ILITs and 2nd to Die Variable Universal Life Insurance

[OldShooter]

... And as the link points out, an irrevocable trust can't adapt to changes in tax laws or conditions. It's up to the OP to determine if it fits their needs/wants, but I'd think very, very long and hard before giving up that flexibility. ...

Certainly the trustee will be largely hamstrung by the nature of the asset, but strictly speaking the trust document can be written to give the trustee maximum flexibility within fiduciary constraints, including sale or conversion of assets.

... An ILIT should be holding whole life or term insurance instead.

Yes. Something that has gotten a bit lost in this discussion is that the OP really has two completely separate decisions; (1) whether to do an ILIT and, if yes, (2) how to fund it.

Buying a Variable Universal Life Insurance Policy (for any reason) is clearly an unpopular idea with the majority of contributors to this thread. The ILIT idea seems to be a little fuzzier because the OP's estate tax vulnerability is unknown. FWIW, barring a radical revision, we will never hit the Federal number but our state begins grabbing money at a far lower point. For the state, we basically play the role of victim.

 

[RetireeRobert]

. The ILIT idea seems to be a little fuzzier because the OP's estate tax vulnerability is unknown. FWIW, barring a radical revision, we will never hit the Federal number but our state begins grabbing money at a far lower point. For the state, we basically play the role of victim.

Yes, state can be a worse problem than federal. Oregon, for example, levies estate tax on anything over $1 million. These days, in many cases, simply having a house could put one at the $1 million level all by itself. Everything above that Oregon takes from 10% to 16%.

So, agreed, OP needs to worry if OP's state is one like Oregon, irregardless of if federal taxes are a worry or not.

 

[RetireeRobert]

A.

Well, this is a very loaded statement. If it was true in general, then many, many posters here would be using life insurance and/or annuities to fund their retirement. It is generally accepted that life insurance is *not* a good investment.
-ERD50

I doubt your claim that many posters here "would be using life insurance to fund their retirement". After all, it's pretty hard to "fund your retirement" since you have to die first to get life insurance to pay anything!!

 

[RetireeRobert]

I hope your LTC's underlying policy is plain-vanilla whole life, not universal, as I've mentioned before.

This thread has nothing to do with LTC.

And what if one's LTC policy has nothing to do with any life insurance at all, but is a plain LTC-only policy??

Thread subject is ILIT.

 

[OldShooter]

... Everything above that Oregon takes from 10% to 16%. So, agreed, OP needs to worry if OP's state is one like Oregon, irregardless of if federal taxes are a worry or not.

With numbers like that, though, the proposed Variable Life cure could easily be worse than the estate tax disease.

... Thread subject is ILIT.

And about variable life.

@RetireeRobert, do you sell insurance or work for a company that does?

 

[RetireeRobert]

.

@RetireeRobert, do you sell insurance or work for a company that does?

Nope and nope. I am a retired CPA. Don't have any relatives in the insurance business either. My closest contact with insurance each year is when I pay my renewal premiums on auto, HO, and umbrella policies!

And you? Do you sell insurance?

 

[OldShooter]

.. And you? Do you sell insurance?

Nope. Techie engineer/manager, 50 year stocks and real estate investor, got interested in more details after serving on nonprofit investment committees and agreeing to teach an investment course. The course trigger was a good friend who was sold "four or five annuities" by Fast Eddie. Learned about variable life by attending a "free steak dinner" pitch and finding that the salesman had 21 customer complaints upheld, listed at brokercheck, many in six figures. A really dangerous huckster.

 

[pb4uski]

Which becomes impossible to pay after a couple of decades (unlike plain-vanilla whole life) since the underlying life insurance premium gets repriced every year.

So you might start out paying $X/year (and building cash value) but 20 years later the annual premium could be $5x to keep it in force.

Unfortunately, in the real world growth in cash value never compensates for the premium increases.

The investments have no chance of keeping pace with the increasing premium because of the limitations mentioned in my post above.

An ILIT should be holding whole life or term insurance instead.

Not sure what you mean by "the underlying life insurance premium gets repriced every year".... the UL policies that I am familiar with didn't reprice anything... mortality charges were set by the contract but could be less depending on experience... minimum required premium never changed since it was set conservatively.

This was at a mutual company in the 1990s. Effectively UL was priced the same as whole-life but had many more component parts because of its structure. We really didn't care whether a customer bought whole-life or UL since the expected economics to us were the same.

 

[pb4uski]

I doubt your claim that many posters here "would be using life insurance to fund their retirement". After all, it's pretty hard to "fund your retirement" since you have to die first to get life insurance to pay anything!!

