As an Insurance & Financial Services Agent, 99% of the population (even licensed reps) do not completely understand how some of these products work. Like David from NY, I also read articles every day and I rarely come across an article that really sticks out to me.
Life Insurance is not an investment product. There are other products available if you are looking to invest your money.

It is also very important to have a knowledgeable Representative who WILL do what is best for the client. If the Rep is so worried about making a big commission and will sell you the policy that makes him the most money, chances are the Rep is not very successful and that commission will ‘make his month.’ These Reps usually don’t make it in the business.

Take these columns or “words of advice from an expert” with a grain of salt.

I firmly believe that 99% of the permanent insurance sold in the market place today is complete garbage. The excessive fees/sales loads really dilute the value of the contract.

There are about 1,000 life insurance companies out there. And really there’s only about 10 of them that I would ever consider buying from. Recognize that 97% of the agents out there really don’t even understand what they are selling. Most of them don’t own what they’re trying to sell you! Ask your agent to show you his own personal policies.

FYI: A few insurance companies offer traditional permanent insurance policies where the agent has the ability to significantly reduce/adjust the commissions (as low as 3% in certain cases). What this means is that you will have a significantly higher cash value right away. The more of your dollars that get into “Cash value” results in a more efficient policy for you the consumer. “Cash Value” is an asset on your balance sheet; it is a liability on the insurer’s balance sheet. Has anyone ever heard of “Blended’ policies? Most consumers assume that pricing (fees) on policies are the same across the board. The truth of the matter is that consumers can purchase life insurance at “wholesale” pricing as oppose to “retail” pricing.

My advice would be to purchase permanent life insurance with a reputable company with much lower upfront fees (sales load).

Remember- term insurance is a temporary solution. It will expire one day. (iF YOU CANNOT AFFORD PERMANENT, BUY TERM WITH THE STRATEGY OF CONVERTING TO PERMANENT IN THE FUTURE- AGAIN MAKE SURE YOU’Re WITH A REPUTABLE COMPANY)

It’s been my observation that most successful people I know are not reducing their life insurance coverage at later ages, they are searching for ways to increase their coverage.

The way these products are being pushed is criminal in my opinion. The % of the population that this makes sense for is so small. Nevertheless, the very people we are going to for help with our financial planning are putting their own financial well being before their clients and at their clients expense.

Nicole in Michigan — I understand how a mec policy works and agree with your explanation. That’s why these policies should never be structured as a MEC. Rather the affluent client funds the policy up to the MEC premium limit but not above. They can essentially choose that limit and their premium by ratcheting up the death benefit accordingly. I thought it was obvious that a MEC was unfavorable and should be avoided — thanks for the clarification.

Shane in Denver, You are correct in stating that its a great idea to overfund your insurance to gain more cash value at an accelerated rate, but people must also be aware that over funding over 7 times your annual premium is detrimental to the policy. You will MEC it and lose all tax advantages.

If your policy is a MEC (Modified Endowment Contract) the tax treatment of any death benefit provided under the contract will still qualify for income tax free treatment. However, you may be subject to additional taxes and penalties on any distributions from your policy during the lifetime of the insured. Any distribution from a policy that is a MEC will be taxed on an “income-first” basis. Distributions for this purpose include a loan (including any increase in the loan amount to pay interest on an existing loan or an assignment or a pledge to secure a loan) or withdrawal. Any such distributions will be considered taxable income to you to the extent there is gain in the policy at the time of distribution. That is, the distribution will be includible in income up to the amount your account value exceeds your basis in the policy.
A 10% penalty tax also will apply to the taxable portion of most pre-age 59 1/2 distributions from a policy that is a Modified Endowment Contract.

And that, my friend is a bad bad thing

You can take good and bad from this column for sure. Should permanent life insurance such as VUL be the only vehicle used for retirement saving? - NO. Is it a flexible plan that can create supplemental retirement on a tax free basis? - YES.
I am a wealth management consultant that works with a myriad of products to create solutions for clients. For those that are affluent and have substantial disposable income, funding a VUL or IUL at the max levels can be a powerful savings strategy with substantial upside. There is no other product where individuals can contribute amounts well in excess of the the traditional limits set by the government (like for 401k’s) and still get favorable tax treatment (tax deferred growth and tax free withdrawals). There are also features that allow for protection against lapse (and the adverse tax affects that causes). In that scenario, overfunded life insurance can create benefits no other plan can do. That being said, the individual that is looking to minimally or moderately fund their insurance protection should consider other options. When it comes to your comments concerning life insurance agents and the implication that they are only looking for a commission — sure some do exist and practice under that methodology. Let’s not kid ourselves though, there are salespeople in every facet of society that do the same thing. Moreover, do you think that just because someone is selling mutual funds or bonds or ira’s that their motives are completely in your best interests? How do you make the distinction that anyone selling life insurance is ripping you off, but anyone else is operating under the highest levels of integrity? Be careful what types of generalizations you make — there are a lot of people that read your column and consider it to be absolutely factual and without personal bias.

