Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

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LFKB
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Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by LFKB »

Please only respond if you have looked into a variable universal policy from a reputable company like Northwest Mutual and properly understood the tax benefits of it...I am looking for what I am missing/not thinking of...

It seems pretty straight forward
1) Yes, there is a commission involved and you have to pay for the insurance
2) The tax savings (for me) are far greater than the cost of insurance and commission, which means the after tax returns are greater

For a variable policy, I can invest in the S&P500 as I otherwise would and the expense ratio of the fund is only 19bps (not as low as Vanguard, but not bad). I also am young and in the best health class which makes the insurance cheaper on a relative basis.

There are dramatic tax benefits as an individual in the top tax bracket in the most punitive tax state (CA)
1) Dividends are not taxed
2) I can re-balance over time without realizing capital gains and being taxed
3) I am in a position where my assets at death will almost certainly be in excess of the estate tax threshold of $11.2M. I can both eliminate the estate tax through a life insurance policy and gift it to a trust and still enjoy a step up in basis when inherited.

What am I missing? Why is this not a no brainer for HNW individuals in high tax states?
Rex66
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by Rex66 »

It is definitely not guaranteed for tax savings to be greater than costs. It rarely is which is why you don’t see non insurance folks recommending it. I wouldn’t be surprised if they illustrated it working out. There was an article written by insurance industry experts you might want to look at. Since it’s still a pro insurance person, it doesn’t outline all the other negatives and I’ll just list a few.

https://infinitewealthconsultants.com/w ... omises.pdf

Costs of investments are not guaranteed and the insurance industry has a history of changing/removing investment options from products when they turn out to be “too good”.

Illustrated costs for insurance are not the guaranteed costs and lately several companies have further escalated insurance on old Universal policies. Not NWM yet but I’ll also tell you agents used to claim they would never increase costs on LTCi but they did.

An irrevocable trust avoids estate taxes not the insurance product. You can put other stuff in an irrevocable.

It’s currently easy to minimize taxes with index funds so that it’s like a 0.2% drag.


It is a not a no brainer but in fact is more the opposite.

If you want it go for it. Go believe you are the unicorn this works like magic for.
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Watty
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by Watty »

LFKB wrote: Mon Sep 14, 2020 1:01 pm I also am young ......

What am I missing?
A few things.

One big one is that tax laws are continually changing. There is no telling what the impact would be on your estate if you die 50+ years from now. Even 20 years from now when you might still be in your prime earning years the tax laws could be a lot different.

"Life happens" and you might not end up being as wealthy in retirement as you are expecting.

It would be good to have a good estate planning lawyer look over their plans to see if they would recommend a variable universal life policy, and then help you pick out a good one. If you have(or will have) a high net worth then estate planning is not something you can do yourself. You can't trust anyone that would be paid a commission if you buy the life insurance.
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Stinky
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by Stinky »

Watty wrote: Mon Sep 14, 2020 3:02 pm
LFKB wrote: Mon Sep 14, 2020 1:01 pm I also am young ......

What am I missing?
A few things.

One big one is that tax laws are continually changing. There is no telling what the impact would be on your estate if you die 50+ years from now. Even 20 years from now when you might still be in your prime earning years the tax laws could be a lot different.

"Life happens" and you might not end up being as wealthy in retirement as you are expecting.

It would be good to have a good estate planning lawyer look over their plans to see if they would recommend a variable universal life policy, and then help you pick out a good one. If you have(or will have) a high net worth then estate planning is not something you can do yourself. You can't trust anyone that would be paid a commission if you buy the life insurance.
Excellent advice from Watty.

Another question from OP - what is the face amount for the proposed policy? Do you even need life insurance?

The best reason to buy life insurance is for the death benefit protection. The worst reason is to do some fancy tax or investment arbitrage.
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Impatience
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by Impatience »

For someone with tons and tons of money yes it makes sense. These policies are almost always demonized around here and with good reason but if you’ve exhausted every other possible avenue of tax advantaged investment then they can be worthwhile.
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HomerJ
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by HomerJ »

LFKB wrote: Mon Sep 14, 2020 1:01 pm Please only respond if you have looked into a variable universal policy from a reputable company like Northwest Mutual and properly understood the tax benefits of it...I am looking for what I am missing/not thinking of...

It seems pretty straight forward
1) Yes, there is a commission involved and you have to pay for the insurance
2) The tax savings (for me) are far greater than the cost of insurance and commission, which means the after tax returns are greater

For a variable policy, I can invest in the S&P500 as I otherwise would and the expense ratio of the fund is only 19bps (not as low as Vanguard, but not bad). I also am young and in the best health class which makes the insurance cheaper on a relative basis.
Here's how they get you.

You will not get the full return of the S&P500. If the S&P500 returns 11% over a year (including dividends), your variable annuity will not go up 11%. It will go up less. Maybe 8%-10%.

This will not be shown as a "fee", but it will indeed be a drag on your returns and you will end up with far less money.

It's in the paperwork somewhere. Deep in the paperwork. Maybe they have a upside limit of 1%-2% a month (so if S&P500 goes up 3% in single month, you won't get all of that). Or maybe you get less dividends than are actually paid out.

The insurance company gets paid. And paid well. Why do you think they have whole teams of salespersons selling this stuff?

Do not spend 2%-3% in hidden fees every year to save 0.4% in dividend taxes (2% dividends times 20% taxes)

Also if you ever take the money out, it will be taxed as income, not capital gains, so probably higher taxes in the end.

And check, are there two numbers? An account balance and a cash surrender value? Because those will be different numbers. If you ever annuitize the annuity, that's how they will really get you. They'll pay you less than you could get on the open market for a SPIA at that point.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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HomerJ
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by HomerJ »

Impatience wrote: Mon Sep 14, 2020 3:16 pm For someone with tons and tons of money yes it makes sense. These policies are almost always demonized around here and with good reason but if you’ve exhausted every other possible avenue of tax advantaged investment then they can be worthwhile.
If the comparison is between S&P 500 index Fund and a variable annuity, the Index Fund will always win.

It's super tax-efficient year-to-year. 2% dividends (less nowadays) times a max dividend tax of 20% equals 0.4% drag on your portfolio. Most annuities impose a 2%+ drag on your portfolio.

Spending 2% each year, every year, to save 0.4% a year in taxes is not smart investing.

And later when you withdraw, capital gain taxes (currently) from a taxable Index Fund are cheaper than income taxes pulling from an annuity.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
petulant
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by petulant »

You note the dramatic tax benefits of the VUL policy, but remember it's a cost-benefit analysis. There are also dramatic costs: the insurance itself, which you might be able to take out if you would have purchased insurance anyway, but the "commissions" and other expenses are significant. They include, typically, the face amount fee, an asset-based charge, premium taxes for putting money in, and an annual administrative fee. The tax savings must eclipse all of these high costs together, which is very difficult.

That said, when I was studying VUL policies deeply, I did find it was possible to support holding stocks inside a VUL policy: investors in California who are in the highest brackets, like 10%+, who are early in their investing careers and will hold the assets, then use them through policy loans and/or tax-free withdrawals, before passing away. Note: the last caveat is very important. An investor who can realize no capital gains taxes by giving away or leaving stocks as an inheritance will never beat a taxable brokerage account using a VUL. Using the VUL for stocks specifically requires a very long holding period and then withdrawing the money to use it.

The reason this happens is that the tax benefits for the VUL are twofold: avoided drag on dividends, which in the case of a very high earner in California is quite large, and avoided long-term capital gains on withdrawal. These take a long time to materialize, while the highest expenses for the VUL policy are frontloaded in the form of the premium tax and face amount charges that last 7-20 years. NW Mutual's VUL Plus product, for example, only has a $96 annual fee and S&P 500 expense ratio once you make it past the special charges and premium costs in the first 20 years. So you need to hold much longer than 20 years, then you need to actually avoid capital gains taxes by using the money without incurring gains tax.

