Could There Be A “Good” VUL Policy?

Long-time readers will probably notice I’ve become less dogmatic in some of my writing over the last two years and softened my tone considerably on several subjects.  For example, although I still think the vast majority of self-styled “financial advisors” are thinly-veiled salesmen, I’ve gotten to know a few that offer good advice at a fair price.  Although I think few people should ever use a whole life insurance policy, I’ve run into a few people who actually understand the product AND are still happy they purchased it for various reasons.  I can even seen a place for reverse mortgages, despite widespread abuse among those selling them.  However, one product I thought I would NEVER see a use for is variable universal life (VUL) insurance.  Over the last couple of months, however, I’ve had a number of readers contact me with questions about a VUL being sold by Larson Financial Advisors.  It seems this particular product addresses many of the concerns with VUL that I’ve outlined before.  It is enough to make me wonder if VUL really might have a place in a retirement “quiver” for at least some physicians.

Any Financial Product Can Be Bad


The truth is that just about any financial product can be made terrible through design features that benefit the product designer and salesman rather than the consumer.  Consider the investment that makes up most of my retirement portfolio- mutual funds.  If the only mutual funds available had an 8% load, a 2% ER, 12B-1 fees, surrender charges, horrible active management, and a high turnover rate, then it would be easy to argue that investors should avoid mutual funds altogether.  However, thanks to Jack Bogle and others, an investor can now buy every stock in the world in seconds with essentially zero turnover, no fees, and an expense ratio less than 10 basis points.

What is Variable Universal Life Insurance?

VULs came out in the 1980s and 1990s when whole life insurance buyers and sellers realized that the relatively low returns available in whole life were getting creamed by stock market investors.  Like with whole life insurance, it has a permanent death benefit along with a cash value component.  The money grows inside the cash value account tax-free, and then in retirement the money is borrowed from the policy so it can be spent.  Upon death, the death benefit pays off all the loans taken (and still provides a bit of money tax-free to the heirs.)  Depending on your state, there may also be significant asset protection benefits for this money, and depending on estate tax laws in place at your death (and the liquidity of your estate) there may be estate tax benefits as well.  Unlike whole life insurance where the cash value never goes down and is credited yearly with a dividend by the insurance company, with a VUL the investment component is invested in mutual fund-like subaccounts, and the value rises and falls with the market.  The theory is that the long-term returns will be higher but you’ll still get the tax-free growth, asset protection, and death benefit.  Stock market returns with life insurance benefits, what’s not to like?

So Why Doesn’t Everyone Have One?

The problems with investing in a VUL are basically three-fold- the investments suck, the insurance is too expensive, and insurance policies aren’t designed to be retirement savings accounts.  Imagine the worst possible mutual fund, and that’s typically what you’ll find in a VUL sub-account- poor performance, high fees, and maybe even loads.  The worst part is you have nowhere else to go.  Instead of having thousands of funds to choose from, you may be stuck with only 5-10, although most newer policies over 50 or even 100+.

The insurance is also too expensive, mostly due to fees.  These suckers are typically loaded up with so many fees it’s almost impossible to have a positive return.  Aside from the ongoing fees, there is usually a surrender charge for the first few years (sometimes for as long as a decade.)  The insurance company doesn’t want to lose money even if you surrender the policy, and since it’s already paid the commission to the salesman, it has to get that money back somewhere.  To make matters worse, since every policy is different, it isn’t a particularly efficient market, and the insurance itself simply isn’t sold at a competitive price.


In order for a VUL to qualify for the tax-free growth and tax-free loans, it has to at least masquerade as life insurance.  That means you can’t cash it out without paying taxes on the gains. There has to be a death benefit.  There are limits as to how much you can contribute for any given death benefit.  You must pay interest on any loans you take out etc.  Insurance isn’t free, and money used for the insurance portion can’t be invested on your behalf.

When you consider all of these issues with a VUL policy, the tax, insurance, asset protection, and estate planning benefits just can’t make up for all the costs and you end up with a severely under-performing investment that becomes even worse if you want to get rid of it.

What If There Were A “Vanguard” of VULs?

Just because the typical VUL sucks, doesn’t mean it isn’t possible to have one that might be worth buying for some people.  What would that VUL look like?  Is it possible for the costs to be kept low enough that the tax benefits would outweigh them?  I don’t know but I’d love to see the equivalent of the constant lowering of total market ETF expense ratios we’ve seen over the last 5 years from the mutual fund industry.

12 Requirements To Buy A VUL

Here are twelve requirements I’d have before considering a VUL:

1) Excellent investment options – Remember you’re stuck with these options for decades.  If something better comes along in the investment world, you’re just out of luck.  So you’d better hope that the investment options are at least the best available options at the time of purchase.  That means low-cost passive investments such as those offered by Vanguard, DFA, and similar companies.  It would be even better if there were a brokerage option where I could purchase investments in the future that aren’t even available today.

2) Low cost investments – No loads, no additional fees, low turnover, and a low expense ratio.

3) Competitively-priced insurance – Permanent insurance is naturally going to cost a lot more than term insurance, but is it too much to ask that the insurance be as cheap as actuarially possible?  This is probably easiest for a mutual insurance company to offer, since like Vanguard, their owners are their policy holders.

4) No surrender charges – Something like 80% of people cash out of their permanent life insurance policies in the first decade, guaranteeing a loss.  There is certainly no point in investing in a cash value life insurance policy if you’re not planning on holding the policy until death.  If you cash out early, you’ll lose money.  If you cash out late, your gains will be taxable and you’ll lose the death benefit.  But if you’re truly offering an excellent product to well-informed, appropriate consumers, very few people ought to be surrendering their policies in that first decade.  You shouldn’t have to stick them with a surrender charge in order to guarantee your ability to pay commissions.

