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A coworker bought $1.6M in coverage at age 47. The monthly premiums are 0.11/$1000. A 20 year term policy has about the same premium. I would expect the GVUL to have higher premiums since there will be a payoff eventually. I'm missing something.

Thanks for any insight

Kelly

That VUL premium is not a 20 year guarantee. It's a monthly cost of insurance that rises every year. Just one moving part within that type of product.

The premium being quoted is the COI charge. A VUL combines investment aspects with life insurance aspects. Specifically, a VUL has a death benefit as well as a cash value. For some VUL policies, the death benefit is a face amount of insurance coverage plus the cash value. For example, if the face amount is $500,000 and $30,000 in premiums are paid, the resulting cash value might be $28000 for a total death benefit of $528,000. The cash value is then invested in a sub-account very similar to a mutual fund. As the cash value grows, so does the death benefit. Alternatively, the VUL's death benefit is a face amount, and the actual insurance paid for is the difference between the face amount and the cash value. To use the previous example, instead of a death benefit of $528,000 including $500,000 of paid-for coverage, it could be a death benefit of $500,000 with only $472,000 in paid-for coverage. In this alternative, since the insurance company is only at risk to pay the difference between the face amount and cash value, the residual is called the "at risk" amount. Generally, a VUL will have a variety of fees, including something like $100-200 in flat annual fees, marketing expenses imposed as a % of commissions, % of face amount, or % of assets (cash value), the expense ratio of the investment sub-accounts (typically higher than comparable mutual funds), and the actual insurance charge for the coverage or at risk amount (the "cost of insurance" or COI). As Chardo points out, the COI can rise annually, although sometimes VUL is sold with a guaranteed COI for the first N period of years, including sometimes guaranteed for 20 full years.

In this case, the numbers you are looking at are the COI charges inside VUL, which will not include the flat annual fee, the marketing expenses, or the higher expense ratios of the funds. Hence, it is not apples-to-apples with the term life insurance policy.

Generally, a group VUL might offer value relative to an individual's VUL if the employer has negotiated for or paid for the marketing expenses. However, even so, the main purpose of VUL is to allow investments inside a life insurance policy chassis, which typically doesn't make sense because stocks outside of the life insurance chassis have superior tax treatment in retirement plans or through LTCG/QD tax treatment with a step-up in basis (though in some high-tax states and particular retirement plan/glidepath scenarios, the comparison is not as horrible as one might think). On the other hand, life insurance products like VUL can offer a reasonable chassis for bonds and other fixed income assets, but VUL is not a particularly valuable product for this since it has higher costs to support the investment options (relative to a straight annuity or whole life insurance policy) and escalating COI late in life is particularly risky (requiring an exit before then, careful management, and/or immense overfunding).

Kelly wrote: ↑Tue Jan 24, 2023 3:13 pm ...I would expect the GVUL to have higher premiums since there will be a payoff eventually...

Some insurance products available through the workplace can have dramatically higher pricing if the insured individual leaves the workplace (due to job change for example) and wishes to continue with the policy. A privately purchased term insurance policy is often far more portable than one connected to one's employment. If an insured places reliance upon the ability to continue coverage after employment ends they should have a clear understanding and appreciation of what costs and limitations are involved with that alternative.

The increasing cost of the annual renewable term component of a universal life insurance policy can be relentless.

Chardo wrote: ↑Tue Jan 24, 2023 3:20 pm That VUL premium is not a 20 year guarantee. It's a monthly cost of insurance that rises every year. Just one moving part within that type of product.

I figured as much but the material I saw was silent on the rate increases. On closer look, the reverse of the rate sheet notes "Your rate will change the first of the month following your birthday". Rates in increase every five years of age.

Thanks to all for your help!

Kelly wrote: ↑Tue Jan 24, 2023 4:20 pm

Chardo wrote: ↑Tue Jan 24, 2023 3:20 pm That VUL premium is not a 20 year guarantee. It's a monthly cost of insurance that rises every year. Just one moving part within that type of product.

I figured as much but the material I saw was silent on the rate increases. On closer look, the reverse of the rate sheet notes "Your rate will change the first of the month following your birthday". Rates in increase every five years of age.

Thanks to all for your help!

You might point your coworker to this thread.

He/she would likely be able to the $1.6 million of life insurance at less cost by buying an individual term life policy.

Stinky wrote: ↑Tue Jan 24, 2023 4:28 pm

Kelly wrote: ↑Tue Jan 24, 2023 4:20 pm

Chardo wrote: ↑Tue Jan 24, 2023 3:20 pm That VUL premium is not a 20 year guarantee. It's a monthly cost of insurance that rises every year. Just one moving part within that type of product.

I figured as much but the material I saw was silent on the rate increases. On closer look, the reverse of the rate sheet notes "Your rate will change the first of the month following your birthday". Rates in increase every five years of age.

Thanks to all for your help!

You might point your coworker to this thread.

He/she would likely be able to the $1.6 million of life insurance at less cost by buying an individual term life policy.

Yes! That's why I asked. His lifetime GVUL premiums to 65 would be $83k. 15 year term would cost $42k (regular) and $33k preferred plus.

I'm thankful there are life insurance experts here. I find these products almost impenetrable.

Kelly wrote: ↑Tue Jan 24, 2023 4:51 pm I'm thankful there are life insurance experts here. I find these products almost impenetrable.

Which is all by design.

Follow up. He's had the policy for 3 years. The cash value is $64k and the cost basis is $69k. He "invested" $60k in one lump sum. Will he get the cash value back.

Kelly wrote: ↑Tue Jan 24, 2023 5:01 pm Follow up. He's had the policy for 3 years. The cash value is $64k and the cost basis is $69k. He "invested" $60k in one lump sum. Will he get the cash value back.

I don’t know if there’s a distinction between his “cash value” and “surrender value”. Many universal life products have surrender charges, which are the difference between cash and surrender value.

Presuming there are no surrender charges, he would get his $64k back if he surrendered now. He would owe no income tax, because the surrender value is less than the cost basis.

Many thanks Stinky. There's no surrender charge.

There might be restrictions on surrendering while still employed with the group employer? Otherwise if there's no surrender charge, there's no reason not to get back the cash value.

Given that the basis is higher than the cash value, if the coworker wants to exit the policy, it might be worth investigating the fixed option in the VUL list to see if the cash value can be invested in that until it reaches the basis so that the surrender can happen closer to basis.

More generally, is the coworker's investment selection in the VUL consistent with some kind of reasonable asset allocation? I notice the amount is down in a way that's consistent with investing some each year, having gains in the first couple years during COVID, and then experiencing the recent market drop. Again, VUL is not the ideal vehicle for stock investments.