There are various other problems, like the lack of options and transaction costs if you need to 1035 the policy. These are complexities that are net cons.

So again, this is all very difficult. It is not a "no brainer." But OP, you may be one of the few people for whom it could make sense if you are making $500K+ in California. If you are making less than that, I think it is very probable you have not quantified all of the probable costs correctly.

If it does make sense for you, what that means is that you're already maxing out all 401(k)-type options, the backdoor Roth, and anything else available first.
Last edited by petulant on Mon Sep 14, 2020 3:57 pm, edited 2 times in total.
petulant
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by petulant »

HomerJ wrote: Mon Sep 14, 2020 3:45 pm
LFKB wrote: Mon Sep 14, 2020 1:01 pm Please only respond if you have looked into a variable universal policy from a reputable company like Northwest Mutual and properly understood the tax benefits of it...I am looking for what I am missing/not thinking of...

It seems pretty straight forward
1) Yes, there is a commission involved and you have to pay for the insurance
2) The tax savings (for me) are far greater than the cost of insurance and commission, which means the after tax returns are greater

For a variable policy, I can invest in the S&P500 as I otherwise would and the expense ratio of the fund is only 19bps (not as low as Vanguard, but not bad). I also am young and in the best health class which makes the insurance cheaper on a relative basis.
Here's how they get you.

You will not get the full return of the S&P500. If the S&P500 returns 11% over a year (including dividends), your variable annuity will not go up 11%. It will go up less. Maybe 8%-10%.

This will not be shown as a "fee", but it will indeed be a drag on your returns and you will end up with far less money.

It's in the paperwork somewhere. Deep in the paperwork. Maybe they have a upside limit of 1%-2% a month (so if S&P500 goes up 3% in single month, you won't get all of that). Or maybe you get less dividends than are actually paid out.

The insurance company gets paid. And paid well. Why do you think they have whole teams of salespersons selling this stuff?

Do not spend 2%-3% in hidden fees every year to save 0.4% in dividend taxes (2% dividends times 20% taxes)

Also if you ever take the money out, it will be taxed as income, not capital gains, so probably higher taxes in the end.

And check, are there two numbers? An account balance and a cash surrender value? Because those will be different numbers. If you ever annuitize the annuity, that's how they will really get you. They'll pay you less than you could get on the open market for a SPIA at that point.
You're talking about a different product. That is one of the big problems with insurance products; there are a lot of variations. OP is talking about variable universal life policies, which really do break out all costs (much more clearly than annuities) and otherwise hold what is more or less a real mutual fund inside the policy. The S&P 500 returns will be real inside the policy, and the expenses for commissions and administrative fees will be broken out clearly.
Greenman72
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by Greenman72 »

LFKB wrote: Mon Sep 14, 2020 1:01 pm
3) I am in a position where my assets at death will almost certainly be in excess of the estate tax threshold of $11.2M. I can both eliminate the estate tax through a life insurance policy and gift it to a trust and still enjoy a step up in basis when inherited.

What am I missing? Why is this not a no brainer for HNW individuals in high tax states?
If this is true, then you need to seek qualified tax counsel. Maybe somebody (like me) who is both an investment advisor AND a CPA, and can talk educatedly about both investments and tax.

(Note to the mods - that's not a solicitation. That's good advice. Please don't slap my wrist again saying that I'm soliciting somebody, because I'm not. edit - and I didn't the last time, either.)
Topic Author
LFKB
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by LFKB »

Rex66 wrote: Mon Sep 14, 2020 2:45 pm It is definitely not guaranteed for tax savings to be greater than costs. It rarely is which is why you don’t see non insurance folks recommending it. I wouldn’t be surprised if they illustrated it working out. There was an article written by insurance industry experts you might want to look at. Since it’s still a pro insurance person, it doesn’t outline all the other negatives and I’ll just list a few.

https://infinitewealthconsultants.com/w ... omises.pdf

Costs of investments are not guaranteed and the insurance industry has a history of changing/removing investment options from products when they turn out to be “too good”.

Illustrated costs for insurance are not the guaranteed costs and lately several companies have further escalated insurance on old Universal policies. Not NWM yet but I’ll also tell you agents used to claim they would never increase costs on LTCi but they did.

An irrevocable trust avoids estate taxes not the insurance product. You can put other stuff in an irrevocable.

It’s currently easy to minimize taxes with index funds so that it’s like a 0.2% drag.


It is a not a no brainer but in fact is more the opposite.

If you want it go for it. Go believe you are the unicorn this works like magic for.
I can't touch the money if it is in an irrevocable trust...this is money that I have access to (via loans) throughout the full time period and also not pay taxes on.

Index funds in taxable I have to pay taxes on the dividends each year and as I get older I will have to sell massive lots to re-balance and pay capital gains. My capital gains rate is currently 37.1% (20% federal, 13.3% state. 3.8% net investment income tax) and only likely to go higher...I can't create nearly enough tax advantaged space for a material portion of my net worth.
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HomerJ
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by HomerJ »

petulant wrote: Mon Sep 14, 2020 3:55 pm You're talking about a different product. That is one of the big problems with insurance products; there are a lot of variations. OP is talking about variable universal life policies, which really do break out all costs (much more clearly than annuities) and otherwise hold what is more or less a real mutual fund inside the policy. The S&P 500 returns will be real inside the policy, and the expenses for commissions and administrative fees will be broken out clearly.
Yeah, they keep changing the names to confuse people. OP should NOT trust the salesperson. Read that prospectus fully. I bet there's a cap...

The insurance company isn't going to give you all the gains and let you avoid all the taxes for free.
What Is Variable Universal Life (VUL) Insurance?
Variable universal life (VUL) is a type of permanent life insurance policy with a built-in savings component that allows for the investment of the cash value. Like standard universal life insurance, the premium is flexible. VUL insurance policies typically have both a maximum cap and minimum floor on the investment return associated with the savings component.


VUL insurance has investment subaccounts that allow for the investment of the cash value. The function of the subaccounts is similar to a mutual fund. Exposure to market fluctuations can generate significant returns, but may also result in substantial losses. This insurance gets its name from the varying results of investment in the ever-fluctuating market. While VUL insurance offers increased flexibility and growth potential over a traditional cash value or a whole life insurance policy, policyholders should carefully assess the risks before purchasing it.
Last edited by HomerJ on Mon Sep 14, 2020 4:24 pm, edited 1 time in total.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
TrollToll
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by TrollToll »

Greenman72 wrote: Mon Sep 14, 2020 3:57 pm
LFKB wrote: Mon Sep 14, 2020 1:01 pm
3) I am in a position where my assets at death will almost certainly be in excess of the estate tax threshold of $11.2M. I can both eliminate the estate tax through a life insurance policy and gift it to a trust and still enjoy a step up in basis when inherited.

What am I missing? Why is this not a no brainer for HNW individuals in high tax states?
If this is true, then you need to seek qualified tax counsel. Maybe somebody (like me) who is both an investment advisor AND a CPA, and can talk educatedly about both investments and tax.

(Note to the mods - that's not a solicitation. That's good advice. Please don't slap my wrist again saying that I'm soliciting somebody, because I'm not. edit - and I didn't the last time, either.)
I happen to be one of those people who price these products. I generally don't recommend universal life to people, but I actually think you'd be in a reasonable place to buy one. Especially if you need income protection (not mentioned in your post).

I see 2 good reasons for life insurance.
1) Income protection. If you're young and have low savings and have a few little kiddos and potentially a spouse w/out a good job, you probably need life insurance. I'd generally go with term.
2) If you're rich and need to avoid the estate tax, life insurance is great!

