A friend of mine who occasionally pings me with financial questions asked recently about VULs. He appears to be getting prompted to investing in them. It would appear my past blogs about EIULs causes him to ask a financial advisor about them. In response, it would appear they have countered with suggesting VULs instead.
I wrote a detailed response to him, but thought why not share it here as well?
The problem with VULs
I don’t like VULs at all. To start things off, what are VULs? They are Variable Universal Life insurance contracts. An EIUL is an Equity Indexed Universal Life insurance contract.
VULs take the idea of universal life insurance (which would be the same idea as an EIUL) but instead of using indexed investment options for the cash value, they instead use mutual funds. My whole retooling of wealth building was to get away from mutual funds. Mutual funds have historically had high costs and lackluster performance.
As part of the question I received, my friend included quotes on the cost of insurance. It appears the agent was trying to point out how inexpensive things would be on the insurance side of things.
Hate to break it to you, but cost of insurance is something regulated by each state. Essentially to buy $1000 of pure life insurance costs the same despite the company you go to. Things like fees, profits, etc. are where different companies can vary things. Different companies manage cash value investments differently. The funds, options, indexes, etc. are different for every company. Different companies offer different degrees of customer service and different ratings when it comes time it either loan out money pay up on claims. Different companies can offer different ways to loan you cash from the cash value part of your policy. But the actual cost of insurance is the same.
So in essence, when evaluating a life insurance company, you should basically subtract out the insurance aspect of things instead look at how well such a company has done on the investment side of things.
For any universal life insurance policy, the agent has a fundamental option to either write up the policy where they either maximize or minimize the death benefit based on IRS regulations. Minimum face value causes maximum cash value growth, and that is what we want. Even if you have no children, no spouse, and no family, these contracts are great places to load up with cash that you can get your hands on when needed, over the long haul.
The financial coach/agent that I learned much of this from runs a blog at http://shaferfinancial.wordpress.com. He was actually a PhD in statistics and psychology before entering the financial/industry. He is driven by evidence and actually has an undergraduate degree in finance. Most financial planners are trained in sales. Dr. Dave’s views on wealth building tend to not follow traditional sales routes but instead focus on evidence of success. If you visit his site and search for VUL, you’ll find some detailed analysis of them and why they don’t work.
I talked to him two years ago and said, “Here’s the money I want to invest. What would that look like at retirement?” He put together a plan and we discussed it over the phone. We made some adjustments and over a five month period put it in action. It’s been doing good so far. One things that I solidly know is that my cash value will do nothing but grow. It won’t drop in value at the next market correction like a VUL would. Therefore when the recovery begins, I will have more cash value to grow from than mutual fund investors.
Do you have an illustration or a quote from an agent? Contact Dr. Dave and ask him to look it over. He has written thousands of them, and knows the lingo. He will surely be happy to point out the pros and cons.
Whatever you do, given the long term nature of this vehicle, take your time until you understand it completely.
FYI: I don’t receive a nickel of cash for writing this opinion on EIULs nor Dr. Dave.