Variable Universal Life help

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graffin
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Joined: Tue Sep 21, 2010 7:26 pm

Variable Universal Life help

Post by graffin »

I've read mixed (although mostly negative) posts here about variable life insurance. I'm now debating what to do with the policy I already have. I'm not yet through my surrender period, but I'm a few years in so I've already paid the biggest of the fees that I will see.

My cash value is at about 5,000. My cash out surrender value is at about 500, if I cancel the policy. That seems like a big loss to take. But if I'm just digging a bigger hole by continuing to fund the product I might consider it. I'm paying 175 per month to fund it. I've paid about 6000 in premiums since it was issued.

Can anybody help me understand what I've got here and which direction makes the most sense for the situation I'm in. Taking into consideration that I've already weathered the storm of the worst part of the fees. I greatly appreciate any help or advice. Thanks.
Whatyear?
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Post by Whatyear? »

I'm probably not the best person to give you actual advice, but I'll tell you how I finally came to this decision (I was in a similar situation a year or so ago, but with more money involved). For me what it boiled down to was that I did not understand enough about how a VUL works to justify staying in it. The (high) cost of the plan relative to term life aside, I could not conceptualize how to eventually tap into the investment part of the plan without running into adverse tax consequences or, worse, causing the policy to lapse. I read a lot about it, I talked to a couple of different investment advisors, I read the prospectus from cover to cover, I talked to the issuer/administrator, etc., but it was so darned complicated and "nuanc-y" that I just said the heck with it. I sold it at a small gain (net of surrender fees) and never looked back.

Good luck with your decision!
wwross
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Joined: Fri Sep 10, 2010 3:43 pm

Post by wwross »

I absolutely agree with getting rid of it. My wife and I had a couple of VUL policies with, it ended up, $18k and $26k respectively. I took a couple thousand dollars hit on each, but given the lack of transparency of the investment choices, inability to work with the investments online, very high cost of the monthly premiums, and incredibly high insurance and fund maintenance costs, I was very glad to leave.

I took the money and put it into our TD Ameritrade brokerage account, invested in Vanguard (and other ETFs) and took the premium savings and purchased very cheap term life policies.
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rfranzen
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Post by rfranzen »

I don't know enough about VUL to give any actual advice. If you decide to get rid of it, one thing you might look into is a "1035 exchange". It allows you to exchange a cash value life policy for another policy, endowment, or annuity with no tax consequences. From the sound of it, your policy isn't old enough to have tax consequences (cash value > cost basis). However if you exchange to an annuity with the same vendor, they might be willing to waive the cash surrender value fee.

I have no idea if they will; it is just a possibility to explore.

(In the USA there is no longer any tax deferral on endowments, which is probably why Americans don't even talks about them any more. I just mentioned it because that is part of the 1035 stuff.)
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qilin
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Post by qilin »

I'm in the same situation at this time. I have two policies for my wife and myself, sold to us ten years ago, and one sold to us 4 years ago, with more money involved. I'm thinking of paying the penalty and surrender the older ones since the amount is not high - consider this as I bought very expensive term life insurances ten years ago. But I'm stuck with the recent one, probably for at least a few more years. I wonder if anyone has any suggestions in terms of what other alternatives I might have.
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mickeyd
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Post by mickeyd »

Hey graffin,

Welcome here.

This is a tough way to learn about how you can get screwed by LI agents. Sorry for the mess. May be just a cost of your financial education.
I'm paying 175 per month to fund it
A short-term action that you can take today is to not pay any more premiums until you decide what to do. If you pay automatically from the checking account, cancel it today. It will cut your losses if you decide to surrender the policy. If you decide to keep it, you can authorize the payment.
Part-Owner of Texas | | “The CMH-the Cost Matters Hypothesis -is all that is needed to explain why indexing must and will work… Yes, it is that simple.” John C. Bogle
qilin
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Post by qilin »

A bit details of my numbers:

Her 150k policy since 2000:
total premiums paid: $10778
surrender value $8135
surrender charge $466

His 400k policy since 2000:
Total premium paid: $21868
surrender value $17000
surrender charge $1550

His 1M policy since 12/2007:
total premium paid: $27720
surrender value $7643
surrender charge $14553

Options:
1. Surrender the first two, keep the last one.
2. Keep all three, but only paid minimum premium. Wait for 5 more years to surrender the first two so there will be no surrender charge. Wait for 10 more years to surrender the last.
3. Keep all three, pay premium as planned. The future will not be as pretty as shown in the initial illustration when they were sold to us.