Sometimes whole life was pitched as retirement funding... you have life insurance coverge when your family is growing up when you need it and then when you retire and presumably no longer have need for life insurance you elect to receive the cash value over the rest of your life like a SPIA.

It's probably not the greatest way to fund retirement but it's also probably not the worst. The IRR on a whole life policy that I bought when I was a naive 22-year old through when I was 65 was 4.84% (today's CSV compared to premiums paid since 1977 ignoring the value of life insurance coverage).

Meanwhile, Vanguard Total Bond returned 5.76% from Jan 1987 to May 2021 (as far back as i could go in Portfolio Visualizer), so I would hae done a lot worse.

 

[RetireeRobert]

Sometimes whole life was pitched as retirement funding... you have life insurance coverge when your family is growing up when you need it and then when you retire and presumably no longer have need for life insurance you elect to receive the cash value over the rest of your life like a SPIA.

OP was talking about universal life though.

And my comments about "leverage" (which OP also did mention in first post) were that the life policy contractually obligated benefit payout to beneficiary was some multiple of accumulated premiums. To many folks, including perhaps the OP, the guarantee of some multiple of their premium being contractually defined, and then available to their daughter or other beneficiary, is what attracts them. They want to know she is provided for!!

The often knee-jerk reaction is "well, one could invest it for the 30 years, or whatever long time period, and come out way ahead" (cue link to fancy projection of returns over "x" years). But these "invest it yourself" results are "not" contractually obligated or guaranteed. What if, at the crucial point she needs the dough, the market happens to be in a long downturn? Then what? The fancy projections of "average annual returns" don't save her anguish then!

And this route also ignores that some people, perhaps including OP's daughter or the OP themselves, may not have the knowledge/skill/ability to invest wisely. Or she, or they, may not have the will and endurance to invest wisely and over that long term. They prefer to know "daughter will be taken care of". OP was also interested in tax efficiency as well, both income and estate tax. OP's search into ILIT's and use of life insurance inside it is not so far fetched.

 

[RetireeRobert]

Which becomes impossible to pay after a couple of decades (unlike plain-vanilla whole life) since the underlying life insurance premium gets repriced every year.

So you might start out paying $X/year (and building cash value) but 20 years later the annual premium could be $5x to keep it in force.

??

OP stated in original post the specific policy they are looking at has "level" premiums.

 

[pb4uski]

OP was talking about universal life though.

And my comments about "leverage" (which OP also did mention in first post) were that the life policy contractually obligated benefit payout to beneficiary was some multiple of accumulated premiums. To many folks, including perhaps the OP, the guarantee of some multiple of their premium being contractually defined, and then available to their daughter or other beneficiary, is what attracts them. They want to know she is provided for!!

The often knee-jerk reaction is "well, one could invest it for the 30 years, or whatever long time period, and come out way ahead" (cue link to fancy projection of returns over "x" years). But these "invest it yourself" results are "not" contractually obligated or guaranteed. What if, at the crucial point she needs the dough, the market happens to be in a long downturn? Then what? The fancy projections of "average annual returns" don't save her anguish then!

And this route also ignores that some people, perhaps including OP's daughter or the OP themselves, may not have the knowledge/skill/ability to invest wisely. Or she, or they, may not have the will and endurance to invest wisely and over that long term. They prefer to know "daughter will be taken care of". OP was also interested in tax efficiency as well, both income and estate tax. OP's search into ILIT's and use of life insurance inside it is not so far fetched.

I was only responding to the part of your response that life insurance isn't retirement funding since you have to die to get the death benefit and point out that life insurance is sometimes used for retirement funding... less so today but more so back in the 1970s and 1980s.

And what I described could be done with whole life or UL.

I wasn't commenting at all on the use of life insurance with an ILIT.

 

[RetireeRobert]

I was only responding to the part of your response that life insurance isn't retirement funding since you have to die to get the death benefit and point out that life insurance is sometimes used for retirement funding... less so today but more so back in the 1970s and 1980s.

And what I described could be done with whole life or UL.

I wasn't commenting at all on the use of life insurance with an ILIT.

Understood. Actually, I quoted you only for the little first part of my response. Sorry, I should have put the rest of my response in a separate post.

The big part, the rest of my response, I was on a rant about some other previous posts (and previous threads) which always seem to ding life insurance (or annuities) and advocate "invest it your self, make more, save all the insurance product fees." Such responses neglect the very fact many people want, perhaps need, and are willing to pay, for the "guarantee" aspect of insurance. Such as "guaranteeing" a loved one (like OP's daughter in this thread) is financially taken care of in some desired degree. Rant over.

 

[pb4uski]

??

OP stated in original post the specific policy they are looking at has "level" premiums.

