Anyone with Guaranteed Universal Life Insurance (GUL)?

[donheff]

All of the talk about Roth conversions, big RMDs, etc has got me looking at options for investing our excess RMDs. When DW enters RMD territory in three years the RMDs will be large and not needed for expenses. Our intent is to invest them in a standard brokerage account to be distributed to our heirs. Somewhere along the line recently I read about Guaranteed Universal Life policies paying into a trust for the kids at death as a reasonable alternative for some of those RMDs. It sounds like GUL could make sense. For DW to get a policy today (she will be 67 in January) would cost $1562/mo for a $1M benefit guaranteed until she is 100 years old. When I compare the results of adding $1562/mo into a taxable account the results look decent, particularly so if she dies on schedule at about 85 . At age 70 the price goes up to something like $1800/mo based on current rates.

Any dear readers familiar with these products? Are they worth looking into? Any gotchas other than the obvious one that you can't get your money back and lose it all if you stop paying or live past the guarantee age?

 

[Souschef]

I believe it is something like a QLAC (google that). In a nutshell, if you are lucky you get your principal back at age 85.
The first entry I found was a discussion as to why you should not do that.
If you have RMD $ you do not need, here's what I did.
Distributed some to our 4 sons
Donated some to my religious institution QCD- you are not taxed on that
Pay my estimated Federal and State taxes
Paid our granddaughter's tuition for nursing school

Paid for a 15 cruise in a suite

 

[brewer12345]

These are risky products for the insurer to write, so if you buy one pick your company carefully. If you can get a worthwhile irr by paying the scheduled premium and you have an ironclad guarantee the policy will not lapse if cash value goes negative, I see no reason not to consider doing this.

 

[donheff]

Thanks Brewer. I'm not sure I will effectively evaluate whether the guarantee is iron clad so I may just stick with my original plan of investing the excess in our taxable portfolio. The quote I got was from Prudential - are they good? I will look into them a bit more before I decide.

 

[donheff]

I believe it is something like a QLAC (google that). In a nutshell, if you are lucky you get your principal back at age 85.
The first entry I found was a discussion as to why you should not do that.
If you have RMD $ you do not need, here's what I did.
Distributed some to our 4 sons
Donated some to my religious institution QCD- you are not taxed on that
Pay my estimated Federal and State taxes
Paid our granddaughter's tuition for nursing school

Paid for a 15 cruise in a suite

QLAC are a different animal. This is more like term insurance guaranteed to continue until an age certain (e.g. 100 yo). You don't get a payout in your lifetime like a QLAC. You don't get any accumulated cash value. Your heirs get a payout on death like term.

The main reason to consider it seems to be that the IRR sounds good if DW dies in her mid 80s as seems likely. Even at older ages it seems to hold up pretty well.

 

[ncbill]

UL policies will "blow up" down the road when the cost of insurance (calculated annually) exceeds the premium + any cash value built up in previous years.

The premium is often fixed for a number of years (5-10 typical) but then rises at an increasing rate...again, it usually rapidly becomes unaffordable outside the fixed period.

 

[donheff]

Looking at my OP I note that I pointed out that the rate goes up at age 70. What I mean by that is that if she waits a few years to get a policy the rate goes up. If she gets it now the "guaranteed" premium is $1562/mo thru age 100. She could elect a modestly higher premium and get the guarantee thru 105, 110, ...

 

[pb4uski]

One thing to consider is that there is a difference between the recommended premium of $1,562 now and $1,800 later and the cost of insurance charges that are applied against the account balance monthly. Most likely, the cost of insurance charges are initially significantly lower than the cost of insurance allowing a balance to build up... then cost of insurance increase significant as the insured ages and are funded by that balance.

Typically the insurer has significant discretion to adjust the cost of insurance charges but it sounds that perhaps in the policy that you are considering that the cost of insurance is guaranteed. If the insurer increases cost of insurance charges then the account balance may not be sufficient to cover them and the policy would fail.

However, essentially you are making a bet on your DW's longevity to gain a tax-free death benefit for your kids. It seems as if you think that you have insights about your DW's longevity that an insurer doesn't... if so, be very careful to be totally truthful when you fill out the application so if she does die prematurely that the claim isn't denied due to a false application.

If you do decide to proceed, Prudential is pretty solid... not top-shelf but a solid player IMO.