What would you do? Please help with the decision.
Topic Author
graffin
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Joined: Tue Sep 21, 2010 7:26 pm

Post by graffin »

mickeyd wrote:Hey graffin,

Welcome here.
I'm paying 175 per month to fund it
A short-term action that you can take today is to not pay any more premiums until you decide what to do. If you pay automatically from the checking account, cancel it today. It will cut your losses if you decide to surrender the policy. If you decide to keep it, you can authorize the payment.
mickeyd, thanks for the reply. And all other replies are great too. Can't have too much info. I know it's been a few months, but I'm still thinking about this. Your response was intriguing.

Tell me if I'm wrong here. I stop making monthly payments, and the cost of insurance each month is taken out of my existing cash value. My cost of insurance is about $50 per month. So I'll be decreasing my cash value (depending on portfolio performance), but saving about $125 per month in my checking account.

Do you know how this affects surrender amount? If I do this for a period of time, a few years possibly, as long as there is cash value left to do so, I could close the gap on what my total premiums in vs cash out surrender value is. Does that sound right? Or is continuing to make payments and build the cash value faster, a better way to go? I'd like to minimize the loss the best I can.

Any other ideas mickeyd, or anyone? Thanks a ton.
Oneanddone
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Post by Oneanddone »

This is not advice on whether it should be kept or dropped.

If you decide to drop it, don't just cancel it. Instead, do a 1035 exchange into an annuity. This can be fixed or variable. Here's an example to show you why.

Ex. Jim has a VUL policy with a $20,000 cost basis. The surrender value is $10,000. He does a 1035 exchange into an annuity. The annuity grows to $20,000. Jim cancels the annuity. There would be no taxes and no pre-59 1/2 penalty.

What the 1035 exchange does is preserves the cost basis. This will allow tax free (not tax deferred) growth up to the original basis.
Dandy
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Post by Dandy »

Before you cash in the Variable Life policies you need to consider what your life insurance needs are. If you still need life insurance you may wish to buy the level of life insurance (usually term) that you and your wife need first. You want to make sure that you are both insurable before you cancel.

If you establish that you need life insurance you might be able to convert the existing Variable Life to term. If they allow it, before you do check competing term rates from other insurance companies.

If you don't need life insurance then I would consider cashing out. By not paying the premium I believe the insurance company will just take the necessary monies from your cash value and that will lower your money when you cash out.
hlfo718
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Post by hlfo718 »

Why don't you call the company to see if you can convert the policy to a Term life policy? Then at least you are still covered and may be able to get some thing out of this one sided relationship. I would not contact the agent though. He/she will try to convince you to stay or sell you another high fee policy. Is a no win situation.
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mickeyd
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Location: Deep in the Heart of South Texas

Post by mickeyd »

graffin wrote:
mickeyd wrote:Hey graffin,

Welcome here.
I'm paying 175 per month to fund it
A short-term action that you can take today is to not pay any more premiums until you decide what to do. If you pay automatically from the checking account, cancel it today. It will cut your losses if you decide to surrender the policy. If you decide to keep it, you can authorize the payment.
mickeyd, thanks for the reply. And all other replies are great too. Can't have too much info. I know it's been a few months, but I'm still thinking about this. Your response was intriguing.

Tell me if I'm wrong here. I stop making monthly payments, and the cost of insurance each month is taken out of my existing cash value. My cost of insurance is about $50 per month. So I'll be decreasing my cash value (depending on portfolio performance), but saving about $125 per month in my checking account.

Do you know how this affects surrender amount? If I do this for a period of time, a few years possibly, as long as there is cash value left to do so, I could close the gap on what my total premiums in vs cash out surrender value is. Does that sound right? Or is continuing to make payments and build the cash value faster, a better way to go? I'd like to minimize the loss the best I can.

Any other ideas mickeyd, or anyone? Thanks a ton.
In my response I was only addressing a small part of your issue with VUL policy and offering a way to cut your losses if you eventually bailed out. If the contract will squeeze off $50 a month to pay the premium your CV will decrease by that amount, as you suggest. As suggested earlier by someone else, it is more important to decide how much LI your needs require and insure for that amount of term insurance, not cash value (expensive!) insurance and invest the balance as your needs require.
Part-Owner of Texas | | “The CMH-the Cost Matters Hypothesis -is all that is needed to explain why indexing must and will work… Yes, it is that simple.” John C. Bogle
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