I'd venture to guess, at least at my former employer, if someone paid the whole life premium into a UL contract with the same sum insured that the CSVs would be similar after 30 years.

 

[teej1985]

if you're going to use variable universal life, you should get a policy from ameritasdirect.com and use Vanguard funds.

 

[Golden sunsets]

??



OP stated in original post the specific policy they are looking at has "level" premiums.

That could be because the $30,000 annual level premium is used partially to pay the annual life insurance premium, with the remainder invested in a basket of investments which theoretically over time appreciate to cover the increasing cost of the insurance premium. A $1.6 million dollar policy covering the second to die who is 60ish isn't $30k per year, but the premium for a 94 year old would be much more than $30k/yr. But if the policy runs to age 95, and the second insured dies at 96, then you're screwed. That's what convinced my DH and I to ditch the policy after 15 years. Fortunately the investment proceeds exceeded our total premium payments.

 

[ncbill]

Not sure what you mean by "the underlying life insurance premium gets repriced every year".... the UL policies that I am familiar with didn't reprice anything... mortality charges were set by the contract but could be less depending on experience... minimum required premium never changed since it was set conservatively.

This was at a mutual company in the 1990s. Effectively UL was priced the same as whole-life but had many more component parts because of its structure. We really didn't care whether a customer bought whole-life or UL since the expected economics to us were the same.

You're probably thinking about GUL (guaranteed universal life), but unfortunately:

"The cost of insurance can be level for the life of the policy, but this isn’t typical.

Usually, there’s a minimum and maximum cost of insurance so, as you get older, your minimum premium will increase significantly."

https://www.valuepenguin.com/life-insurance/universal-life-insurance

IMHO, you're better off picking a terminal age ("term to age XX") & just buying a term policy that remains in force until then.

And I echo the poster above...are they really fixed premiums, with a no-lapse guarantee while paying that annual premium, for the life of the policy?

 

[pb4uski]

You're probably thinking about GUL (guaranteed universal life), but unfortunately:

"The cost of insurance can be level for the life of the policy, but this isn’t typical.

Usually, there’s a minimum and maximum cost of insurance so, as you get older, your minimum premium will increase significantly."

https://www.valuepenguin.com/life-insurance/universal-life-insurance

IMHO, you're better off picking a terminal age ("term to age XX") & just buying a term policy that remains in force until then.

And I echo the poster above...are they really fixed premiums, with a no-lapse guarantee while paying that annual premium, for the life of the policy?

Yes, I was thinking of GUL... we didn't issue VUL. I never said that the cost of insurance would be level... GUL is akin to a permanent term policy inside a savings account... the cost of life insurance coverage increase each year for age and perhaps also for sum assured depending on whether the benefit is type A (level death benefit) or type B (death benefit is sum assured +account value). And yes, to protect the policyholder the contract indicates what the maximum mortality charges can be but they are typically lower.

 

[pb4uski]

That could be because the $30,000 annual level premium is used partially to pay the annual life insurance premium, with the remainder invested in a basket of investments which theoretically over time appreciate to cover the increasing cost of the insurance premium. A $1.6 million dollar policy covering the second to die who is 60ish isn't $30k per year, but the premium for a 94 year old would be much more than $30k/yr. But if the policy runs to age 95, and the second insured dies at 96, then you're screwed. That's what convinced my DH and I to ditch the policy after 15 years. Fortunately the investment proceeds exceeded our total premium payments.

I think there is some nomenclature getting in the way.

These policies are akin to a permanent term policy combined with a savings account for GUL and combined with high-fee mutual fund accounts for VUL.

The premium is the amount paid from the policyholder to the insurance company (the $30k/year referred to) and is a "deposit" to the account value (savings account). Typically there is a recommended target premium that is designed so that the policy will noy lapse using conservative assumptions. If one pays the target premium then the account value will grow in the early years as the premiums exceed the mortality charges and fees and that built up account value funds the higher mortality charges in later years. The structure isn't much different from whole life except you can see all the component pieces and no-lapse isn't guaranteed (that is why target premiums are lower than whole life for milar mortality coverage).

The problem is that many policyholders pay less than the target premium and as a result at later ages there is not enough accumulated account value to fund the higher mortality charges in the later years and the policy runs out of money.

The cost of insurance is the monthly charges against the account value for mortality coverage. The maximum rate for the mortality charges (per $1,000 of coverage at each attained age) is set in the contract, but the actual COI charges are typically lower and are set by the insurer periodically.