There are a few others, such as small business owners with partners and/or kids who may or may not continue on with the business. Also, people who may be sued for malpractice may be able to shield assets with life insurance depending on the state. But these are more rare, in my estimation.

Anyway, I just want to second the comment above. I believe life insurance is good for avoiding the estate tax - BUT - you need to do a fancy thing with some accountants or lawyers or someone (I don't know the details - this isn't my job). I think it has something to do with buying the life insurance with a trust or something. Otherwise, it isn't shielded from the estate tax - nullifying the benefit. (note: it took a while for me to write this, so someone may have beat me to the punch)

Note: drawbacks to a VUL include
-Taxes as income rather than cap gains if you withdraw in your lifetime.
-Expense are non-guaranteed. This means ten years in, the charges can increase and there isn't much you can do. I predict regulations will make adverse changes less common, though. New regulations say that insurance companies can't increases charges if it will increase their profitability - they can only do it to compensate for reduced profitability (increase in incurred expenses, etc). But this could always change.
-If you don't need insurance, you will need to pay for it anyway. This starts out low, but COIs increase dramatically as you age. Also, the amount of insurance in your contract increases as your "investment" increases. There's a certain ratio of insurance to "investment" that needs to be maintained. If you ever see CVAT or Guideline Test or Corridor, that's what this is.
-You mentioned rebalancing is tax-free. That's true. But you probably won't get a great bond fund. Whatever you want to invest in other than S&P 500, options will be limited.
-You never know what tax laws will be like in the future (especially distant future). I think assuming they stay the same, or similar, is a reasonable assumption. But you never know.

May the odds be ever in your favor.
Topic Author
LFKB
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by LFKB »

petulant wrote: Mon Sep 14, 2020 3:53 pm You note the dramatic tax benefits of the VUL policy, but remember it's a cost-benefit analysis. There are also dramatic costs: the insurance itself, which you might be able to take out if you would have purchased insurance anyway, but the "commissions" and other expenses are significant. They include, typically, the face amount fee, an asset-based charge, premium taxes for putting money in, and an annual administrative fee. The tax savings must eclipse all of these high costs together, which is very difficult.

That said, when I was studying VUL policies deeply, I did find it was possible to support holding stocks inside a VUL policy: investors in California who are in the highest brackets, like 10%+, who are early in their investing careers and will hold the assets, then use them through policy loans and/or tax-free withdrawals, before passing away. Note: the last caveat is very important. An investor who can realize no capital gains taxes by giving away or leaving stocks as an inheritance will never beat a taxable brokerage account using a VUL. Using the VUL for stocks specifically requires a very long holding period and then withdrawing the money to use it.

The reason this happens is that the tax benefits for the VUL are twofold: avoided drag on dividends, which in the case of a very high earner in California is quite large, and avoided long-term capital gains on withdrawal. These take a long time to materialize, while the highest expenses for the VUL policy are frontloaded in the form of the premium tax and face amount charges that last 7-20 years. NW Mutual's VUL Plus product, for example, only has a $96 annual fee and S&P 500 expense ratio once you make it past the special charges and premium costs in the first 20 years. So you need to hold much longer than 20 years, then you need to actually avoid capital gains taxes by using the money without incurring gains tax.

There are various other problems, like the lack of options and transaction costs if you need to 1035 the policy. These are complexities that are net cons.

So again, this is all very difficult. It is not a "no brainer." But OP, you may be one of the few people for whom it could make sense if you are making $500K+ in California. If you are making less than that, I think it is very probable you have not quantified all of the probable costs correctly.

If it does make sense for you, what that means is that you're already maxing out all 401(k)-type options, the backdoor Roth, and anything else available first.
Thanks. I am mid 30s in California with income well above the highest state and federal tax levels and currently paying 37.1% capital gains rates, so it appears I am exactly the person you are saying it would make sense for.
petulant
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by petulant »

HomerJ wrote: Mon Sep 14, 2020 4:15 pm
petulant wrote: Mon Sep 14, 2020 3:55 pm You're talking about a different product. That is one of the big problems with insurance products; there are a lot of variations. OP is talking about variable universal life policies, which really do break out all costs (much more clearly than annuities) and otherwise hold what is more or less a real mutual fund inside the policy. The S&P 500 returns will be real inside the policy, and the expenses for commissions and administrative fees will be broken out clearly.
Yeah, they keep changing the names to confuse people. OP should NOT trust the salesperson. Read that prospectus fully. I bet there's a cap...

The insurance company isn't going to give you all the gains and let you avoid all the taxes for free.
What Is Variable Universal Life (VUL) Insurance?
Variable universal life (VUL) is a type of permanent life insurance policy with a built-in savings component that allows for the investment of the cash value. Like standard universal life insurance, the premium is flexible. VUL insurance policies typically have both a maximum cap and minimum floor on the investment return associated with the savings component.


VUL insurance has investment subaccounts that allow for the investment of the cash value. The function of the subaccounts is similar to a mutual fund. Exposure to market fluctuations can generate significant returns, but may also result in substantial losses. This insurance gets its name from the varying results of investment in the ever-fluctuating market. While VUL insurance offers increased flexibility and growth potential over a traditional cash value or a whole life insurance policy, policyholders should carefully assess the risks before purchasing it.
Investopedia is not a reliable source of information. The material you're discussing seems to be referring to equity indexed universal life insurance policies.
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HomerJ
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by HomerJ »

petulant wrote: Mon Sep 14, 2020 4:27 pm
HomerJ wrote: Mon Sep 14, 2020 4:15 pm
petulant wrote: Mon Sep 14, 2020 3:55 pm You're talking about a different product. That is one of the big problems with insurance products; there are a lot of variations. OP is talking about variable universal life policies, which really do break out all costs (much more clearly than annuities) and otherwise hold what is more or less a real mutual fund inside the policy. The S&P 500 returns will be real inside the policy, and the expenses for commissions and administrative fees will be broken out clearly.
Yeah, they keep changing the names to confuse people. OP should NOT trust the salesperson. Read that prospectus fully. I bet there's a cap...

The insurance company isn't going to give you all the gains and let you avoid all the taxes for free.
What Is Variable Universal Life (VUL) Insurance?
Variable universal life (VUL) is a type of permanent life insurance policy with a built-in savings component that allows for the investment of the cash value. Like standard universal life insurance, the premium is flexible. VUL insurance policies typically have both a maximum cap and minimum floor on the investment return associated with the savings component.


VUL insurance has investment subaccounts that allow for the investment of the cash value. The function of the subaccounts is similar to a mutual fund. Exposure to market fluctuations can generate significant returns, but may also result in substantial losses. This insurance gets its name from the varying results of investment in the ever-fluctuating market. While VUL insurance offers increased flexibility and growth potential over a traditional cash value or a whole life insurance policy, policyholders should carefully assess the risks before purchasing it.
Investopedia is not a reliable source of information. The material you're discussing seems to be referring to equity indexed universal life insurance policies.
I suggest he reads the prospectus fully then to be sure.

The fact that it was explained to him as a "no-brainer" with all upside and no downside is a pretty big red flag.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
Greenman72
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by Greenman72 »

LFKB wrote: Mon Sep 14, 2020 4:24 pm Thanks. I am mid 30s in California with income well above the highest state and federal tax levels and currently paying 37.1% capital gains rates, so it appears I am exactly the person you are saying it would make sense for.
Which means you can afford to pay a CPA and a "real" investment advisor (and probably and attorney) to do the heavy lifting for you--not just a bunch of randos on the internet.
Rex66
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by Rex66 »

LFKB wrote: Mon Sep 14, 2020 4:12 pm
Rex66 wrote: Mon Sep 14, 2020 2:45 pm It is definitely not guaranteed for tax savings to be greater than costs. It rarely is which is why you don’t see non insurance folks recommending it. I wouldn’t be surprised if they illustrated it working out. There was an article written by insurance industry experts you might want to look at. Since it’s still a pro insurance person, it doesn’t outline all the other negatives and I’ll just list a few.

https://infinitewealthconsultants.com/w ... omises.pdf

Costs of investments are not guaranteed and the insurance industry has a history of changing/removing investment options from products when they turn out to be “too good”.

