Long-time readers will probably notice I’ve become less dogmatic in some of my writing over the last two years and softened my tone considerably on several subjects. For example, although I still think the vast majority of self-styled “financial advisors” are thinly-veiled salesmen, I’ve gotten to know a few that offer good advice at a fair price. Although I think few people should ever use a whole life insurance policy, I’ve run into a few people who actually understand the product AND are still happy they purchased it for various reasons. I can even seen a place for reverse mortgages, despite widespread abuse among those selling them. However, one product I thought I would NEVER see a use for is variable universal life (VUL) insurance. Over the last couple of months, however, I’ve had a number of readers contact me with questions about a VUL being sold by Larson Financial Advisors. It seems this particular product addresses many of the concerns with VUL that I’ve outlined before. It is enough to make me wonder if VUL really might have a place in a retirement “quiver” for at least some physicians.
Any Financial Product Can Be Bad
The truth is that just about any financial product can be made terrible through design features that benefit the product designer and salesman rather than the consumer. Consider the investment that makes up most of my retirement portfolio- mutual funds. If the only mutual funds available had an 8% load, a 2% ER, 12B-1 fees, surrender charges, horrible active management, and a high turnover rate, then it would be easy to argue that investors should avoid mutual funds altogether. However, thanks to Jack Bogle and others, an investor can now buy every stock in the world in seconds with essentially zero turnover, no fees, and an expense ratio less than 10 basis points.
What is Variable Universal Life Insurance?
VULs came out in the 1980s and 1990s when whole life insurance buyers and sellers realized that the relatively low returns available in whole life were getting creamed by stock market investors. Like with whole life insurance, it has a permanent death benefit along with a cash value component. The money grows inside the cash value account tax-free, and then in retirement the money is borrowed from the policy so it can be spent. Upon death, the death benefit pays off all the loans taken (and still provides a bit of money tax-free to the heirs.) Depending on your state, there may also be significant asset protection benefits for this money, and depending on estate tax laws in place at your death (and the liquidity of your estate) there may be estate tax benefits as well. Unlike whole life insurance where the cash value never goes down and is credited yearly with a dividend by the insurance company, with a VUL the investment component is invested in mutual fund-like subaccounts, and the value rises and falls with the market. The theory is that the long-term returns will be higher but you’ll still get the tax-free growth, asset protection, and death benefit. Stock market returns with life insurance benefits, what’s not to like?
So Why Doesn’t Everyone Have One?
The problems with investing in a VUL are basically three-fold- the investments suck, the insurance is too expensive, and insurance policies aren’t designed to be retirement savings accounts. Imagine the worst possible mutual fund, and that’s typically what you’ll find in a VUL sub-account- poor performance, high fees, and maybe even loads. The worst part is you have nowhere else to go. Instead of having thousands of funds to choose from, you may be stuck with only 5-10, although most newer policies over 50 or even 100+.
The insurance is also too expensive, mostly due to fees. These suckers are typically loaded up with so many fees it’s almost impossible to have a positive return. Aside from the ongoing fees, there is usually a surrender charge for the first few years (sometimes for as long as a decade.) The insurance company doesn’t want to lose money even if you surrender the policy, and since it’s already paid the commission to the salesman, it has to get that money back somewhere. To make matters worse, since every policy is different, it isn’t a particularly efficient market, and the insurance itself simply isn’t sold at a competitive price.
In order for a VUL to qualify for the tax-free growth and tax-free loans, it has to at least masquerade as life insurance. That means you can’t cash it out without paying taxes on the gains. There has to be a death benefit. There are limits as to how much you can contribute for any given death benefit. You must pay interest on any loans you take out etc. Insurance isn’t free, and money used for the insurance portion can’t be invested on your behalf.
When you consider all of these issues with a VUL policy, the tax, insurance, asset protection, and estate planning benefits just can’t make up for all the costs and you end up with a severely under-performing investment that becomes even worse if you want to get rid of it.
What If There Were A “Vanguard” of VULs?
Just because the typical VUL sucks, doesn’t mean it isn’t possible to have one that might be worth buying for some people. What would that VUL look like? Is it possible for the costs to be kept low enough that the tax benefits would outweigh them? I don’t know but I’d love to see the equivalent of the constant lowering of total market ETF expense ratios we’ve seen over the last 5 years from the mutual fund industry.
12 Requirements To Buy A VUL
Here are twelve requirements I’d have before considering a VUL:
1) Excellent investment options – Remember you’re stuck with these options for decades. If something better comes along in the investment world, you’re just out of luck. So you’d better hope that the investment options are at least the best available options at the time of purchase. That means low-cost passive investments such as those offered by Vanguard, DFA, and similar companies. It would be even better if there were a brokerage option where I could purchase investments in the future that aren’t even available today.
2) Low cost investments – No loads, no additional fees, low turnover, and a low expense ratio.
3) Competitively-priced insurance – Permanent insurance is naturally going to cost a lot more than term insurance, but is it too much to ask that the insurance be as cheap as actuarially possible? This is probably easiest for a mutual insurance company to offer, since like Vanguard, their owners are their policy holders.
4) No surrender charges – Something like 80% of people cash out of their permanent life insurance policies in the first decade, guaranteeing a loss. There is certainly no point in investing in a cash value life insurance policy if you’re not planning on holding the policy until death. If you cash out early, you’ll lose money. If you cash out late, your gains will be taxable and you’ll lose the death benefit. But if you’re truly offering an excellent product to well-informed, appropriate consumers, very few people ought to be surrendering their policies in that first decade. You shouldn’t have to stick them with a surrender charge in order to guarantee your ability to pay commissions.
5) Low (no?) commissions – Speaking of commissions, if we can have no-load mutual funds, why not no-load insurance policies. Agents like to point out that the consumer doesn’t pay them, the insurance company does, but who are we really kidding here? All expenses including company profits are paid by the consumer in some way or another.
6) Zero percent interest – Since the point of this policy is to act as an investment, and you know that to access your money eventually you’re going to have to take out a loan, why can’t that loan be offered at 0%? It would be direct recognition (I don’t think this term is even used with VULs) so the money you’re borrowing is no longer invested in the policy, but why should you have to pay the company interest to borrow your own money? Even if 0% interest is impossible, let’s see how close we can get to it shall we?
7) Overfunded policy, paid annually – Again, the point of the policy is to act as an investment. You want to be able to contribute as much as possible to the investment component while spending as little as possible on the insurance component. That means funding it up to the “MEC line” and paying annually, or at least not penalizing the policyholder with higher premiums for paying it monthly.
These last 5 requirements have more to do with the purchaser than the policy, but they would still be requirements for me to recommend one for someone.
8) Insurable at a reasonable price – I’m probably never going to invest in a life insurance policy because the costs of insuring climbers are just too high. The same issue exists for those with health problems. Mixing investing and insurance usually doesn’t make sense for most people, but for some people, it NEVER makes sense.