There are typically two death benefit options. One is to receive a stated death benefit (like whole life).... and for these policies the insurer's net amount at risk declines as the account value grows so COI charges are lower since they are based on net amount at risk... so for example if the death benefit is $1m and the account value is $400k then the mortality coverage is based on $600k of net amount at risk. The other option is a death benefit of a stated amount plus the account value and in those cases mostality coverage is based on the stated amount since that is the net amount at risk. So if the death benefit is $1.4m in that case the mortality charges would be based on $1m of net amount at risk.

 

[Radlink54]

I regret doing what you propose

Talked in to same by a NWML agent @ 15 years ago. Front loaded and “self sustaining “ after 7 years was our promise. Needless to say policy projections were crap and never became self sustaining. Finally had to reduce death benefit by @ 40% to get out of continued payments. Also Once in ILIT you have limited options to annuitize or otherwise adjust to life and family changes.

Best advice you got is review your comprehensive estate and consider something like this only in very specific and rare estate situations.

 

[gcgang]

Thanks for all the thoughtful replies.

A big Part of my motivation to do this is to avoid Estate Tax. I hate paying taxes that can be avoided.

OTOH, even if the policy performs as the agent promised, whether we “cheat” the IRS out of $ or not when we’re both dead probably isn’t going to change daughter’s lifestyle much, assuming our other assets hold their value.

Also, it’s likely that we wouldn’t qualify for the full amount, as there may be health issues that the insurance company wouldn’t like. Plus the costs to set up and administer the ILIT are a complication I don’t want.

Think I’ll tell the agent to put this idea to bed.

 

[jayanu]

I assume the folks who are down on ILIT, would say the same things about long-term care insurance?

A reputed 5 star Type-A LifeCare CCRC is a better option.
Otherwise, Type B or Type C.

In old age loneliness can be a killer so being In a maintence-free Independent living with lots of amenities and residents is a big advantage.
Plus the portion of the entrance fee and monthly fees is treated as prequalified Medical deduction if you itemize. This can be substantial. LTCi deduction is limited to ~$5,00.year only.

LTCi are expensive, and hard to get. Many companies folded the tent or increased the premium or decreased the benefits, or both. to get a lower premium you have to take LTCi at an early age, but then when you need it the price of the LTC has gone beyond the benefits!

Typically, they are for 3-5 years for $125K. The median in NJ is $125K for one person in a semi private room. If both need to use, then the benefit per person is half and your years are half also!

Yes, I will be down on LTCi also.

 

[Golden sunsets]

I think there is some nomenclature getting in the way.



These policies are akin to a permanent term policy combined with a savings account for GUL and combined with high-fee mutual fund accounts for VUL.



The premium is the amount paid from the policyholder to the insurance company (the $30k/year referred to) and is a "deposit" to the account value (savings account). Typically there is a recommended target premium that is designed so that the policy will noy lapse using conservative assumptions. If one pays the target premium then the account value will grow in the early years as the premiums exceed the mortality charges and fees and that built up account value funds the higher mortality charges in later years. The structure isn't much different from whole life except you can see all the component pieces and no-lapse isn't guaranteed (that is why target premiums are lower than whole life for milar mortality coverage).



The problem is that many policyholders pay less than the target premium and as a result at later ages there is not enough accumulated account value to fund the higher mortality charges in the later years and the policy runs out of money.



The cost of insurance is the monthly charges against the account value for mortality coverage. The maximum rate for the mortality charges (per $1,000 of coverage at each attained age) is set in the contract, but the actual COI charges are typically lower and are set by the insurer periodically.



There are typically two death benefit options. One is to receive a stated death benefit (like whole life).... and for these policies the insurer's net amount at risk declines as the account value grows so COI charges are lower since they are based on net amount at risk... so for example if the death benefit is $1m and the account value is $400k then the mortality coverage is based on $600k of net amount at risk. The other option is a death benefit of a stated amount plus the account value and in those cases mostality coverage is based on the stated amount since that is the net amount at risk. So if the death benefit is $1.4m in that case the mortality charges would be based on $1m of net amount at risk.

Yes PB. You've described our policy. It was recommended to us by our attorney back in 2000. Around the time that we canceled the policy, we touched base with him again and he agreed that the reason for the policy, no longer existed in our situation. He also said that the modeling used by the insurer was ridiculously unrealistic. The administrative costs to maintain the policy, which were originally minimal, were rapidly changing in the industry and at his law firm inparticular. His firm was the trustee of our ILIT, and they had decided to farm out the administration to a national firm that offered the service, for a ridulous amount of money annually. I think the cost exceeded $2,000 per year, as a package, where we had been paying an annual bill to the firm of $100 +/- which represented the hourly costs of the ckerks at the firm who sent us a letter annually requesting the premium and then turned that payment around to the insurance company.

 

[mickeyd]

Run!

What he said!