Variable Universal Life
Should we switch our variable universal life insurance policy to a guaranteed universal life policy?
My husband and I each have variable univeral policies…our agent is suggesting we change over to guaranteed universal policies – we will save a few hundred dollars a year and add 100k onto the benefit. My husbands policy was bought in 1999, mine in 2001. We were not using the existing policies as an investment. Does it make sense to change now? (we are in our early 40′s) The agent suggested that in the future insurance costs may rise, and we may not be able to afford the current policy- but the new policy rates are guaranteed to never increase. Any thoughts or advise?
Well, you’ve been pretty well beaten over the head with some of the answers here so let’s look at a bit more of what you’re asking.
There are some other considerations here. In your variable product depending on your asset allocation of your sub accounts, you’re likely making anywhere from 8-12% over time. That should more than make up for any increase in cost of insurance over time, plus provide you surplus. In a guaranteed UL (I’m presuming since you didn’t say so that it’s not an equity indexed product), you’re liable to be guaranteed only about 4-6% or so. (Inflation is running at about 3.5% nationwide right now.) There is a good chance too that the accounts that generate this are part of the general accounts of the insurance company and are not outside subaccounts.
If they are part of the general accounts than that leaves them liable to being taken by a creditor if, for whatever reason, the insurance company goes belly up (unlikely, but it has been known to happen). Sub-accounts in the VUL are not liable to that potential problem.
You say you aren’t using the VUL as an investment. Why not? Your money can grow tax deferred within it and you can access it tax free and needn’t wait till your 59 1/2 as you would if it were in some other tax free access products.
Has your agent shown you the possibility of an Equity Indexed UL? You seem to be somewhat fiscally conservative (at least from the tone of your note here) and an equity indexed product might be something to look at. Most such products have guarantees of about a floor of 1-2% with a cap of about 12% or so and likely average about 8% over time which is above your standard UL but most likely less than the potential returns of a VUL.
I would suggest you might also like to simply call your own insurance company and speak to them. First, see if they can explain all the ins-outs and potential tax benefits that your VUL can perform for you. You might find out if they have an equity indexed product that they might be willing to do a 1035 exchange into that would perform the best for you. They might even be willing to do so without any surrender charges being imposed, if you ask, though they likely would start a new contestability period.
Lastly, I wouldn’t take anyone’s ideas on a board like this (including my own) without first determining just what it is that YOU and your HUSBAND need. What is your strategy? Where do you want to be 10, 15, 25 years from now? Do you already have your retirement funding going? If so, is it all in a tax box that might leave you vulnerable to taxation on withdraw?
Have you considered simply reallocating your funds within the VUL to see if you can bring its performance more in line with what you’d prefer to see? If the need for $100,000 extra coverage exists, is it a permanent one or could it be handled by adding a small term policy outside the VUL? Or even adding on one within it?
These are just SOME of the questions you might wish to consider. Good luck
Susan Orman on Life Insurance
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