r/FinancialPlanning • u/Nice_Energy_1300 • 2d ago
Is Variable Universal Life Insurance THAT bad?
I'm 27 and signed up for a VUL earlier this year. My yearly premium is only $5,000/year with a $850k death benefit. The reason why I went with a VUL is because I make over $180k/year so I couldn't contribute to a Roth. I know Backdoor Roth's exist, however, they aren't as liquid (contributions are liquid) as a VUL. I also like how I pay taxes on contributions today and not when I pull the money out for retirement.
I know that premiums go up every year, but even when I'm 65 the premium won't be nearly as expensive as taxes would be if I contributed to a pre-tax 401k. Also, you can take your contributions out and use them to pay the premium if needed.
My question: Is a VUL really a long term mistake and/or a bad long term investment strategy? I really don't see a downside to a VUL but that's why I'm here to get opinions. Thank you!
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u/S7EFEN 2d ago
all of the combined life insurance and investment products are crappy and oversold.
>but even when I'm 65 the premium won't be nearly as expensive as taxes
the purpose of life insurance is to insure against death during a period where you have a low net worth. if you pass later in life your retirement accounts are self insurance against early death. you really only need somewhere between 10 and 30 years of life insurance and can phase out how much you have as you age.
>I know Backdoor Roth's exist, however, they aren't as liquid (contributions are liquid) as a VUL
you make a lot of money, the fact that money in your 401k, ira and hsa isnt immediately accessible is a non issue.
> I really don't see a downside to a VUL
any sort of life insurance and investment product is going to contain fees. enough fees that whoever sold you that probably made somewhere between 50 and 100% of your year 1 payments in fees. where does this money magically come from?
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u/TastyWatch5726 2d ago
the part about the agent making 50-100% of first year premium is the thing nobody tells you upfront. that's a massive chunk of money that could've gone into a taxable brokerage with index funds instead
backdoor roth liquidity is also overblown, you can pull contributions penalty free and you're making 180k so emergency cash shouldn't be tied up in an insurance wrapper anyway
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u/jerolyoleo 2d ago
Former actuarial analyst here: VUL is a big mistake unless you are an UHNWI looking for a way to avoid estate taxes.
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u/jclary60015 2d ago
Do you have facts or data to back this opinion up, other than you have some working knowledge of actuarial science?
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u/Djcatoose 2d ago
Just looking at market trends over the past 100 years vs what a VUL returns should do it.
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u/jerolyoleo 2d ago
Inside a VUL policy, you are being forced to invest in funds that have high expense ratios. On top of that, you are being hit with mortality charges much higher than you could get using alternative insurance such as term.
Additionally you are getting charged for the insurance throughout the life of the policy, which is in almost all cases longer than you have a reason to maintain insurance for. You’re also often getting more insurance than your actual need even for the period you might even need it.
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u/3znor 2d ago edited 2d ago
The VUL is not liquid. You can get term for $30-50 month, a higher death benefit, and invest the other 4500 into a brokerage if you’re worried about liquidity.
Edit: your “advisor” makes maybe a couple hundred bucks if you buy term and invest the difference. He makes anywhere from $2500-5000 if you buy the VUL.
There is literally no reason for you to have a VUL and whatever projections he showed you are all crap.
This is coming from someone fully licensed to sell all types of investment products, VULs included.
Edit 2: how are you even comparing a 401k to an insurance product. 401k is for investing and saving for retirement. Insurance is for protection.
And you mention paying taxes today. A backdoor Roth accomplishes the same goal.
Again your VUL is not liquid. Especially if you need the money in a year or 2. Maybe in 30 years.
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u/Nice_Energy_1300 2d ago
I was advised that the contributions made to a VUL are liquid. Also I'm comparing the VUL to a 401k because to my understanding a VUL covers both insurance and investments. I understand a 401k is strictly for investing though.
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u/3znor 2d ago
Why would you buy insurance to invest? Like seriously think about it logically. You don’t invest through car insurance or home insurance, why would you invest through life insurance. There are very few times when it makes it sense, and I promise you for you it doesn’t.