5) Low (no?) commissions – Speaking of commissions, if we can have no-load mutual funds, why not no-load insurance policies.  Agents like to point out that the consumer doesn’t pay them, the insurance company does, but who are we really kidding here?  All expenses including company profits are paid by the consumer in some way or another.

6) Zero percent interest – Since the point of this policy is to act as an investment, and you know that to access your money eventually you’re going to have to take out a loan, why can’t that loan be offered at 0%?  It would be direct recognition (I don’t think this term is even used with VULs) so the money you’re borrowing is no longer invested in the policy, but why should you have to pay the company interest to borrow your own money?  Even if 0% interest is impossible, let’s see how close we can get to it shall we?

7) Overfunded policy, paid annually – Again, the point of the policy is to act as an investment.  You want to be able to contribute as much as possible to the investment component while spending as little as possible on the insurance component.  That means funding it up to the “MEC line” and paying annually, or at least not penalizing the policyholder with higher premiums for paying it monthly.

These last 5 requirements have more to do with the purchaser than the policy, but they would still be requirements for me to recommend one for someone.

8) Insurable at a reasonable price – I’m probably never going to invest in a life insurance policy because the costs of insuring climbers are just too high.  The same issue exists for those with health problems.  Mixing investing and insurance usually doesn’t make sense for most people, but for some people, it NEVER makes sense.

9) Maxed out retirement plans – Remember that a very low cost VUL MIGHT make sense when compared against a taxable account, but when you’re comparing it against a solid 401K or Roth IRA, it just isn’t going to hold up.  If you haven’t maxed those out, it’s frankly pretty stupid to even look at a VUL.

10) High dividend/capital gains tax rate -  Dave Ramsey likes to call cash value insurance the “payday lender of the middle class.”  The tax benefits are just dramatically less if you’re not paying much in tax anyway.  If you’re in the 10% or 15% bracket, your capital gains rate is 0%.  If you’re under $200K, your rate is only 15%.  That goes as high as 23.8% for an individual with a taxable income over $400K.  If you’re investing in something that is highly tax-inefficient, like corporate bonds or REITs, your marginal tax rate could approach 50%.  That’s when the tax benefits of a VUL might make up for the costs of the insurance.

11) High value placed on asset protection, estate planning, or the death benefit – Life insurance can offer many benefits, but the fewer of these you care about the less benefit you are likely to get from investing in life insurance.  If your state has a low (or no) exemption for life insurance cash value from your creditors, that aspect is useless.  If you have no liquidity issues, or are nowhere near the $5M ($10M married) estate tax exemption, the estate planning aspects don’t do you any good.  Likewise, if you don’t really care about the death benefit, why pay for it?

12) The alternative is paying an AUM fee – If you’re working with an asset manager to whom you are paying an AUM fee, then a VUL becomes more attractive.  The advisor would get paid by the commission you’re paying anyway (at least until someone comes out with no-load insurance) and you’d save the AUM fee you’d otherwise pay on those assets.

Not For Me

I’m not going to invest in even a perfect VUL.  Between my 401K/profit-sharing plan, defined benefit plan, backdoor Roth IRAs, stealth IRA, individual 401K (for the blog) and other investments I want to make in 529s, UGMAs, and a taxable account (like real estate) I just don’t have the money to put in to anything else.  The insurance component of any product would be too expensive due to my bad habits.  I also don’t place much value on the asset protection, estate planning, and death benefit of permanent insurance and dislike the lack of flexibility inherent in an investment that must be held for decades.  I also find a taxable account an exceedingly attractive alternative.  Thus far in my life, a taxable account has LOWERED my tax bill rather than raised it, thanks to tax-loss-harvesting and donating appreciated shares to charity.  I’m in a relatively low tax bracket (actually got down into the 25% bracket last year, last time I’ll see that for a while) and I don’t pay an asset manager.  It just doesn’t make sense for me.

But I’ve met enough doctors in real life and on the internet whose financial lives are sufficiently different from mine that they could possibly benefit from a really good VUL.  Check the example below to see how it might benefit some people.

The Math

How does this work?  Let’s use a hypothetical example.  Let’s assume you put $30K a year into a perfect VUL policy over 30 years, and $3K of that goes toward insurance costs.  It provides the same investments available to you in a taxable account (let’s say they gain 8% a year) and you’re in the top tax bracket now and in retirement, let’s say dividend and long-term capital gains rate of 23.8%.  You then borrow the money out at 0% in retirement.  After 30 years, the cash value in the policy would be $3.06M.  Now, let’s compare that to a taxable account.  We’ll assume the investments are fairly tax efficient, perhaps a yield of 2% taxed at 23.8%, lowering your rate of return to 7.52% per year.  After 30 years, you pull all the money out and pay capital gains taxes at 23.8% on it.  You end up with 2.37M, $690K less.  You also don’t get the asset protection and estate planning benefits (if any), and the death benefit.

This whole post has been mostly hypothetical to show that a really good VUL could be a good idea for certain investors.  Whether the policy being marketed by Larson Financial is really good or not remains to be seen.  I’ve sent a draft of this post to Tom Martin, their main investment guy, and asked him to submit a guest post about it.  Then we can see how close it comes to an “ideal” policy and readers can decide if something like that makes sense for a portion of their retirement money.  For the rest of us, we’ll continue to not mix insurance and investing.