9) Maxed out retirement plans – Remember that a very low cost VUL MIGHT make sense when compared against a taxable account, but when you’re comparing it against a solid 401K or Roth IRA, it just isn’t going to hold up. If you haven’t maxed those out, it’s frankly pretty stupid to even look at a VUL.
10) High dividend/capital gains tax rate – Dave Ramsey likes to call cash value insurance the “payday lender of the middle class.” The tax benefits are just dramatically less if you’re not paying much in tax anyway. If you’re in the 10% or 15% bracket, your capital gains rate is 0%. If you’re under $200K, your rate is only 15%. That goes as high as 23.8% for an individual with a taxable income over $400K. If you’re investing in something that is highly tax-inefficient, like corporate bonds or REITs, your marginal tax rate could approach 50%. That’s when the tax benefits of a VUL might make up for the costs of the insurance.
11) High value placed on asset protection, estate planning, or the death benefit – Life insurance can offer many benefits, but the fewer of these you care about the less benefit you are likely to get from investing in life insurance. If your state has a low (or no) exemption for life insurance cash value from your creditors, that aspect is useless. If you have no liquidity issues, or are nowhere near the $5M ($10M married) estate tax exemption, the estate planning aspects don’t do you any good. Likewise, if you don’t really care about the death benefit, why pay for it?
12) The alternative is paying an AUM fee – If you’re working with an asset manager to whom you are paying an AUM fee, then a VUL becomes more attractive. The advisor would get paid by the commission you’re paying anyway (at least until someone comes out with no-load insurance) and you’d save the AUM fee you’d otherwise pay on those assets.
Not For Me
I’m not going to invest in even a perfect VUL. Between my 401K/profit-sharing plan, defined benefit plan, backdoor Roth IRAs, stealth IRA, individual 401K (for the blog) and other investments I want to make in 529s, UGMAs, and a taxable account (like real estate) I just don’t have the money to put in to anything else. The insurance component of any product would be too expensive due to my bad habits. I also don’t place much value on the asset protection, estate planning, and death benefit of permanent insurance and dislike the lack of flexibility inherent in an investment that must be held for decades. I also find a taxable account an exceedingly attractive alternative. Thus far in my life, a taxable account has LOWERED my tax bill rather than raised it, thanks to tax-loss-harvesting and donating appreciated shares to charity. I’m in a relatively low tax bracket (actually got down into the 25% bracket last year, last time I’ll see that for a while) and I don’t pay an asset manager. It just doesn’t make sense for me.
But I’ve met enough doctors in real life and on the internet whose financial lives are sufficiently different from mine that they could possibly benefit from a really good VUL. Check the example below to see how it might benefit some people.
The Math
How does this work? Let’s use a hypothetical example. Let’s assume you put $30K a year into a perfect VUL policy over 30 years, and $3K of that goes toward insurance costs. It provides the same investments available to you in a taxable account (let’s say they gain 8% a year) and you’re in the top tax bracket now and in retirement, let’s say dividend and long-term capital gains rate of 23.8%. You then borrow the money out at 0% in retirement. After 30 years, the cash value in the policy would be $3.06M. Now, let’s compare that to a taxable account. We’ll assume the investments are fairly tax efficient, perhaps a yield of 2% taxed at 23.8%, lowering your rate of return to 7.52% per year. After 30 years, you pull all the money out and pay capital gains taxes at 23.8% on it. You end up with 2.37M, $690K less. You also don’t get the asset protection and estate planning benefits (if any), and the death benefit.
This whole post has been mostly hypothetical to show that a really good VUL could be a good idea for certain investors. Whether the policy being marketed by Larson Financial is really good or not remains to be seen. I’ve sent a draft of this post to Tom Martin, their main investment guy, and asked him to submit a guest post about it. Then we can see how close it comes to an “ideal” policy and readers can decide if something like that makes sense for a portion of their retirement money. For the rest of us, we’ll continue to not mix insurance and investing.
I have done some research on VUL and noticed that Peter Katt, who is a fee only life insurance advisor not affiliated with any life insurance co in practice for 30 years, has written multiple articles on VUL in the AAII journal and the Journal of Financial Planning. The AAII journal often has excellent articles on life insurance and annuities so that’s why I was looking there.
He has been consulted numerous times on VULs that were about to implode because of market downturns. What may look good on paper with various projections never plays out truly in the real world.
I have spoken to him personally on the subject and he recommends that physicians stay away from VULs and stick with whole life from the big mutual cos if they decide cash value life will be beneficial for them. I asked him to contribute to this discussion but is not interested. His articles (at least 100 of them) are all available on his web site.
http://www.peterkatt.com/articles/AAII_nov2003.html
http://www.peterkatt.com/articles/AAII_sep2010.html
Thanks for your post, Greg. I’ve been a big fan of Pater’s for years and closely follow his work. I think it’s important to note that a well-funded plan, that follows sound investment fundamentals (two key caveats that I realize are often overlooked), would not implode. The ones that implode are the ones that neglect one of those two key components.
Whole life insurance, in general pays no more than 3% in actual ROI. If safety is the goal (and market risk is seen as something to be avoided), then I’d submit there may be better ways to get a 3% return than whole life.
It’s also important to note that to date, I’m not aware of any research from Mr. Katt that considers a well funded VUL (with low-cost Vanguard funds) as compared to a taxable account (using similar funds) for a high-tax bracketed investor. I’ve also not seen any research showing the impact of a volatile market on the performance of a well-funded, properly diversified VUL. That’s actually Phase 3 of what we’ve been up to over the past 4 months. We hope to publish by the end of the year and we’ll certainly be looking deeper into that issue than anyone has done in the past. On the surface, the theory is already wrong because we could use a fee-based VUL product that spreads the expenses out long-term and then the volatility of the market becomes no more relevant than it would for a taxable Vanguard account. The question we have is if a product with front-loaded expenses causes a bigger risk during the first 10 years due to market volatility. It seems on the surface the answer should be “no” because there is much less value in the policy during the first 10 years but this is something that to our knowledge has yet to be well investigated. After the first 10 years, the expenses should be low enough, that again, market volatility would have no more impact than on a normal Vanguard account. It makes sense, but I don’t want to claim it definitively until I actually see the data.
I’ll easily agree that a poorly funded policy is a huge ticking time bomb. I’ll also agree that most people should stay away. My favorite journal post about life insurance claims, you should avoid it as an investment as the default unless your situation proves otherwise.
I’m just advocating that we all actually look at it from a scientific perspective to see what actually happens under the hood. When I examine data (and the academic evidence), a well-funded policy avoids the problems often associated with it.
We have to separate the portfolio risk issue from the VUL concept. We have the same risk either way, the question is just whether the expenses impact things on the early end. If so, then the fee-based products are the easy solution, although they increase long-term expenses (albeit still less than a taxable account).
I dont quite understand it, but the second article speaks to how to astutely manage a VUL policy. It seems way too complicated and I think it should be avoided by most. Describing an ideal VUL on a theoretical basis is one thing, and how they would perform in the real world is much different. Even if you could manage one for most of your lifetime who would manage your clients’ policies correctly 30 yrs in the future?