Illustrated costs for insurance are not the guaranteed costs and lately several companies have further escalated insurance on old Universal policies. Not NWM yet but I’ll also tell you agents used to claim they would never increase costs on LTCi but they did.

An irrevocable trust avoids estate taxes not the insurance product. You can put other stuff in an irrevocable.

It’s currently easy to minimize taxes with index funds so that it’s like a 0.2% drag.


It is a not a no brainer but in fact is more the opposite.

If you want it go for it. Go believe you are the unicorn this works like magic for.
I can't touch the money if it is in an irrevocable trust...this is money that I have access to (via loans) throughout the full time period and also not pay taxes on.

Index funds in taxable I have to pay taxes on the dividends each year and as I get older I will have to sell massive lots to re-balance and pay capital gains. My capital gains rate is currently 37.1% (20% federal, 13.3% state. 3.8% net investment income tax) and only likely to go higher...I can't create nearly enough tax advantaged space for a material portion of my net worth.


Permanent insurance does NOT avoid estate taxes. You can use the money to pay estate taxes. But to avoid it, then you need to place it in an irrevocable trust. You could put other stuff in such a trust.

If you read the article, you might understand that because of sequence of events, it isnt going to work out well in retirement especially if you take out loans from the policy. The chance of going bust goes up and then all gains plus loan interest is immediately taxable at INCOME rates.

You dont do it that way. You re-balance primarily in your tax preferred accounts. Once you consider the cost of the loans over time, it actually we also be a big issue. For instance if the loan is 8%, it will only take a few years to cancel out the tax advantages on that money. Keep in mind that loan money within the policy gets transferred into their general account at whatever that is obtaining and as i mentioned many companies have gotten around this by claiming a guarantee of 3-4% but just increasing the cost of insurance beyond the typical UL increases as one ages so its actually more expensive than that.

Folks stop confusing IULs and VULs. IULs are the permanent product that has caps/participation rates but there is also a floor of no "investment" loss (you still have loss from all the insurance costs though). That doesnt make VULs better. In late years if there is a significant down year, the CSV goes down which further compounds the issue of cost of insurance. The cost of insurance is always related to the difference between the death benefit and the current cash value. Thats also why you dont "get both the CSV and DB" at death. Its part of the death benefit. So lets just pretend this individual uses some of the money in retirement as loans (which by the way all loans are tax free and the guaranteed rates from insurance companies are not currently competitive). This money will be now in the insurance companies general account which is mostly bonds/treasuries. If the other 50% is in stocks then if a bad year happens, the difference between csv and death benefit increases at the same time as "typical" increase in cost of insurance. A pretty bad mix and also very likely. Thats why you see most people who really promote using permanent for an actual estate issue dont recommend VUL. They will recommend one of the others to reduce risks of going bust.
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Nate79
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by Nate79 »

How about posting actual information from the actual policy that you are being quoted?
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by bog007 »

I don't know so won't comment :shock:
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by petulant »

Rex66 wrote: Mon Sep 14, 2020 5:26 pm
LFKB wrote: Mon Sep 14, 2020 4:12 pm
Rex66 wrote: Mon Sep 14, 2020 2:45 pm It is definitely not guaranteed for tax savings to be greater than costs. It rarely is which is why you don’t see non insurance folks recommending it. I wouldn’t be surprised if they illustrated it working out. There was an article written by insurance industry experts you might want to look at. Since it’s still a pro insurance person, it doesn’t outline all the other negatives and I’ll just list a few.

https://infinitewealthconsultants.com/w ... omises.pdf

Costs of investments are not guaranteed and the insurance industry has a history of changing/removing investment options from products when they turn out to be “too good”.

Illustrated costs for insurance are not the guaranteed costs and lately several companies have further escalated insurance on old Universal policies. Not NWM yet but I’ll also tell you agents used to claim they would never increase costs on LTCi but they did.

An irrevocable trust avoids estate taxes not the insurance product. You can put other stuff in an irrevocable.

It’s currently easy to minimize taxes with index funds so that it’s like a 0.2% drag.


It is a not a no brainer but in fact is more the opposite.

If you want it go for it. Go believe you are the unicorn this works like magic for.
I can't touch the money if it is in an irrevocable trust...this is money that I have access to (via loans) throughout the full time period and also not pay taxes on.

Index funds in taxable I have to pay taxes on the dividends each year and as I get older I will have to sell massive lots to re-balance and pay capital gains. My capital gains rate is currently 37.1% (20% federal, 13.3% state. 3.8% net investment income tax) and only likely to go higher...I can't create nearly enough tax advantaged space for a material portion of my net worth.


Permanent insurance does NOT avoid estate taxes. You can use the money to pay estate taxes. But to avoid it, then you need to place it in an irrevocable trust. You could put other stuff in such a trust.

If you read the article, you might understand that because of sequence of events, it isnt going to work out well in retirement especially if you take out loans from the policy. The chance of going bust goes up and then all gains plus loan interest is immediately taxable at INCOME rates.

You dont do it that way. You re-balance primarily in your tax preferred accounts. Once you consider the cost of the loans over time, it actually we also be a big issue. For instance if the loan is 8%, it will only take a few years to cancel out the tax advantages on that money. Keep in mind that loan money within the policy gets transferred into their general account at whatever that is obtaining and as i mentioned many companies have gotten around this by claiming a guarantee of 3-4% but just increasing the cost of insurance beyond the typical UL increases as one ages so its actually more expensive than that.

Folks stop confusing IULs and VULs. IULs are the permanent product that has caps/participation rates but there is also a floor of no "investment" loss (you still have loss from all the insurance costs though). That doesnt make VULs better. In late years if there is a significant down year, the CSV goes down which further compounds the issue of cost of insurance. The cost of insurance is always related to the difference between the death benefit and the current cash value. Thats also why you dont "get both the CSV and DB" at death. Its part of the death benefit. So lets just pretend this individual uses some of the money in retirement as loans (which by the way all loans are tax free and the guaranteed rates from insurance companies are not currently competitive). This money will be now in the insurance companies general account which is mostly bonds/treasuries. If the other 50% is in stocks then if a bad year happens, the difference between csv and death benefit increases at the same time as "typical" increase in cost of insurance. A pretty bad mix and also very likely. Thats why you see most people who really promote using permanent for an actual estate issue dont recommend VUL. They will recommend one of the others to reduce risks of going bust.
The loans on these are typically around .5%, and after enough time they can drop to 0%.

But agreed, just having life insurance isn't a silver bullet for estate taxes. The reason insurance policies in an irrevocable trust can work very well is that contributions can be done under the annual gift tax limit and can be combined with other items that aren't inheritable, like an annuity. A successful business owner, for example, can sell into a CRT with a life payment and then use part of the proceeds to buy life insurance to leave a large estate to heirs, for example. Doesn't seem present here.

And agreed, IULs and VULs aren't the same. Managing the DB to stay in an efficient range with CSV is also an ongoing challenge.
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by petulant »

LFKB wrote: Mon Sep 14, 2020 4:24 pm
petulant wrote: Mon Sep 14, 2020 3:53 pm You note the dramatic tax benefits of the VUL policy, but remember it's a cost-benefit analysis. There are also dramatic costs: the insurance itself, which you might be able to take out if you would have purchased insurance anyway, but the "commissions" and other expenses are significant. They include, typically, the face amount fee, an asset-based charge, premium taxes for putting money in, and an annual administrative fee. The tax savings must eclipse all of these high costs together, which is very difficult.

