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Aug 6 2012 12:00AM


Should I get a variable universal life insurance policy for future tax benefits or life insurance? I’m 54 years old and in very good health.


Many confuse risk management (insurance being a form of that) with investments. Or they try to kill two birds with one stone. Think about your success rate of throwing a stone and killing two birds with it … pretty slim. Insurance should be used for risk management purposes. Which means you need to get the right kind of insurance.

Life insurance should not be viewed as an “investment vehicle”. It is an extremely inefficient investment vehicle because it has all sorts of expenses that drag it down. There are sales charges (commission when the agent sells it), mortality charges, management costs, etc. A variable life insurance product adds to that the mutual fund expense ratio, and most of those policies use mutual funds that have high expenses.

A whole life product is a known item: there’s no magic, nothing going on behind the Wizard’s curtain. You pay a certain premium during your life, your beneficiary get a known death benefit when you die, and my suspicion is that, when a life insurance agent wants to replace an existing policy, he or she is looking for a new commission. Not always the case, but a possibility.

Your investment vehicle should be lean and mean, which means it has the least amount of cost associated with it. If you are running a marathon, you want to wear light-weight, breathable athletic wear; not jeans, sweatshirt and army boots.

So, let me recommend a process for you to employ, which your financial professional should be asking you:

  1. Do you need life insurance?
  2. If so, how much? And, for how long?
  3. What kind of policy will accomplish this for you? What are your investment needs? Define your need(s), and then develop a strategy to accomplish those. Saving for retirement? You should take into consideration how much you will receive in Social Security benefits, employer pension, and what will be your shortfall. You must save enough in your investments to supply that shortfall.
  4. Invest in low cost mutual funds in the most tax-efficient vehicle…might be your 401(k) plan, an IRA, a Roth IRA, or an individual brokerage account.
  5. Develop an asset allocation (a mix of stocks, bonds, cash, and perhaps real estate and commodities) that is right for your risk tolerance and your goals.

You may have little or no life insurance need. Or you may say, “If I die now, my wife won’t have enough to live on.” Maybe you buy a 15-year level term policy. There is no cash value, it’s pure insurance. If you live 16 years, you threw away your money. Look at it like fire insurance on your house; if you have no fire, you threw your money away. But you really, really, really need to have that fire insurance. A 15-year term policy (for example; I don’t know your financial situation) gives you 15 years to save, invest, and grow your assets such that you don’t “need” life insurance after that point. And the cost should be low compared to a variable life policy.

You can also consider transferring your existing whole life policy for a “paid up policy.” For example, if you had a $500,000 policy with $30,000 cash value in it, your life insurance company might offer you a $200,000 death benefit for the rest of your life. Pay no more premiums; you are covered for life. And maybe that meets your “insurance needs.”

To summarize, spend the least amount possible on life insurance and maximize your savings and investments.

If your net worth is north of $3 or $5 million and/or own a small business, you would have more sophisticated insurance needs, and other financial planning issues. My discussion generally assumes you are a W-2 employee, might own your home, married, and kids out of the house or close to it.

Your planner needs to find out about your lifetime goals, and all the factors you have in your life (spouse, kids, investments to date, income tax issues, estate desires, insurance needs) and develop a strategy for accomplishing your goals. You asked a simple question, and I’ve thrown a lot of “it depends” at you. And hopefully some education about proper use of insurance.

Lastly, as I re-read your question, the “future tax benefits” of a universal variable life insurance product should not be a consideration. For the 3% per year cost of that product, it will lose the investment race to a product that costs you 0.3% per year. This product will most likely bury your investment performance compared to your athletic, lean & mean mutual fund. 

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