VUL: A Bad, Bad Investment

By Bob Moeller
WEAC Member Benefits

March 2003

Financial Planning Seminars
Achieving Financial Independence

As a financial planner, I get magazines on financial planning all the time. Frequently, these have details about products, such as commissions, fees, etc. One product I would never recommend to members is Variable Universal Life. Yet, some of our members own it. The November 2002 issue of Investment Advisor Magazine has some revealing data on Variable Universal Life (VUL) policies that dramatically show why they are bad, bad investments.

The idea of VUL is that you can get some insurance, and put in extra money. The money is invested in the stock market (variable), and the gains are not taxed until you withdraw them. If you die, of course, life insurance proceeds are not taxable. That doesn’t sound so bad, but the typical comment from financial planners running throughout the article is that these are bad, bad policies. Why? In a word, FEES.

To give you a couple of examples, let’s take some statistics quoted in the article for a 45-year-old person. We are going to assume a 10-year period of investment, to age 55, and we are going to assume a $100,000 death value policy. A reasonably priced 10-year level premium $100,000 death value policy would cost about $14 per month or less. That amounts to $168 per year for the insurance.

Here’s an example of the Lincoln Benefit Life (Lincoln, Nebraska) Investor Select VUL. If male, you would invest $1,276 per year. As stated above, the value of your insurance is about $168 per year. Therefore, you are investing an extra $1,108 per year. Over 10 years, you will invest a total of $11,080 extra. Your value? Hang on! At the end of 10 years, even assuming your investments earned a generous 10% a year, your total value is $11,270. Read that last sentence again. You have gained $190, assuming you earned 10% a year. Where is the rest of the money? FEES! What if your account doesn’t earn 10% a year? You already know the answer to that.

Here’s another example, this time with ING Reliastar Life (Minneapolis) Flexdesign plan. You are a female age 45. You buy a $100,000 policy and pay $1,074 per year. The value of insurance is $168 per year, while the extra money sent in is $906 per year, or $9,060 over 10 years. Fees charged against the policy are 5% of each premium, plus a 10-year surrender charge (% not stated), plus $99 per year administrative charge, plus 0.35% per year mortality and expense fees. The net result? If you earn 10% a year on your sub-accounts, your $9,060 extra sent in will blossom to $ 9,416. Wow! If your sub accounts average only 9% earnings per year, which would seem quite good, you will lose money.

Am I deliberately picking out the worst examples? Not at all. The message is clear. Variable Universal Life is a bad investment. In fact, with the possible exception of low-cost, low-commission straight life, any life insurance product that builds a cash value is not a good idea. I like the way Money Magazine (September 2002, page 120) puts it “…beware of letting an agent sell you on the idea that life insurance is an investment.”

Your best approach to life insurance? Buy only term policies. Shop hard for the best price. Buy via the Internet, or phone calls you make. Try not to deal with any agents. Avoid any connection between life insurance and stock market investments. Figure out your insurance needs based on your situation in life (debts, age of children, etc.) and program terms accordingly.

How much life insurance do you need? Enough to replace your needed income stream. As you get older, you want less and less insurance. Your debts should be lower, your kids gone, and your retirement secure. Obvious major factors such as Social Security income, no dependent children or a spouse employed in a well-paying profession should be considered.

There are a number of methods to determine how much life insurance you need, and NEA has published an excellent consumer guide to help you determine the level of coverage required. However, for most members the following shortcut method may be of value: multiply one-third of your annual gross income by the factor in the chart below opposite the number of years until you turn 65, not to exceed 30. Subtract your accumulated investments and any group term insurance your school provides and then add in one-third of your income for final expenses. Round the figure up to the nearest $1,000 and you will have your answer.

Posted March 10, 2003