That said, when I was studying VUL policies deeply, I did find it was possible to support holding stocks inside a VUL policy: investors in California who are in the highest brackets, like 10%+, who are early in their investing careers and will hold the assets, then use them through policy loans and/or tax-free withdrawals, before passing away. Note: the last caveat is very important. An investor who can realize no capital gains taxes by giving away or leaving stocks as an inheritance will never beat a taxable brokerage account using a VUL. Using the VUL for stocks specifically requires a very long holding period and then withdrawing the money to use it.

The reason this happens is that the tax benefits for the VUL are twofold: avoided drag on dividends, which in the case of a very high earner in California is quite large, and avoided long-term capital gains on withdrawal. These take a long time to materialize, while the highest expenses for the VUL policy are frontloaded in the form of the premium tax and face amount charges that last 7-20 years. NW Mutual's VUL Plus product, for example, only has a $96 annual fee and S&P 500 expense ratio once you make it past the special charges and premium costs in the first 20 years. So you need to hold much longer than 20 years, then you need to actually avoid capital gains taxes by using the money without incurring gains tax.

There are various other problems, like the lack of options and transaction costs if you need to 1035 the policy. These are complexities that are net cons.

So again, this is all very difficult. It is not a "no brainer." But OP, you may be one of the few people for whom it could make sense if you are making $500K+ in California. If you are making less than that, I think it is very probable you have not quantified all of the probable costs correctly.

If it does make sense for you, what that means is that you're already maxing out all 401(k)-type options, the backdoor Roth, and anything else available first.
Thanks. I am mid 30s in California with income well above the highest state and federal tax levels and currently paying 37.1% capital gains rates, so it appears I am exactly the person you are saying it would make sense for.
I still really wonder about alternatives. With that kind of income, there's no reason to think you will need to spend the money such that VUL is that helpful. Might be better located in a lot of real estate you can access tax-free through loans, or stocks that you can access with small margin loans, etc. I would check out some alternatives.
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by Rex66 »

Please show a policy with 0 cost loans guaranteed.

Also as I mentioned there are several other costs not guarausuch as cost of the investments, which investments will remain available and the cost of insurance illustrated is not the guaranteed cost for insurance.

Maybe you are hoping that the total loan cost will be so low when factoring in rate of return if the money being loaned.
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by petulant »

Rex66 wrote: Mon Sep 14, 2020 6:34 pm Please show a policy with 0 cost loans guaranteed.

Also as I mentioned there are several other costs not guarausuch as cost of the investments, which investments will remain available and the cost of insurance illustrated is not the guaranteed cost for insurance.

Maybe you are hoping that the total loan cost will be so low when factoring in rate of return if the money being loaned.
You're right that what matters is the net interest rate, which is the interest on the loan less the interest credited for the collateral inside the policy. For example, Prudential's VUL Protector has a 0.05% net loan rate after ten policy years. It's guaranteed in the prospectus. I'm not sure if you care about literally 0% or if 5 bps is good enough for you.

https://www.prudential.com/personal/lif ... rospectus/

You're right there's no guarantee what investments will be included in the future. But then again, there is no guarantee your 401(k) will keep the same investments, nor is there a guarantee Vanguard will still be around in the future.
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by LFKB »

Greenman72 wrote: Mon Sep 14, 2020 4:54 pm
LFKB wrote: Mon Sep 14, 2020 4:24 pm Thanks. I am mid 30s in California with income well above the highest state and federal tax levels and currently paying 37.1% capital gains rates, so it appears I am exactly the person you are saying it would make sense for.
Which means you can afford to pay a CPA and a "real" investment advisor (and probably and attorney) to do the heavy lifting for you--not just a bunch of randos on the internet.
Can, but don’t want to
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by Rex66 »

You can always roll your 401k to ira at retirement. Competition for low fee iras is very good. I wouldnt say vanguard is best currently.

You cant do that with insurance. Almost zero chance you will be able to 1035 it at same health rating.

Im not talking about things the insurance might do but has never done before. Im talking things they are currently doing. They are currently increasing the cost of insurance closer to max charges on old universal policies with decent loan provisions with 3-4% interest rate. They have currently taken investments out of various variable contracts that were favorable to the clients or changed the cost of such investments. That has created less cash available and in some cases crash of the policy.

So if they are currently doing that, what makes one think they wont do that in the future?

They can in the prospectus listed for just the funds charge 1.18%.

If they hadnt been getting away with do this on old ULs currently, one could have more faith it might not happen in the future. Not willing to meet your 3% says a lot.
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by Watty »

LFKB wrote: Mon Sep 14, 2020 7:29 pm
Greenman72 wrote: Mon Sep 14, 2020 4:54 pm
LFKB wrote: Mon Sep 14, 2020 4:24 pm Thanks. I am mid 30s in California with income well above the highest state and federal tax levels and currently paying 37.1% capital gains rates, so it appears I am exactly the person you are saying it would make sense for.
Which means you can afford to pay a CPA and a "real" investment advisor (and probably and attorney) to do the heavy lifting for you--not just a bunch of randos on the internet.
Can, but don’t want to
Then it would be good to defer the purchase of it until you are at a point where you are willing to do your due diligence on something like that.
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by LFKB »

Watty wrote: Mon Sep 14, 2020 8:00 pm
LFKB wrote: Mon Sep 14, 2020 7:29 pm
Greenman72 wrote: Mon Sep 14, 2020 4:54 pm
LFKB wrote: Mon Sep 14, 2020 4:24 pm Thanks. I am mid 30s in California with income well above the highest state and federal tax levels and currently paying 37.1% capital gains rates, so it appears I am exactly the person you are saying it would make sense for.
Which means you can afford to pay a CPA and a "real" investment advisor (and probably and attorney) to do the heavy lifting for you--not just a bunch of randos on the internet.
Can, but don’t want to
Then it would be good to defer the purchase of it until you are at a point where you are willing to do your due diligence on something like that.
There aren’t any other ways to create this type of tax benefit and hold equities, so not sure I need to
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by HomerJ »

Looking at that prospectus, it does appear you're not going to get the S&P 500 returns. It's not JUST a 0.19% expense ratio vs a 0.04% expense ratio (from Vanguard)
Sales Charge On Premium
We may charge up to 6% of premiums received in all Contract Years. This charge, often called a “sales load”, is deducted to compensate us for the costs of selling the Contracts, including commissions, advertising, and the printing and distribution of prospectuses and sales literature.
Currently, we charge 3% of premiums for sales expenses in the first five Contract Years, 2.25% in Contract Years six through 10, and zero thereafter.

Premium-Based Administrative Charge
We may charge up to 7.5% of premiums received for a premium-based administrative charge, which includes any federal, state or local income, premium, excise, or business tax or any other type of charge (or component thereof) measured by or based upon the amount of premium we receive. This charge is made up of two parts, which currently equal a total of 3.75% of the premiums received.
The first part is a charge for state and local premium taxes. The current amount for this first part is 2.5% of the premium and is our estimate of the average burden of state taxes generally. The rate applies uniformly to all Contract Owners without regard to location of residence. Tax rates vary from jurisdiction to jurisdiction and generally range from 0% to 5% (but may exceed 5% in some instances). We may collect more for this charge than we actually pay for state and local premium taxes.
The second part is a charge for federal income taxes measured by premiums. The current amount for this second part is 1.25% of the premium. We believe that this charge is a reasonable estimate of an increase in our federal income taxes resulting from an Internal Revenue Code provision which requires us to capitalize and amortize a percentage of premiums received each year. The required amortization period is 15 years. This charge is intended to recover this increased tax. See Company Taxes.
And I didn't read the whole thing.

