Great product for children and young adults?

Discussion in 'Life Insurance Forum' started by NHB_MMA, Nov 21, 2006.

  1. NHB_MMA
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    NHB_MMA Guru

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    An agent in my office ran a sample VUL for an 8 year-old child with a monthly target premium around $35. The projections at age 100 had a death benefit of $1M to $1.8M on the illustration. Anyone else doing this market? Seems like an awesome product if it's started early before too much of the monthly premium is sucked into the term component. I haven't got my 6 & 63 yet, so I can't market it, but it looks like a winner.

    Sure beats any WL product and for the price of what term will cost in a mere 20 years down the road.
     
  2. Sam
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    Sam Founder Administrator

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    Getting an 8 year old approved for a policy that size is no walk in the park.
     
  3. NHB_MMA
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    The face amount used was 100K or 150K, I believe. I would think that wouldn't be an issue.

    NYL actually has one VUL that accepts issue age that low that starts with a face amount of $1M, though I have no idea who would buy that as a gift for a kid. I'll try to make sure I don't bump into either Rolls Royce on the way out. :)
     
  4. Guest
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    You asked on another thread whether I would consider VUL on my children. The answer is "yes." Ofcourse you probably are interested in my thoughts as to why I would consider it.

    The way I see VUL, is that it is ideal for:

    1. Someone who has maxed out his IRA or earns too much to contribute.

    2. Anyone seeking to shelter funds from bankruptcy or a law suit judgement.

    3. A high net worth individual who can muster an array of attorneys and advisors to give him their best advice. Probably involves estate planning, i.e., second to die insurance to pay for estate taxes.

    4. Some young couple with two new, fully loaded vehicles on their driveway, great wardrobe, latest flat screen or plasma television in their family room. All of a sudden they have a baby, financial responsibility hits them. They realize they are maxed out on their credit, have no savings, no retirement, no life insurance, and now they have to play catch up if they are going to be responsible parents.

    They can't afford to save, plan for retirement, and provide life insurance for their new baby's security so they need an all-in-one product.

    5. The stock market savvy individual or those with great optimism in the stock market.

    NOTE: If anyone disagrees, please respond. I wish to learn as much about this product as possible.

    The Pros and Cons of the product (as I see them and how it affects my family. So please do not think I am knocking the product, the producer, or the underwriter):

    CONS

    1. In reality it is probably best suited for a high net worth individual. I am "small potatoes" with a joe six pack budget (which is preciselly the reason for my attraction, the opportunity to earn higher returns by taking more risks).

    2. Requires a stock market savvy individual to administer. The child for whom this was bought will eventually get the policy and he may not be that savvy.

    3. A favorably taxed product is taken (investment in the stock market is taxed favoribly as opposed to earned income) and if withdrawn from the policy in cash, taxed at an unfavorable rate. So if an individual held a stock portfolio, sales from the portfolio would be taxed at the capital gains level. Instead, withdrawing funds from the VUL he is taxed at his earned income rate.

    4. There is no guarantee the stock market will always rise. There is no guarantee that when someone wants to cash out, there will not be a severe drop in value of the investments.

    PROS

    1. Tax deferred, sheltered from judgements.

    2. Hedge against inflation. A WL policy builds up cash value which can be dramatic. Unfortunately, the dollars shown in the underwriter's illustrations do not take inflation into account. I know retired people that have told me their new car costs more than their first house. And I am not talking about a luxury car.

    Many products will keep place with inflation. However, the double whammy of taxes and inflation will eat away at principle. I think the CV in this product, if invested in stocks, will outpace inflation.

    CONCLUSION

    I see this product as superior to WL if purchased early in an insured's life as the investment in stocks allows for the CV to beat the combination of inflation and taxes (assuming CV is cashed out as opposed to received as a DB).

    MY INDECISSION

    Right now I am confronted with this very decision. I have to do something for my children. I am torn between VUL and a variable annuity. The VA will result in more of my premium actually being invested because there are fewer fees, but the tradeoff is no life insurance (to speak of, beyond contributions which the VA insures).
     
  5. James
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    James Guru

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    One major draw back of the VUL is the taxation, dividends of the VUL is tax not as income but long and short cap gain rates. This is just one major draw back, I would recommend against the VUL as a good investment. Since you can buy DB a lot cheaper else where I don't see a good reason for the VUL?
     
  6. Guest
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    James,

    1. Sorry, I do not follow you on the Cap. Gains. I thought all withdrawals were taxed at the earned income rate (granted you can deduct your purchases at FIFO, right?).

    2. Can you mention one or two better products as investments for DB. I would sure appreciate ideas. The thing is, I am also considering CV. The way I see it, the way for CV to keep abreast of taxes and inflation, is to be invested, at least partially, in stock.

    Thanks
     
  7. James
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    James Guru

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    Taxation laws changed back in 2003, VUL's are no longer under the old laws plus your dividends from the cash side is tax no FIFO involved that has to do with taking money out of the policy which in most VUL's is really not suggested at all plus premiums should be paid up yearly to increase the cash value side. I found this article which explains why some like them and others are leary at best or basically stop offering the VUL.

    http://www.financial-planning.com/pubs/fp/20050601031.html

    Which ever you like I would highly suggest getting a financial person you trust and ask for some advice, esp. about the taxation issue. I am confident that a good UL or WL will do a better job then the VUL in long term goal planning.
     
  8. Guest
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    James,

    1. Thanks for the article. No doubt about it VUL's are a risky proposition.
    The one thing (that I can see) mitigating the risk is if the insured has a long time frame to weather the inevitable ups and downs in the stock market.

    Thus, for a child, well, if the parent needs to take on the stock market risk in exchange for potentially higer rewards in the CV, it might be worth the gamble.

    2. I will ofcourse look at taxation. To be honest with you, I do not follow what you are saying. Admittedly, I have only read about taxation of variable annuity withdrawals. Everything I have read states that one drawback of the VA is the fact that if you invest in a stock sub-account, you are putting your money in an investment that is favorably taxed (stock) and by virtue of it being in a VA, turning it into something that is taxed at an earned income rate (the annual payments).

    I am working on the assumption if you did a 72(t) on a VUL, it would be the same. Whatever you pulled out would be taxed at your tax rate (less the basis of what was pulled out - - is that what you mean? that the dividends in the VUL are taxed as income? Same in WL right - - dividends are taxable?)

    Thanks again.
     
  9. Guest
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    Guest Guest

    This thread has gone without responses for close to a month, so I don't feel like I am hijacking it. If I am, let me know, and I won't do it again.

    On another thread involving children and life insurance, a respondent stated that life insurance is income replacement and thus not suitable for children (unless it is final expense insurance).

    Well, I would like to know what other options there are for investments for children. Certainly education IRA's, but what else. I can only think of variable annuities or life insurance. Then further down on the list:

    1. Real estate. I would love to find a parcel of land (no money down) for a $100 or so per month payment.

    2. Gold coins. How about buying each child a gold coin a year, say a Krugerand or Maple Leaf. Easy to store, conceal, transport, transfer, great inflation hedge.

    3.???? What are your ideas for a small monthly payment of say $100 per month, which would be great for a child. (Do not like a mutual fund UGTMA as it would count heavilly against any college aid). So any other ideas?

    Thanks.
     
  10. James
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    James Guru

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    I think John's suggestion of participating in a DRIP type of account would be a good idea.
     
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