Also to add to that all the money that you think you are investing into a RRSP or 401(K) is taxable and All the money you take out of an UL policy is TAX FREE when it is set up for the client to win.It is beyond me to think that I have an avenue to have my money 100% tax advantaged and I look in another direction, OH ya the same direction that the so called Porfessional Financial planners are directing me too. I am positive that they DO NOT HAVE MY BEST INTEREST IN MIND.Just their own when it comes to commissions.You are the best keeper of your own money. Take some Financial Litrecy cources and learn how money works and stop depending on someone else to lead you by the hand.

I don’t know who is setting up your UL Policy. But it seems to me that they are still setting them up so the company wins and the policy holder loses. I have one set up so I have the policy payed off in 10 years and the policy earns enough to pay for the policy for the rest of my life until I turn 100 and will automatically pay out. Also all the account surender value increase will be provided to me or my benifactor TAX FREE. This STRUCTURE is the only way that a policy like UL will work for the CUSTOMER and not fully for the COMPANY.
It is fair to say that less than 3% of all policies are ever paid out. This is because they are set up so when you get older you can not aford the premiums and you drop the policy while the company is laughing all the way to the bank.It is sad that the companys have to do this to normal people.They are paying to die instead of paying to live.

I think a lot of you are not looking how and why VUL are tremedious products. If you are young, healthy, and successful. You are getting in the insurance at the lowest cost as well investing the rest of the money into the market. I contribute to the match of my 401k as well as contribute $1000/month into a VUL. One I am successful and I can’t contribute money into a Roth IRA. So I did my research, and you also have to take into account what company and riders are included in the policy. In mine after 20 years the cost of insurance is paid back into the secodary account. Not only does the insurance increase overtime it also gets cheaper every year. (inflation) You also have to take into account what you think is going to happen over time. Do you think taxes will increase or decrease in the next 30 years hmmm. If they go down, great I will have a lot of money in my 401k that won’t be taxed as high, if they increase I will also be able to take out policy loans that are tax free to supplement my retirement income. I am dervisifying my portfolio for both circumstances. You also have to be realistic about your returns, no I don’t expect to average 12-14 percent for the life of my 401k or VUL but traditionally speaking I should be able to get 7-9 percent return. Is a VUL perfect for everyone NO, but if you look at what you want to get out of it and the benefits of not only giving you permanent insurance but a way to supplement your retirement income similar to a roth ira imbeded in life insurance with out the catches of a ROTH ira you get the best of both worlds, especially for people that make a lot of money that want to contribute a lot of money into something that will grow tax free and be able to take it out tax free as well as not having to wait until your 59 and 1/2 to access the money without penalties. So in a lot of circumstances they aren’t great vehicles BUT for people that see the big picture and are looking long term they can be extremly productive. It is life insurance for living, and hopefully I won’t even have to access the money but be able to use the insurance for estate purposes and for family down the line. In closing I believe if you are healthy, and between the age of 22-35 and can afford the premiums you will reep the benefits in time. And for all those buy term and invest the difference you actually have to invest the difference and then what are you going to pass to your children. It is a great way to build wealth and create wealth for you and future generations and shouldn’t that be the goal of everyone.

While I would not consider a VUL solely for retirement purposes, If you have insurance needs that dwindle over time, there are some tax advantages in going this route. However, unless you want to manage the investment and stay on top of it, it can cost you much more if it isn’t properly funded.

Would VUL’s or EIUL’s make sense to invest in when the only income you are currently receiving at age 37 is non-taxable long-term disability payments and social security disability income? I can’t contribute to a 401k or an IRA any longer since I am no longer working. The long-term disability payments stop at age 65 and they are the bigger portion of income now over the SSDI, so then what?… at 65, I have only social security to live on? Besides tax free muni bonds and other tax advantaged products, aren’t these two life insurance products a good thing for someone like me?… a 37 year old, unmarried, permanently disabled female?

I think you are right on. I’m licensed to do life, annuities, Variable annuities, and Mutual Funds. The thing about UL/VUL is it’s ART tied to a savings vehicle. ART is Annually Renewable Term meaning that it goes up every year. Talk to almost every 3rd party planner and they’ll all say the same thing as Walter. Cash Value Life Insurance isn’t wrong 100% of the time. I’ll agree with that. However 99% of the time it is.
1. What is the actual ROR of the savings?
2. If you have cash value built up and you die, who keeps “your” savings?
3. If you have some savings built up and you need to make a “withdrawal” why are you taking a “loan” against your own money and paying the Insurance company the %? Whose $ is it?
4. If you have borrowed money from your cash value and you die, why do they subtract the outstanding balance from your death benefit?
If you have a “Cash Value” policy you can find that in your policy.