Because I really don't care if the OP buys it. I'm not going to get a fat commission check if he buys it. But the guy he's talking to will. So go ahead, trust THAT guy to have your best interests at heart.

I'm thinking 0.4% in dividend taxes on a plain jane S&P 500 fund in a taxable account sounds pretty good compared to that small subsection of charges I found with 2 minutes of looking at this particular prospectus (okay maybe 0.5%-0.6% in CA with their high state taxes - I'm not sure how they handle qualified dividends)
Mortality And Expense Risk Charge
Each day we deduct a charge from the assets of the Variable Investment Options in an amount equivalent to an effective annual rate of up to 0.45%. Currently, we charge 0.25%. This charge is intended to compensate us for assuming mortality and expense risks under the Contract.
So they charge you more for life insurance depending on how much money you have invested? Buy term for a set amount and invest the rest.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by Rex66 »

enjoy. i hope it works out for you.
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by HomerJ »

LFKB wrote: Mon Sep 14, 2020 8:37 pm There aren’t any other ways to create this type of tax benefit and hold equities, so not sure I need to
Quit worrying about taxes. Don't let the tax tail wag the dog.

The Total Stock Market Index fund is extremely tax-efficient. You only pay on dividends, and no capital gains unless you sell.

Or maybe buy a tax-managed fund. Vanguard has them. At least investigate how they compare to an insurance company junk offerings.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by Nate79 »

HomerJ wrote: Mon Sep 14, 2020 8:42 pm
Looking at that prospectus, it does appear you're not going to get the S&P 500 returns. It's not JUST a 0.19% expense ratio vs a 0.04% expense ratio (from Vanguard)
Sales Charge On Premium
We may charge up to 6% of premiums received in all Contract Years. This charge, often called a “sales load”, is deducted to compensate us for the costs of selling the Contracts, including commissions, advertising, and the printing and distribution of prospectuses and sales literature.
Currently, we charge 3% of premiums for sales expenses in the first five Contract Years, 2.25% in Contract Years six through 10, and zero thereafter.

Premium-Based Administrative Charge
We may charge up to 7.5% of premiums received for a premium-based administrative charge, which includes any federal, state or local income, premium, excise, or business tax or any other type of charge (or component thereof) measured by or based upon the amount of premium we receive. This charge is made up of two parts, which currently equal a total of 3.75% of the premiums received.
The first part is a charge for state and local premium taxes. The current amount for this first part is 2.5% of the premium and is our estimate of the average burden of state taxes generally. The rate applies uniformly to all Contract Owners without regard to location of residence. Tax rates vary from jurisdiction to jurisdiction and generally range from 0% to 5% (but may exceed 5% in some instances). We may collect more for this charge than we actually pay for state and local premium taxes.
The second part is a charge for federal income taxes measured by premiums. The current amount for this second part is 1.25% of the premium. We believe that this charge is a reasonable estimate of an increase in our federal income taxes resulting from an Internal Revenue Code provision which requires us to capitalize and amortize a percentage of premiums received each year. The required amortization period is 15 years. This charge is intended to recover this increased tax. See Company Taxes.
And I didn't read the whole thing.

Because I really don't care if the OP buys it. I'm not going to get a fat commission check if he buys it. But the guy he's talking to will. So go ahead, trust THAT guy to have your best interests at heart.

I'm thinking 0.4% in dividend taxes on a plain jane S&P 500 fund in a taxable account sounds pretty good compared to that small subsection of charges I found with 2 minutes of looking at this particular prospectus (okay maybe 0.5%-0.6% in CA with their high state taxes - I'm not sure how they handle qualified dividends)
Mortality And Expense Risk Charge
Each day we deduct a charge from the assets of the Variable Investment Options in an amount equivalent to an effective annual rate of up to 0.45%. Currently, we charge 0.25%. This charge is intended to compensate us for assuming mortality and expense risks under the Contract.
So they charge you more for life insurance depending on how much money you have invested? Buy term for a set amount and invest the rest.
My eyes glazed over when reading thru those horrendous fees in the posted example product. This site rails against the shenanigans from the likes of extremely high expense advisors like Edward Jones and their ilk selling expensive products (high ER and high loads or AUM) but this product makes EJ look like a Saint! No one in their right mind should buy such a horrible product, especially under the extreme misgivings that they will save more on taxes.
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by Stinky »

HomerJ wrote: Mon Sep 14, 2020 8:45 pm
Quit worrying about taxes. Don't let the tax tail wag the dog.
Best quote of this thread!
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by petulant »

HomerJ wrote: Mon Sep 14, 2020 8:42 pm
Looking at that prospectus, it does appear you're not going to get the S&P 500 returns. It's not JUST a 0.19% expense ratio vs a 0.04% expense ratio (from Vanguard)
Sales Charge On Premium
We may charge up to 6% of premiums received in all Contract Years. This charge, often called a “sales load”, is deducted to compensate us for the costs of selling the Contracts, including commissions, advertising, and the printing and distribution of prospectuses and sales literature.
Currently, we charge 3% of premiums for sales expenses in the first five Contract Years, 2.25% in Contract Years six through 10, and zero thereafter.

Premium-Based Administrative Charge
We may charge up to 7.5% of premiums received for a premium-based administrative charge, which includes any federal, state or local income, premium, excise, or business tax or any other type of charge (or component thereof) measured by or based upon the amount of premium we receive. This charge is made up of two parts, which currently equal a total of 3.75% of the premiums received.
The first part is a charge for state and local premium taxes. The current amount for this first part is 2.5% of the premium and is our estimate of the average burden of state taxes generally. The rate applies uniformly to all Contract Owners without regard to location of residence. Tax rates vary from jurisdiction to jurisdiction and generally range from 0% to 5% (but may exceed 5% in some instances). We may collect more for this charge than we actually pay for state and local premium taxes.
The second part is a charge for federal income taxes measured by premiums. The current amount for this second part is 1.25% of the premium. We believe that this charge is a reasonable estimate of an increase in our federal income taxes resulting from an Internal Revenue Code provision which requires us to capitalize and amortize a percentage of premiums received each year. The required amortization period is 15 years. This charge is intended to recover this increased tax. See Company Taxes.
And I didn't read the whole thing.

Because I really don't care if the OP buys it. I'm not going to get a fat commission check if he buys it. But the guy he's talking to will. So go ahead, trust THAT guy to have your best interests at heart.

I'm thinking 0.4% in dividend taxes on a plain jane S&P 500 fund in a taxable account sounds pretty good compared to that small subsection of charges I found with 2 minutes of looking at this particular prospectus (okay maybe 0.5%-0.6% in CA with their high state taxes - I'm not sure how they handle qualified dividends)
Mortality And Expense Risk Charge
Each day we deduct a charge from the assets of the Variable Investment Options in an amount equivalent to an effective annual rate of up to 0.45%. Currently, we charge 0.25%. This charge is intended to compensate us for assuming mortality and expense risks under the Contract.
So they charge you more for life insurance depending on how much money you have invested? Buy term for a set amount and invest the rest.
Please read the thread. I did mention exactly these charges in my first reply to OP. It's a cost-benefit analysis. Thing is, over enough time, avoiding QDLTCG taxes really can make up the difference. I didn't say OP should jump for it, but the numbers really work even with these numbers when the marginal tax rates are high enough.
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by primetime5 »

I believe these have to be set up under ILIT's in order to avoid the estate tax. I haven't set one up before but have some sense of the concept in my field.
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LFKB
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by LFKB »

HomerJ wrote: Mon Sep 14, 2020 8:42 pm
Looking at that prospectus, it does appear you're not going to get the S&P 500 returns. It's not JUST a 0.19% expense ratio vs a 0.04% expense ratio (from Vanguard)
Sales Charge On Premium
We may charge up to 6% of premiums received in all Contract Years. This charge, often called a “sales load”, is deducted to compensate us for the costs of selling the Contracts, including commissions, advertising, and the printing and distribution of prospectuses and sales literature.
Currently, we charge 3% of premiums for sales expenses in the first five Contract Years, 2.25% in Contract Years six through 10, and zero thereafter.

