More Questions about VUL Policy

[Golden sunsets]

There is another active thread on VUL policies which is of interest to me and I don't want to hijack it as my questions on this type of policy are quite different. PB4uski I know that you are very knowledgable about insurance in general and this type of policy in particular. I would love your take on my situation.


Bought this policy 15 years ago. Face Amount $500,000. DH and I 67/69 now. It is actually a Second to Die Policy purchased in our family trust set up by our estate attorney. He recommended it at a time when the Federal Inheritance tax exemption was much lower as a vehicle to pay estate taxes that were likely to accrue at the death of my DH and I.
We have paid 15 years of premiums of $5,480 or $82,200 thus far. The policy plan actually shows stopping premium payments if we desire after 15 years, at which point the Cash Value theoretically covers all future premiums. In reality however I don't think that if we stopped making premium payments that the funds would be there to pay the increasing cost of insurance assuming that we live into our 90's. The Cash Value is currently $101,000 and is invested in a Moderate Aggressive portfolio of Vanguard ETF funds. There is no longer a surrender charge, starting this year. Fees other than the cost of insurance are currently 242/yr but if we make no more premium payments, fees would drop to $100 and never be greater than $120/yr.

We can well afford the premiums and have always looked at this as more or an investment vehicle for our heirs vs an insurance product. I have asked our attorney what his thoughts are on the policy now that the estate exemption has increased so much. He was neutral on it. Frankly I don't really even connect the policy to the estate tax exemption anymore and have not for some time. We do anticipate leaving a significant estate to our heirs. I also asked a fee only FA who we hired for a one off review of our situation a few years ago his thoughts on this particular product and he was ambivalent.

One thought I had is, say we continue making the premium payments and the cash value continues to grow, as the modeling shows, to several million dollars by age 100. It seems as though the COI will be very high relative to the value of the insurance and that the $500,000 will be a minor part of the death benefit when adding the face amount of the policy to the cash value. Would it not make sense at that point to stop paying the COI premiums and eliminate the insurance component of the investment? Is that even possible?

I'm really quite muddled about this and would appreciate any thoughts/suggestions. Thanks in advance for responses.

 

[pb4uski]

Well first off... ignoring the value of the insurance protection you have had you have received a 2.9% return (ie; $5,480/year invested for 15 years at 2.9% would be $101k)... probably much better if you added in the value of the mortality coverage.

If you look just at the net growth for the last policy year and ignored the value of the mortality coverage, what would your return have been? IOW [$101,000/(BOY CSV + $5,480/2)]-1 = x%?

As you say the original purpose no longer exists due to the change in estate taxes and you don't need the life insurance. You "might" be able to reduce the COIs by reducing the amount of insurance coverage but you can't eliminate it entirely because a certain amount of mortality risk is required to retain the tax-deferred attributes of the policy.

I would not be inclined to keep it because you don't need the insurance and the COIs will be a constant and increasing drain as you age.

You can get a refresh of the illustration and talk with your agent as to what options you have. Another alternative they might not suggest is that in 2017, once you are retired, you could surrender it but the excess of the CSV over the premiums paid would be taxable income but if you are in a lower tax bracket then that might be an opportune time to do it.

Since you don't seem to need that money and are viewing it as for your heirs, you could invest the CSV after paying the taxes in a good balanced fund and then perhaps withdraw some each year as gifts to your heirs to fund contributions to a Roth (assuming they qualify). [I probably should do something like this for DD and DS but have not yet pulled the trigger... there is some remote chance that I might need that money someday].

 

[Golden sunsets]

Thanks PB. I'm not surprised by your analysis, which leads me to ask if you have ever recommended this product for anyone? Unfortunately for us, my income stops this year, but DH's RMD's start next year, so no room for paying taxes at a lower rate on the excess of CSV over premiums. I have wondered if it would be possible for the Trust to terminate the policy and retain the liquidated CSV within the trust and not pay any taxes, investing it for our heirs. Any thoughts on that? I also have wondered about converting the CSV into a paid up policy. I wonder how much we would be able to convert it to? Any WAG's from you on that front?

Answering your question on return for 2015 that number would have been 2.05%. Equity values didn't do much last year.

 

[pb4uski]

I'm not a big fan of variable products to begin with as they commonly have a lot of fees but second to die is very useful for certain estate planning situations.

Your question on the trust is more of a question for your accountant as it depends on the terms of the trust. My folks trusts were set up as a pass-through while they are alive so I suspect not but is depends on how the trust was set up.

I guess paid-up would be better than continuing to pay premiums and was implicit in my suggestion of options the agent might recommend.... but on the other hand as I understand it you don't need life insurance so paid-up is only a partial solution but might not be a bad thing if you want to further defer the tax on the build up.

Unless you are in a really high tax rate I think I would lean towards cashing it in and paying the tax and having the after-tax proceeds to do whatever you want with... perhaps a nice vacation for you and your heirs... sometimes experiences are more valuable than $$$$.

 

[Golden sunsets]

Thanks again PB. Just discussed with DH and we are inclined to surrender the policy this year after checking with our Insurance Agent to vet our options to make sure we aren't missing anything. Taxes would be about $6000, Fed and State at the 25% federal level and 7% State-not too bad. Thinking that the funds will provide house downpayment funds for our DS and DD. Appreciate your perspective.

 

[Taxman59]

An alternative to paying the taxes is see what the cost would be to roll the cash surrender value over into a paid up policy (only the taxable portion). You take the excess cash and have a small paid up policy (guaranteed by the insurance company to never have a premium again) with a $0 tax basis, and cash. I have recommended this to clients in the past and it can work.

 

[Golden sunsets]

Thanks Taxman. I'll inquire about that option as well.