Can Someone Translate This?

[Guest]

Hello,

I am in the process of selecting a life insurance policy for my children. The research I have been doing landed me here. My goal is to build up as much tax deferred CV for them as possible to give them a head start in life. As an IRA is not an option for them, I see the potential tax deferred growth of CV in a VUL as an alternative.

I read the following in Wikipedia which I do not understand, and was hoping (praying) someone here could decipher:

[edit] Criticisms of Variable Universal Life
Some general Criticisms

High Costs - VUL's tend to be more expensive than other types of insurance, including Whole Life, Term, and Universal Life (in that order). The total cost of insurance in a VUL policy will be greater over its lifetime than a term policy and therefore more profitable to the insurer (see Buy term and invest the difference).

1. What does it mean that VUL's tend to be more expensive? More COI, More M & E? I do not understand. Less of the premiums go to CV?

2. It says that VUL's are more expensive than WL. Term, UL in that order.
Does that mean UL is the cheapest? How so? Why?

Thank you very much.

 

[NHB_MMA]

This could be good info for all I know, but I don't know why a VUL would have a more expensive insurance component than the others. Why would a VUL be more expensive than a UL? Again, this is NOT my area of expertise and I'm just touching the surface on learning about these products, so maybe it's accurate info, but Wikipedia basically lets anyone publish something and is not a great place for unbiased info in general.

The WL will begin accumulating to a larger death benefit almost immediately and will grow steadily, although at a modest rate. The UL and VUL will take a long time till the cash value exceeds the face amount, but in later years the cash value gets to be pretty sizeable. They would seem to be a more logical choice for a very young person when the retirement planning component factors in heavily, I would think.

The bottom line is look at several illustrations and see what the projections are at various ages. Who cares what the product actually is and what the breakdown of it is if it meets your needs? What matters is what actually meets your objectives.

 

[4star]

VUL is a very complex tool. It is more expensive than a whole life and UL because it is a variable product consisting of securities, which makes it more costly for the insurance companies to administer it, therefore their internal charges costs more.

Their internal charges are ongoing and is deducted as you pay your premium. These charges consist of the COI (Cost of Insurance), M & E (Mortality & Expense), funds expense fee (the fee for each funds you select), and any other riders and options you may tack along onto the policy.

So, when you pay a premium in the VUL, the insurance co. will first deduct all the charges from it (including the surrender charges for the first xx yrs depending on which co. it is), and then whatever is left over, they will add the interest earned from your selected funds.

So the idea is to select the appropriate mix of funds to outweigh the internal charges, which will not likely happen until many years down the road as the surrender charge disappears and your account value is accumulating. The better your funds perform, the faster your account value grow (duhhh). Keep in mind, it is a variable product meaning you can also lose money if your funds are not performing well consistently.

It is of course a long-term tool and the minimum premium required are higher than other life products. How long are you planning on saving for your child and for what purpose?

If it is for college, the college savings plan may be more suitable. If its for more long-term (over 20 years), and you have excess money to be able to afford to pay the higher premium, can find a good carrier, and don't mind the risk in exchange for a possible greater return, then the VUL may be a good choice. I am not promoting it, just expressing my opinion. And of course, you should talk to a knowledgable advisor to explore your options for your situation.

 

[4star]

Marcircus,

To better answer your questions, the main difference between VUL and UL are its cost and how your premium is being invested. The VUL always costs more in terms of internal charges; therefore the premium will be higher; however, it has the potential for higher returns for greater cash value but with NO guarantees. The UL costs less; however it's returns are fixed at a low-modest rate and are guaranteed.

Whatever money is left of the premium after all expenses are deducted will go towards an account to grow. In a VUL, it goes towards funds' subaccounts (expect interest returns anywhere from -x to +xx, hence the term variable). In a UL, it goes towards the insurance company's general account. (expect interest returns to be from at least 3% to around 5% these days.)

On your 1st question, you asked "less premium towards CV (cash value)?" That is technically correct because the higher internal charges in the VUL will be deducted from your premium, which leads to less premium going towards your CV; but again, your funds' subaccount could potentially be earning a higher interest than in a UL's general account. I know it sounds repetitive, but its a little hard to grasp.

To say which plan is most suited for you is impossible without knowing your situation. A good way for you to understand it is to find a good, trustworthy agent and actually look at an illustration of all three and learn, then ask yourself: 1.) Which one could I afford comfortably? 2.) Will I be committed to consistently pay the premium for a long time? 3.) Do I understand the policy enough? 4.) Can I endure the risk of a variable plan? 5.) Is this a reputable company? etc...

