Why Keep A VUL Whose CV is More Than The Original Coverage.

[Guest]

Hello,

I finally got my children VUL's.

Something that occurred to me. When the CV exceeds th db why would I want to keep the policy. Let me explain:

As you all know the VUL premium has several deductions. This one has the following deductions:

1. 5% of the premiums paid.
2. An M & E monthly charge.
3. A COI monthly charge.
4. An $8.00 monthly admininstrative fee.

As I see it, when the CV in this policy approaches the policy face amount I would be better off doing a 1035 transfer for them into a variable annuity. By doing that, I would be saving alot of the charges.

Does this make sense to you folks? Wouldn't a variable annuity provide basically the same benefits (again, once the CV approaches the amount of insurance):

1. Access to cash.
2. Can be used as collateral.
3. Some protection from creditors and judgements.
4. Tax deffered.
5. Can add funds to it anytime you want.
6. Can be used if income is too high for an IRA or if 401(k) has been maxed out.

Thank you.

 

[NHB_MMA]

Interesting thought. I'm curious to see how those with more expertise view this idea.

One drawback I can think of offhand is you would lose the tax-free death benefit. I think one appealing feature of such a VUL is, suppose your children are in good financial shape late in life, they could opt to not cash it out at all and the entire thing would pass tax-free, taking care of their own children or grandchildren. Of course, that is just one aspect of several to consider.

 

[Guest]

Thanks NHB_MMA,

When my children were born, I bought them 10 pay participating permanent life policies. Well, those are now paid off.

These policies are really for them to give them the foundation for a solid future. Even when I bought these things, I did it because I figured at age ten, they would get more of a bang for their dollar than traditional participating whole life. I was going to tell them (and write it down for them too) when they were older to do a 1035 transfer into a variable annuity or just freeze plicy and do a 72(t) withdrawal when they got real old and the COI skyrocketed. Well, that got me to thinking, what is the point of having a VUL once the CV approaches the amount of the insurance.

As to passing the proceeds on to beneficiaries tax free, I figure that we are not talking dollar amounts that would be subject to estate tax. I also relize though that the funds could get passed on without probate if life insurance disbursements.

Do people really keep VUL's till death?

Thanks.

 

[4star]

maricircus,

Did you buy the VUL with option 1 (level) or option 2 (increasing) DB? I assume you got the option 1 since you asked "what if the CV approach the DB?"

The idea of 1035 exchange into a VA in the later years when CV has accumulated is not a bad idea. Like you stated, their are certain advantages such as saving on the deductions, no more increasing COI charges, etc., but there are other things to consider such as:

-new surrender charges in the VA for the first 7-10 yrs

-no tax-free DB to your child's beneficiary; BUT, there are some VA's have a rider that helps beneficiaries pay for some or most of the taxes from the DB.

-VUL or life insurance in general, you can withdraw anytime and as much as you need as long as you have sufficient CV to support it and understand the consequences; whereas, in a VA, there will be restrictions on when and how much you can withdraw before the age of 59 1/2.
The owner will incur 10% penalty if he/she withdraws before that age unless under certain hardships such as death, disablility, first-time home purchase, paying medical expenses exceeding 7.5% of owner's annual income, certain college expenses, to pay for health insurance premiums for up to one year if owner becomes unemployed. Also, VA's will only allow you to withdraw freely a certain % annually regardless of any of the hardship stated above without getting the 10% penalty. Of course, the VA is a retirement tool, thats why there are more restrictions on early withdrawels.

Just wanted to toss up a few things to think about when making that move. There are so many different routes you can take but it all boils down to what your child's situation is like down the road and what his/her goals will be. Will their priority be leaning more towards a DB, or will it be more for retirement savings needs? Either ways, you're giving them a great start and they are lucky to have you as a father. Your logic is on the right track, but life is unsure. Who knows how things are going to be in the next 20-40 yrs?

 

[Sam]

You forgot about the most important part of why you would buy the policy, if you don't need the death benefit. You can take "loans" out of the policy on a tax free basis, and you can continue to do so as long as the policy remains in force. That is the real "retirement benefit"
If you roll it over to an annuity, then only the percentage of cash that was premium dollars, will be tax free, but any interest, will be taxed. Now when yu roll it over, but when you withdrawl it as income. If you keep it in the UL, then you won't have to pay taxes on the "income"

 

[Guest]

4star

Thank you for the kind words.

True, we don't know what the future will bring. That is why I like the idea of a VUL. To me, it is like a financial Swiss Army knife. My first choice was an IRA, but that is out of the question. As a substitute, I thought of starting a variable annuity. But, the flexibility of a VUL can't be beat.

I have twins. What I intend to do when they become adults is to give them each ownership of a policy, the insured being their sibling. Does this make sense financially? I figure that Mom and Dad are there for them now, but when we are gone, they will only have each other. So if one of them were gone, there would be a very real loss (beside the emotional loss). So A would have the policy on B's life, and B would have the policy on A's life. Does that sound reasonable?

