Trying to understand how VUL policy works

[Susan Sullivan]

Can someone tell me how this works? I'm concerned about my son's business partner (son is minority owner) who has a policy which costs $5000 per month. The current total of payments is $765,000 plus for a 3 million dollar death benefit. Doesn't seem like a good deal. I think some money has been taken out but not sure. Is money taken out taxable?

Thank you!

 

[DHK]

Variable Universal Life is a permanent, cash value policy that invests the investment component directly into the stock market through mutual fund sub-accounts.

Assuming a 0% rate of return (unlikely), based on $765,000 / $5,000 monthly payments, the policy would've been in-force for just under 13 years (which is why I believe a 0% return is highly unlikely). Money can be accessed at any time tax-free via policy loans.

A "good deal" is based on what the policy is meant to do. Trading $765,000 for $3 million sounds decent enough. However, if you're assuming that it's a pure investment, and you're not taking insurance costs into account, then you will be thinking that it is a poor deal. A "Key person" policy is a common business practice, as is having a policy for funding a buy/sell agreement.

Suze Orman once told a caller that it was a "horrible investment" without any analysis whatsoever. I dissected this "advice" in this thread here:
https://insurance-forums.com/community/threads/be-wary-of-advice-from-financial-entertainers.92316/

 

[Susan Sullivan]

Thanks so much! I just figured out this is a forum for insurance professionals so I appreciate you answering my question!

 

[DHK]

We do get consumers asking various questions on occasion too. As long as you aren't asking me to analyze the securities holdings in the policy (requires securities registration that I no longer have), we can talk about nearly anything else.

What are your concerns for your son and this policy?

 

[scagnt83]

I think some money has been taken out but not sure. Is money taken out taxable?

This depends on the Ownership of the Policy.

If the Business is the Owner and the Payor, then Loans or Withdrawals are taxable as business income.

If the Business is the Owner, you son can get info from the Insurance Carrier directly. All he has to do is call (and provide proof that he is an officer of the business). Or if he has access to annual statements those will show Withdrawals or Loans.

If the Business is not the Owner, or if it is not the Payor. Then the taxation will vary. But someone always gets taxed when a business is involved! LOL.

---

The policy could be a perfectly fine thing for the business. Lots of businesses use them just to defer earnings. The Cash is taxable if taken out, but it grows Tax-Deferred, and is pretty much the only tax-deferred savings product a business can utilize.

It is very normal to put a Death Benefit on business partners. And it can be normal to use a Cash Value policy. It all just depends on the situation, the purpose, and how its being used.

 

[Robert Barney]

I am just amazed at how positive people can be about a policy they have darn little information about.

I guess the general assumption is that if a life insurance company sells it then it must be OK.

 

[MosesNewmanNAAIP]

It is amazing on how a person can be so confident about something and it ends up causing them to maliciously harm thousands of insurance agents. FYI - N.A.A.I.P. offers term life quoters for Free.

 

[pfg1]

I am just amazed at how positive people can be about a policy they have darn little information about.

I guess the general assumption is that if a life insurance company sells it then it must be OK.

So I read that folks were asking more questions about the policy, saying that it "could" be a good fit, that not enough info has been given to give accurate advice.

Personally, I'm not a huge fan of VUL, BUT that doesn't make it a bad product for the right situation.

Bob you seem to down EVERY permanent policy that is ever brought up on this site. So the opposite can be said of you.... "I'm amazed at how negative people can be about a policy they have darn little information about".

 

[scagnt83]

Im constantly amazed as well.

Amazed that a business owner, who sells Term Life Quote Software, whose only income depends on consumers being sold term insurance. Would go on a public forum and act like they are an actual life insurance expert.

Im especially amazed that they would direct their biased and inaccurate statements towards a consumer who is in need of an experts advice.

Especially when that business owner constantly makes incorrect statements about the product and is constantly corrected by actual licensed experts.

 

[jboussea]

I am just amazed at how positive people can be about a policy they have darn little information about.

I guess the general assumption is that if a life insurance company sells it then it must be OK.

The threadstarter did not buy the policy.. sounds like her son's business partner did. so of course she would not have any idea of the details of the policy.

I do agree that too many people don't understand what they are buying but that's the case for the majority of the stuff people buy these days including Term Insurance.

I know so many people who don't even realize that what they have is Term insurance. Met others who accidental death who thought they had life inssurance.