I set my wife up with the policy - she has MS and it was the only way to continue Life insurance we converted her 10 year term to UL. Her coverage is much less than mine but at least it gets her coverage not dependent on her employer… I kept my term and just extended it to Age 70 (or maybe 80) again like other we are not intending to use it as retirement vehicle, but as a source of Life insurance.

Actually, VUL is a horrible option for life insurance. What most people don’t realize is the mortality charges and expenses in UL and VUL is not like whole life insurance, even though they are all basically junk and full of catch 22’s. The mortality charges(basically annual renewable term) increases annually, even more once you get older. Eventually they will far surpass your premium and the difference will be deducted from your cash values or investment fund as many companies refer to it as. Once all cash values are exhausted, the insurance company will require you to increase the payment which will become huge and continue to increase. At that point if you can’t afford it, you will have to lapse the policy and have nothing. If you just start out in the beginning by buying a good level term policy and invest wisely in mutual funds, especially into a Roth IRA if you qualify, by the time the term policy expires or goes up at renewal your mutual funds will take the place of the life insurance because 20 years later your needs will decrease for life insurance and your need for retirement income will be imminent. Insurance agents will always recommend whole life, UL, or VUL because the commissions are way more than term and pay renewals to the agent for years. Do your homework and don’t listen to agents looking out for their wallets instead of your future.

Todd in Pittsburgh. I don’t blaim you for not understanding. Most Financial Planners don’t understand how they work either. They see “investment” and they know that will get a client’s attention.

Buying term and investing the difference may seem like the only way to go. Find a true professional insurance advisor, not a planner who is only looking to charge you for their “expertise”. Real insurance advisors will take the time to educate you on ALL options, not just the “easier” ones to explain.

Look into true whole life insurance sold by mutual companies. You will be shocked at how powerful these tools can be in your planning process.

I agree with Shaun in CA. How can someone give advice if they aren’t licensed? I certainly can’t give legal advice if I’m not an attorney. Walter, you need to be careful.

As far as life insurance as a retirement plan…it’s not about the cash value. VUL policies are often underpriced and are too high risk. They are illustrated with unrealistic returns and don’t focus on how the cost of the insurance continues to rise as the insured gets older.

When you’re 35 and you see an illustration that shows 10% rates of return over the life of the policy, is that realistic? When you reach retirment you will look for a safer portfolio, including that within a VUL policy. Unfortunatley, the insurance costs and underlying fees continue to hit your “cash value” and thus the overall value of your contract. In essence, you will probably need to keep paying the premiums.

Look at traditional whole life issued by a mutual company. These contracts don’t offer the glamorous “10-12%” rates of return, but that isn’t what they’re designed to do. Cash value life insurance should be viewed as a portion of your “fixed” rate portfolio. It outpaces, in many areas, CDs, Bonds, Money Market Accounts, and savings accounts. Heck, depending upon your tax bracket, you’ll see a 5-6 after-tax rate of return.

Now, how is life insurance valuable in retirment? It’s leverage. You leverage the death benefit to allow you to spend down your other retirement assets at a slightly higher rate. You will have more wealth, less risk and enjoy more money while you are living. The life insurance will be your legacy.

If you are on the fence, talk to a professional. A real professional will take the time to educate you on all the options out there…not just the one’s their company provides. Don’t take the word of a columnist. He will most commonly pitch what the advertisers on the site/magazine are selling.

Remember, the best advice for you is given by someone who knows you…knows your goals, risk tolerance, wants, and dreams.

Universal life & whole life do have their purpose. I have a whole life that I purchased when I was young & healthly & at a reasonable price. I have had cancer & would be considered uninsurable now. If I had purchased term life too save a few bucks, I would have no life insurance and no protection for my family. It’s insurance, protection from risks, not an investment. It may not make sense analysing it until the unfornuate event happens to you. Boy, then you really look smart.
p.s. I’m not an salesman for anything

This is not like asking a mechanic for medical advice. How absurd!
I sold life insurance many, many years ago and I agree with all that the “expert” has written in this article. Outside of estate planning I don’t recommend getting near anything but term life insurance.
Lastly, as for the policy paying the insurance premiums for you…don’t be dense. You are paying every dime of that policy premium. You’re just paying it in advance. Considering the time value of money, advance payments are never a good idea.
These policies are sold for the huge fees that the salesmen get. I know, I was one of them.

Right on VUL-the fees and expenses are not worth it but Wrong on EIUL. The are policies that even pay 140% of the S&P 500 up to 10% a year. All you need is these to average 8% and you do great. WHAT ABOUT THE DEATH BENEFIT? Oops, that was left out. If I had an asset that paid $20k year, I would insure it. Most retirees who had high earnings get that in Social Security. At the death of one spouse, one check goes away. This will affect your standard of living no matter what.

