Variable Universal Life Insurance (VUL)?
I am 19 and met with a financial adviser to try and start on a retirement plan. He strongly recommended that i go with a VUL. He wants me to invest $10,000 up front and then make monthly deposits. I did some research on it but im skeptical. Is this a good retirement/life insurance plan? Or should i go with a 401k or another option?
- Anonymous9 years agoBest Answer
Life insurance is never an investment or retirement plan. You should report this financial adviser to your state's insurance commissioner for misrepresentation of a life insurance product to keep this guy from deceiving other people.
This is how a VUL policy works. Your premiums are paid for three things: The universal life insurance, fees and charges (such as policy fees, administrative fee, commissions, sales charge, etc.), and the cash value. The cost of universal life insurance goes up as you get older. That means more of your premiums goes to insurance and less toward the cash value. Eventually in 10 to 20 years, you will have to pay more premiums to keep this policy.
Your cash value is invested in the market and as with any investments, nothing is guaranteed. When you mix investments with life insurance, insurance companies charges lots of fees to manage your cash value. While a particular stock, mutual fund, or bond may do well, the high fees eats away the return of your investment. I have not seen a single VUL policy that has done better than 5% return. If you wanted to take money out, you will be borrowing money from the policy and pay loan interest of 8%. If you die, the insurance company keeps your cash value, but pays the death benefit to your beneficiary.
If you want to start a retirement plan, open a Roth or Traditional IRA. If you are working and your employer has a 401k plan or 403b, then contribute to the retirement plan at work. You should be aware that retirement plans has 10% penalty if you make non-qualifying withdrawals before age 59 1/2. So you should be aware that retirement plans are long term investments and you shouldn't put all your savings into them in case you need to take money out. I suggest setting up an emergency fund by opening a money market fund and put away 6 months of income into it. For example, if you earn $2000/month, then you need to have a total of $12,000 saved for emergencies. That way in case you do need to take money out, you can leave your retirement plan alone.
If you plan to get life insurance, go with a 20 year or 30 year term insurance. Term insurance is inexpensive and doesn't build cash value. Life insurance is to provide income to your family in case something happens to you. In other words, it is to replace your income. Since term is inexpensive to buy, you can buy lots of coverage. For a 19 yr old, I don't see any reason why you need life insurance, unless you have kids or you have large debts to pay.
If you open a Roth IRA, contribute to your employer's retirement plan (if there is one at your job), and invest on a monthly basis, you should have no need for life insurance in 20 to 30 years. I suggest you invest in equity mutual funds for your retirement plan because mutual funds have historically outperform the inflation rate. Equity mutual funds has an average rate of return of 12% in the past 30 years. If you invest $400/month for the next 30 years, you can potentially have $1.4 million. What if your portfolio wasn't doing that great and instead your average rate of return was 6%? Then in 30 years you will have around $403k. In 30 yrs, you will only be 49 yrs old. If you continue to invest $400/month until you are 60, then you will have anywhere between $850k (with 6% return) to $5.3 million (with 12% return).
In conclusion, don't listen to the financial adviser or anyone telling you that life insurance is some sort of investment or savings plan. You can check the definition of what life insurance is and it will say its a contract, not a plan. If you are working, open a Roth IRA (you must be earning income in order to contribute to an IRA) and max out the contribution limit if you can. The maximum contribution limit to IRA is $5000/year. I contribute $400/month to my Roth IRA and it is invested in 4 different mutual funds, so I don't max out my IRA, but its close enough. If your employer offers a retirement plan, contribute to it (I normally contribute 3% of my salary to my 401k and my employer also match what I put in). Setup an emergency fund so that you don't need to take money out from your retirement plans. If you are looking to get life insurance, buy term insurance. I bought a 30 year term policy when I was 30 yrs old and pay $475/year for $500k coverage.
- RetirementGuruLv 59 years ago
You're right to be skeptical. And NO, it's typically not a good retirement plan. Keep your life insurance and retirement needs separate.
Life insurance is designed to provide for a lump sum to your family/beneficiaries; when there is an economic loss or need as a result of your premature and untimely death. Term insurance is cost-effective, and can provide for this need, when the time comes. One could argue some permanent insurance, like whole life or universal, could be prudent, to pay for a final illness and burial needs.
Retirement options abound! A 401k, for example, can provide three potential benefits: (1) it's automatic, so the money gets put away whether you remember to fund it, or not; (2) you get a tax deduction, reducing your tax bill, and (3) there will likely be a company "match," providing you with more dollars towards retirement.
In my 25-plus years in the biz, I've never seen a VUL policy work out like the original illustration. Ask the agent to run it based on the last 10 years, at 0%, instead of the hypothetical rate he or she chose, and you'll see how horrible the results are. The expenses are just too high.
Hope that helps.
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DISCLAIMER: While the information in this response was obtained from sources believed to be reliable, its accuracy and completeness cannot be guaranteed. The opinion voiced in this answer is for general information only and it shall not be construed as tax, legal, or investment advice for any individual. Questioners are urged to consult with their professional advisers before making any decisions regarding their finances.
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- Anonymous9 years ago
Canadian answer: Not a bad idea to buy life insurance when you are young and presumably healthy to guarantee your future insurability (GIO option) when you need more coverage, but $10,000 AND monthly instalments at your age? In Canada an RRSP would be where I'd put a large lump sum to get the tax deduction if eligible on current taxable income. Universal Life is wonderfully flexible but CAN have high admin fees and escalating mortality fees that later suck all the proceeds from the account value. Also human nature (like credit card debt at high interest charges) often defeats the wisdom of early deposits. Can be a great product if you have inhuman savings discipline.The financial advisor is right to start a savings plan before you have a lot of bills and responsibilities.Source(s): Used to sell it. Still own it but wish I'd bought Permanent life insurance instead which locks in the rates forever. You can afford less of it but no price increases ever. Image buying car or home insurance with prices frozen forever. Get a "participating" policy which pays dividends and chose Paid Up Additions to use the annual dividends to buy more commission free coverage (offset inflation). State Farm is a great buy for Whole Life (Permanent) Insurance! So is North-West Mutual.
- AnnaLv 44 years ago
If you're going to do it, you should generally pay the maximum non-MEC premium, or close to it. Maximum so that more of your premium goes towards the investment portion, and down the road as the corridor of insurance between your cash value and face amount gets smaller, your cost of insurance should go down even while the cost per thousand goes up. Non-MEC so that you don't violate the rules of TAMRA and you have a chance of pulling money out beyond your cost-basis income tax-free. Fees and charges alone aren't enough to evaluate an investment. If they were, the other agents on this forum would have addressed your no-load comment. As long as you plan to hold the contract longer than the surrender period, which any agent should be able to point out, the main drawbacks in my eyes are the limited investment world and the volatility of the insurance charges (see previous posts on this topic). Oh, and the average length of time a person owns any one term policy is 5-8 years because of changes in market pricing and changes in the owner's life. Buying a term policy for an overly long period of time may just be putting more money in the agent's pocket unless you have a specific goal. Especially with gross commissions to the agent and general agent of 90% to 150% of your first year premium. Loaded insurance can still be more competitive than no-load if you shop around.
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- AnonymousLv 79 years ago
Do you have a great need at age 19 for life insurance? What's the motivation for buying life insurance? Is it yours or the adviser's?
- Anonymous9 years ago
insurance is not for investment - especially retirement
don't waste your money
and only buy TERM life - you will get lots for coverage for lots less money
and if you are single, you don't really need life insurance at all