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Comments

Could There Be A “Good” VUL Policy? — 80 Comments

  1. Beyond all of the problems you listed with VULS, even a perfect VUL used for retirement or some other purpose other than a permanent death benefit has a serious flaw in it. VULs have ever increasing costs for insurance and if you take out loans in retirement (even at 0%) then if the market goes through a down swing then you can find yourself needing to put new money into the policy that you might not have available. Considering the majority of the rest of your portfolio is likely in the market, having another bucket of money with market risk but now with ever increasing costs for insurance is adding excessive risk in my view. Agents like to pretend the return on these products is constant and always up. If the market goes down for your 401k then you dont have the added burden of losing the death benefit and being taxed at income rates all at once. You have to hope you dont live too long in that situation.

      • Im sure someone could offer a secondary guarantee which is what happens with gUL (otherwise the cost of insurance is still increasing its just that if you continue to pay x dollars per year they will keep the policy in force even if csv goes to zero). That rider costs money as well as the amount required is above what a current illustration would be asking for. As you know those polices are written such that they have little to no cash surrender value. That isnt going to work here though since you are controlling the investments as opposed to the insurance company alone making the decision. Add to the fact that the person is wanting to take out those 0% loans and how would it would work? As you know im not an agent or in the industry.

        • Yes, their guarantees cost money. The question is whether it is possible for a “perfectly designed” VUL to have tax benefits for certain high tax individuals which would be greater than the additional costs of the insurance component.

  2. WCI,

    You mention in the article that you max out 401k + DBP+ backdoor Roth + stealth IRA + 529 + individual 401 k.

    As a hospital employee, I can do 403b, 457b, 529, backdoor Roth. I cannot do a stealth IRA. If I open a side business” can I do a solo 401k In addition to this? Keep in mind that with my employer 403b (17.5k), 457b (17.5k) and employer match, I will exceed the 51k limit.

    Thank you. Love your posts here and on bogle heads.

  3. I have actually been researching VULs for about a year now. I’ve come to the conclusion that the Vanguard of VULs is TIAA-CREFs. I would recommending that anyone who is thinking of buying a such a policy compare it to the TIAA-CREF VUL.

    Unfortunately, though I feel confident that the TIAA-CREF is the best VUL available, I’m still not sure whether it is better than no VUL at all and doing something else with the money. And I satisfy all of WCIs 12 requirments, except for possibly #11 (If I die in my 80s or later, I’ll have a big enough estate for the death benefit to help pay estate taxes, but I’m not sure how much I care about that).

  4. Great post White Coat! Your full reply is forthcoming but in the mean time, 3 quick thoughts:

    1. 99%+ of people out there should NOT be using VUL, even if there were a “Vanguard” version.

    2. Rex is thinking right for most insurance, but when VUL is done properly, you would actually reduce insurance expenses and eventually get rid of them over time. That’ll be more clear in my response but this is one of the biggest myths surrounding VUL. Even though you’re getting older, your net amount at risk is being eliminated (if used properly) – and your insurance costs along with it.

    3. Even though VUL isn’t perfect, I happen to own it because I’m part of the <1% it makes sense for. I'll walk the readers through why I personally own it and why I use it for clients even though it earns me less compensation and hurts the value of my business/practice far more than normal taxable AUM accounts would.

    In the meantime, I'd greatly appreciate it if readers would post any questions they've had about VUL. That'll help me make sure I'm addressing all questions in my response.

  5. It will be interesting to see how you back up those claims of eliminating insurance expenses. If you are also reducing the death benefit well then thats misleading.

    You say used properly but frankly its never the client making the decisions. They dont know what options are available. Its the agent who isnt structuring the policy for the client’s benefit and that likely happens the majority of the time (similar with whole life).

    People dont need to pay AUM fees. Its rare that those costs add much value so that isnt a proper comparison. I personally pay zero AUM fees.

    • There are definitely two worthwhile comparisons here. One buying a VUL as a do it yourself investor and one buying a VUL as an investor using an advisor to whom you’re paying AUM fees. While the numbers might not work out for the first, they might for the second.

  6. Hi Rex,

    I appreciate your reply. Just to lay some groundwork for how a good VUL would be structured, if the point is to maximize investment value then by definition we have to minimize the insurance costs. The best way to do that is to maintain the minimum required death benefit (determined by the IRS guidelines). Therefore, by definition, we will be reducing the death benefit as quickly as possible. That’s not misleading at all, rather, very intentional and the only way to keep expenses as low as possible or get rid of them. For my family’s protection needs, I’m a huge fan of term insurance.

    In the perfect world of VUL, I’d be able to dump $100k per year into a $1 life insurance policy and still maintain all of my tax advantages. The IRS doesn’t allow that so instead I have to have a larger death benefit to play by their rules but I only want the minimum death benefit they require. Otherwise, I’m buying more insurance than I’m required in order to keep all my tax advantages.

    In my personal situation, I’ve got VUL for tax-sheltered investment purposes (already maxed out everything else), and then I use term insurance for all of the additional protection I want for my family. My ratio is about 1:4 currently in VUL vs. term insurance from a death benefit stand point.

    To be clear though, I’m not doing VUL for the death benefit protection at all – I could easily buy more term insurance if that’s all I wanted. I do it for other reasons and the death benefit is an added bonus I tend to ignore. I’ll definitely start bleeding down my death benefit as soon as I’m allowed by the IRS in order to get my expenses even lower.

