Down Payment / We May Never Buy - About to Surrender "Toxic" VUL

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DarkHelmetII
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Down Payment / We May Never Buy - About to Surrender "Toxic" VUL

Post by DarkHelmetII »

I have a TIAA-CREF VUL holding funds for a down payment however with no clear timeframe - I'd say 50% chance we rent for next 5 years. Happy to be a "wealthy renter" and keep socking away $$ (above and beyond the allocated down payment) into stocks & bonds bogleheads style.

The asset mix of the VUL - allocated to the down payment - is 80% fixed account (floor of 3% and currently around 3.1%) and 20% in Vanguard S&P 500 equivalent at 0.15% expense ratio. I recognize VUL's are generally "toxic" however found that the fixed account (especially in this environment) and relatively low expenses for a VUL (no surrender charge, reasonable ER on the equities, no expense ratio on the fixed account - yes I am aware that capital gains have been converted into ordinary income taxes) coupled with providing level of insurance I would otherwise require made this a reasonable deal for the past several years.

Still yet I want to exit / simplify, buy term, and put the down payment into a conservative balanced portfolio very likely the Harry Brown Permanent Portfolio. I welcome feedback, commentary etc... on this approach.
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David Jay
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Re: Down Payment / We May Never Buy - About to Surrender "Toxic" VUL

Post by David Jay »

If I was ever going to use a VUL (which I am not), I would probably start with TIAA. They will be among the lowest cost options.

I would never hold SP500 inside a VUL. What is your marginal tax rate? 22%? 24%? You are just flushing money down the drain.

If you keep it, I would hold 100% fixed account. Hold your equities outside of the VUL.
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Stinky
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Re: Down Payment / We May Never Buy - About to Surrender "Toxic" VUL

Post by Stinky »

While the vast majority of VUL products are "toxic", I would not describe this product in that way.

On the good side, it sounds like you're making 3+% on a fixed bucket, which has instant liquidity. I have no problem at all with you putting your down payment / liquid cash into a 3% bucket. Also on the good side are the favorable product terms with TIAA.

On the bad side, you're investing in the S&P within the VUL, which you recognize as tax-inefficient. I agree with David Jay that you optimally should not hold equities inside a VUL.

Before you surrender and buy external term life insurance, I'd request an inforce illustration to see how the product will perform over the next 10 (or 15, or 20) years. I'd pay particular attention to the internal "cost of insurance" charges to be assessed in the future. You should compare the present value of those COIs to the cost of a level term policy that you could buy externally (check term4sale.com or zander.com for quotes). You'll probably find that the COIs on the VUL are higher than the cost of a term policy. However, the higher term life costs might be offset by the 3% interest you're getting, compared to alternative liquid investments.

I wouldn't suggest surrendering the VUL until you do a little more analysis. A lot will depend on how heavily you've funded the VUL - a heavier policy might offset a higher term premium.

Also remember that the VUL COIs will be partially (or fully) paid with interest income, which effectively avoids taxes on the VUL interest income - another benefit to the VUL.
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Jack FFR1846
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Re: Down Payment / We May Never Buy - About to Surrender "Toxic" VUL

Post by Jack FFR1846 »

The insurance portion of a VUL or UL is typically the worst of the worst deals. It is re-evaluated annually as if you're Joe Smith off the street. Because of this, as the policy gets older, the cash value starts going down with an eventual zero'ing out of both death benefit and cash value.
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Stinky
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Re: Down Payment / We May Never Buy - About to Surrender "Toxic" VUL

Post by Stinky »

Jack FFR1846 wrote: Thu Apr 08, 2021 9:20 am The insurance portion of a VUL or UL is typically the worst of the worst deals. It is re-evaluated annually as if you're Joe Smith off the street. Because of this, as the policy gets older, the cash value starts going down with an eventual zero'ing out of both death benefit and cash value.
That is true. I expect that the VUL cost of insurance charges are higher than the premiums for a newly issued level term policy.

However, the COI might be offset by higher interest than is available elsewhere, plus paying COIs with pretax dollars if the VUL balance is high enough.

On balance, the VUL could be a good value for OP. The only way to know for sure is to request an inforce illustration and do some calculations.
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