We have a VUL and regret buying one because it was not the right thing to invest in. Now, what do we do?
Cash it out – There will be tax implecations from this (ironically, because it was marketed as a tax-free investment)
Leave it in – Continue with the tax free benefit – $880K
I also forgot to mention – Northwestern Mutual claims they are the best VUL and they aren’t like the rest of the 90%, which don’t perform as well
Northwestern claims they are the best everything. I’m not sure I’ve seen anything they’re the best for yet. Certainly they have the largest sales force.
You can exchange it into a better VUL or into a low cost variable annuity. First thing I’d do is calculate what the tax hit would really be if you just cashed out. If it isn’t bad, that’s an option too.
Hi Chris,
Sorry to hear about your experience with your VUL. Unfortunately, we see this a lot. There are a lot of neat ways to turn a relatively bad situation into a decent one but it’s not usually a 1 direction answer.
This is the decision framework I usually take a policy through if someone comes in and is wondering what they should do:
1. I double check that it’s really a bad investment. I had a client 2 weeks ago that had VUL from a previous advisor and wanted to cancel it. After looking into it, it was set up great, had excellent index fund investment choices, long-term low costs, etc. The real issue was that they could no longer afford the same deposit. Rather than canceling the policy, we were able to help them reduce their premiums. Since it was a long-term reduction, we also reduced the death benefit. That solved the problem.
2. Sometimes, though, it really is the wrong fit and there’s nothing that can be done to fix it. Assuming that’s the case, there are several options to consider and which path would be very different based on your situation. Here are other options.
A. If the policy has a large gain (worth way more than you put into it originally), then you could do one of the following:
i. Roll to a low-cost variable annuity (Jefferson Nat’l would likely be my current choice with $240 in annual administrative expense). This would be done through a process called a 1035 exchange (simple to do). In doing so, you would not owe any tax on the “rollover” and then once in the annuity it would continue to grow tax-free until you withdrew the money later. Note: I’m not trying to get exhaustive about the tax issues here so if you go down this road, make sure you understand them fully.
ii. Roll the money into a paid up life insurance policy. There are some options out there where you can get a paid up death benefit by rolling over the cash. You give up access to the cash but we’ve had a few people do this because they knew they wanted to leave money to their kids or a charity anyway. The longer you live, the lower your rate of return on the cash will become (typically dropping below 5-6% in your 80s). If you want to leave it to a charity, there are some current tax benefits you could probably get to do this.
iii. You can do the same 1035 exchange and roll the money over into long-term care insurance. I haven’t actually ever done this with a client, but it’s conceivable if this is an important issue for you).
iv. As White Coat mentioned, you could do the 1035 exchange into a better VUL that fits your needs more appropriately.
(Typically few people want to cash out their policy if they are at a large gain, so although the above are fun, they probably aren’t aligned with your issue…)
B. Instead, what if the policy is worth a lot less than you put in originally. Then the following would be items I’d consider:
i. Cashing out locks in your losses and you’re not able to deduct them on your taxes. This is probably a bad option but it’s there if you need the cash.
ii. Rolling to a low-cost variable annuity (see Jefferson Nat’l example above) would allow you to retain your loss. You wouldn’t owe gains on growth in the annuity until you’d recovered your original deposits from the life insurance. Sometimes people at a loss “roll” the money to the annuity (same 1035 exchange process) and then let it sit until it gets to a break-even point). Then they cash it out and in effect they’ve gotten the full benefit of the loss they had in their life insurance by using it to offset future gains.
iii. A more aggressive variant of ii above is to “roll” the money to the annuity, and then cash out the annuity in the near future. Some accountants are comfortable with you claiming the full “loss” on your taxes. (i.e. including the life insurance loss) There’s historically been some gray area here so this isn’t a recommendation but I’ve seen it done at least a dozen times. The idea is that you actually end up getting to deduct the loss that was caused by the life insurance but since you can’t deduct the life insurance loss directly if you cash it out, instead you do the 1035 exchange to the annuity and then deduct the loss after you cash the annuity out. As of 3 years ago when I last spoke about this with some tax attorneys, the IRS had not provided clear guidance. That may have changed so seek good counsel before you consider going down this road.
iv. The same concept from ii applies if you 1035 exchange the money into a new, better suited VUL. You’d get to benefit from the losses in the old policy by having more access to eventual tax-free cash in the new policy since the loss would transfer over.
IMPORTANT CAVEAT:
Sometimes it is best to time when you cancel your old policy. I had a recent example where a new client wanted to get out of an old policy. We found that just by leaving the policy alone, his surrender penalty was dropping by much more than his annual expenses. In other words, he could shut the premiums off entirely, allow the policy to pull the expenses from his existing cash, and still have his year end cash increase (due to the surrender charges being reduced due to the specific timing). In that case, it made the most sense to wait for 3-4 more years until cashing out the existing policy because he was getting a reasonable return on his cash by simply keeping the policy in existence – although the premiums had been turned off completely.
Wish I could give you a quick answer with 1 specific solution but this is one of those situations where every case has to be evaluated on it’s own merit. Feel free to shoot me an email if you want me to take a closer look. Unfortunately your statement will rarely show your cost basis so you’ll need to call the insurance company and ask. As soon as you do that, they will likely alert your insurance agent that you’re making calls so be prepared for the reactionary phone call asking what you’re up to.
Again, I’m a fan of keeping it simple so if we’re not talking a lot of money, then cashing it out might be the easiest answer. Just make sure you understand the tax consequences of doing so.
Best Regards!
To all,
Here is my VUL story with the Larsons…
The Larson brothers, as we know by now, are big proponents of this. I was a resident when the Larsons gave their pitch. It sounded good to me since I knew nothing about finance. I was pretty scared to tell you the truth since I was heavily in debt and was starting from scratch. I had a 250K loan obligation. My staring salary was 250k with a 10K signing bonus when I began my career. I was working with Jeff/Paul depending on their schedule. They looked at my 401K and were not impressed by it since my company did not match. We had no other retirement benefits. Yes, I know, this group was terrible when it came to that. They did inform me about Roth IRA for two years since the IRS was allowing this for high earners. But, they never mentioned to me about the back door IRA for the other years.
They were very enthusiastic about this VUL as a retirement policy. It sounded good to me. I knew nothing about M and E charges, front load charges, exp ratio, COI, and Issue charges. The problem with me is that I was naive. I only have myself to blame for not asking more questions about this policy. I trusted that the Larsons were doing their “fiduciary” duty by telling me my best options. In fact all their in force illustrations had the policy giving me a 10% return. This is ridiculous now that I have educated myself the best that I can.