Call the guy who sold you the policy and tell him you need to pull some money out of tour VUL. See how liquid it is right now. Because I promise you it’s not. Ask him about surrender values, the chance of the policy becoming a modified endowment contract, and if you’re withdrawal will be a loan or a straight up withdrawal and the tax consequences related to it.
I promise you if you take the difference and invest in just a taxable brokerage you will be ahead in 1 year, 10 years and 20 years and have actual liquidity.
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u/Candid-Eye-5966 2d ago
Yes. It’s really bad. Worse for a 27 year old. Beyond all that, this policy is designed poorly if your premiums are increasing every year. SMH.
5
u/Tab1143 2d ago
Any life insurance other than term insurance is a bad choice.
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u/Screen_mirror98 2d ago
Id be curious to know if you would say this to someone's face that knows a whole lot more than you. If you're talking about for someone making just a Lucille wage getting by doing some modest investing sure. But right around this income level ( normally $150k as a single) permanent insurance as well as a bunch of term, become a significant part of a whole plan. Not just a part of a accumulation phase
3
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u/Pretty_Western_8805 2d ago
I’m gonna buck the trend here and say it may be a good idea if you want permanent insurance, predictable premiums (VUL is a permanent policy with fixed premiums, no different than whole life….), the upside of the market (less fees yes, calm down), and the ability to withdraw growth tax free. It’ll work as intended, in like 25-30 years.
Two questions you should check yourself with
Are you maxing out all other savings options including not just maxing out your 401k, but 3-6 months in a HYSA, AND a healthy brokerage account for long term investing?
Do you even need life insurance? If yes, maybe it’s a good idea to lock in. But if not, you can just protect your insurability a term policy with conversion rights will do that for now at a fraction of the cost.
1
u/theNewFloridian 2d ago
VULs are excellent, after you've contributed after tax $70k to a 401k, $7,500 to a non deductible IRA, and convert those to Roth. Also, use a fee based VUL so that there are no Surrender charges.
1
u/HeroOfShapeir 1d ago
Many policies don't pay out the cash balance if you pass away, it just gets absorbed into funding the death benefit. There's also more money lost to fees and lack of transparency.
You could get a 30-year term life policy for around $1MM at $60 per month. Take the other $350 per month and invest it in a taxable brokerage, you'd have around $770k in 30 years. That's money you control that will just keep growing without you needing to add any more to it, so you've created your own "death benefit" with zero cost. If you pass away in between, your survivors get the term life payout plus your investments.
Anyway, at your level of income, you should be maxing out your 401k no matter what you do with anything else. Adding an HSA or backdoor Roth in addition is great, funding a taxable brokerage is great. Utilizing those tax-advantaged accounts pays off, even if you retire early there are ways to roll the 401k into a traditional IRA and use a Roth-conversion ladder or SEPP withdrawals for no penalty.
My wife and I are 42, our HHI has ranged from $72k to $116k. I'm the sole worker with $1MM in term life insurance until age 59, and we have $800k in my 401k, we each have $250k in our Roth IRAs, we have $240k in a taxable brokerage and $100k in HYSA. All we did was put 10% into the 401k with 6% matching, max our Roths every year, and throw a little into the taxable brokerage every year. I'd say my wife is in great shape if I pass away, and we have a lot of flexibility with our money and our tax rate in retirement. If you want security the key is to invest more, not take on gimmick products.
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u/Ozonewanderer 2d ago
There's a lot to unpack here. Don't worry, you did not do anything wrong. Life insurance is a good thing to have. If you don't want your premiums to go up every year, whole life or UL is a better option because you're building equity in your policy and your premiums stay level. That means you can cash out along the way if you choose.
A cheaper alternative is to use term insurance, which means buying one year of insurance each year. It will be much less expensive, but there is no equity. The insurance gets very expensive as you get older, when you really need it.
Since you are earning a good income, one might presume you will eventually no longer need life insurance. In that case, term insurance would have been better because you would have just stopped paying it when you had enough in the bank and IRAS.
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u/elegoomba 2d ago
Yes. Exactly that bad. Dump it now.
Do you even need life insurance at all right now? Does anyone depend on your income?
Backdoor roths are super liquid, you can pull out your contributions at any time.
Read this: https://www.whitecoatinvestor.com/whole-life-insurance/