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VULs. I surrender? (and pay off student loans?)

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  • VULs. I surrender? (and pay off student loans?)

    Add me to the list of docs who did not know better about VULs.  I am unfortunate enough to have more than one Variable Life Policies with Northwestern!

    I opened the first one in residency. I thought my financial advisor had my interests in mind. I thought everyone provided all the “pros, cons, and alternatives.”  I’ve learned a lot since those days.

    I was sold my first policy, despite not maxing out my retirement accounts and having large student loans.  It was my “financial advisor’s” answer to the best means of saving for retirement. Later, with my first job, I wanted to save more and got talked into opening another VUL.

    I actually asked a lot of questions.  I remember asking specifically about any fees and penalties -  I was told “there are no penalties” , and that I could take my money out anytime.  Turns out I can “borrow” my own money anytime for 5% fixed interest and there are surrender charges that disappear after 16 years!!

    I’ve learned  a lot from this website. I still don’t understand these policies completely, but I’m ready to cut my losses and get rid of them.

    The cash value of my VUL is about 100K which is about the balance of my student loans (@2.6% interest rate).  With the pretty good interest rate on the student loans, I feel like it is an more of a feel-good decision to get rid of both these burdens in one swoop.  And it would free up a good chunk of money for me to put towards 529, other savings, etc.

    My questions are ... Since I’ve had the older policy for about 12 years, is that reason enough to keep it? Or in other words: if worth keeping from fee standpoint, How would such policy ever benefit me in the future? Also, any major red flags with using  the money to pay off student loans? Some info about me:

    - I’m trying to get rid of all debt. I don’t understand the logic of ever borrowing my own money at 5% interest
    - I won’t even be able to access the gains without 5% interest !?
    - I’m over insured: I have more term life insurance than I need through work (up to age 70)
    - I don’t see a need for permanent death insurance for me
    - The gains in one  policy are small (about $1,000) and Zero in the 2nd policy (I opened in 2008)
    - I don’t think I need it for estate planning:  I don’t have expensive property or a business, etc
    - I’m maximizing my 401K and (back door Roth) IRA - only other loan is mortgage
    - I understand a good chunk of my money is already lost here

    Live and learn.  My next task is to review the disability policy my advisor sold me...

  • #2
    Just the term "VUL" is enough to scare me away. A sunk cost is a sunk cost and should not factor into your future decisions.

    I am not a life insurance expert but I'd be very tempted to surrender the policies and get out what you can.  Generally speaking, the bulk of the fees and commissions are usually weighted toward the front end but you are definitely paying commissions out with every payment.  What kind of payments are we talking about anyway?

    At best, you're putting money away for your heirs, which you will never get to enjoy.  At worst, you're throwing money away and the fact that you're throwing it away eats at you every month for the rest of your life.  If you think you already have enough in term insurance, what's the point?  If you think of that cash surrender value as money that you might have spent or otherwise lost, then this is a big windfall for you to be able to payoff your student loans and lose not only the premium payments (which I suspect are sizable) but also your student loan payment.  That might easily be a couple few grand a month swing for you, which is a mortgage payment on a nice house, lease payments on a Mercedes and a decent 529 contribution put together, or just money that looks nice sitting in your bank account.

    The job of the insurance salesman is to sell you insurance.  I have one northwestern guy who visits my office pretty regularly.  I really like him and think he's a good guy, but I don't think I've ever heard him say a negative thing about one of his policies.

     

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    • #3
      Thanks guys for responding. Appreciate all the feedback.

      Rex, thanks for explaining the logic behind borrowing from one's VUL.  It makes a bit more sense now. Also thanks for the rec re non job associated term insurance.

      Craigy, thanks for helping me articulate and answer my question better: "what is the point?"  I will review the in force illustrations. And if it shows that the policy is worth keeping, then I have to decide what I am keeping it for. It looks like if I never borrow money from it, then I'm basically keeping the policy to pass money to heirs? I would rather use the money now for a 529 I just opened and to save/pay down mortgage, etc (i'm spending about $900/mo on VUL premiums and $900/mo on student loan payments).

      (Another option I've come across is to stop making future payments to policies if I keep them - placing them on "paid up" status. This would still free up those monthly payments.  But still strongly leaning towards closing and cashing out the policies to wipe away my student loans).

      Thanks again for your thoughts ad tips.

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