This is to Tom: I feel pretty ripped off by this policy. I feel you guys did not do your fiduciary duty by putting me in this confusing, complicated, expensive, and outdated policy. Can I sue you guys? I feel like Larson has a really good thing going: prey on financially naive doctors like me who know nothing about this stuff. You guys know this and Introduce VULs. I cannot find one damn article that says anything positive of VULs. My cousin who married a guy who works in senior management at an insurance company told me to stay away from VULs. He said VULs are there biggest money makers! Every guy I know that knows a lick about finance says that VULs are a rip off. I even had Schwab and Vanguard do a three way, separately, with my Life insurance company to help me get out of it. I’m too far into it for anyone to give me what direction to go.
And by the way Tom, were the Larsons asking me to pony up another $2000 a year for estate planning and the such. I think that should have been done with the 1.25% you guys were charging me. A lot of FA told me this added fee seemed ridiculous.
Lastly, to all my fellow doctors out there, please learn about finance and retirement. Don’t be lazy by thinking that your advisor is taking care of everything. Who is watching them and making sure you don’t get ripped off? You should!!! Once they realize you know somethings about this stuff, they get scared. Don’t be naive like me. Get other people to evaluate your portfolio. And read read read!!! The only person that can get you financial freedom in YOU! Thank you WCI! You were the 1st source and well as an article by cnn/money that opened my eyes. I started educating myself with things you recommended
Hi Billy,
We have a firm policy to not respond to anonymous complaints after learning that a competitor was smearing us anonymously lobbying all kinds of false accusations.
So, I won’t speak to your case but would encourage you to give me a personal call so that I can understand your situation better. I’ll be glad to help however I can.
Some general feedback:
The long insurance costs that you mention often average out to less than 1% (as a hit to your ROI) long-term so it may not be nearly as bad as you think but I can’t know without looking at your actual file. The key is that you’re trading heavier up front expenses for very low long-term expenses. Since this was a retirement vehicle that could be a fair trade.
There are numerous journal articles that speak highly of VUL when used properly. Both Mayo and Cleveland Clinic provide VUL to physicians as a solid retirement option so there is more merit than many people realize on the surface. (although I don’t personally like the structure of their options)
To your friend’s advice, it holds true that VUL can be either really good or really bad depending on how it was initially designed. The long-term carrying costs could hurt your returns by 5% or 1% or less so I can never lump the two together because they lead to very different outcomes. One would indeed be a big money maker for the insurance company and the other would not.
I don’t know your case, Billy, so I can’t speak to your specifics but I’ll do anything I can to help. I’ve had the opportunity to take many sophisticated clients under the hood as deep as they want to go with their policy and the normal response is that the better they understand it, the more they appreciate it.
Seriously, give me a call. Even if you understand it better, and still don’t want to use it, there are often better ways to disconnect than simply shutting it down outright. Hopefully Schwab and Vanguard outlined several options as the decision tree includes at least 6 and a quick “cash out” is rarely optimum.
Hope you’ll reach out, Billy.
Tom,
1st of all, this VUL had a 5% front load. Secondly, the Larson bros always used 10% returns for everything, including the VUL. A 10% return in today’s world is really pushing the optimism button. I’m sorry to say that they didn’t really tell me to max out my 401K, at least for tax saving purposes. They thought the mutual funds available in them were weak. I really don’t think a guy with a large debt of 250K and 250K annual income should have been started in a VUL so quickly. My interest rate was low on my debt, about 3.5%. But according to them, paying off debt was a dumb idea since my return would be 10% based on returns from WW II. I think we live in a new world now. Expecting 10% return with today’s volatility and liberal politics is unrealistic. By the way, I never knew about the costs of insurance from the bros, other than they would decrease the death benefit at year 10 to increase the investment portion. I truly believe they did not explain the cons of this. I was very uneducated back then in terms of my finance. Not anymore. Cost are important. I feel Frontlines PBS special called the Retirement Gamble opened my eyes as well. What pisses me off so much now is the fact my collegues make very little effort to educate themselves. I’m a firm believer that in this country, the ONLY way to make money is to do it yourself . This holds true whether it’s owing a McDonalds or picking mutual funds or stocks. I have yet to see an example of where you give your money to someone for any type of investments and come out ahead. I understand that people want to spend time with family and go on missions. But, this is no excuse for closing your eyes and hoping for the best when age 65 rolls around.
Hi Billy,
I’d like to help and hope you’ll reach out.
It’s easy to run everything with a lower expected return to understand the impact. I routinely run them at 7% to make sure that it still functions as a sound investment and it does it.
I share that to say, even if you don’t like the return example that was used initially, that doesn’t make it a bad policy.
The front-load doesn’t make it bad either. My personal policy is front-loaded at 8% year 1 and 6% thereafter. That load only applies to deposits and doesn’t cover all of the expenses. The best way to analyze the true impact of all of the insurance costs is to look at the ROI pages.
Take your gross return (whatever you want to plug it in at) and then subtract the ROI. This ROI accounts for all of the expenses of the policy. The difference is the hit the expenses are causing to your rate of return (easily calculated by subtracting to get the difference). This can then be compared with alternative options like paying down debt, funding the 401(k) with whatever options exist, funding a taxable account, etc. Once you know your cash on cash return (after all expenses) it is easy to compare alternatives.
By checking the costs this way, the insurance costs often average out to be very low long term. My personal policy has a front load that hurt my returns by more than 18% in year 1. Why would someone do that? Because the trade off is that long-term the insurance costs should average out to a hit of only 1% against my return. To get to a 1% average down the road, after an 18% hit in the first year, the costs by definition are getting very small. Often less than .1% per year by the time you get to your retirement years. This is what can be compared to the alternatives.
Again, big picture is I’d like to help. I’d be happy to walk through things to understand your situation better. I just don’t jump to conclusions until I see all of the facts. Then I can understand the best option available and how sound the advice was on the front end.
Just want to be clear that neither the 10% example or the 5% up front load mean that you have a bad policy. There are easy ways for me to check but not without seeing your actual stuff.
You’re good to question this stuff. You’re right on that people need to be more involved. But to do that, we need to have solid resources out there for people to get good advice. The average investor isn’t spending their time in the journals and conferences the way White Coat does. I spend a large portion of my time fixing the mistakes of do-it-yourselfers that have cost them hundreds of thousands of dollars. It can definitely be done but it takes a solid commitment.
I’m thankful for this blog being such a great resource. Just wish more physicians would take the time to read it!
Give me a call if you’d like me to take a look. Decent chance you’ve got something much better than you realize and even if not, then there are decent options for winding it down. Thanks Billy!
Tom,
My only question to you: was it wise for me to be put in a VUL when my starting salary was 250K, 250K in student loan repayments, 3K/month in VUL premiums, no family or kids? I know you dont want to comment on individual cases, but the best thing and most fiduciary thing for Larson Financial to have done was to put my 3K/month in low cost index funds like Vanguard. You guys dont actively trade stuff around anyway. The costs of this policy were NEVER explained to me. The only thing that was explained was that I can borrow money at no interest after year 10. Im sure you guys have now “boned up” in regards to these lack of clarity to your new clients. However, I was feel like a sacrificial lamb in all of this. You guys know that most of us are lacking in knowledge regarding finance. I feel it was strategic on Paul’s part to work with phyicians only. We are high earners with severly poor knowledge of money. We blindly give our hard earned money without knowing the costs of giving our money
There are many times where this could make sense, Billy. That’s why I can’t comment specifically to your situation without understanding it in full – which is why I’m giving you an open invitation to schedule a complimentary review.