    From an AUM standpoint, I pay a 1% management fee to my advisor because I like knowing he’s making sure I don’t miss anything along the way. It’s well worth it to me even though I’ve spent my life studying this stuff and am asked to lecture on it around the country. Even if I were to retire tomorrow, I’d still have my advisor do it rather than doing it myself because my time will still be way more valuable in other ways. Most busy physicians tell me their time is worth $500-$2,000 per hour in the O/R and that they don’t enjoy this stuff the way that a few people do.

    It’s often said that the most valuable thing we have is our time. 1% is well worth it for peace of mind for those of us that want someone watching our back and have things we would rather do with the limited time we have.

    I’m not seeking to change your mind. Nor would we have this amazing blog without a physician that enjoys this stuff and is capable of doing it solo. Just realize that to me (and many others we serve), the 1% AUM fee I pay is dirt cheap for the peace of mind I get and the time it saves me to do things that earn me a far better ROI. Not to even mention all of the extra stuff my advisor does to pay for himself along the way…

    • I still find it interesting that you pay an advisor. I think I’d rather take less investment risk for a similar after expense return. Do most advisors at your firm actually pay 1% to another advisor?

      • It’s not about the portfolio risk level for me. It’s simply about the bottom line. My time is worth a lot of money and my advisor, Andy, saves me a lot of time. I calculate that he saves me way more time than he costs me money so it’s a simple value proposition.

        The key is that I trust Andy (enough to make him a co-trustee of my kids’ money if something ever happens to me), and I know he’ll do what’s best for my family 100% of the time. Knowing this allows me to focus on everybody else without having to worry about myself nearly as much. I love that I can spend 1 hour per quarter to keep up to date on what’s happening with my accounts rather than having it be a constant worry on my shoulders every day. That’s money well spent for me.

        I also love knowing that I can go to a 3rd world country on a missions trip with our doctors where I don’t have cell reception and not have to worry about whatever is happening in the market that might trigger a re-balancing event in my portfolio. Andy could charge me double and I’d still be getting the good end of the deal…

    • It takes minutes per year to avoid the 1% AUM and it doesnt mean missing anything. In fact its typically the opposite with more turnover of the funds with more fees if you use ad advisor and less money for the client. A boglehead approach will beat that 99% of the time. Most people will still need to watch their back once they have an advisor. In fact they might need to watch thier back more depending on the “advisor”. No way 1% is dirt cheap period.

      You still cant ELIMINATE the insurance costs which is what you claimed. I see nothing new about overfunding to MEC limits and then surrending. Agents are always posting here like their ideas are different and new than previous posts yet its never the case. Sure overfunding any permanent insurance is an improvement but its still lipstick on a pig.

  7. Rex,

    You’re a good man. Please save some of that unwavering passion for my actual post!

    In response: I’ll kiss that ugly pig all day long if she’ll save me over $500k more in taxes than she costs me in insurance expenses… and that’s actually far less than what I’m on track for (far more if my long-term capital gains tax rate continues to climb).

    In spite of that, you’ll quickly find that I’m not a big fan of insurance, Rex. In fact, insurance represents most of what I abhor about the financial services industry and I agree completely that there are plenty of advisors out there that take advantage of people rather than watch their backs.

    But I don’t let the fact that there are plenty of bad doctors out there (admittedly in far less proportion to bad advisors) stop me from taking my special needs daughter to see the good ones every month. Rather, the good ones are well worth every dime I pay them and then some because they help my daughter achieve results she never would without their help.

    I can assure you that it takes far more than “minutes a year” to manage a portfolio well when there are tax issues involved with the interplay of 15 different accounts that all need to be working together for the same objectives – some with limited investment options and others with unlimited choices. I wish it were only as simple as buying a 3-fund Bogle portfolio but that strategy simply isn’t an option in my case (or for most of my clients). And even if it were an option for me, it would cost me a lot more money than my advisor does. He doesn’t try to pick hot stocks or hot funds – rather, delivers solid Vanguard Index Funds/ETFs and DFA Funds and helps me allocate in the accounts where my investment choices are limited. His value proposition isn’t to beat the market but rather to manage my risk within the market. That’s a value proposition I’m willing to pay for.

    Most importantly, he’s paying attention on all the days that I don’t want to. There’s real value in that for me because my dollar per hour is simply too valuable to put in the time it would require to properly manage my accounts in harmony with one another. I prefer to give the limited hours I have to my family, my clients, my friends, and my church rather than using them to manage my portfolio.

    To be clear, I’m not against others spending their time on their portfolios; that’s simply not my choice when I know my guy has my back and has easily saved me more money than he has cost me. 1% is cheap when he saves me far more than that and I’m convinced he does.

    You seem like a great guy as I’ve read many of your posts on the blog and appreciate your willingness to help guide others. I can’t fault you for spending your time doing what you enjoy. Because this stuff is clearly something you enjoy, the cost of an advisor would be far more expensive for you than it is for me or many others because time spent doing something you love is time well spent. In my case, every minute I spend paying attention to my personal portfolio is a minute I can’t spend with my kids. That costs way more than 1% in my case when I put such a high premium on that time.

    I bring an open mind to your comments and hope you’ll bring an open mind to my upcoming post. I don’t like insurance, but until the IRS lets me contribute far more money to my Roth IRA each year, I’ll continue to use my VUL. I don’t mind some expenses on the front end of my policy if it leads me to a nearly* expense free harvest.

