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Variable Universal Life Insurance Question
Old 10-15-2018, 06:59 PM   #1
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Variable Universal Life Insurance Question

Hello,

I've read many posts, and like some others, I am getting out of Ameriprise and hoping to do a better job of managing my position myself.

There is one thing that is just confusing me the more I read about it. What to do with a Riversource Variable Universal Life Insurance Policy.
  • This is for $1,000,000 with a "cash value" of $71,325 and "value if surrendered" of $68,922. I 'think' I'm paying $125/mo to maintain this, but I kinda don't know (lot's I don't know, much of why I'm not happy with Ameriprise)
  • I DO have a family that depends on me working, probably another 20 years, so I DO think I should have life insurance. I also have another $1,000,000 term policy and I do think it's fair to my family to keep $2,000,000 of total life insurance.
  • What I think I want to do, is cash out this VUL policy, and buy additional term insurance (I have an employer now that offers this, may be cheaper, will need to research).
  • What I don't know, is what to do with the ~$68,922 after surrendering. I assume I would have to pay taxes on this. And, of course, I'm in the highest of tax brackets, so that will suck.
  • What I want to do is invest that into something.
  • In this situation, what options are there (if any) that is tax neutral or tax beneficial?

Thank you!
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Old 10-15-2018, 08:06 PM   #2
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Your taxable gain, if any, would only be for any excess of the cash surrender value over the premiums paid... when you do the surrender they should be able to tell you wnat the taxable gain is.
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Old 10-15-2018, 08:54 PM   #3
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Quote:
Originally Posted by pb4uski View Post
Your taxable gain, if any, would only be for any excess of the cash surrender value over the premiums paid... when you do the surrender they should be able to tell you wnat the taxable gain is.
@pb4uski is correct. I'd add that it is likely that the vast majority of the ~$69K will be a return of your premiums and therefore not taxable. Perhaps even all of it; i.e., your taxable gain might very well be zero.

If you're in the highest tax brackets, you'd probably want to reinvest the ~$69K in tax deductible investments - traditional IRAs for you and your spouse and your 401(k)s or similar are likely the best options.
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Old 10-15-2018, 09:11 PM   #4
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Originally Posted by DrGerm View Post
[*]In this situation, what options are there (if any) that is tax neutral or tax beneficial?[/LIST]
Thank you!
You could do a 1035 exchange of your life policy for an annuity policy. There is no income tax at the time of the exchange, the basis in the life policy becomes the basis in the annuity. You will pay ordinary income tax rates (not capital gains rates) when you surrender the annuity. You can defer surrendering a long time by doing 1035 exchanges from one annuity to another.

You'd probably want a "deferred" annuity. They are frequently sold as to people who have no intention of ever "annuitizing" (taking the proceeds as a lifetime income).

At the high level,
Fixed - Some provide fixed, guaranteed interest rates for the surrender charge period (almost always less than 10 years). These compete against CDs.
Variable - Some provide investments that look like mutual funds. These compete against mutual funds.

There is a recent post comparing the interest on fixed annuities to CDs, the CDs were noticeably better.

Variable annuities have notoriously high fees. I'd look at Vanguard first, they claim "average" fees of 52 basis points. That's quite a bit higher than Vanguard's average mutual fund, but lower than other VAs.

You would have to analyze your own situation to see if the tax deferral is worth the higher fees.
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Old 10-15-2018, 09:36 PM   #5
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Originally Posted by pb4uski View Post
Your taxable gain, if any, would only be for any excess of the cash surrender value over the premiums paid... when you do the surrender they should be able to tell you what the taxable gain is.
Ahh.. I see. I should have got that.

Yes, the "Total Premium Paid" says $58,500. So, the excess gain isn't so much. I don't feel as much pressure now. Thanks!

Compare that to $2,820 total premium paid for an equal amount of Term Insurance purchased at the same time... I may have done better putting the money in a savings account
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Old 10-19-2018, 12:01 PM   #6
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Originally Posted by DrGerm View Post
I DO have a family that depends on me working, probably another 20 years, so I DO think I should have life insurance. I also have another $1,000,000 term policy and I do think it's fair to my family to keep $2,000,000 of total life insurance.
A work group policy is probably going to be more expensive than an individual policy if you are young and healthy since the work group policy needs to insure the older and less healthy individuals.

I have a $750k 20 year policy - 10 years left and a $1.25M 20 year policy that's got about 15 years left on it ($900/year premium)
I wish I had found this forum sooner as pb4uski had a good idea about a term insurance ladder.

You should ideally have less and less of a need for a term policy as you get closer to FI. If you were to croak when you have 20 years left, you might need a $2M policy for your family. If you were to croak when you were 10 years from retiring, you might need $1M and when you are five years away you might only need $0.5M.

If I had a do-over, I would probably have set up a ladder like this (all policies starting at the same time) FI-20 years

These numbers are from a generic term life insurance quote.

$2M 20 year term @ $90/month

or

$500k 20 year term @ $27/month
$500k 15 year term @ $19/month
$500k 10 year term @ $17/month
$500k 5 year term @ $16/month

Year 1-5: $79/month
Years 6-10: $63/month
Years 11-15: $46/month
Years 16-20: $27/month

Sure you'd have less coverage after the first five years, but you'd also have fewer working years to cover and also hopefully a larger nest egg for your family to live off in addition to the payout.
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Old 10-20-2018, 10:48 AM   #7
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Originally Posted by Independent View Post
You could do a 1035 exchange of your life policy for an annuity policy.

[...]

You would have to analyze your own situation to see if the tax deferral is worth the higher fees.
I know little about annuities, but I would be hesitant to trade a small one-time tax bill on ~$10K for years and years of paying annuity fees (which I think include both mortality and investment expenses that can be ~2% per year or more) on ~$70K. Doesn't sound like a good idea to me.
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