Your policy probably has index fund sub accounts inside of it that would be comparable to Vanguard funds. So the real question is which would be worse – the cost of your long-term future taxes or the cost of your up heavy up-front and lesser ongoing insurance costs? It’s not difficult to calculate the break even point. It would depend on what state you live in but at your income level your break even point is probably somewhere between year 8-10. Until that point, you’d have been better off with the index funds outright – after that point, provided taxes remain similar, then you’d probably be better off with the VUL. (I’m assuming a 7% return here – if it were above that, then you’d break even sooner)
Journal of Risk and and Insurance:
“Since the tax advantage of the life insurance policies increases with the holding period of the policy, there is often a specific holding period after which investment in the universal/variable life insurance policy dominates an alternative unbundled investment strategy without the life insurance tax advantage.”
“In general, universal/variable life insurance policies must be kept in force for at least eight years before providing a greater return than comparable investment strategies.” (Written at a time when most tax rates were lower than today so the break even point can be even quicker now sometimes. With the no-commission version of VUL that we’ve recently brought on, the break even point is often year 1 but then the long-term expenses are higher than the front-loaded policies – this is why I personally own the front-loaded version instead of the no-commission version though most likely there was not a solid no-commission version at play when you took out your policy – that’s an update in the market place that’s occurred very recently and we’ve been on the front end of pushing for this on behalf of our clients. It’s just not better long-term but it takes away the complexity of having to stomach the front-end costs so I like it as a viable option. And it includes Vanguard index sub-accounts…)
The fact pattern I have thus far:
– low student loan rate with no specific aversion to debt
– high income
– 401(k) with no match and poor investment choices
– using backdoor Roth
– lower up front VUL loads than my own policy
Based on this I don’t yet see any problems with a properly structured VUL being part of the plan. You don’t need a death benefit but nor do I. I use it for the tax benefits so being single isn’t a specific problem for you. There are numerous other things I’d need to understand to better provide individual insight but nothing you’ve shared would lead me to believe this would be a poor option to have on the table.
Now, if this wasn’t money for retirement, that would be a whole different issue, but you’ve already stated that these funds were earmarked for retirement and therefore we have a long-term time horizon. So it seems an 8-10 year break even point could be reasonable to have 40-50 years of being ahead when using similar index funds outside the policy compared to inside of it.
Again, big picture is that I want to help. It seems perhaps you’ve already drawn your conclusions but possibly prematurely without fully understanding what you had. I can assure you, Billy, that I don’t want my legacy to be associated with defending the merits of life insurance as part of the investment portfolio but its one of those products that has a bad stigma because its done poorly so often. I get that, but it all comes down to the design at the individual level. If its designed well, life insurance can be a great option for many high income earners. If its not designed well, then index funds would likely prove far better outside the policy instead of inside of it.
It all comes down to design and that’s the part we’re trying to push the industry as a whole to get far better at explaining/educating consumers about. You can imagine the resistance of the industry when this means that profit margins will decrease. We have a great track record for solid design and as such, I have clients routinely calling to ask if they can put more money into their VUL because they got a bonus.
You’ve touched on two key issues for the industry though, Billy:
1. People have to understand this stuff better. I’m working on that. Once most people fully look under the hood, they want to put more in.
2. To help people look under the hood easier, we have to have a better process of analysis. You’ve probably read earlier in this post but the main method of analysis still used today was developed back in 1932 and it gives credit for the death benefit in the comparison when I don’t think that’s often appropriate. We’ve got to fix this and we’ve done so internally but it takes a while for things to circulate through the world of academic publishing. It’ll get there eventually.
Until then, I’m happy to take you under the hood as far as you’d like to go if you’re open to better understanding things. If you’ve already cashed it in, there still might be options on the table.
Thanks again, Billy. I genuinely want to help. Please give me a call so we can look at it together so I can fully understand and provide a more confident assessment and recommendations.
Billy
I think you should let Larsons fix your VUL policy. A VUL definitely requires regular reviews and meetings to keep it funded correctly. If they cant fix it, maybe they can refund you on commissions they earned on it.
Tom and Greg,
First of all, I had a bunch of different financial advisors look at my policy, from Schwab, Vanguard, ING, TransAmerica and Salmons. They all felt that it was an expensive policy and not worth it. Each of them did a 3 way conversation with me and they basically felt bad for me because it was a lousy deal. Basically, a bad policy to begin with. Tom, you talk about using the cheaper sub accounts that are indexed in my VUL. OK, tell the Larson boys that then. The majority of my sub accounts were in funds that had an exp ration > 1.0 I basically re-allocated my own account to cheaper index funds. But these index funds are not cheaper than Vanguard index funds that you claim. The cheapest index fund is an S&P 500 fund that had an exp ration of 0.25 -that’s 2x more expensive than the Vanguard Index funds. Also, this is a fund of funds. You pick an allocation from conservative to aggresive. And, these allocations have a damn high exp ratio…around 0.75. Tom, these costs were never explained to me ever by Larson Financial. It was like it did not matter. The problem with financial advisors is that they only care about returns. Thats what was explained everytime I met up with the Larson boys. No one ever talks about the costs of these instruments. I want you to realize this Tom. Cost is important. Very important. They never explained to me the cost of may accounts. Looking back, that was en egregious omission. colst
I have to agree with Greg in every way. I started with Larson during residency and just 3-4 months of a steady income, and I was being sold VUL insurance, even before looking into all the other options for a $200k salary. It was stupid on my part because I should have asked more questions and trusted less. And reading through this entire post (including trying to decipher what [post deleted due to rude comment] could have said), has made me realize what a sham VUL insurance is for someone in my position. It’s disappointing to have this kind of experience especially when you think you can trust your advisor but I think it speaks for most financial advisors and not just Larson. It is a business after all, and what they really want (and no, it’s not for the client to get the best possible outcome) is to get paid. Fair enough.
And Tom, I’m sorry to say this especially when you’ve been so great and professional with all your responses but I completely and wholeheartedly disagree with you in your stating that Larson is not selling VUL to doctors with incomes between 200-300k. WCI, don’t be reassured. See Greg’s post above. Read mine. And there are several other clients that are friends who have been approached to buy it also. I just think you need to look into the company’s happenings and see what’s really going on.
Trust me when I say I don’t delete anything of substance when deleting the rare rude comment. They’re generally personal ad hominem attacks.
I think I’ve been pretty clear in the past that I don’t like the vast majority of VUL policies. I also think I’ve been pretty clear that I don’t think investing in insurance is a good idea generally, especially when a doctor is passing up a more traditional retirement account.