    (*I have to say “nearly” because although my insurance expenses (admin or M&E) are likely eliminated, I still have ongoing investment expenses – in my case my investment expense adds .06% to my annual portfolio expense compared to if I put the money in my taxable account. That additional expense will remain ongoing throughout the rest of my life even if my insurance costs will likely be eliminated throughout the back 1/2 of my life. So, you are right that I cannot eliminate the extra .06% I will be paying in investment expenses throughout my lifetime. I should not expect that to go away. And by the way, that extra .06% is only accounting for the difference in internal fund expenses comparing my DFA/Vanguard taxable portfolio to my DFA/vanguard VUL portfolio – I’m not counting the 1% I pay my advisor that is waived for my VUL – that would actually put my taxable portfolio way behind the VUL from an expense standpoint but I’m not counting that in my .06% differential)

    Just to reiterate, most people shouldn’t touch VUL so please don’t take this comment as a recommendation as that’s not my intent. You’ll read in my upcoming post that only a small segment of the population should even consider VUL. I just happen to fall in that segment so that’s why I use VUL personally for tax-efficiency and asset protection purposes.

    • I don’t understand how you can keep saying that the insurance charges are eliminated. As long as there is a net amount at risk (i.e. death benefit exceeds cash value), there will always be insurance charges. In fact, within UL policies, the insurance charges increase as we age. The only time insurance charges will be eliminated is at policy maturity when the cash value equals the death benefit since there is no net amount at risk. For most policies this happens at age 121. Saying that you can eliminate the insurance charges is a flat out lie.

      Also, if anyone is paying an AUM fee for the assets within a VUL policy, they are being completely ripped off. Life insurance pays commissions. Nobody should also be paying management fees on life insurance cash value as well.

  8. Mike, I’ll clarify to help you understand. With a good policy design the net amount at risk is decreased to be minimal fairly quickly throughout the withdrawal period. During that time, loyalty credits, asset credits, dividends, etc. can therefore often fully offset the insurance costs even prior to policy maturity – thereby eliminating the insurance costs (not the investment expenses). None of these credits, dividends, etc. are guaranteed and my post will cover this as an important downside of VUL to understand but the point is valid.

    How do insurance companies pay for this without dipping into their profits?

    Actuaries suggest in 2 ways:

    1. Because companies are required to overprice mortality expenses because the commissioner’s tables are too conservative regarding life expectancy. The over-pricing is refunded through various means throughout later years.

    2. Because too many policies lapse prematurely. Policy holders that stick around get rewarded by sharing in the spoils of policy holders who cancelled their policies for whatever reason.

    For the right situation — mine being one of them — the VUL is still a great option even if the non-guaranteed elements don’t come to fruition for whatever reason. The best way to solve this concern about guarantees is to only work with companies that have long-term historical track records of doing what they say they will do. We maintain this historical data for every company a client would like us to consider working with for their situation. If they’ve ever increased their costs of insurance, or failed to deliver what they’ve set as expectations to policy holders, then they are automatically eliminated from consideration.

    Regarding the AUM fees, not all life insurance policies pay commissions. We use a commission free product when it makes sense for a client. In that instance, an AUM fee is certainly appropriate.

    Hope that clarification helps. Like Rex, I appreciate the passion and hope you’ll save it for the actual post. Thanks Mike

  9. Mike,

    Dont be fooled, he hasnt eliminated the fees like he claimed. First off he hasnt done anything special but 2nd off you have prepaid those costs. That isnt eliminating them as claimed by any non insurance agents definition of elimination.

    In regards to AUMs what he is doing is setting up a straw person argument that if we werent investing a VUL that in essence we would be investing in a manner that has all these cost that when you now compare it to VUL, the VUL doesnt look so terrible. His ideas on having a person to in essence market time by pulling or putting in the market while he is away is something pretty much none of us need. If he is such a good market timer maybe he can start posting when we should enter and exit the market. Most of us should just travel without worring about what happens in the market because we cant effectively market time. Additionally you will notice he focused on saving on taxes. This is never the appropriate end point. You frequnetly save on taxes with permanent insurance only to have less money in your pocket.

  10. Rex,
    I’m a big opponent of market timing. Not sure where you’re coming up with that as we all know market timing is a joke. You’ve also not yet read my post to know at all what I’m advocating – which is that most people shouldn’t even consider life insurance as an investment.

    I’m glad to prepay my expenses when even my prepayment is far lower than my tax cost alone (not even to take into account my management fees). How is that a straw man argument when it’s exactly what the editor has asked me to examine? He asked me to examine VUL side by side with a normal DFA/Vanguard portfolio we would manage for our clients. You’ve already shared that you don’t value the advisor’s role and I’ve stated why I personally pay my own advisor. The high income physicians we serve are very happy to pay our reasonable fees as many have attested to on the White Coat’s Review of our firm. http://whitecoatinvestor.com/larson-financial-review-friday-qa-series/

    Why don’t you read my post first and then light it up? Why tip the readers to your prejudice before you’ve even seen the research? This blog is known for its pursuit of truth and knowledge, but stating an extreme bias before you’ve seen the data is far from this pursuit. You don’t even know what I’m advocating or not at this stage so your comments are premature.

    Again, I appreciate your passion and hope you’ll bring it to the comments on my response.

  11. [Portion of comments deleted to preserve civil tone.] You claimed you eliminated the expenses. [I strongly disagree]

    You said you needed to have someone available when you are on a medical mission for a week or so to make changes/rebalance. That isnt necessary and is really market timing when done in such a fashion.

    • Thank you for clarifying my question on where the market timing comment was coming from. I understand better now. Rebalancing based on threshold tolerances is very different than market timing and is what I was referring to that I appreciate from my advisor.

