Universal Life Insurance

[Tabaxus]

So, I've read the threads.  I know it's generally not good. Here's my conundrum, wondering if anyone has any thoughts.

I am required to purchase a certain amount of universal life insurance through my practice.  Annual premium could be a lot worse than it is for a universal life policy (~$1,200/year for $2M of coverage until my mid 30s, then goes up to ~$1,300 for mid 30s, then goes up to ~$1,500, then to ~$1,700 for my 40s, etc--the numbers start getting gross as I get closer to my 50s). As I get more senior in my practice, I will be required to increase that life insurance amount to $5M.

Within that context, I think I need several million of additional life insurance cover ($2-3M) for myself now (as opposed to later when it will be required by my practice anyway).  (I'd like to get life insurance coverage for my spouse as well, but probably not going to be affordable.)  I could either go and shop 10-year term policies (10 years because that will get me to the stage where I'm just required to buy the GUL), or I could buy the policy increase through the GUL.  Going up to $5 on the GUL would increase my cost from ~$1,200 to ~$2,900 until my mid 30s, then ~$3,100 in my late 30s, then ~$3,700, then ~4,300.

So, what I'm grappling with is really... in 5 years, assuming I'm still where I currently am (which is NOT BY ANY STRETCH a safe assumption), I'm going to be stuck with this anyway.  So do I just swallow the pill now to start the clock on getting the return to be nominally less terrible, or do I just get term to fill the gap for now, and defer the pain until I absolutely have to incur it.

My gut is to get term to fill the gap.  A big part of that instinct is that I can't know for sure whether I'll get the promotion that will necessitate the increase from $2M to $5M.  If I don't stay (either by choice or because I'm politely shown out), I would certainly have the option to keep the policy, but with only 5 years into it, I imagine it would be better to cut bait and cash it out.

Exacerbating all of this is that, though I've read enough to know it's bad, I'm not entirely sure I even know the right questions to ask to fully evaluate how bad it actually is.

[Hank]

Buy sufficient high quality, low cost term life insurance to take care of your family until you reach financial independence.  That might be a single 20 or 30 year term policy, or it might be a 10, 20, and 30 from different companies.  Somewhere between $2M and $5M probably is the right number.  Ignore the insurance from the office, since you can't be sure you'll be there until you reach financial independence.

Who requires you to purchase universal life and why do they require that?  Even if you make partner, this isn't key man insurance for a managing partner.  Is this driven by a requirement to buy in or buy out of the partnership for a smaller firm?  Is an insurance salesman drinking buddies with the managing partner and somehow this became a requirement at the practice?

This sounds like an annoying and unnecessary expense.  However, I wouldn't make a stink about it at least until you make partner and probably not until you take a significant management or equity stake.  You don't know how long you're going to be with this firm or whether they'll merge and morph into something utterly unrecognizable in five or ten years.  Hell, if this is a big enough firm, the partners in Beijing might be calling the shots in a decade.

Get the insurance you need to take care of your family.  Assuming your quality of life and wage per hour worked are high enough, consider this universal life policy a cost of doing business.  If the quality of life and compensation aren't nice enough, look at other practices, in house counsel, or government work depending on your desired quality of life and just how hard you want to work at the pie eating contest.  (The prize is more pie.)

[Tabaxus]

To be clear--definitely not looking to pick a fight over the required nature of the insurance.  I'm supportive of the firm requiring a base level of life insurance.  I wish that it was term, rather than universal, for cost reasons, but is what it is, no grousing from me on it.  Just trying to figure out how to fill the bucket that I need

Seems like you're suggesting that I buy the full $5M of term and totally ignore the $2M GUL that I have to have.  Im struggling with that.  If I buy a $3M term policy (that I'll drop 5 years from now), that gets me to my $5M.  If I lose my job, I'll go buy another $2M term policy (less whatever I get through the new job)--I wouldn't think I should overinsure now (i.e., buying $5M of term so that I have $7M overall).

[Hank]

Term is cheap, especially if you're healthy and you only plan on having the policy for 5 years.

