VUL Analysis

[BryanMD]

I'm looking for a little help better understanding an analysis of a VUL I have had in place almost 8 years. I had Mr. James Hunt run this analysis for me off my in-force illustration provided by Nationwide. I'm not sure if this is the right place to seek this sort of help or if it's even appropriate to do so. I don't think there is anything proprietary about Mr. Hunt's analysis that I'm giving away, I just need help making a decision to pull the trigger on taking the CSV on this VUL or riding it out for the long haul. I've been on an emotional roller coaster looking at all the in force illustrations and bouncing between dropping the plan or fully funding it forever and everything in between. I'm asking because I think I might be the rare person that should keep there VUL in place having already paid the bulk of the fees to this point and having a high earner outlook. If I had a redo, I never would have bought it in the first place. WCI doesn't have a crystal ball and I don't have a time machine.

If it helps paint the picture: I'm 39. Orthopedic Surgeon. I am a "high income physician". I currently:
Fund this VUL with $60k/yr
Max out His and Hers 401Ks
Backdoor Roth IRAs
529s for both children funded at $16k/yr
Get a work supplemental benefit plan that contributes 7.5% of my previous year salary
Put $24k into my taxable account.

If I cash out the VUL I don't have a plan for the ~$400k CSV (maybe just into the Total Stock Market Fund or pay off my remaining 2.25% mortgage and be completely debt free).

[GasFIRE]

What has changed since this thread https://forum.whitecoatinvestor.com/...ce-appreciated other than Mr. Hunt has weighed in? Did you carefully read the report? You are at the break-even point 1/22/22. "Having already paid the bulk of the fees" is still the sunk cost fallacy, there are still significant future charges that you don't have to subject yourself to. The report states that "holding this policy indefinitely will be superior to any other VUL you can buy." Using the $60K/yr as additional taxable account funding plus the one-time $420K CV invested in Total Stock Market as you suggested will certainly provide a higher ROR than any similarly invested VUL. The only thing that would slow me down from surrendering is if I do need the life insurance. If you do, get a term policy for the limits you need then get your money out. Everyone on this forum has made some poor financial decisions at one time or another. You should consider yourself fortunate to have the opportunity to get out and minimize the damage. Don't compound the problem by continuing to toss $60K a year at this albatross.

[BryanMD]

I was all set to drop the policy in January to get out at the break even point. I even called and let my advisor know. I got directed to a blog post from WCI https://www.whitecoatinvestor.com/fi...ncome-doctors/ and I read point #8. All the qualifiers in that point sound a lot like me. I know the snap answer to “Should I get a VUL?” is No!!! But there always seems to be an “except when” in the answer to whether or not I should keep a VUL.

[GasFIRE]

Are you sure? Does your VUL policy minimize death benefits, insurance and investing fees? Is it “paid up” or will you have to continue the $60K/yr premium? Is that $60K a reasonably limited % for an insurance product vs your total yearly contributions to investments? I’m not convinced your policy qualifies as the “except when”. I think at your income level $24K/yr into taxable is very low.

[BryanMD]

I believe my policy is has death benefits minimized up to the MEC level. The fees on my funds have an average expense of 0.55%. That could come down by about 25 basis points with some re-allocation. The $60k I put into this is about 20% of my yearly investment amount. The 6% loads are brutal but in the long run may be offset by the cost I'd have to pay for term.

Yes I can definitely stand to put more into my taxable account. I do invest some on private equity real estate outside of my taxable account, and yearly put in any of my unspent income. That's variable in how much that is each year. All in I'm probably investing 30-35% of my gross income a year.

[afan]

That is an excellent analysis by Hunt. The only limitation is that it compares apples to apples, VUL vs buy term and invest the difference. This forces the analysis to consider paying for term insurance long past the point that you likely will no longer need it. A more useful comparison would have the amount of term insurance dropping as your need for coverage declines. At your income level and savings rate, you likely will quickly past the point when you need life insurance to protect your family. As the amount of insurance decreases the premiums for term will decrease and then go away. Then more and ultimately all of the money put into life insurance premiums will be invested instead and your side fund will grow faster.

If you get out at the break even point, there will be no taxes due.
If you consider the cash value in the VUL policy, those are pre tax amounts. If you take money from the VUL policy later, or cash it in, then you will owe taxes on the proceeds above your basis. The buy term and invest the difference side fund values SHOULD be net of taxes on dividends but not on capital gains. Properly invested, you will not realize capital gains until you sell assets in the side fund. If you never sell in the side fund, then you will never pay CG taxes. The step up basis at your death would mean there would never be CG tax on that side fund

In other words, the side fund and the VUL cash value as illustrated are not on the same playing field. You need to adjust to compare.

8% is perhaps too optimistic a rate of return on a balanced or all stock portfolio, given high valuations of stocks and bonds. It may be informative to run the analysis at a much lower rate, say 4% annual return.

Since the VUL policy already has the lowest possible insurance component, you cannot make the performance better through further reductions. You should consider whether you need life insurance at all and if so how much. Comparing a product with built in insurance that you don't need makes it look good compared to BTID, but ignores how easy it is to reduce or eliminate the term premiums and put that money to work in investments instead.

If I really needed the amount of insurance included in the VUL and it looked good compared to BTID at 4% total annual return, accounting for taxes, then I would keep the policy.

If I did not need the full amount of insurance, or needed no insurance at all, then I would consider surrendering and investing the money without life insurance. Again, I would run the analysis at a much lower rate of return before deciding.

In either case, I would also check performance if there is a major and sustained drop in stocks. That would hit both the side fund and the VUL policy, but the side fund expenses are much lower.

If your state provides asset protection to the life insurance cash value and you own the policy, then there would be an argument for keeping it for that purpose. Depends on the malpractice climate in your area and the risk with the cases you do.

[Notsobad]

I just got out of mine, which is a much smaller policy than you were us. I did not do any fancy analysis, but the cash value is much more than I paid into it. The Insurance cost is getting higher the older I get. And I am old enough that I don’t really need the insurance anymore. However I did not take the cash. I am rolling it over to a fixed annuity, basically a CD in an annuity box, so I can defer taxes until I get to the appropriate age.

my comparison was more of, am I better off keeping VOL, or taking that out. So I took it out and put it into my conservative bucket

[BryanMD]

In Mr. Hunt's email with the analysis, he did say "Don't get hung up on buy term, invest difference analysis. It's a way for me to judge the policy." So I do think he figured the level of decreasing term insurance costs in his written recommendations.

This has been helpful. The whole process of considering getting rid of the VUL has been stressful but extremely educational. I'm pretty confident I'm going to take the Cash Surrender Value to invest and just get some laddered term life policies. It is good to bounce it off a community of people much smarter than myself. I just didn't want to make any rash decisions based initially off of my shame in getting swindled into the plan 7 years ago. I want this to be a financially sound drop and not a spite drop of the policy.

[Hank]

Get term insurance in place before dropping a current insurance policy.