Imagine a financial vehicle providing tax free money. You don’t have to be eligible to withdraw the money at age 59 ½ . You will not be mandated to a RMD (Required Minimum Distribution) like a Traditional IRA. You are not limited to $5,000 maximum contribution limit like the Roth and Traditional IRAs. According to The New Life Insurance Investment Advisor, by Ben G. Baldwin, CLU, ChFC, CFP, it is “a veritable financial Swiss army knife, a product that is capable of helping nearly everyone.” Without going into an extended amount of detail, the financial product I will be discussing about is the Variable Universal Life (VUL) insurance. The VUL has a little sister name Equity Index Universal Life (EIUL) insurance. Both products are life insurance. Withdrawing money from a life insurance contract, meaning the cash value, you don’t pay taxes on it because the money is borrowed. When have you ever paid taxes on borrowed money? You may be asking, “uh, Nelly, you do have to pay interest on that borrowed money, right?” Well, to answer that I would have to say yes and no. If you decided to use the cash value for a down payment on a home, you should pay it back. But, before you borrow you must find out what the interest will be first. If you withdraw the money from retirement purposes, well, by that time you should have enough funds for the policy to even pay for itself. In order for that to happen you have to over-fund the policy. Meaning you should be funding the policy with more than just the minimum premium and appropriate diversification. Some companies offer less than 1% interest on the borrowed money. But first you should know you will be withdrawing your contributions first before you borrow. This brings me to a few pointers of these products: In a VUL you can invest your money. Make sure there is broad range of mutual funds to choose from. In addition if you decide to change your investment allocation within the same mutual fund family offered you will not incur any transaction costs or create any income-tax liabilities. In an EIUL your money is not invested, but rather it is linked to the performance of the S&P 500 Index. Plus, it will provide a guaranteed rate. So, at least you are protected from down market performances.
In a VUL you can invest your money. Make sure there is broad range of mutual funds to choose from. In addition if you decide to change your investment allocation within the same mutual fund family offered you will not incur any transaction costs or create any income-tax liabilities. In an EIUL your money is not invested, but rather it is linked to the performance of the S&P 500 Index. Plus, it will provide a guaranteed rate. So, at least you are protected from down market performances.
Both products provide flexibility. You can put it in more or less premiums each month. However, I wouldn’t encourage it. But, if there’s a month where an emergency comes up and you need to stop funding the policy that month you can do so.
“Nelly, I heard that a VUL is one of the most expensive forms of insurance you can get.” Well, I disagree. Of course, you should never blindly buy an insurance policy without knowing if the expenses are competitive. Remember, these products are a combination of life insurance and investment or it’s linked to the performance of an index. First, you must ask yourself if you need/want life insurance. As far as the cost you should understand how it operates. Know how much is going to the cost of insurance and how much to your investment account (sub-account or separate account). Many people look at no-load products incorrectly to their circumstances. There will be fees in those products, too.I have a VUL, and “I love it.” There has been a time when I had to stop paying my premium for a month and there have been times when I funded my policy with more money. I enjoy having a peace of mind that I will have income-tax benefits. These policies work well for those who have a family and someone is dependent on your income. But, in my case I don’t have dependents and I still opted for a VUL. And it’s only because I fully understand how it works. I know exactly how much is going towards my cost of insurance and I even called the company to get an estimate of what the cost will be as I get older. I encourage borrowing from the library or buying The New Life Insurance Investment Advisor by Ben G. Baldwin which explains all the in-n-outs of life insurance and Missed Fortune by Douglas R. Andrew. In addition, speak to a Certified Financial Planner (CFP) or an insurance professional who has the proficiency and qualifications in working with these products.Keep your Moneylicious!