I’m also disappointed to learn that at least some Larson advisors make a habit of pushing VULs to relatively low income doctors and that some of the VULs are composed of high income funds.
This post was about whether it was possible to design a VUL that would actually be beneficial to a physician investor instead of using a taxable account. I think the answer to that is yes. That has little to do with whether any particular VUL sold to you by Larson or anyone else will actually be beneficial to you. I don’t own a VUL and don’t plan to buy one…ever, for several reasons: Plenty of available retirement accounts, high insurance costs due to bad habits, dislike of mixing investments and insurance, a particularly tax-efficient way to use taxable accounts (tax loss harvesting losses and donating gains to charity) etc. But if costs are kept very low, it is mathematically possible for the tax advantages of the VUL to overcome the additional insurance costs of the policy.
I’m not sure how I can “look into” the company’s happenings to see what’s really going on. If Tom wants to send me data about how many of its clients have VULs and what VULs they have, I’m more than willing to publish it. As far as I know, he’s still working on the promised paper about analyzing VULs. I found the preliminary data I looked at intriguing. But that data shows low cost Vanguard/DFA investments in the VUL, which is not what has been described. I think the anecdotes people like you and Greg have been sharing are just as useful at cautioning readers that they need to be informed consumers of any financial advice.
Does anyone have information on TIAA-CREF VUL polic? I looked at the prospectus, but it didn’t elucidate anything. Specifically, what makes it the Vanguard of VULs? If anyone has this policy or knows about it, please share.
Here’s a link to the prospectus:
http://www1.tiaa-cref.org/public/prospectuses/ivul_policy.pdf?fundclass=LI
Here’s a link to the investment returns:
https://www.tiaa-cref.org/public/pdf/performance/ivul_performance.pdf
You’ll notice there are quite a few TIAA-CREF and DFA funds in there.
The fees section is usually where I spend time when looking at these things:
Here are some quotes:
We make certain charges and deductions under the Policy. These charges and deductions compensate us for: (1) services and benefits we provide; (2) costs and expenses we incur; and (3) risks we assume. Charges and deductions allow us to provide you services, but have the effect of reducing your Policy Value and death benefits.
Prior to allocation of Premium, we deduct a specific Premium Tax Charge from each Premium to compensate us for certain taxes applicable to the state of contract issue and credit the remaining amount (the Net Premium) according to your allocation instructions. Premium Tax Charges vary from state to state and can range from 0.00% to 3.50%.
The Monthly Charge has three components:
•
a monthly Policy Fee (applicable only to Policies issued on a single life basis, and applicable only to certain Issue Ages on such Policies)
•
the monthly Cost of Insurance charge; and
•
charges for any Riders (as specified in the applicable Rider).
Monthly Policy Fee. We assess a monthly Policy Fee only on Policies issued on a single life basis to compensate us for certain administrative and operating expenses of such Policies with younger Issue Ages.
The annualized Policy Fee of $120 applies for Issue Ages 0–17.
PARTIAL WITHDRAWAL CHARGES
We will deduct $20 for a partial withdrawal.
DAILY CHARGES
We deduct daily charges from each Investment Account (but not the Fixed Account) to compensate us for certain mortality and expense risks we assume, and for certain expenses we incur.
The mortality risk is the risk that an Insured will live for a shorter time than we project. The expense risk is the risk that the expenses that we incur will exceed the charges we set in the Policy. Currently, we deduct this Mortality and Expense Risk Charge daily at the following annual rates:
•
0.95% if the value of Units in all Investment Accounts is less than $100,000;
•
0.65% if the value of Units in all Investment Accounts is from $100,000 to $500,000; and
•
0.35% if the value of Units in all Investment Accounts is over $500,000.
In Policy Years 21 and later, the annual rate is 0.35% regardless of the value of Units in all Investment Accounts.
We charge you interest in arrears (the “charged interest rate”) on a loan at a current interest rate of 5%. We also credit interest on amounts in the Loan Account (the “earned interest rate”) at a current fixed annual earned interest rate of 4.35% for Policy Years 1-10. For Policy Years 11 and thereafter, we will credit interest on amounts in the Loan Account at a current annual earned interest rate of 4.80%
In certain situations, as agreed to between you and a registered investment adviser, Advisory Fees may be deducted each quarter from specified Allocation Options to compensate an adviser for any management of your Policy. The fees may be deducted from the Fixed Account and/or all of the Investment Accounts (except the Loan Account) in proportion to the Policy Value in each Allocation Option (pro rata) or they can be deducted from designated Investment Accounts as specified by you. These fees may be considered withdrawals from the Policy for tax purposes. Please see “Federal Tax Considerations” below and consult with your personal tax adviser. These fees will go to individual registered investment advisers who are not affiliated with the Separate Account or the Company. These fees are not the investment advisory fees paid by the underlying Portfolios.
Each Investment Account purchases shares of the corresponding Portfolio at net asset value. The Portfolios deduct management fees and other expenses from their assets. The value of the net assets of each Investment Account reflects the management fees and other expenses incurred by the corresponding Portfolio in which the Investment Account invests.
So you’re paying the ER on the underlying funds, any advisory fees, the costs of insurance, an annual $120 fee, $20 per withdrawal (that’s quite an ATM fee), up to 0.95% for “mortality and risk charge” and up to 3.5% for premium tax charges. I’m not sure I would use “The Vanguard of VULs” to describe those fees. Your all in fees could be as high as 5% per year. That’s pretty tough for a tax benefit to overcome fees of that level.
WCI,
Thanks for the information. This sounds similar to my policy, except the borrowing rate in policy year 11 sounds better with Tiaa. John Hancock told me it’s 1.25% before or after year 10. This is after the kick
back interest rate they help me out with
Here is a policy from Minnesota Life with many Vanguard funds offered.
https://service.minnesotalife.com/product/prospectuspublic.jsf?product=AVUL
here is the prospectus.
https://service.minnesotalife.com/library/public/files/prospectus/pdf/AVULProspectus.pdf
On page 5 is a fee table with all the charges.
Again great in concept to have vanguard funds in the VUL wrapper but the fees and premium charges are too high not to mention that the vanguard VA portfolios all have expense ratios much higher than ETFs available in a retail account.
WCI, I don’t think an ideal VUL policy exists.
[Comment removed at commenter’s request. While initially critical of Larson Financial, the matter has since been resolved to his satisfaction.]
The paper is still in development last I heard.
Allan Roth wrote about the Medical Economics “best financial advisors for doctors” list here: http://www.cbsnews.com/news/dog-nearly-fetches-prestigious-financial-advisor-honor/
Any updates on this? I, too, was approached by the Larson Financial advisor with whom I started working, and this after telling me this spring when I first signed up that term life insurance was the way to go. Seems to be a lot more than the “1%” their sales force is marketing to. Is this a transition that Larson Finanial is making? Would be interesting to hear an update from Tom about it.
