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.
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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?
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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.

term life: buy now or buy later?

(This is a long one, but I think its pretty interesting if you’re finance-geeky)

if you've talked to me lately, you'll realize that I’m not a huge fan of whole life, variable life or any type of cash value life insurance policy. Part of that has to do with bitterness from having been sucked into one such policy a few years ago (one of the worst financial decisions of my life). Another part of that is that I ignored such clear advice from independent experts. Such as this, this and this.

Anyway, making the case against whole/variable life can come later, but this post is about how I came to realize that holding off on buying term life insurance makes sense if you aren't married/don't have any dependents.

Some background -- a fallacy that I’d been following was that buying term life when I was younger was ideal because it helps me to lock in a lower premium. But I talked to a former math major who did some actuarial stuff for insurance companies and he helped me realize that $400 in today's value is not necessarily less than $500 in tomorrow's value (hypothetically speaking). Ok, so here's the set up. I was wondering, "Hmm, should I buy a $500k policy today, at $295/year for the next 20 years?" I’m single, have no children -- legitimate or ill- -- and so no one really depends on my income. If I didn't buy today, the alternative would be buying (again, hypothetically speaking) in five years, when I may have a dependent. but if I wait five years to buy a policy for the same term (20 years) and coverage ($500k), my annual premium goes to $310 (the annual premiums are quotes I got off Fidelity's insurance quote tool).

Blah Blah, too many words in paragraph form. What does this scenario look like graphically? Below is a table to illustrate:

As the table above shows, if I were to buy term life now, I would:

• End up paying $5,900 for coverage that ends when I'm 47.
• 10% (2 years) of the term of my policy will be in force during a time when I'm fairly confident I'll have no dependents. On the flip side, from ages 48-52, when I *might* have a dependent or two, I'll have no coverage.

If I were to wait five years, then I would:

• End up paying $6,200 for coverage that doesn't start until I'm 33, but ends when I'm 52.
• All of the years of my policy will be in force at a time when I *might* have dependents, and zero when I'm certain I'll have no dependents.

Ok, so you may be thinking, hmm, the stuff about being insured when you’re more likely to have dependents makes sense, but still, you do save $300 by buying now versus later. But as the table below shows, there's another cost to consider.

What the table above shows is what would happen if I were to take money I would've paid towards a life insurance premium and invested it in the years when I didn't have a policy in place. So in the "buy now" scenario, I wouldn't have premium money to invest until I’m 48, when I could invest $310/year (I use $310 because that's how much I would be paying if I waited). In the "buy later" scenario, I would have $295/year to invest ($295 b/c that's how much I would've paid if I bought now) right away, for the next five years.

Assuming a conservative 6% annual return and investing only a total of five years, it’s clear that the power of compounding benefits me most in the "buy later" scenario. When I’m 52, my total return on investment in the "buy now" scenario would be $1,747 while my ROI in the "buy later" scenario would be $5,333 (in other words, more than 3x greater). So what are the final numbers? Yes, there IS another table to illustrate! =)

(I feel like some finance professor or worse, a financial advisor.)

So if I were to buy now, after paying 20 years of premiums and investing five years of the alternative premium payment of $310/year, and receiving a return of $1,747, I would be down about $5,700 while receiving insurance coverage. On the other hand, if I were to buy later, after 20 years of premiums and investing five years of the alternative premium payment of $295/year, and receiving a return of $5,500, I’d be down only $2,140. Just that alone would make a strong case for buying later. What makes the case even stronger is this -- remember, I still have the investments going and compounding (even conservatively at 6%). but at the "buy later" scenario, my "base" at age 52 is 3x more than my base in the "buy now" scenario. That means even though the returns will grow at the same rate, the actual amounts will be higher if I wait!