Premium-Based Administrative Charge
We may charge up to 7.5% of premiums received for a premium-based administrative charge, which includes any federal, state or local income, premium, excise, or business tax or any other type of charge (or component thereof) measured by or based upon the amount of premium we receive. This charge is made up of two parts, which currently equal a total of 3.75% of the premiums received.
The first part is a charge for state and local premium taxes. The current amount for this first part is 2.5% of the premium and is our estimate of the average burden of state taxes generally. The rate applies uniformly to all Contract Owners without regard to location of residence. Tax rates vary from jurisdiction to jurisdiction and generally range from 0% to 5% (but may exceed 5% in some instances). We may collect more for this charge than we actually pay for state and local premium taxes.
The second part is a charge for federal income taxes measured by premiums. The current amount for this second part is 1.25% of the premium. We believe that this charge is a reasonable estimate of an increase in our federal income taxes resulting from an Internal Revenue Code provision which requires us to capitalize and amortize a percentage of premiums received each year. The required amortization period is 15 years. This charge is intended to recover this increased tax. See Company Taxes.
And I didn't read the whole thing.

Because I really don't care if the OP buys it. I'm not going to get a fat commission check if he buys it. But the guy he's talking to will. So go ahead, trust THAT guy to have your best interests at heart.

I'm thinking 0.4% in dividend taxes on a plain jane S&P 500 fund in a taxable account sounds pretty good compared to that small subsection of charges I found with 2 minutes of looking at this particular prospectus (okay maybe 0.5%-0.6% in CA with their high state taxes - I'm not sure how they handle qualified dividends)
Mortality And Expense Risk Charge
Each day we deduct a charge from the assets of the Variable Investment Options in an amount equivalent to an effective annual rate of up to 0.45%. Currently, we charge 0.25%. This charge is intended to compensate us for assuming mortality and expense risks under the Contract.
So they charge you more for life insurance depending on how much money you have invested? Buy term for a set amount and invest the rest.
Care to expand on how you finding a random prospectus that isn’t a part of my policy is relevant?

The math is pretty simple - the after tax returns are better because the tax savings are greater than cost of insurance and commissions. It’s a win win.
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LFKB
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by LFKB »

HomerJ wrote: Mon Sep 14, 2020 8:45 pm
LFKB wrote: Mon Sep 14, 2020 8:37 pm There aren’t any other ways to create this type of tax benefit and hold equities, so not sure I need to
Quit worrying about taxes. Don't let the tax tail wag the dog.

The Total Stock Market Index fund is extremely tax-efficient. You only pay on dividends, and no capital gains unless you sell.

Or maybe buy a tax-managed fund. Vanguard has them. At least investigate how they compare to an insurance company junk offerings.
I realize you have a serious aversion to these but many knowledgeable people on this board have recommended them for people in my tax situation

1) my current capital gains rate is 37% and likely to go up
2) I will need to rebalance (i.e. sell equities) and my tax advantaged space will not be sufficient enough to do this, which will lead to massive capital gains payments, which I can avoid through this structure

Again, the after tax returns are better, so in spite of the commission I’ll be better off in any case, and my heirs will be much much better off
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by LFKB »

Stinky wrote: Mon Sep 14, 2020 9:25 pm
HomerJ wrote: Mon Sep 14, 2020 8:45 pm
Quit worrying about taxes. Don't let the tax tail wag the dog.
Best quote of this thread!
Do you have a 401k? IRA? 529?
000
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by 000 »

Question: how expensive is it to get out of the arrangement if in the future you change your mind?
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Stinky
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by Stinky »

LFKB wrote: Mon Sep 14, 2020 9:49 pm
HomerJ wrote: Mon Sep 14, 2020 8:42 pm
Looking at that prospectus, it does appear you're not going to get the S&P 500 returns. It's not JUST a 0.19% expense ratio vs a 0.04% expense ratio (from Vanguard)
Sales Charge On Premium
We may charge up to 6% of premiums received in all Contract Years. This charge, often called a “sales load”, is deducted to compensate us for the costs of selling the Contracts, including commissions, advertising, and the printing and distribution of prospectuses and sales literature.
Currently, we charge 3% of premiums for sales expenses in the first five Contract Years, 2.25% in Contract Years six through 10, and zero thereafter.

Premium-Based Administrative Charge
We may charge up to 7.5% of premiums received for a premium-based administrative charge, which includes any federal, state or local income, premium, excise, or business tax or any other type of charge (or component thereof) measured by or based upon the amount of premium we receive. This charge is made up of two parts, which currently equal a total of 3.75% of the premiums received.
The first part is a charge for state and local premium taxes. The current amount for this first part is 2.5% of the premium and is our estimate of the average burden of state taxes generally. The rate applies uniformly to all Contract Owners without regard to location of residence. Tax rates vary from jurisdiction to jurisdiction and generally range from 0% to 5% (but may exceed 5% in some instances). We may collect more for this charge than we actually pay for state and local premium taxes.
The second part is a charge for federal income taxes measured by premiums. The current amount for this second part is 1.25% of the premium. We believe that this charge is a reasonable estimate of an increase in our federal income taxes resulting from an Internal Revenue Code provision which requires us to capitalize and amortize a percentage of premiums received each year. The required amortization period is 15 years. This charge is intended to recover this increased tax. See Company Taxes.
And I didn't read the whole thing.

Because I really don't care if the OP buys it. I'm not going to get a fat commission check if he buys it. But the guy he's talking to will. So go ahead, trust THAT guy to have your best interests at heart.

I'm thinking 0.4% in dividend taxes on a plain jane S&P 500 fund in a taxable account sounds pretty good compared to that small subsection of charges I found with 2 minutes of looking at this particular prospectus (okay maybe 0.5%-0.6% in CA with their high state taxes - I'm not sure how they handle qualified dividends)
Mortality And Expense Risk Charge
Each day we deduct a charge from the assets of the Variable Investment Options in an amount equivalent to an effective annual rate of up to 0.45%. Currently, we charge 0.25%. This charge is intended to compensate us for assuming mortality and expense risks under the Contract.
So they charge you more for life insurance depending on how much money you have invested? Buy term for a set amount and invest the rest.
Care to expand on how you finding a random prospectus that isn’t a part of my policy is relevant?

The math is pretty simple - the after tax returns are better because the tax savings are greater than cost of insurance and commissions. It’s a win win.
Here’s a link to the NWML variable life prospectus. 40+ pages of pretty dense text.

https://www.northwesternmutual.com/asse ... lp.pdf?v=1

On a quick glance, it looks like the charges for NWML VUL are higher than those for Prudential.
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sergeant
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by sergeant »

OP, congratulations! You seem to have found a product that works for you. Not sure why you're asking for opinions and not posting what exact product you are interested in? Let us know how it goes. Good luck.
AA- 20+ Years of Expenses Fixed Income/The remainder in Equities.
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by Nate79 »

LFKB wrote: Mon Sep 14, 2020 9:54 pm
HomerJ wrote: Mon Sep 14, 2020 8:45 pm
LFKB wrote: Mon Sep 14, 2020 8:37 pm There aren’t any other ways to create this type of tax benefit and hold equities, so not sure I need to
Quit worrying about taxes. Don't let the tax tail wag the dog.