No updates yet. Compliance and publicity issues make it tricky for Tom to publish anything on the site but we’re trying to work something out for another post on the subject, perhaps a Pro/Con post. I think Tom and I agree that there is a certain percentage of doctors who could benefit from a “good” VUL and there are a certain percentage of doctors who they are almost certainly not right for. Our disagreement mostly lies in how big we think those percentages are!
[Post held temporarily. Commenter advised by email.]
[Comment held and commenter emailed.]
Please let me know when the post/article by Tom is published. [Remainder of comment held and commenter emailed.]
As you’re well-aware from my email, that post/article probably won’t be published any time soon.
[Comment removed at commenter’s request.]
I bought vul at age 25. I’m now 53 and paying the same premium. I over funded it modestly for 10 years and paid nothing when my husband died and left me with no income for several years. . To replace this insurance now would cost me 45% more for a term policy. I know this because I have another. I have 4% guaranteed minimum on cash balances which was laughable in 1990, but quite interesting today. This policy does what I bought it for.
.
Glad to hear you’re happy with your purchase. I’m curious to see what your current surrender value is and what your annual premium was.
[Comment held and commenter emailed.]
[Update: Email bounced back due to bad email address. If you want that email, post your real address or clean out your email box.]
My husband and I are contemplating purchasing VUL policies. They are attractive to us based on the tax free growth and the ability to use the cash value as collateral for future borrowing needs (10+ years down the road) Here is an overview of our financials:
Household income of $160k +
We currently contribute 13% to 401ks (6% traditional, 7% roth) as well as max out our HSA and Roth IRAs. We estimate that the policy we are looking at will cost us about 15% (with hopes to earn 7%) We understand we could get a greater ROI in another investment but think that the tax advantages may outweigh that. We both believe that taxes will continue to increase during our lifetime. We are in our early 30s. Thoughts?
$160K income and good savers? I can’t imagine you’re in a very high tax bracket now nor that you will be in a particularly high one in retirement given your savings rate and division between traditional and Roth/HSA accounts. I certainly wouldn’t buy a VUL in your situation unless there is some critical piece of information you’re holding back. If you really think your personal tax rate on withdrawal will be higher than on contribution, then favor Roth investments and tax gain harvest your taxable account as you go along. But realize that isn’t the case for most retirees.
RM,
With a properly structured VUL you are trading the money that you would have spent on taxes for the policy charges of the insurance company. The less drag you can have on your account from expense charges, cost of insurance, administrative charges and the mortality and expense charges the better. You cash accumulation value will be higher, which should be your top priority in you are trying to use VULs as an alternative investment vehicle to supplement retirement income.
My wife and I are in our late 30’s, and being in the financial advisory business I shopped around all of the VUL/IUL options after having maxed out our SEP-IRA and ROTH/HSA accounts. I ran the numbers on the top policies and found that if we make a $15k annual contribution for 20 years, the policy that provided us with the highest policy cash value at age 60 was the following:
1. Ameritas $993,279
2. Nationwide $915,878
3. John Hancock $905,712
Then I ran the numbers to show which policy would provide the greatest annual cash withdrawals from age 61-95 without lapsing, and Ameritas was at $101k, $86k for Nationwide, andn $88k for John Hancock.
The key to Ameritas is their transparent fees and expenses. There is no commission paid to any broker, so there are no surrender charges, and more of your money goes to work for you right off the bat.
My policy had fixed monthly admin charges of $7.50/month, and a mortality and expense risk charge of .7% during the first 15 years, and .1% thereafter. The sub account fees were super low using DFA funds of about .38% per year. This policy illustrates at a net 11.46% rate of return, which I think is very realistic over a 20 year time period. Currently the policy has a net zero loan option upon distribution.
The biggest eye opener for me was the quicker cash value accumulation, especially early on in the process. Ameritas illustrates a positive cash value after the 1st year, whereas all of the other options were negative were several years until the breakpoints were met. As a consumer, I want more of my money working for me, and not the agent/broker/insurance company.
Buyer beware on these….you have to make sure you work with someone that can advise you not only today (it is easy to set these things up) but will also be there 20 years from now when distribution time comes, because the 800 call center on most of these plans is not well versed on how to manipulate these policies to get the highest cash value growth during accumulation phase, and switch the policy design to get the highest annual withdrawals without lapsing the policy.
I can’t tell you the number of clients that have come in with IUL/VUL policies that have no idea how the things work, and have been grossly mismanaged. Also, we chose to go with a company that offered very liberal sub account trading options, so we can proactively manage assets appropriately during bull and bear markets without penalty.
I hope these insights help……not all VUL plans are created equal, and slight savings in the policy fees, expenses, commission, sub account options will be worth hundreds of thousands of dollars to you 30+ years down the road.
Thank you very much for your insights! Very helpful.
I certainly agree with that last paragraph. Not sure I’m convinced that “proactive management” of assets is really any better of an idea with VUL subaccounts than with mutual funds though.
Here is a lawsuit against Larson for selling VUL to several Docs. I haven’t been able to find anything on how case was settled.
http://www.thewpi.org/pdf_files/Larson.%20Lawsuit.Complaint.PW.pdf
I recently started working with a Larson advisor who, interestingly, has recommended a VUL policy to me as a part of building my “tax-advantaged” “bucket”.
In looking into it, I came across this thread and have found it informative, especially in light of the Larson connection.
I am at the low end of the income brackets thrown around in this thread – just recently crossing into territory where I will need to do a backdoor Roth. I am in an employed situation – currently maxing out my 403b, 457, Roths, HSA and contributing some to a state-sponsored 529 plan. My advisor told me my only real options at this point, since I still have some discretionary investible income, is to go to a VUL to the tune of $2000/month or to simply invest in a taxable brokerage account. He is recommending stopping the 457 contributions and rechanneling that money (which I would then pay taxes on) to the VUL because the 457 is not very well asset-protected in my state. He told me that long-term, investing the $2000/month in the VUL would be as beneficial to me as investing $3000/month in the taxable account. He told me that if I go with the VUL option, the projections indicate I could possibly retire 5-7 years earlier than planned. Of course, that sounds great to have that option, but I’m not sure I buy it. I asked him what percentage of Larson’s clients who get a VUL later regret it and get out and he told me “maybe 1 or 2 out of 1000.” Not sure what to think about that given this thread, unless there is a tremendous selection bias for individuals who are dissatisfied with the VULs posting here.
After reading some of the posts on this thread I did look into the policy in more detail and I think it looks like it is set up fairly well as VULs go – to maximize returns. IF I stick with the investment program for the recommended 20-25 years, the IRR goes as high as 6.4% or so. I’m just not sure I want to make that commitment and be locked into the product, losing the flexibility to use the money elsewhere if I want to.
Also, has the promised definitive post from Tom Martin ever been published? I have not seen it here, but was wondering whether it was possibly put out somewhere else.
Does anyone have a VUL policy they are happy with – especially one recommended by Larson?
First, a caveat to all this. Unlike your advisor, I don’t have access to all of your financial information and I haven’t spent a couple of hours sitting with you talking about your financial goals, fears, and dreams. Nor do I know the details of your employment situation and 457. That said, there are a number of things about your situation that concern me.
