February 5, 2007

beware the variable universal life

I've recently sat through a pitch for variable life, and so have some of my friends. The advisors that sell this stuff are like snake oil salesmen. When you're in the middle of the pitch, you can't help but think everything they say makes total sense.
Now, I suspect that part of the sales pitch for this VUL policy was the promise of tax-free returns down the road. With a VUL, part of the premium you pay goes to the insurance part of the policy, which pays the benefit, or face amount of the policy, to your beneficiary if you die. But you get to invest the rest of your premium in the policy's "subaccounts," which are essentially the equivalent of mutual funds.

The idea is that these subaccounts build value over time - this is known as the "cash value" portion of the policy - and you eventually tap that cash value when you need it for, say, a house down payment or child's education expenses or even for retirement.

And here's where the real sales hook comes in. Instead of just selling some of your investments and withdrawing money from the policy, you borrow (usually at a very attractive rate) against the policy's cash value. Since loan proceeds aren't taxable, you're effectively gotten a tax-free rate of return. Isn't VUL wonderful?


Thankfully, if we're smart, we can take a step back, do some independent research and realize -- STAY AWAY FROM ANYTHING WITH "VARIABLE" IN IT (including variable annuities).

Here's a great CNN Money article about the pitfalls of variable life insurance.

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