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Group Variable Universal Life (VUL) Insurance versus Separate Term Policy

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  • Group Variable Universal Life (VUL) Insurance versus Separate Term Policy

    I would like to know what others on this forum would do in my situation. My employer offers a paid group universal life policy worth 3 times my salary. This is free benefit through prudential. As a part of this policy, they also allow you to increase the coverage to an additional 2 times your salary in a group variable universal life policy for $0.063 monthly cost per $1000 of coverage (for my age group 30-34). So I make $260k per year and get 1.30M in coverage for $32.76 per month (260*3=780K in death benefit for free plus 260*2=520K in death benefit for $32.76 per month). Over the next five years, I have guaranteed built in salary increases every year such that in 5 years I will be making 500K. The monthly cost per $1000 of coverage is $0.063 for ages 30-34, $0.070 for 35-39, $0.078 for 40-44, $0.117 for 45-49, and then $0.180 for 50-54. I am 31 now and I am planning to use this insurance product for 20 or so years until I “self-insure.” I won’t likely ever leave my employer as it is a perfect academic job that pays in the 75 percentile for my specialty (let’s just call me naïve, but even if I get another academic job, I will negotiate for a comparable life insurance policy).

    The policy has recently allowed us to increase our group VUL policy from 2 times to 6 times your salary. So in 5 years when I’m 36 years old and making 500K, I could get 4.5M in coverage for $210/month (500k*3=1.5M for free and 500*6=3M in additional coverage for $210 per month). Now, it may be in 5 years I decide 1.5M in free life insurance is sufficient. But for $210 a month, it seems reasonable to get an extra 3M in coverage. Of course there is always the middle ground as well (3x or 4x my salary instead of 6x). At 50, if my salary is the same and the rates are the same, the rate for the extra policy will increase from $351 to $540 a month for the max coverage, so I’ll likely not continue past age 49. Remember, I will still have a 1.5M death benefit for the employer paid group universal life policy.

    The other interesting feature is there is an accumulation fund. You can put up to 12 times your monthly premium into the side fund. It collects interest at a rate of 4%.

    My questions are:

    1. Is this a comparatively reasonable policy?

    2. Would anyone just take the employer paid group policy and get a separate 20-year term policy? Doing so would obviously mean you are ineligible for the side fund. I love my employer, coworkers, and work situation, it is exceedingly unlikely I will ever leave. Golden hand-cuffs so to speak.

    3. Has anyone used a side fund like this to serve as the fixed income portion of your retirement portfolio? If I maxed this out, this could be 900k or so by the time I am 50. I would use my 403b, 457, and back-door roth IRA spaces for “riskier” index funds like Vanguard Total Stock Market and Vanguard Total International Stock Market funds. Are there tax efficiencies to be considered here by not using bonds, etc?


    Sorry this is so long, but I greatly appreciate any thoughts you all have on the matter.

  • #2
    Assuming that you would qualify for the best underwriting classification, using age 31 (with most companies you may be considered age 32 if you have passed your half birthday and that is your "nearest" age), a $520,000 20-Year Level Premium Term policy with American General would have a monthly premium of $21.73 and a 30-Year Level Premium Term policy with American General would have a monthly premium of $36.12.

    Forgetting about the "free" coverage, using a death benefit of $520,000, the monthly premium would be as follows:

    Ages 30-34 $32.76

    Ages 35-39 $36.40

    Ages 40-44 $40.56

    Ages 45-49 $60.84

    Ages 50-54 $93.60

    By the same token, using age 36 and purchasing a $3,000,000 20-Year Level Premium Term policy with American General would have a monthly premium of $111.93 and a 30-Year Level Premium Term policy with American General would have a monthly premium of $215.73 (compared to the group UL with a monthly premium of $210.00).

    Based on the above, I don't see why you would want to get involved with a group VUL policy (and the potential problems associated with it) when you can purchase individual coverage for less money with less complexity and put your money to better use elsewhere.

     

     
    Lawrence B. Keller, CFP, CLU, ChFC, RHU, LUTCF
    www.physicianfinancialservices.com

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    • #3
      Thanks for weighing in!  The only reason I see to do it is the side fund.  But then again 4% isn't all that great, and besides it's less than 4% if I'm "overpaying" for the life insurance.  It seems as if the side fund could replace the bonds as the fixed income portion of my retirement portfolio.  It's not tied to the market so I'd get protection against a poor sequence of returns early in retirement.  But the more I think about it, the more I realize the returns would *probably* be better in the market.

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      • #4
        Great points.  This is why I wanted to ask.  Definitely perspectives I had not previously considered. Did not realize they invested primarily in bonds.

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        • #5
          Curious, which companies increased their rates?

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          • #6
            Here is an article that describes the issue and mentions several companies:

            http://www.wsj.com/article_email/surprise-your-life-insurance-rates-are-going-up-1449225000-lMyQjAxMTA1MjAyNzMwMjcyWj
            Lawrence B. Keller, CFP, CLU, ChFC, RHU, LUTCF
            www.physicianfinancialservices.com

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