  12. Tom,

    You are still claiming to eliminate the insurance costs! You need to start being more honest, especially with your clients. YOU CANNOT ELIMINATE THE EXPENSES! You are simply paying them out of the policy cash value with the interest you are earning from the underlying investments. You are still paying the expenses. The only difference is that you are no longer paying them out of pocket, but rather they are being automatically deducted from your policy’s cash value and “offset” by the investment interest. In any event, the costs are still there and are being paid one way or another. [Rude comment edited out. Keep the comments about ideas, not people.]

    • You can pick on semantics all you want, the simple fact is that I am being paid an extra credit – not inclusive of the returns from my investments – that OFFSETS my COI costs IN FULL beginning in year 12 of my policy.

      I will acquiesce that a better choice of words would have been “offset in full” rather than “eliminate”. All I care about is the end result which remains unchanged by the semantics. This is a credit being paid in addition to the return on my investments and has nothing to do with the funds I choose. Therefore it has nothing to do with earning interest on my account. It is truly a return of expense from the insurance company with the implied purpose of OFFSETTING my ongoing costs of insurance.

      If you refer to my original response where I referred to the elimination of my expenses, you’ll find the point I was making is still completely valid and remains unchanged regardless of the semantics.

      • Call it whatever you want, Tom. The fact is that you are not eliminating ANY of the insurance charges. You are simply using an account value enhancement, or “extra credit” as you call it, which is never guaranteed anyway, to pay for these charges. I highly doubt this “extra credit” is sufficient to cover the total costs of insurance beginning in year 12 until the day you die.

      • And, Mike, yes I fully understand that the credits will ultimately relate back to how my investments perform because this will impact my net amount at risk. I get it. This is part of why they are not guaranteed and I’m trying to be clear about that.

        The end result is that my expenses are still being offset in full. This still lines up with the point I was trying to make so there is no intent to mislead.

        I agree that verbiage needs to be especially clear as it relates to this stuff so I’m appreciative for the clear clarification although we’re still getting to the same end result.

        • Calling the intricate details of an insurance policy semantics and ignoring these details is simply unprofessional. The end result is not always justified by the means of getting there. If my advisor told me that my charges are eliminated and I later found out that these charges are now just being deducted from the policy values without me having to pay them directly, he would be fired. One of the biggest problems with VUL policies is that people do not understand the fees/charges. An even bigger problem is that the fees/charges are either not disclosed or are misstated.

          This website provides invaluable advice. However, I truly think that there needs to be better oversight and cross-referencing for the “advisors” that post here. It’s becoming way too much of a marketing campaign for advisor groups.

          • Mike, this is exactly why I walk people through the details of the contract and prospectus and more. My job is to help people become more informed decision makers and I take a lot of pride in that and do it well.

            I was referencing my own policy making the clear point that all of my expenses are easily offset by my tax savings I receive and suggesting that my insurance expenses are immaterial in the later years since they are no longer hitting my pocket book – eliminated from my P&L by being offset by an extra credit from my insurance company.

            My clients come 100% by referral these days so I’m not here to market my services. I am contributing to this post because I was requested based on my roles:
            1. As a former insurance professor and CFP dept chair
            2. As a guy who has helped design these products for companies
            3. As a man who genuinely wants to seek the truth about what’s best for the physicians I am honored to serve
            4. As a personal owner of VUL who believes VUL is a far better fit for a situation like mine than anything else that’s been proposed
            5. As a guy who has done graduate training in financial planning and business at some of the top programs in the country (Univ of Chicago, Kansas State, and currently Harvard Business School).
            6. As someone who is financially independent because I’ve managed my resources well and now only serves others because I genuinely love helping others.

            Not sure what other criteria you’re looking for…

          • Are you volunteering to moderate comments? :)

            If an idea is bad, it should be easy to show it is a bad idea. If an idea can withstand the scrutiny of thousands of readers, it is probably a good idea. I disagree that professionals, whether they be advisors, insurance agents, attorneys etc, aren’t adding value to the website. If their ideas are wrong, fine, then point out the errors or your difference in opinion in a polite, professional manner. It makes it difficult to encourage quality guest post submissions and constructive comments from financial professionals AND fellow physicians if readers berate them personally in the comments section. Lots of people, including me, have very strong feeling about insurance as an investment, both pro and con (just had an email today from an “advisor” who says all my conclusions about the LEAP system are wrong and that the LEAP book I read cover to cover didn’t explain it well enough.) Let’s try to disagree without being disagreeable.

  13. Now you’re saying that the policy expenses are offset by your tax savings. Continuing to hold your position that the charges are eliminated is just getting ridiculous. By your logic, someone who has account maintenance fees in their brokerage account is able to eliminate these fees simply because the account earns interest equal to the maintenance fee. That couldn’t be further from the truth! You are still paying the fee! [Rude comments deleted. Keep it professional folks.]

  14. From an exchange I had via email:

    WCI-

    I am a Certified Financial Planner® with a fee only RIA. I agree with all of your points about mixing investments and insurance, however, I too have come across the occasional client where a VUL policy might be a viable alternative. In both cases, the clients have brought the idea up to me and have maxed out all retirement vehicles.

    I initially was very negative for all the reasons that you and others have pointed out. I did, however, do some investigation for two clients and ended up speaking with TIAA-CREF about their policy and it seems to incorporate a lot (maybe all–I’m not sure) of the requirements. They do offer the DFA Funds, which my firms uses exclusively and may offer Vanguard–I’d have to check.

