Variable Universal Life Policy -- Keep or Cut?

[arvmaha]

Hello. My wife and I have both had variable universal life policies for the past 11 years. I have also had a disability insurance for the same time. I initially purchased when I started my career so that if anything happened to me, my wife and kids would be taken care of. I thought that it was the right thing and have been continuing it for that time. Now as I become educated on financial topics and read the forum, I am questioning what is the best option and how to correct this if my current plan is not correct.
In terms of details, my wife and I have separate life insurance policies and each policy has ~$120k in surrender value. I own a family practice and my wife works with the practice. I still have some concern about taking care of the family. I am trying to evaluate what would be the best way to financially care for the family if anything happened to me. It seems that a VUL is not the best financial approach for wealth accumulation -- am I correct to think so? What would be the best way to accumulate wealth while protecting family in case of the worst?
If VUL is not a good option, what is the best option to terminate policy and liquidate assets?
Thanks for all the help.

[VagabondMD]

The best solution is to separate insurance from wealth accumulation. You do this by buying inexpensive term insurance, and instead of investing in the high-expense insurance product, invest in low cost index mutual funds in a retirement account, in a Roth IRA and in a taxable account. The majority of the people on this forum do a majority of their insuring and investing in this way.

[Scott at MD Financial Services]

Hello. My wife and I have both had variable universal life policies for the past 11 years. I have also had a disability insurance for the same time. I initially purchased when I started my career so that if anything happened to me, my wife and kids would be taken care of. I thought that it was the right thing and have been continuing it for that time. Now as I become educated on financial topics and read the forum, I am questioning what is the best option and how to correct this if my current plan is not correct.
In terms of details, my wife and I have separate life insurance policies and each policy has ~$120k in surrender value. I own a family practice and my wife works with the practice. I still have some concern about taking care of the family. I am trying to evaluate what would be the best way to financially care for the family if anything happened to me. It seems that a VUL is not the best financial approach for wealth accumulation -- am I correct to think so? What would be the best way to accumulate wealth while protecting family in case of the worst?
If VUL is not a good option, what is the best option to terminate policy and liquidate assets?
Thanks for all the help.

Assuming you are in good health you can probably purchase all the term life you want for under $100 per month....

[arvmaha]

Thank you both. I was leaning that way myself. What would be the best way to extract and invest the funds that we have "accumulated" so far via the VUL? I have heard about conversion to annuity via 1035 exchange. Is that the best way or is something better from tax/investment perspective?

[GasFIRE]

If VUL is not a good option, what is the best option to terminate policy and liquidate assets?
Thanks for all the help.

How much is your cost basis vs the $120K CSV? If you don’t know then request an in-force illustration. The best option may be different based on the difference between the two.

[arvmaha]

The total cost of the payments (which is what I believe cost basis is -- please correct me if I am wrong) over the time that we have had the insurance policies are ~$257k. The total value of both insurance policies combined in ~$240k. I believe this means that I am down around $17k.

[GasFIRE]

Personally I would accept the $17K loss as tuition in your financial education and move on. After obtaining adequate term insurance coverage I would surrender the policy, take the cash and invest as suggested by VagabondMD. Many resources on the blog and in this forum if you need help. The 1035 exchange into an annuity would give you the opportunity to break even. Once the value of the annuity equals your cost basis you surrender the annuity @ zero profit or loss, thus no tax consequences. You’re close enough to even that I would just skip this step and start learning to invest earlier rather than later.

[Scott at MD Financial Services]

I would agree with GasFire, the move to an annuity to re-capture the 17k is a good deal of process to capture the tax on $17k. Buy your term then move to cancel. If you do the 1035 you still buy the term then get with Vanguard, Fidelity or one of those firms and ask about a no-surrender charge annuity and then compare for fees to make your final decision.

[arvmaha]

Thanks everyone. I really appreciate the knowledge.

[DrK-007]

I’m not sure I agree with the responses. You are 11 years in and so have done the ‘hard part’ of the policy ie making payments for all those years expecting to only ‘break even’ about now or perhaps in another year. The years that follow (say the next 11 years) would be the years when the policy does much better (guaranteed) and then you’d be able to borrow from your cash in a systemic tax efficient manner without having to pay back any loan while keeping the insurance product (say in retirement). It’s in these later years that these policies often make sense. It’s my view that providing you have your other financial ducks in a row, ULI can be great if you compare it to fixed income rather than other investments such as 401k’s/taxable accounts etc. If the premiums are a relatively small proportional of your income to maintain the policy/payments, then it will be a useful and potentially fantastic option to have in your retirement years to allow you to pay less income tax and have flexibility in the way you use it (this is providing the distribution is properly structured)…It’s one of the few topics I disagree with in the WCI teachings as i believe it is discussed out of context.

[BryanMD]

I was in the same boat as you. I just surrendered mine for $390k after investing $410k. A $20k stupid tax is a tough pill to swallow after investing for 7 full years into a roaring bull market. Now the chance to double down on my stupidity by trying to reinvest that cash into this roller coaster of red and green. Maybe I’ll just use it to pay off my mortgage. That’s a guaranteed 2.25% return at least.