Melmunch3

Thank you for the direct answer; I appreciate that. For one to avail themselves of the "tax free" loans though, I feel one must be pretty astute with finance, investing, and tax law and lucky with the stock market not having any sudden loss. I state this not to be argumentative, just to see if I can elicit further comment from you. We are now talking about 10 year old children and who knows what their acumen will be in these matters as adults. One can really jam oneself up if they take too many loans out. I can see taking one emergency loan out, but that is about it.

I was thinking of writing them instructions (as I may not be around in 20 or 30 years) as to what their options were and leaving it with their policy.

4star and Melmunch3, thank you both very much for your comments, I appreciate them greatly.

 

[James]

Haven't we already come to agree that a VUL is a high maintenence vehicle? If the children can not handle loans withdrawals from the VUL then how would one reasonably think they can handle the maintenence of a VUL? I'm not saying they won't be able it would seem as though that is one of your concerns.

We are now talking about 10 year old children and who knows what their acumen will be in these matters as adults.

 

[4star]

marcircus,

As I understand with your post, each twin is the beneficiary of the other's policy, correct? If so, you may want to consider changing you to be the primary beneficiary until your children become 18. The reason being that, just in case worst happens and one of them passes away before they reach 18, you will recieve the DB without delay. If your surviving child is primary beneficiary and is under 18 at the time of death, the insurance company may have to place the DB in a trust until he/she becomes 18. Just a worst case scenario.

Along with writing instructions for them for the future, you should also make sure they understand to find a good advisor when you're not around anymore to help them make decisions. A VUL is a policy that especially deserves advising because of its complex nature.

And like James said, VUL is a high maitenance vehicle, well at least compared to nonvariable products because of its variable component. Your children may or may not be able to handle the premium when you pass it to them whether it is when they become 18 or 38. If they can afford it and understand it enough to take it over, then great; but if they can't, then you may have to 1.)continue paying for them until they're able to or 2.)transfer into a VA and make smaller payments. or 3.)along with an advisor's suggestion and illustrations, lower the premium to an amount that will not be too volatile to the policies or worst case scenario 4) cash it out and invest the money elsewhere along with an advisor's evaluation.
From your posts, it seems like you are planning to pay for awhile.

You asked does it makes sense financially? Well, the answer to that is subjective. For one, they each do not have any financial obligations towards each other, well at least not yet. But why did you start up the plan for them in the first place? People buy life insurance for two reasons: Either because of a financial obligation for business reasons, loans, etc. OR just out of love because they just want their loved ones to be secure when they're gone. And I'm sure you bought it because of the latter reason because you want the most for them and you believe you can maintain the plan. So, does it make sense financially? Not at the moment, but we are looking towards the long run when CV is built up and the insurance protection is there.

 

[James]

Plus who will be the policy owner? Will each sibling be the owner of the other policies? If so I can see disaster in that!

 

[Guest]

4star:

Thank you for your very thoughtfull and reasoned reply. There are many fortunate people out there I am sure, to have you as their agent/advisor/counselor.

My question to you was poorely worded. I realize you cannot give advice as to whether it makes sense, I thought perhaps while you could not "bless" it, there might be some rule of thumb or some other consideration I had not thought of that you might bring up to say that it would be ill advised based on xyz.

What I contemplate, is that, lets say Joe owns the policy on Bill and Joe is also the beneficiary. Bill owns the policy on Joe and Bill is also the beneficiary. My logic: When Mom and Dad are gone, they only have each other. If one of them were gone, (in addition to Mom and Dad being gone), there would be a very real loss economically (in addition to the emotional). I figure that as siblings, they can always borrow money from each other, be a co-signor, be a room-mate in an apartment, borrow/use their car if financial harship hit. Thus, in fact, there is an insurable interest.

So, while you may not say that is a great idea, you might say "wait a minute, you did not think of ..."

Thanks so very much 4star.

James:

1. I sure as heck would appreciate you to elaborate as to why that would be a disaster in the making.

2. So you think they should own the policy on their own life? Why?

Memunch3:

I am intrigued by your response of using a VUL as an ersatz annuity.

Are you familiar with studies on SWR (safe withdrawal rates) in retirement from investments so as to sustain a stream of income? There is a whole body of study on this. Likening SWR to the VUL CV withdrawal rate through loans, is there some key word or phrase I can use on Google to do research on using a VUL as an annuity or for consistent, periodic, "tax free" withdrawals? I mean, is there also a whole body of study on this? Or does one just wing it based on amount of CV, stock market performance, age?

As I see it, in such an endeavor, one should expect their investments in the sub-accounts to at least earn more than the interest the carrier is charging for the loan plus the extra COI.
Additonally, one should have funds to pay for any increase in premium if there is a stock market crash. Am I thinking about this correctly? It never dawned on me one could use a VUL as a do it yourself annuity.

Any input on this would be great.

Thanks to all.