The Total Stock Market Index fund is extremely tax-efficient. You only pay on dividends, and no capital gains unless you sell.

Or maybe buy a tax-managed fund. Vanguard has them. At least investigate how they compare to an insurance company junk offerings.
I realize you have a serious aversion to these but many knowledgeable people on this board have recommended them for people in my tax situation

1) my current capital gains rate is 37% and likely to go up
2) I will need to rebalance (i.e. sell equities) and my tax advantaged space will not be sufficient enough to do this, which will lead to massive capital gains payments, which I can avoid through this structure

Again, the after tax returns are better, so in spite of the commission I’ll be better off in any case, and my heirs will be much much better off
Why do you need to rebalance?
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by HomerJ »

LFKB wrote: Mon Sep 14, 2020 9:49 pm The math is pretty simple - the after tax returns are better because the tax savings are greater than cost of insurance and commissions. It’s a win win.
If the math is simple, then buy it.

How many pages in that NW prospectus? Did you see the part about 2% + 0.55% + 6.95% charges on each Premium payment for the first 10 years? (3.95% instead of 6.95% for years 11-20).

Are you sure the math is simple? Dividend taxes are only 0.4%-0.6%... You're paying 0.2% in normal expenses (instead of 0.04%), plus all those extra fees on premiums... 10% fees on your premiums for the first 10 years is a pretty big hit. It will take time for the tax savings to catch up.

But maybe your prospectus is different.

You might indeed have more after 30-40 years... maybe.

Note that they can raise their fees any time they want. It says it very plainly. Multiple times.

Good luck!
Last edited by HomerJ on Tue Sep 15, 2020 12:39 am, edited 3 times in total.
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CheckMate404
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by CheckMate404 »

The answer is obvious. It seems the main thing you’re trying to avoid, is the resulting capital gains taxes from rebalancing. Without this, you seem to acknowledge the tax benefit doesn’t come close to overcoming the life insurance related fees.

Furthermore, your goal is to hold the S&P500.

Isn’t the answer obvious? If you want to hold the S&P500, then why are we talking about rebalancing? Go 100% stocks and forget about it.

If you want some safety, hold 5 years of expenses in bonds, and keep the rest in the S&P500, never rebalancing. If you want cheap loans, Interactive Brokers will give you a loan based on the balance of your portfolio for 0.75% interest:

https://www1.interactivebrokers.com/en/ ... hp?f=46376

There are many objectively superior alternatives to this life insurance plan your salesman is pushing on you. I doubt you’ll find anyone here who pays a large % of their net worth every year in capital gains taxes for the purposes of rebalancing.
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by MiddleOfTheRoad »

OP is in finance and sounds like a smart dude.
He posted almost the same question last year.
viewtopic.php?f=1&t=274362&p=4408623#p4408623

Something is holding OP back despite the fact that this is a “no brainer” and no one can convince him otherwise.

OP, either just do it or listen to your instincts.

By defending this over and over just make this thread seem like a perfect shill post for NWM.

Best of luck.
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LFKB
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by LFKB »

Nate79 wrote: Mon Sep 14, 2020 10:10 pm
LFKB wrote: Mon Sep 14, 2020 9:54 pm
HomerJ wrote: Mon Sep 14, 2020 8:45 pm
LFKB wrote: Mon Sep 14, 2020 8:37 pm There aren’t any other ways to create this type of tax benefit and hold equities, so not sure I need to
Quit worrying about taxes. Don't let the tax tail wag the dog.

The Total Stock Market Index fund is extremely tax-efficient. You only pay on dividends, and no capital gains unless you sell.

Or maybe buy a tax-managed fund. Vanguard has them. At least investigate how they compare to an insurance company junk offerings.
I realize you have a serious aversion to these but many knowledgeable people on this board have recommended them for people in my tax situation

1) my current capital gains rate is 37% and likely to go up
2) I will need to rebalance (i.e. sell equities) and my tax advantaged space will not be sufficient enough to do this, which will lead to massive capital gains payments, which I can avoid through this structure

Again, the after tax returns are better, so in spite of the commission I’ll be better off in any case, and my heirs will be much much better off
Why do you need to rebalance?
As I get older I will shift more into bonds, just like virtually everyone else on this board
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LFKB
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by LFKB »

HomerJ wrote: Mon Sep 14, 2020 10:31 pm
LFKB wrote: Mon Sep 14, 2020 9:49 pm The math is pretty simple - the after tax returns are better because the tax savings are greater than cost of insurance and commissions. It’s a win win.
If the math is simple, then buy it.

How many pages in that NW prospectus? Did you see the part about 2% + 0.55% + 6.95% charges on each Premium payment for the first 10 years? (3.95% instead of 6.95% for years 11-20).

Are you sure the math is simple? Dividend taxes are only 0.4%-0.6%... You're paying 0.2% in normal expenses (instead of 0.04%), plus all those extra fees on premiums... 10% fees on your premiums for the first 10 years is a pretty big hit. It will take time for the tax savings to catch up.

But maybe your prospectus is different.

You might indeed have more after 30-40 years... maybe.

Note that they can raise their fees any time they want. It says it very plainly. Multiple times.

Good luck!
I see the fees. I see the commissions. The after tax returns are still higher.
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by 000 »

LFKB wrote: Tue Sep 15, 2020 12:54 am As I get older I will shift more into bonds, just like virtually everyone else on this board
If you expect to be high income for a long time (based on your assumption of being in a high tax bracket), why not put all of your high income towards the bonds and redirect all stock dividends towards the bonds? How much in bonds do you really want?
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by LFKB »

MiddleOfTheRoad wrote: Mon Sep 14, 2020 11:40 pm OP is in finance and sounds like a smart dude.
He posted almost the same question last year.
viewtopic.php?f=1&t=274362&p=4408623#p4408623

Something is holding OP back despite the fact that this is a “no brainer” and no one can convince him otherwise.

OP, either just do it or listen to your instincts.

By defending this over and over just make this thread seem like a perfect shill post for NWM.

Best of luck.
There was a personal reason that I ended up not following through with it last time despite doing the work and proving our that it financially made sense. I am picking this back up now and just trying to ensure I remind myself of all the pros and cons.
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Re: Variable Universal Life Insurance Experts - Seems Like a No Brainer - Please Read

Post by FoolStreet »

LFKB wrote: Mon Sep 14, 2020 8:37 pm
Watty wrote: Mon Sep 14, 2020 8:00 pm
LFKB wrote: Mon Sep 14, 2020 7:29 pm
Greenman72 wrote: Mon Sep 14, 2020 4:54 pm
LFKB wrote: Mon Sep 14, 2020 4:24 pm Thanks. I am mid 30s in California with income well above the highest state and federal tax levels and currently paying 37.1% capital gains rates, so it appears I am exactly the person you are saying it would make sense for.
Which means you can afford to pay a CPA and a "real" investment advisor (and probably and attorney) to do the heavy lifting for you--not just a bunch of randos on the internet.
Can, but don’t want to
Then it would be good to defer the purchase of it until you are at a point where you are willing to do your due diligence on something like that.
There aren’t any other ways to create this type of tax benefit and hold equities, so not sure I need to
Reading this thread, pretty much everyone is saying don’t do the VUL, some are just more polite than direct.

I want to reiterate the point that you don’t sell stocks to buy bonds to change your AA as you get older. You just start putting new money of the class you want to beef up.

Lots of 37%ers on Bogleheads. No one recommends VUL. Saying there are benefits seems to be more of a theoretical math problem that you work on for fun, but don’t actually want to implement. .

Honestly, if there really is a reason to buy one, you nor anyone else is explaining why.
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