    At this point, neither of the clients have entered into a policy. Perhaps, to some degree they sense my reluctance to recommend this arrangement and have not moved forward. I keep going back to not liking the idea of wrapping insurance and investments together. I have merely told them if you want to do this, then the non-commissionable product with no surrender charges is the way to go. My recommendation is to invest the money in tax efficient investments in a taxable account.

    I just thought you might be interested in hearing about this–perhaps it is what Larson is using. I’d be glad to put you in contact with the TIAA-CREF people if you wanted to chat with them.

    I greatly enjoy your blog and feel you are providing an enormous service to those in your profession (and those outside) who I have witnessed on many occasions being taken advantage of by the financial services/investment industry.

    On May 29, 2013, at 2:43 PM, editor@whitecoatinvestor.com wrote:

    With your permission, I’d love to post your email as a comment on the blog, with or without identifying information.

    WCI

    Dr. Dahle,

    Nothing like a good insurance and investment blog to get the fur flying!

    You have my permission to post my earlier email with or without identifying information–I’ll leave that up to you.

    In the spirit of transparency, if the client did invest in these VULs with TIAA-CREF, I would still manage the investments along with his other accounts–so I would get a management fee on those assets. So for me, either way I was going to be managing the assets, it was just the location of the assets that are in question and the appropriateness of the location.

    I checked on the investment choices available with the TIAA-CREF policy and Vanguard is not one of them. There are 15 well-known mutual fund groups on their list, including DFA.

  15. I was approached by Larson and the plan stated a “tax-free” investment in the proposal that turned out to be a suggestion to do $60k/yr into a VUL. I had not disclosed that a good familiy friend was in the insurance industry and found out that the death benefit they were recommneding was not close to the MEC limits. Larson does do a lot of sound planning on a lot of little points, but i fear it is a ploy to gain trust and sell highly commissionable VUL life policies.

    Tom…please comment on your firms practices to use perm LI right away and please discolse the commissions that are generated for you and your peers when being the writing agent on this product. (EX: if you put in $60k/yr, what would your firm make?)

  16. Funny how they are claiming only 1% of the time a VUL should be considered. I wonder what made DJ into the 1% club. Im seriously doubting that they only present it 1% of the time.

    • It’s definitely not just 1% of the time. I know several other former residents that they encouraged to take on a VUL policy. I’m just waiting to see how differently they try to explain it in the upcoming post, especially the subject of “eliminating” insurance charges since we all already know that these charges can’t be “eliminated”. I’m just thankful that I know a lot about finances and insurance to help protect myself from advisors.

  17. I have been approached by Larson advisors as well to open a VUL an I am studying this option. I am wondering why there is no “full reply” from Mr. Martin yet. And also why DJ’s question has not been answered:

    “Tom…please comment on your firms practices to use perm LI right away and please discolse the commissions that are generated for you and your peers when being the writing agent on this product. (EX: if you put in $60k/yr, what would your firm make?)”

    • I’m still waiting for the promised guest post. Tom was working on it last I checked with him a couple of weeks ago. As far as the commissions, they usually run 40-80% of the first year’s premiums for most cash value life insurance products. So if you’re contributing $60K a year, the advisor is splitting something like $30K with his firm that first year. Sometimes there are residual commissions for up to ten more years, but the amount is much smaller.

  18. Hi Shawn,

    Thanks for the follow up. We are actually having our findings audited by one of the large accounting firms at the moment to help mitigate any thoughts that we have a bias coming through. There’s enough solid data that it will most likely turn into a journal post as well as the blog post and we have to sort out the order of how those need to work together from a timing standpoint. We’ve been keeping the White Coat editor somewhat in the loop along the way and have worked with Vanguard and DFA to vet out a few of the tax issues we wanted to make sure were being accurately portrayed in the analysis (ex. How much annual return in a taxable account is attributable to dividends vs. short term capital gains vs. long-term capital gains?)

    The editor responded to DJ that we would cover his questions in the response (he’d already seen the draft of my post discussing compensation) so I didn’t respond further to share the same with DJ but if he has any questions prior to the full post, he’s welcome to touch base with me directly anytime. Without knowing specifics I can’t fully answer because we utilize both fee-based and commission-based VULs. In other words, the answer to the commission question could be $0 (if a fee-based option), otherwise it varies on a case by case / company by company basis. VUL is merely one aspect we consider out of hundreds in our process but we have a full training module around it to make sure anytime VUL is being considered, it is within a narrow framework of what should work well for the client. You’ll read in my post that from a business standpoint, a fee-based account of any type is certainly preferable because it pays much more long-term than a commissionable VUL and it increases the value of a practice far greater than a commissionable VUL.

    Again, appreciate your follow up. Feel free to contact me directly if you’d like the pre-cursors to our findings. I don’t want to publish until we have the audit back though and most likely we’ll submit to the journals first and then paraphrase what gets approved on that front. It’s not a fast process but the end results are groundbreaking in that we’re finally educating people on how to properly analyze how this fits into their own unique situation. It’s exciting stuff for a nerd like me and definitely confirmed for me that I was on the right track in using VUL personally and that physicians with high incomes will often be solid candidates as well.

    Thanks Shawn!

  19. I strongly doubt that many of us would consider the assumptions in your “research” valid and appropriate.

    So I am supposed to believe that you have legit ground breaking evidence that all the rich and powerful insurance companies were unable to provide? That doesn’t seem very likely.

    I especially have trouble with that statemen after the statements on eliminating charges (which just isn’t true), the posters who have mentioned VULs being recommended routinely although you seem to indicate above that you would only be doing this rarely, and the fact that one of the recommendations was for a VUL that wasn’t overfunded near MEC levels.