 

[James]

I think some are thinking that the actual COI of a VUL is higher then that of the UL or WL. As in this, "This could be good info for all I know, but I don't know why a VUL would have a more expensive insurance component than the others." I'm just not sure if the actual COI is more expensive, I suppose one should read their contract with a fine tooth comb to find out, don't deal with VUL's. Yet though the taxation issue is there and it is treated differently then WL or UL becuase of the Capital Gains from the Security end of the VUL.

Outside of that as in all CV policies it wise to pay in a Yearly Pay, esp with the VUL! Then you have the other little problem of keeping up with the VUL and picking the right investment mix which is problematic since this will change on a yearly basis. So outside of higher fee's, greater risk you have the problem of properly managing these funds as in time spent managing your portfolio within the investment side.

 

[4star]

The taxation on the VUL is the same as any other life products. You do not get taxed on the Capital Gains from the funds. It is all tax-deferred the same way as UL and WL.

The COI, I think, is pretty much the same as the UL. The VUL has more and higher internal charges. For example, the VUL has funds' expense since it uses mutual funds, while the UL doens't. The M&E is also higher in the VUL. Though the differences looks small in numbers, it really adds up in the long run, which again, is why the VUL is more costly.

Selecting the mix of funds in the VUL can seem complicating, but a good advisor can make the job much easier. It's important to find a reputable carrier with a VUL that has funds with good performance history and low expenses. Though you need to reallocate the mix from time to time, it's really not that often. People usually reallocate only a few times as they get older and their risk level changes, such as getting close to retirement or nearing an anticipated withdrawel.

 

[Guest]

NHB_MMA Thanks for your info.


4star Thanks.

To answer your question, I am purchasing the policy for my children. When they were born I bought them a 10 pay WL policy and I made the last payment last month.

Now I am inclined to buy a VUL because they are only 10 years old. I believe that I can leverage their youth with the stock market, and if they do not touch the funds because of some personal emergency, in about 50 years, they should have a nice chunk of money.

I want to take the extra risk of VUL for potential larger gains than WL and UL. You see, I am contemplating a $100,000 policy. With WL, you get some nice CV down the road per illustrations BUT inflation will kill you.

The way I see of beating inflation, is to put it into sock.

If I could put it into an IRA for them I would, but they are only 10 years old. To me I am essentially getting them both an IRA and permanent insurance. I see it as forming part of the cornerstone of their financial stability and well being as adults.

James, Thanks.

 

[NHB_MMA]

Any of them would be a nice asset, in spite of inflation, but the VUL I would think would give the greatest gain, given the long period of time we're talking.

VUL is definitely not a short-term tool and it has risks. It is certainly not a basket to put all the eggs in, but given how relatively inexpensive it is to start early in life, I think it provides a pretty good start to life insurance and retirement planning.

James, I am not sure what the tax drawbacks you were talking about in the other thread are. The cash value accumulates tax-deferred. Is there a penalty tax of some sort?

 

[James]

James, I am not sure what the tax drawbacks you were talking about in the other thread are. The cash value accumulates tax-deferred. Is there a penalty tax of some sort?

If you are selling the VUL as an investment you have to understand most people will assume they can take more out of the policy then they put in, correct? Now this is where the VUL really stinks as in any Insurance Contract, that is once you hit the point of basis of the premium you have placed into the contract. Now you can take loans but sooner or later that will catch up to the policy, if you are going to use the loan feature I don't think you'll beat a good UL or WL. Yet though, if the poster wants to really understand the value of any Insurance contract there are places he can send any contract to have it indepently examine by expierence Insurance/Investment Advisors or Counselors to have it graded.

 

[NHB_MMA]

If you are selling the VUL as an investment you have to understand most people will assume they can take more out of the policy then they put in, correct? Now this is where the VUL really stinks as in any Insurance Contract, that is once you hit the point of basis of the premium you have placed into the contract. Now you can take loans but sooner or later that will catch up to the policy, if you are going to use the loan feature I don't think you'll beat a good UL or WL. Yet though, if the poster wants to really understand the value of any Insurance contract there are places he can send any contract to have it indepently examine by expierence Insurance/Investment Advisors or Counselors to have it graded.

I'm not sure I understand what you're saying.

As for loans, I wouldn't really recommend anyone borrow from a VUL or even a UL, as the term component really begins to skyrocket and it puts some REAL RISK into the contract, especially with the VUL that depends on a postive performance to keep growing. I would urge clients that start their policies as children to keep them till their retirement years and would strongly encourage that they not borrow, but cash in if needed. I wasn't factoring loans into the equation. To me, it seems borrowing for a life insurance policy is a last resort, IMO, but I could be offbase about that. When I was comparing the three products, I was just looking at illustrations under the assumption that a person would hold the policy until death or a very old age.