Why I Don't Like Variable Universal Life (VUL) Insurance
For one, most employees already have health and life insurance from their employers. So why not just invest the money instead of paying for another life insurance?
Some might not have life insurance, or the coverage is lacking, while some might want a life of insurance of their own that isn't dependent on their employment status.
But even if that's the case, you can still do better by getting a term life insurance and investing the difference in a high-performing mutual fund or UITF.
And that's the second problem I have with VULs. It might seem like a 2-for-1 deal. But it's really a 2-for-2 deal.
Just look at the premiums of a VUL with the premiums of a comparable term life insurance without an investment component. A VUL is more expensive, maybe even considerably more so. In effect you really are paying for a life insurance and paying for an investment.
And that's my third objection with VULs. I'm already paying for an investment (since it's not a 2-for1 deal like it seems), and yet my investment is tied to my provider.
What's wrong with that?
First, there are several factors in choosing an investment fund. By getting a VUL, you're effectively bypassing those choices.
And second, even if it turns out that the insurance company's fund is a good fit for you, it can take a long time before you can withdraw it. While I advocate long-term investing you should consider if the fund's timeline aligns with your goals.
And even if it aligns (say it's for retirement), I personally prefer versatility and mobility in my investments. Plans change, life throws curve balls, and in general I think it's much better for a financially literate person to have full control of his investments - including choosing which fund to invest it in (including the company/provider, not just the type).
Lastly, a VUL has two supposed strengths - you get money when you die and you get money when you grow old.
We've already established that for a significantly more affordable premium (in term life), you can get the same coverage. So there's no need to over pay.
If it's money when you grow old, investing the difference can net you more returns (as I pointed to earlier). So, again, there's no need to over pay.
The only "advantage" left is that as life insurance, the money can be claimed without hassle by your beneficiaries. But again, term life is insurance too and enjoys the same benefit.
And if you invest directly in stocks, mutual funds, or UITFs, you can make your beneficiary a secondary on your account. (thanks to +Carlo Mercado for the tip). That means that after you use the proceeds from the term life to pay off the estate tax, redeeming or continuing your investments can be as easy as a few clicks of the mouse. (update: An earlier version of this post implied that simply setting up a secondary will let you avoid estate taxes on your investments. I sincerely apologize to everyone who read the previous version.)
If your UITF and settlement account is enrolled online, they can click a few buttons and withdraw from the nearest ATM. Even if it's not a UITF, and it's not enrolled online, they can just inform the stock broker and/or mutual fund company of their intent to withdraw and then get the money. It can be just as convenient as claiming your insurance money.
(A point can be raised abut your secondary withdrawing without your knowledge. But then, beneficiaries are usually spouses, parents, and children. And I've never met a person who was going to make one of those a beneficiary without trusting them - and without that person having earned their trust.)
So once you really think about your choices, it's very clear that a VUL is not a good investment at all.
But of course, that's just my personal opinion. Life is complex, and I readily admit that a VUL can potentially be a decent investment.
It's not right for me, and in my opinion, not right for the vast majority of people. But my opinion isn't necessarily the best. After all, personal finance is personal.
Update: But If you already bought a VUL, you may want to read my other article: So I've Got A VUL, What Now?
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