Based on some of these users comments i think we can tell who is making money on selling these complicated overpriced products.

And who cares if someone isn’t licensed to sell the product they are giving advice on. They probably made a choice not to sell the products based on seeing how over hyped they were. Besides, people come to me for advice about finances not becuase i am even in a related feild, but becuase i know how to do my research on different issues.

VUL’s can, however, be a great option for life insurance. My husband and I both have whole life policies like these and what we like is not the payments right now (definitely more than term!) but the option to suspend premium payments and let that “cash value” pay the premiums for us. That way we will get the benefit later in life of having whole life insurance (we’re both covered to age 100), but we’ll have the flexibility when we have children of not making premium payments for a few years while living on only one income. Our policy has a lapse protection, so that when we’re within 6 months of running out of cash value to pay the premium, we’ll get a phone call and a letter letting us know its time to pony up again. Definitely not a good idea as a retirement fund, but as life insurance, we feel like its a flexible alternative.

Don’t forget the Roth 401(k), where you invest after-tax dollars for tax-free withdrawals in your retirement. The Roth 401(k) beats hands down the trap of borrowing tax-free money from the cash values of VUL’s.

I have to respectfully disagree with your assertion that EIULs are a bad idea. I can see the case for VULs, but not for the reasons you assert.

A few things pop out in my mind, one of which is that you make the same mistake that both the critics and the defenders of permanent insurance make, which is that you believe 1) life insurance is an investment (it’s not) and that 2) you assert some variant of the erroneous idea that all cash value insurance is a scam, too expensive, not worth the money, only or mostly sold by dishonest life insurance agents, and so on. I’ve heard it all.

I have also debunked it all, even the challenge that cash value policies are “way too expensive”. It’s funny that the one problem that EIULs (actually all insurance policies) DO have is never addressed here. Why not? You tell your readers to invest in 401(k)s Mr Updegrave, but don’t tell them any of the problems that plague mutual funds. Why not? You don’t tell them that there is an onerous tax consequence with ALL 401(k)s and IRAs that can nullify all of its tax advantages under the right circumstances. Why not? You never disclose the fact that EIULs are coming equipped with protection features that prevent accidental overloaning that results in the tax consequence you mention in your article. Why not?

As for the quote “convoluted” crediting methods…here is what the bulk of policies will do: They credit the higher of the minimum guarantee or the upward movement in the S&P 500 up to a cap, typically somewhere in the 11%-14% range. So if the cap is 12% and the index moves upward by 14% you get 12%. But if the index falls 5%, you still get the contractual minimum guarantees. What’s so convoluted about that?

You know every day I read financial articles. Some of them are good, a few are excellent, but many of them are just OK. Some of what you have to say is downright dishonest and misleading. That’s too bad. You should really tell the truth about life insurance.

I guess my only comment, as a Financial Consultant who does BOTH life insurance sales and retirement planning, is that permanent life insurance should NOT be sold as simply an investment. The fact of the matter is, however, that people may NEED life insurance after their 30 year term expires and so for that purpose, permanent life insurance comes into play. Also, VUL’s can be good tools to SUPPLEMENT your retirement but just like any other investment they must be taken care of! I think that not pinpointing the fact that a VUL is a great tool to use if you’d like life insurance past 30 years (and to be able to actually access the THOUSANDS of dollars you’d spend on the term-instead buying a VUL and accessing the cash value later) is an injustice to a product (life insurance) that can have monumental effects on the lives of our clients.

Walter
Good article, but it is also important to distinguish the difference between V.U.L policies and
the other type of Universal Life policy. The “plain vanilla” U.L life
policy that is not tied to a seperate
side fund of investments. If you are looking for an affordable life policy
that will last a lifetime, with affordable premiums (less than whole life) than Universal Life is the answer. You can purchase a U.L policy
that exceeds the 30 year maximum length
of coverage for term insurance. It provides a lifetime of coverage for a
premium between the cost of term and whole life, with NO cash accumulation.
It’s an excellent option for those looking for a death benefit only.

Hi,

The only issue I have with experts that comment on retirement and insurance products is they are often not licensed to sell the product they are giving advice on.

A quick analogy is to think of going to your auto mechanic and ask them for medical advice…

I went through a process a few years ago interviewing financial planners, and I found it very odd that all three were heavily pitching variable life products as a primary source of “savings.” As a lawyer in the investment business, two things struck me: (i) even as a lawyer, I had a difficult time understanding the products being sold; and (2) how expensive they were compared to ETFs or other low-cost open ended funds. In addition, the monthly premiums were HUGE versus a term policy with similar death benefits. Just never made any sense to me….