Second, yes, there are plenty of Larson clients who are happy with their VUL. A VUL can be a very reasonable investing option in certain situations, primarily when your income is very high and you expect a very high taxable income in retirement. Basically, if the investments inside the VUL are the same as the ones outside the VUL, it comes down to whether or not the tax savings from the VUL outweighs the insurance costs from the VUL. In addition, if you are using a financial advisor, and the commissions from the VUL replace the AUM fees you are paying, those can reasonably be added into the equation as well. So if taxes + AUM fees > insurance costs, you may be okay using the VUL. So, if you’re making $800K a year and expect to have tons of money in retirement and you’ve maxed out all your tax-protected accounts and you’re paying AUM fees, well, that VUL may work out just fine.
Third, I wouldn’t hold your breath for the aforementioned definitive post, but it’s not for lack of effort. The tool (a spreadsheet) to compare investing in a VUL vs taxable was developed by Larson, but compliance/regulatory issues prevent them from presenting it to clients, much less posting it here. That’s the unfortunate reality of our financial system. Even calling insurance an investment, which is exactly what it is in situations like this, is a big no-no. I may do another post on the subject in the future, but I wouldn’t expect Tom to ever be able to publish anything definitive.
Fourth, due to events over the last year or two, including posts and comments here, Larson has revamped their process of selling VULs, such that they sell significantly fewer of them and the head management looks at the cases in which it is sold very closely. So I think they would be very interested if you would email me your advisor’s and your name so they could look into your case. I’m pretty skeptical that your particular case would have actually gotten past management. In short, I don’t think your advisor would have been allowed by Larson to sell you a VUL. And here’s why:
1) You’re skeptical. When you buy a VUL, it’s a life-long commitment. Unless you’re 100% sold on it, you don’t want to buy it and they don’t want you buying it.
2) Like in 1, you’re concerned about sticking with it for 20-25 years. Yet for it to work out best, you need to stick with it not just for 20 years, but for 50-70 years. I’d recommend against it based on this alone.
3) Income wise, you’re an average to just below average physician. You say you’re just getting into the Backdoor Roth IRA range. If married, that’s a MAGI of just $183K. Even if you add your 403(b) and 457 and HSA to that, you’re still under $225K or so. I just don’t think VULs work out very well for people in this income range.
4) Any comparison that I’ve ever made, and as far as I know Larson has ever made, of VULs is to a taxable account, not a tax-protected one. That’s because it compares very poorly to either a tax-deferred account or a Roth account. Yet your advisor is talking about replacing a tax-deferred account, a 457, with a VUL. I see little reason to do that. Certainly it’s unlikely to be a good move tax-wise.
5) 457 asset protection is a little unique. It is extremely well-protected from your creditors (since it’s not technically your money), although it is not protected from your employer’s creditors. More details here: https://www.whitecoatinvestor.com/non-governmental-457-plans-friday-qa-series/ but bottom line, if it is a governmental 457, I certainly wouldn’t skip it to invest in a VUL or a taxable account. But might a VUL get better protection than a 457 in your state? There’s a good chance. How worried are you about your employer getting sued and not having other assets to pay for the suit or going out of business?
6) Nothing wrong with using a taxable account. Sure, you may pay a little more in taxes and there isn’t any asset protection, but asset protection is rarely needed if you have adequate insurance policies and there are many ways to invest tax-efficiently in a taxable account. Read here for more details: https://www.whitecoatinvestor.com/retirement-accounts/the-taxable-investment-account-2/ Plus, a taxable account is super flexible and requires no long term funding commitment.
7) I’d rather have $3000 in a taxable account than $2000 in a VUL any day. Even for someone for whom a VUL is appropriate, the difference isn’t that big.
I think Tom is still following this thread, but I think he’d be interested in looking into the specifics of your case if you would like. If you want to email me, I’ll forward it to him.
Dear White Coat,
I am a new follower but kudos to you for building such an important resource for your fellow physicians. As a Larson client I have been following this thread with great interest. Admittedly I fall into the neophyte category of investors who have dabbled in loosely trading various equities over the years with out much more formal training than the soul-crushing lesson on tech (/growth) speculation of the early 2000s that lead to keeping a copy of Benjamin Graham’s Intelligent Investor next to might night stand to remind me of the value…of value investing.
Being married, a parent, and begrudgingly becoming more fiscally conservative as each year passes I have realized that “Failure” can be a great character-building life lesson early-on but can be devastating with fewer recovery years ahead to buffer ambitious risk. All the more reason to be an informed consumer… Caveat Emptor.
I too, like many Larson clients, including many of my residency classmates, received a recommendation to purchase a VUL policy. I too, like Tom alluded to earlier, place a high value on my time and was very willing to “off load the cognitive burden” to a designated fiduciary. Unlike many of the posters here, I HAVE been very satisfied with Larson Financial. We have enjoyed a great relationship with our advisor Todd D. and his staff. We get amazing personalized service and they have been very accommodating responding to our varied needs.
Like many here, I expect that over the years my tax bracket will likely go up and that is one of the primary motivators to have a “Tax-free” bucket. As a loyal Larson client, in an effort to help sway all the naysayers (I’m looking at you Rex, Greg, and Billy 😉 I would be happy to have Tom (with the help of White Coat) use my case as an example of how useful a VUL can be the best option for even a modest income physician. For the sake of full disclosure, at the time of VUL purchase I was an Army physician (single/no kids) in his 1st year of practice earning approx. 150K. Because I was eligible for some 1099 income through moonlighting, we weighed the option of opening a Roth 401K vs. a VUL. Unfortunately because I am not so savvy with all of the nuanced fiscal considerations I’m sure I won’t be able to illustrate all of the reasons that this is the best choice for so many of us. Tom, you guys do an awesome job and we love the personal attention and great service that we get. Please use my situation to specifically demonstrate this poorly understood investment vehicle.
I’m pretty skeptical a VUL would work out better than an individual Roth 401(k) (unless it was purely a contribution limit issue-i.e. you could only put $2K into a Roth 401(k)-especially since you have access to the TSP, but could put $30K into a VUL) but would love to see your original illustration and a recent in-service illustration and do a post about it. I have no idea if compliance would allow Tom to contribute to a post like that, but nothing is keeping you from doing so.
Actually, for a military doc making $150K, I’m pretty skeptical about VUL being better than a taxable account for you, unless you really wanted the permanent death benefit or asset protection or something.
At any rate, I’m glad you’re happy with your advisor and your policy and let me know if you want to share more.
I’m always glad when someone is happy and I mean that so looking at me doesn’t offend me. I understand permanent insurance very well which you admit you don’t and there is a reason neither you or anyone else has produced good evidence for a vul. How many years ago was this new evidence promised and still nothing? Again I am glad you are happy with your purchase. I do also appreciate you telling everyone that they push vul commonly since he denied that.
Great blog. Interesting arguments.