much without exception, you will end up with a combination of an expensive life insurance policy, a mediocre (at best) mutual fund, and a salesperson with a fat commission. Compare what is being offered to you to a combination of term life and equity index mutual funds from Vanguard or TIAA-CREF. Look very closely at the fees and expense ratios involved with a variable life policy.Generally a bad deal.
so what about all the tax benefits this financial planner guy showed me after the VUL matures or does whatever it does, he told me it will come out tax free because i can borrow against my own policy and it creates a wash account - no interest payment, no taxes because it's essentially a loan from yourself. do you know what the flaw of this is?????
chuck79, you asked:<< Does anyone have some pros and cons for me to weigh about starting a VUL policy? >>There are all kinds of pros and cons. But the pros and cons are subject to just how you're trying to use such a policy. So, the simple answer is, IT DEPENDS. It's like trying to answer the question, what's the pros and cons of a hammer? Depends on how you intend to use it, right? Types of life insurance contracts are financial tools to be used towards a set of issues. << so what about all the tax benefits this financial planner guy showed me after the VUL matures or does whatever it does, he told me it will come out tax free because i can borrow against my own policy and it creates a wash account - no interest payment, no taxes because it's essentially a loan from yourself. do you know what the flaw of this is????? >>Most of what was said as you understand it is correct . . . . except the part about “it's essentially a loan from yourself”. It's a collateralized LOAN using the cash value account of your policy. Loan's, of any kind, are not considered income and therefore are not taxable. Interest rate charges are different from policy to policy. There ARE policies that provide “net interest loans” of 0%. That means the policy may charge an interest rate of 8% on the loan . . . but, the amount you've borrowed is moved from your investment account(s) into a fixed account earning 8% interest. Therefore the net cost would be 0% for the loan. Many people in the life insurance industry don't particularly like the “wash loans”. This is because it's very possible that the IRS will make a ruling and consider such a “wash loan” as not a “loan” at all since no interest is really being charged. What many insurance companies are doing in anticipation of such a ruling by the IRS is to offering policies with loans that are very nearly a “wash loan” . . .where the net interest cost is maybe only 25 to 50 basis points (50 basis points = ½%). When using loans from a life insurance policy (where one really doesn't plan on paying anything back until the time of death when outstanding loans plus any accrued interest is then paid from the Total Death Benefit for a Net Death Benefit to the beneficiaries) one needs to be aware that if such a policy lapses with outstanding loans, the IRS will then consider those loans as “early distributions” from the policy. Such early distributions means that the loans lose their “loan” status resulting in a taxes due plus any 10% penalty for early distributions before age 59 ½. Also, because the policy must stay in force and there just be just so much in the cash value account to support the policy, one doesn't have access to 100% of the cash value this way (typically this is not a problem as retirees don't use up all their cash before they die anyway – for various reasons). But you just need to be aware so you can make informed decisions as to how you plan your retirement.VUL are very complex life insurance contracts and are NOT suitable for most people. Whether or not it's suitable for you DEPENDS on much more information about you AND about how you actually plan on using such a contract. These policies are NOT for financial neophytes or those who have little or not experience with investing. They are also not for those who have a low tolerance for risk (either through personal temperament and/or through one's financial situation). These policies are GREAT if used properly by those who they are appropriate for. Note also, these policy work fine as PART of a comprehensive life insurance and investment plan. They DON'T work well and/or are high risk as a primary source of retirement income flow.So, approach with CAUTION . . .not fear. Take your time and ask lots of questions of this “financial planner” about ANYTHING you're not very clear on. These are LONG TERM contracts and getting out early can be costly. You'll want to make a good informed decision that you WILL stick with and see it through to make it work.
Try the Motley Fool discussion on "What are the differences between term life and cash value policies?" at http://leviticus.www.fool.com/insurancecenter/life/qa/05.htmThey point out that there are significant up-front costs, including the commission for the agent/"financial planner."
TTRoberts:chuck79, you asked:<< Does anyone have some pros and cons for me to weigh about starting a VUL policy? >> Ted has given a reasonable response. My other computer contains my detailed references (from prior discussions on the Insurance board), but I will try to summarize:Do you need/want more insurance? If no, why buy VUL insurance?Do you already max out all other tax deferred investment opportunities?Are you out of debt (other than reasonable priced home mortgage)?Do you have an adequate emergency fund?Might you need other insurance? Eg., renter's insurance, disability insurance, etc.Can you overfund the policy substantially?Do you realize that you are making a lifetime commitment (in order to avoid generally adverse tax consequences)?Are you relatively agressive in your investing style? If I undestand correctly VULs tend to wrok better when not invested in MMA or bond fund.Hope this helps. Regards, JAFO
JAFO,Looks like you've been paying attention. Those are an excellent set of issues one should consider when considering how a VUL might fit into their comprehensive planning (for both insurance AND investing).<< If I undestand correctly VULs tend to wrok better when not invested in MMA or bond fund. >>You understand correctly.
TTRoberts:<<<<JAFO,Looks like you've been paying attention. Those are an excellent set of issues one should consider when considering how a VUL might fit into their comprehensive planning (for both insurance AND investing).>>>>Ted, thanks. I try. I also have been hanging aound this board for quite awhile now; if I had learned nothing, that would have made all my time wasted.To the original poster:You may want to take a look at FoolWAM's post #1913 at http://boards.fool.com/Message.asp?id=1040016000465002 to see if you'd be a good candidate or not. Also 5188 at http://boards.fool.com/Message.asp?mid=13889886Regards, JAFO
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