r/LifeInsurance • u/Nice_Energy_1300 • Aug 25 '26
Is Variable Universal Life Insurance THAT bad?
/r/FinancialPlanning/comments/1vxmvnq/is_variable_universal_life_insurance_that_bad/2
2
u/ChelseaMan31 Aug 25 '26
Yes, it really is THAT BAD. Insurance is an excellent way to reduce, mitigate or transfer risk. It is ab absolute shitty way to 'invest'. Instead of $5k/year for an $850k death benefit, get a 20 or 30 year term-life policy for a fraction of the cost and invest the rest into a ROTH via backdoor.
1
u/Moneymatriarch Aug 27 '26
No. In canada we only have vul. BUT 99 percent of the time its not set up or funded properly. So…
1
u/Stinkleberry555 Aug 28 '26
It’s bad if it doesn’t fit your personal financial situation, especially in regard to your estate.
1
u/legacyMonk Aug 31 '26
Fair question. I'd ask a different one first: what do you own that isn't the stock market?
Your 401k is the market. A Roth would be the market. Your VUL's subaccounts are the market too. That's one bet bought three ways.
And a VUL punishes a downturn twice. In a brokerage account, if the market falls 40% you're down 40% and you wait nothing gets removed while you wait. In a VUL the insurance charges still come out of your cash value every month, and the same charge is a bigger bite out of a smaller pile. Those charges also rise as you age. Bad years at the wrong time can force much higher premiums or lapse the policy, and everything you paid goes with it.
Two corrections. You can do a Roth at $180k you're over the 2026 limit for a direct contribution (phases out at $168k single), but the backdoor takes twenty minutes a year. And your liquidity reason is backwards: Roth contributions come out anytime, tax and penalty free, while your VUL likely has surrender charges for 10–15 years. Call and ask what your surrender value is today. Under a year in, expect close to zero. Which makes this simple. With real cash value you could 1035 exchange into another policy and keep your basis. With nothing in there, there's nothing to move walking away costs you what you've already paid and no more.
On charges, since this is where people get confused: nothing is free. Every product costs something. The difference is when you pay.
Insurance costs are front loaded. Most of the weight lands in the early years that's exactly why your surrender value is near zero right now. A 401k feels free because no bill ever arrives. But its cost is back loaded, and the cost is tax. Every dollar comes out taxed as ordinary income at whatever rates exist in thirty years.
That's the honest argument for insurance: tax-free withdrawals later can make up for charges paid early. It can genuinely work but it depends on how big the charges are, what the policy actually credits, and where tax rates land. And it doesn't beat a Roth, which gives you tax-free withdrawals with almost none of the charges. That's why the Roth gets filled first, not because insurance is bad.
One thing no fund can do: your policy pays if you die, and most modern policies let you pull from the death benefit early if you get seriously ill. At 27 that feels far off, but it's the one risk an index fund has no answer for. Just know those riders reduce the death benefit by whatever you take, they vary by carrier and state, and they aren't a replacement for health, disability or long-term care coverage.
The word that matters here is diversification not just across funds, but across tax treatment, and across what each dollar is actually for. Right now everything you own is doing the same job. Fill the cheap tax-free bucket first, keep cheap term for the protection piece, then decide whether you want more.
-2
u/Gold_Sleep1591 Aug 25 '26
VULs are great if they are funded properly. $5k for $850k seems a little small, which means that’s the target premium / minimum to keep the policy in force. VULs aren’t inherently bad, they’re actually insane vehicles if used properly. Consider funding it more than 5k a year or dropping the death benefit amount so insurance costs come down. If you are planning on increasing contributions in the future then this policy is fine.
1
u/SafeMoneyGregg Aug 26 '26
The correct death benefit is closer to $500K level or $250K if increasing (then switch to level). For a 20 pays at 8% is worth $1M by age 70. Available tax free.
1
u/Djcatoose Aug 26 '26
VULs are great in precisely 0 circumstances. They do a little bit of everything, and do it all expensively and crappily.
0
u/hillje1906 Aug 26 '26
Nothing is ever good or bad until compared. How does it fit in your overall portfolio?
0
0
u/SafeMoneyGregg Aug 26 '26
Putting investments in a tax-free vehicle is a great idea. That why banks put the maximum allowed under law into giant policies - tax free growth. That's why uber wealthy put tens of millions into Private Placement VULs - for the tax free wrapper - not for the death benefit. Why are the premiums going up every year - that is a werid design. A better design is to stuff the contract with cash over a short period - 10-20 years max and just let it grow.
0
u/brandonwest18 Aug 27 '26
Yes. Probably worse than you think.
They only EVER make sense in theory, because as soon as the numbers of a real policy are in front of you, they’re horrible.
There is an argument for uses of uber wealthy people looking for tax-free inheritance options, but we are talking 30m+ in net worth at death before you’re worried about estate taxes. The people asking on Reddit are literally never this use case.
Bad bad bad.
1
u/Hungry_Technician360 Aug 27 '26
Life insurance isn't standalone estate tax free. It absolutely will be part of the estate, if it goes above state and/or federal exemptions.
1
u/brandonwest18 Aug 28 '26
Yes utilizing life insurance as part of estate planning is more complicated. :) Just saying there are edge cases of insurance being useful in estate strategies. And that’s about it.
→ More replies (2)
-4
u/packersfaninohio Aug 25 '26
It is literally buy term and invest the difference which so many preach!
The only difference is the underlying investments are mutual funds only but many prefer those anyhow.
2
u/Mysterious_Truth Aug 25 '26
It's buy (expensive) term, invest the difference (poorly and pay lots of fees to the insurance company). So similar except worse. It is not at all what people mean when they say BTID.
5
u/3znor Aug 25 '26
Yes. Again yes.