How much income do you need to replace and how much debt do you need to pay off?  You say that you will drop the term life insurance in five years, yet you seem to indicate that you need $5M in insurance coverage.  It seems unlikely (though perhaps possible) that you're growing liquid net worth by $1M per year after spending and taxes for each of the next five years.

[Jason Veirs]

Tabaxus wrote:

So, I’ve read the threads.  I know it’s generally not good. Here’s my conundrum, wondering if anyone has any thoughts.

I am required to purchase a certain amount of universal life insurance through my practice.  Annual premium could be a lot worse than it is for a universal life policy (~$1,200/year for $2M of coverage until my mid 30s, then goes up to ~$1,300 for mid 30s, then goes up to ~$1,500, then to ~$1,700 for my 40s, etc–the numbers start getting gross as I get closer to my 50s). As I get more senior in my practice, I will be required to increase that life insurance amount to $5M.

Within that context, I think I need several million of additional life insurance cover ($2-3M) for myself now (as opposed to later when it will be required by my practice anyway).  (I’d like to get life insurance coverage for my spouse as well, but probably not going to be affordable.)  I could either go and shop 10-year term policies (10 years because that will get me to the stage where I’m just required to buy the GUL), or I could buy the policy increase through the GUL.  Going up to $5 on the GUL would increase my cost from ~$1,200 to ~$2,900 until my mid 30s, then ~$3,100 in my late 30s, then ~$3,700, then ~4,300.

So, what I’m grappling with is really… in 5 years, assuming I’m still where I currently am (which is NOT BY ANY STRETCH a safe assumption), I’m going to be stuck with this anyway.  So do I just swallow the pill now to start the clock on getting the return to be nominally less terrible, or do I just get term to fill the gap for now, and defer the pain until I absolutely have to incur it.

My gut is to get term to fill the gap.  A big part of that instinct is that I can’t know for sure whether I’ll get the promotion that will necessitate the increase from $2M to $5M.  If I don’t stay (either by choice or because I’m politely shown out), I would certainly have the option to keep the policy, but with only 5 years into it, I imagine it would be better to cut bait and cash it out.

Exacerbating all of this is that, though I’ve read enough to know it’s bad, I’m not entirely sure I even know the right questions to ask to fully evaluate how bad it actually is.

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I must say that it's very interesting that your practice is requiring that you purchase a UL, as chances are a 20-35yr Term policy would most likely still satisfy what they're looking to accomplish, but that's not for me to say. Is this for Key Person coverage, or in order to fund a Buy-Sell Agreement?

If for Key Person coverage, the Employer will usually be the Owner/Payor/Beneficiary on the policy, with yourself being the Insured. The life insurance proceeds would then used to help make the practice "whole" in the event of your demise.

It also sounds like the UL policy is a group policy, as you mention that the premiums increase every 5yrs - This is typical with most group policies, whereas, most GUL policies can be illustrated to be guaranteed ages 85-121 and have level premiums. To be honest, I would double check with your Employer in order to make sure that you're both on the same page.

Hope this helps!

[AlexxT]

Tabaxus wrote:

If I lose my job, I’ll go buy another $2M term policy

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But you may not be healthy enough then to qualify for more insurance.  The whole point of term life is to insure against unlikely events.  So spend a few hundred dollars a year more for a couple of years to be sure that you have enough  insurance both now and in the future.

[Tabaxus]

Hank wrote:

Term is cheap, especially if you’re healthy and you only plan on having the policy for 5 years.

How much income do you need to replace and how much debt do you need to pay off?  You say that you will drop the term life insurance in five years, yet you seem to indicate that you need $5M in insurance coverage.  It seems unlikely (though perhaps possible) that you’re growing liquid net worth by $1M per year after spending and taxes for each of the next five years.

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I'd drop the term in 5 years because at that point my GUL policy will have to be increased to $5M to satisfy my requirements (it's not a gradual increase, it's just a cliff requirement).  So if I'm still with the same place in 5 years, I'll drop the term because I'll be required to have $5M of GUL anyway, so having that plus term would be unnecessary.