 

[donheff]

One thing to consider is that there is a difference between the recommended premium of $1,562 now and $1,800 later and the cost of insurance charges that are applied against the account balance monthly. Most likely, the cost of insurance charges are initially significantly lower than the cost of insurance allowing a balance to build up... then cost of insurance increase significant as the insured ages and are funded by that balance.

Typically the insurer has significant discretion to adjust the cost of insurance charges but it sounds that perhaps in the policy that you are considering that the cost of insurance is guaranteed. If the insurer increases cost of insurance charges then the account balance may not be sufficient to cover them and the policy would fail.

However, essentially you are making a bet on your DW's longevity to gain a tax-free death benefit for your kids. It seems as if you think that you have insights about your DW's longevity that an insurer doesn't... if so, be very careful to be totally truthful when you fill out the application so if she does die prematurely that the claim isn't denied due to a false application.

If you do decide to proceed, Prudential is pretty solid... not top-shelf but a solid player IMO.

I haven't looked into the details of this proposed policy and am not sure I am going to do so. I looked GULs up because they were described as a possible option in an estate planning podcast I ran into in a thread here. As I understand them (subject to a detailed review if I ever proceed), the premiums are fixed for the guaranteed period determined when you get the policy (e.g. until age 100, 105, etc.). There is no account balance to evaluate as you age. Just a death benefit as long as you die before the guarantee runs out and pay your premiums.

As to bets on DWs longevity - I have no more info than the insurer other than the average age of death for her relatives which might predict 85. The tables say ~87. The policy actually looks OK (on a quick initial evaluation) even if see lives into her early 90s. If she gets up toward 100 not so good. If she lasted to 101, total loss (unless I paid a bit more for a longer guarantee). I would welcome the math gurus to chime in. $18864/yr invested for x years vs $1M payout. If you use 6% or 7% nominal return on the investment alternative it looks OK up to 22 years or so. If returns are less or more the picture changes. What is a good rate of return to select?

As you can see from my comments I don't really know much about these policies which is why I posted here.

 

[pb4uski]

Here is what I get for IRRs assuming a premium of $1,562/month and a $1m death benefit.... looks in line with your results.

Age	Years	IRR
77	10	31.91%
82	15	15.58%
87	20	9.02%
92	25	5.62%
93	26	5.14%
94	27	4.70%
95	28	4.30%
96	29	3.93%
97	30	3.60%
98	31	3.30%
99	32	3.01%
100	33	2.75%

 

[brewer12345]

Donheff, your understanding of gul policies is correct. The insurer can't kill the policy even if cash value goes negative as long as you pay the guaranteed premium. Crunch the numbers and check the returns at various death ages, but if the policy language is airtight you are thinking about this the right way.

The other issue is that this will likely be an irrevocable decision, so do it only with assets you will never need in your lifetimes.

 

[donheff]

Here is what I get for IRRs assuming a premium of $1,562/month and a $1m death benefit.... looks in line with your results.

Age	Years	IRR
77	10	31.91%
82	15	15.58%
87	20	9.02%
92	25	5.62%
93	26	5.14%
94	27	4.70%
95	28	4.30%
96	29	3.93%
97	30	3.60%
98	31	3.30%
99	32	3.01%
100	33	2.75%

Thanks. I don't really understand how to calculate IRR. I just used some online investment calculator and plugged in various return guesses. I will have to lookup IRR and see if I can figure out how to do it.

 

[donheff]

Donheff, your understanding of gul policies is correct. The insurer can't kill the policy even if cash value goes negative as long as you pay the guaranteed premium. Crunch the numbers and check the returns at various death ages, but if the policy language is airtight you are thinking about this the right way.

The other issue is that this will likely be an irrevocable decision, so do it only with assets you will never need in your lifetimes.

Thanks Brewer. We can easily spare this amount with zero impact on our lifestyle. Interestingly it has an added isurance value if DW dies prematurely. She gets social security and a COLA'd law firm stipend totaling about $67k/year (~$50K/yr after age 75) that disappears after her death. Our tax rate would also go way up. This windfall in the event of early death would make up the loss in savings that would impact the kids inheritance in that case.

 

[pb4uski]

Thanks. I don't really understand how to calculate IRR. I just used some online investment calculator and plugged in various return guesses. I will have to lookup IRR and see if I can figure out how to do it.

in LibreCalc (and Excel to my knowledge) you can use the rate function.

RATE
Returns the constant interest rate per period of an annuity.

