Are VULI's a scam?

[RhodyGreg14]

I recently met with a PFP for the first time. Being from NY I am always a skeptic and while he didn't push any one thing too much, from my other research I have seen a lot of negative things said about variable universal life insurance policies - something that the PFP made sound like a great idea.

Is it just a matter of my limited knowledge of the subject, or just a few individual opinions I've seen, or my sometimes over-skepticism of anything that sounds pretty good? Are these things OK for some people or is it one of those almost pyramid schemes that are only set up to depart a fool from his money?

Thanks.

 

[CyclingInvestor]

VULIs are investment products designed to turn worthless equity into valuable fees and commissions.
They are not pyramids or illegal, just very high-fee products which pay a large sales commission
up front to the PFP, giving him a very good reason to push them.

 

[FinanceDude]

I recently met with a PFP for the first time. Being from NY I am always a skeptic and while he didn't push any one thing too much, from my other research I have seen a lot of negative things said about variable universal life insurance policies - something that the PFP made sound like a great idea.

Is it just a matter of my limited knowledge of the subject, or just a few individual opinions I've seen, or my sometimes over-skepticism of anything that sounds pretty good? Are these things OK for some people or is it one of those almost pyramid schemes that are only set up to depart a fool from his money?

Thanks.

I haven't seen many situations where VULI is a good option.

Unless you're mega-rich and need to do a lot of wealth transferring, it's most likely not needed..........

 

[bright eyed]

those products have very very high commissions for the seller, so they are very very motivated to get you to buy them.

 

[brewer12345]

Not a scam, since these are products sold by very, very regulated entities with lots of (sometimes ineffective) consumer protection laws in place. But they are typically a pretty bad deal for most people.

 

[mickeyd]

What is a PFP? Do you mean CFP?

VUL is a great way to insure that your insurance agent is financially able to send his children to an Ivy League university in the future. The best kind of life insurance is term insurance in an amount that is appropriate with your needs.

Agents only get about a 20% commission on this kind of low cost coverage and you can often pick it up with no commission, but they prefer that you commit to the VUL package that they can skim off about 80% of the first year's premium and about 10% thereafter.

 

[FinanceDude]

What is a PFP? Do you mean CFP?

I think he means Personal Financial Planner, which is a moniker a lot of insurance agents use........

VUL is a great way to insure that your insurance agent is financially able to send his children to an Ivy League university in the future. The best kind of life insurance is term insurance in an amount that is appropriate with your needs.

For the most part, although I own some permanent insurance also.........


VUL is usually presented in such a confusing way that a University Of Chicago MBA would struggle...........

 

[brewer12345]

For the most part, although I own some permanent insurance also.........

Just curious: why?

I couldn't make the numbers work when I looked at a UL policy and I couldn't fathom needing a policy for the rest of my life. But there must be some reason educated people buy these things.

 

[ziggy29]

I couldn't make the numbers work when I looked at a UL policy and I couldn't fathom needing a policy for the rest of my life. But there must be some reason educated people buy these things.

I have to believe there is at least *one* person out there for whom whole or universal life was a better option than buying term and investing the difference. But I haven't yet heard a scenario where that seems like it would be true.

 

[Peaceful_Warrior]

I haven't seen many situations where VULI is a good option.

Unless you're mega-rich and need to do a lot of wealth transferring, it's most likely not needed..........

This seems to be the prevailing perspective from my own investigation into the topic. Typically those who are already maxxing out their various tax advantaged accounts and still need a shelter will get a VUL.

It is important to note that most people who actually see VUL as an investment opportunity structure it in a way that they can put the maximum amount of money in over 7 equal consecutive payments, while getting the minimum amount of actual life insurance.

This ensures that the investment side of the VUL increases quickly enough to offset the inherently high costs within the VUL.

Some people swear by this strategy... but as FD noted, there are some situations it's useful but generally not so much.

Another possibility for buying permanent policies is as a hedge against the "unexpected" -- such as your health deteriorating during your term, then you having dependents after the term expires. When you go to renew the term, it skyrockets to higher than a perm policy whereas if you had a permanent policy while healthy then the overall cost might be cheaper.

I haven't run the numbers on that last possibility, so it may be false and totally inaccurate (also depends on the various riders on the policy).

Best thing is to always do the numbers. Also be sure to factor in opportunity cost, since in the case of insurance if you live, then all the money is "gone" and you could have invested it.

I had a WL policy, but finally dropped it a few months ago after feeling that regardless of how good an investment it may or may not be, I didn't want to have to wait 20+ years to see any benefit.

 

[FinanceDude]

Just curious: why?

I couldn't make the numbers work when I looked at a UL policy and I couldn't fathom needing a policy for the rest of my life. But there must be some reason educated people buy these things.

Not VL or UL, but whole life. I converted some term to whole life for two reasons:

1)Protecting against future uninsurability

2)So I can gift a tidy sum to my sister's memorial fund upon my death...........

 

[Dosai]

Your VUL analysis..

I haven't seen many situations where VULI is a good option.

Unless you're mega-rich and need to do a lot of wealth transferring, it's most likely not needed..........

------------------------------

I once read an excellent analysis on VUL(& onlyhave a hard copy, so will have to covert to pdf to post). It said, there is a window when it becomes beneficial. (We have to remember, all insurance is a game we play with the company)

There comes a time, when you have maxed out 401k etc..then VUL becomes a ROTH IRA like function.
Here is summary of what it would work
You invest in funds just the same, get ~7-8% return on average,
But when you have reached a 10yr period, you are able to withdraw against your balance (4%) that is taxfree. The balance keeps growing.
+ there is a death benefit.

I have one but of course have not reached a point of any withdrawal. but the analysis from my FP seems good.
Your thoughts?
D

 

[saluki9]

Agents only get about a 20% commission on this kind of low cost coverage and you can often pick it up with no commission, but they prefer that you commit to the VUL package that they can skim off about 80% of the first year's premium and about 10% thereafter.

Nonsense.

The first year commission on term ranges from 60 - 120% with most being in the 80% range.

 

[saluki9]

Just curious: why?

I couldn't make the numbers work when I looked at a UL policy and I couldn't fathom needing a policy for the rest of my life. But there must be some reason educated people buy these things.

Brewer - Part of the problem is that the product is so complex that you need an honest pro to get a good deal. If you can get somebody who knows what they're doing to run the illustration you can really strip a lot of the costs out of the policy. You can set them up so the policy is 90% term in year one and only buys up the permanent when the cost of term goes up.

I've seen a lot of deferred comp plans set up with VUL where you're putting 95%+ of the premiums right back on the balance sheet which is amazing for permanent insurance.

 

[mickeyd]

I have one but of course have not reached a point of any withdrawal. but the analysis from my FP seems good.
Your thoughts?

Seems as though you have consunmed too darn much of their Kool-Aid.

 

[chinaco]

I would not consider a VUL. I cannot speak much to them and their use. But I would suspect that the pitch is tax advantage plus life insurance.

IMO - For a normal retirement investing... I would invest in diversified Mutual Funds. If I needed life insurance, I would stick with term insurance... just make sure the length of the contract suits your needs.


I have worked with many actuaries. I have yet to find any that use life insurance products as a pillar of their personal investment portfolio or for retirement.

I wonder why?

 

[mickeyd]

I wonder why?

Perhaps it's because they understand basic math better than most.