I'm replacing over $350k of income, but that's not really the test in my mind because expenses could come way down.  More importantly is needing to fully fund newborn (incl. college), pay off a $450k mortgage, and support a stay-at-home spouse for life.  $5M is the right number, I think.

Yes, it's a group universal life policy.  However, there is a specific rider that permits people to keep it if they move on.

Definitely no disconnect in terms of what is required.  I agree that other options could have fit the bill, but again, I'm not quibbling with the requirement, just exploring whether to go with term or GUL for the gap period.  Seems like people seem to agree with my gut that term is the better approach until I'm required to kick my GUL amount up.

[Tabaxus]

AlexxT wrote:

Tabaxus wrote:

If I lose my job, I’ll go buy another $2M term policy 

Click to expand…

But you may not be healthy enough then to qualify for more insurance.  The whole point of term life is to insure against unlikely events.  So spend a few hundred dollars a year more for a couple of years to be sure that you have enough  insurance both now and in the future.

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This is a fair point, I guess my concern is that I'll be layering more on top of more, i.e., if I was really to just lock in, say, a 20-year $5M policy now, not only is that duplicative of the $2M I'm already paying over $1k a year for, but if I kept it, in 5 years, I would be paying thousands for $5M of GUL plus the $5M of term.  This is a ton of insurance.  I don't want to give the people in my life THAT obvious an incentive

[AlexxT]

Tabaxus wrote:

I would be paying thousands for $5M of GUL plus the $5M of term

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The GUL cost is a sunk cost.  Ignore it.  The extra term is there to cover you in the event that you change jobs.

You could get two separate policies,  3 million and 2 million.  You could ladder them:  one could be for 10 years and the other for 20; or for 20 and 30 years, depending on your savings rate.   Or get a single  5 million policy that  will let you decrease coverage down to 3 million in a few years.

Term is cheap.  When in doubt, get more.

 

[Hank]

The portability rider on the GUL makes it less of a problem than typical group policies.  Nevertheless, I'd look at how much insurance you need and just get term for that amount for 20-30 years.  AlexxT's approach seems sound.

[Jason Veirs]

Tabaxus wrote:

Hank wrote:

Term is cheap, especially if you’re healthy and you only plan on having the policy for 5 years.

How much income do you need to replace and how much debt do you need to pay off?  You say that you will drop the term life insurance in five years, yet you seem to indicate that you need $5M in insurance coverage.  It seems unlikely (though perhaps possible) that you’re growing liquid net worth by $1M per year after spending and taxes for each of the next five years.

Click to expand…

 

Yes, it’s a group universal life policy.  However, there is a specific rider that permits people to keep it if they move on.

Definitely no disconnect in terms of what is required.  I agree that other options could have fit the bill, but again, I’m not quibbling with the requirement, just exploring whether to go with term or GUL for the gap period.  Seems like people seem to agree with my gut that term is the better approach until I’m required to kick my GUL amount up.

Click to expand...

Term will always be more affordable than a GUL, so I concur with using term for the gap period.

If your Employer is definitely requiring that you purchase a GUL, then I would compare the cost between the group policy and what you could purchase on the open market, as group policies tend to be more costly - You would just have to compare the 2. They also increase in 5yr age brackets (ie: ages 35-39, 40-44, etc.), so you have to take this into account when comparing the extrapolated costs. Group policies are great if you're unhealthy, as you typically don't need to medically qualify, but you can usually find a better value on the open market as I previously mentioned.

Also, it sounds like your group GUL policy has a portability option, which would allow you to continue paying on the policy, even if you were to leave that Employer. Keep in mind, you will most likely not exercise this option, based on your previous replies, so it's really a moot point.

Lastly, do yo know how long your Employer is requiring you to keep this GUL policy? I would assume that it's for the entire period of employment, which is unknown, so if you plan on retiring in 30 or 35yrs, what is your Employer's rationale in not letting you go with a 30 or 35yr Term policy? You could also take out a GUL which is only guaranteed to age 80-90, as you will most likely be well off into your retirement years by then.