Syntax
RATE(NPer; Pmt; PV; FV; Type; Guess)
NPer is the total number of periods, during which payments are made (payment period).

Pmt is the constant payment (annuity) paid during each period.

PV is the cash value in the sequence of payments.

FV (optional) is the future value, which is reached at the end of the periodic payments.

Type (optional) is the due date of the periodic payment, either at the beginning or at the end of a period.

Guess (optional) determines the estimated value of the interest with iterative calculation.

In the LibreOffice Calc functions, parameters marked as "optional" can be left out only when no parameter follows. For example, in a function with four parameters, where the last two parameters are marked as "optional", you can leave out parameter 4 or parameters 3 and 4, but you cannot leave out parameter 3 alone.

So in your case, for 20 years it would be =RATE(20*12, -1562,0,1000000,)

The result will be 0.72%... but that is a monthly rate. To annualize the rate amend the formula to =(1+RATE(20*12, -1562,0,1000000,))^12 - 1 and you'll get 9.02% as shown in the table.

Essentially, LibreCalc solve for the interest rate that equates $1,562 a month for 20 years to $1 million.

 

[donheff]

in LibreCalc (and Excel to my knowledge) you can use the rate function.



So in your case, for 20 years it would be =RATE(20*12, -1562,0,1000000,)

The result will be 0.72%... but that is a monthly rate. To annualize the rate amend the formula to =(1+RATE(20*12, -1562,0,1000000,))^12 - 1 and you'll get 9.02% as shown in the table.

Essentially, LibreCalc solve for the interest rate that equates $1,562 a month for 20 years to $1 million.

Thanks. I have LibreCalc so I can do it now.

 

[OldShooter]

... At age 70 the price goes up to something like $1800/mo based on current rates. ...

So you're signing a blank check? This would be a show stopper for me.

 

[pb4uski]

So you're signing a blank check? This would be a show stopper for me.

No, OS.... I think he means that the premium is fixed for the guarantee period but might be different if they were to buy later... like in 6 months or 12 months.

Not that the insurer has discretion to change the premium once he has bought it.

 

[Sunset]

If OP just wants a tax free benefit to pass on to heirs from surplus RMD, then a simple (IMHO) solution would be to buy BRK.B shares.

Since they don't pay dividends, there is no declarable earnings increase each year to pay taxes upon.
Upon death, the shares would transfer to heirs with a stepped up basis, so tax free.

 

[donheff]

If OP just wants a tax free benefit to pass on to heirs from surplus RMD, then a simple (IMHO) solution would be to buy BRK.B shares.

Since they don't pay dividends, there is no declarable earnings increase each year to pay taxes upon.
Upon death, the shares would transfer to heirs with a stepped up basis, so tax free.

I am looking at this as an alternative to a regular investment of the same monthly or annual amount. The quoted GUL appears to offer decent long term value and to offer excellent short term value in the event of premature death. The downsides I see so far are insurer risk, failure to pay premiums on time, and a life extension breakthru leading to death after the policy term.

 

[donheff]

pb4uski. I plugged your numbers into LibreCalc and it works fine. I found a similar rate fuction in Google Sheets which I use more frequently but it appears to limit the periods to 30. When I use annual premiums of $18744 it and Librecalc return similar but not identical numbers. The whole thing is a bit of a black box but useful for comparing the results I get when plugging the premiums into online investment calculators and looking at the future value with various rate estimates.

 

[brewer12345]

So you're signing a blank check? This would be a show stopper for me.

Nope. The premiums are guaranteed level and cannot be changed by the insurer.

 

[donheff]

I see a potential show stopper. DW uses medical MJ for restless leg syndrome. A lot of carriers will treat that as equivalent to smoking and double the rates.

 

[brewer12345]

I see a potential show stopper. DW uses medical MJ for restless leg syndrome. A lot of carriers will treat that as equivalent to smoking and double the rates.

Worth finding out. Talk to the agent about it and they can tell you the likelihood of it being an issue.

 

[OldShooter]

Nope. The premiums are guaranteed level and cannot be changed by the insurer.

My heart is becoming calm.

 

[Sunset]

I am looking at this as an alternative to a regular investment of the same monthly or annual amount. The quoted GUL appears to offer decent long term value and to offer excellent short term value in the event of premature death. The downsides I see so far are insurer risk, failure to pay premiums on time, and a life extension breakthru leading to death after the policy term.

And the fees charged by the insurance for profit purposes.