    This thread has gotten to the point where I have to agree with the above poster Mike about the review of this particular post. I imagine it will be a very very long time before we get the information and that it will be substantially abridged. I imagine when this post was conceived, that WCI thought he was going to have the response a week or two later and that people could debate it. Now instead we have a pseudo advertisement for a group that supposedly knows how to do VULs to make it worth it.

  20. Hi Rex,

    Hope your Independence Day was excellent!

    I invite you to schedule some time with me offline and I’ll walk you through step by step what we’re working on. You’re passionate enough about this topic that I’d love to have you involved if you’re willing to look at the data. I believe that having multiple viewpoints at the table only leads to a better outcome for everybody so I welcome you to join us on challenging the way the industry analyzes the investment merits of life insurance.

    Why is our research groundbreaking and necessary?

    Because the insurance industry is still utilizing a comparative methodology that originated in the 1930s that neglects much of what we all believe to be important in the world of investments. Many insurance companies have a tendency to miss important aspects of taxation that we all believe are important, so yes, we’re looking at things from the perspective of an efficient investor. This is very different than the historical straw man that pays ordinary income tax each year on the growth in his non-qualified account. We both know that’s not a fair comparison and yet that’s the historical norm that is currently published and presented. Additionally, current analysis in the journals still largely uses 1930s Linton Yields that assume everyone needs a death benefit and we know that’s not always the case. These are just two examples of many that explain why this issue still needs a better process 8 decades later.

    To answer a couple of your direct charges:

    1. Yes, we believe VUL should only be used in rare cases for abnormally high income people AND yes, that is the majority of our clients. (Ex. The average income of my Top 28 clients is approximately $1,100,000/year.) Those are the situations where we believe VUL can make sense so if that’s who we work with on a regular basis, then VUL would be a very appropriate conversation with much of our clientele. In other words, my statements are congruent in the context of who we represent. The needs for retirement funding, asset protection, and tax planning are very different for someone earning $400K/yr+ than for someone who is not.

    2. There are numerous reasons why funding below the MEC limit would be more appropriate. That statement in itself has no bearing on anything without understanding the specifics of the case.

    You are correct that both the editor and I expected to have this follow up published far quicker. I realized very early on though that I needed a 3rd party audit to help squelch those who approach the topic with a bias already in hand before they’ve even seen the data. That’s what has primarily contributed to slowing things down. And then in the midst of it, I realized that if we were doing all of the work anyway, then why not actually put it out to my colleagues in the academic world where it can be vetted for the world and not just the blog? I think anyone in my position would find that to be a reasonable course of action when presenting an updated methodology to the world.

    Again, my post will not focus on recommending VUL, but rather on teaching people on how to analyze it as an option in their own situation. In doing so, many will find that VUL is not a good option for them and those in similar positions to my own will find VUL to be an attractive solution to solve many of their challenges in the same way I did.

    Last thoughts: I’m not here to market, Rex. We’ve put some great guest posts on this blog as part of our pro-bono educational efforts. My business comes from referrals from the clients who appreciate the great work we do for them. I’m here because I’m an educator and I support the mission of this blog. The editor is the real deal and cares about education as much as I do. It’s for that reason that I spend time here as I’m able to in coordination with my other priorities. We were asked to contribute this guest post and we’re actively pursuing it with the time allowed for pro-bono projects. Thus far we’ve had interns working for a month to tabulate over 100,000 industry-wide data points. If you want to speed things up then connect with me offline and pitch in on the work.

    Thanks sir!

    • Tom,

      As I’ve mentioned before, your firm had recommended VUL policies to several former residents that I know. Not a single one of the had an income around the $1.1 million average that you mentioned. In fact the majority of them were around 200 to 300k. Can you explain why these people are being pitched VUL when you clearly state that your firm does not pitch these products to people at thier income levels? The statements just aren’t adding up.

      Can you elaborate on your “pro-bono” projects? I may be wrong, but its pretty normal for advisors to not be compensated for writing educational articles. The main reason why any advisor (or any business for that matter) would do so is for recognition and visibility. It’s always nice to have your articles pop up on a google search, isn’t it?. Calling it pro-bono just makes it sound like the articles you write are somehow special and unbiased compared to other advisors. The biggest problem that I have had with this entire post is your transparency.

      Lastly, I find it very hard to believe that you are able to come to some groundbreaking conclusions that a multi-billion dollar insurance company has yet to figure out. After all, it is the insurance companies job to promote, market, and sell these products. I have no doubt that their understanding and analysis of thier own products is more in depth and accurate than a random third party advisor. What taxation issues are you referring to that the insurance companies overlook? One of thier biggest marketing points is based on the taxation aspects versus investing elsewhere.

    • In regards to looking over your data, I have two concerns:

      The first is that i might not have on the tip of my finger the correct knowledge to judge the methods you are using since they arent listed. Im sure i could acquire a reasonable level with enough time but probably not enough that i couldnt be tricked. This brings me to my second problem. You consistently do/say things that make it hard to trust you. You start off saying its uncommon for VUL to be appropriate, then that you are talking about mostly over 1 mil in income, then that well 200k is ok. Well pretty much 200k is every non academic physician and that is not the impression you gave. You talk here like you know a VUL is correct for these folks but it seems you havent completed the research that you claim proves it right. Since you “know” VULs make sense, im really hesitant to believe you wont twist things.

      Additionally there arent lots of good reasons where permanent insurance used as an investment should be funded below MEC levels. There are some mediocre reasons ill grant you.

      Now i will point out that james hunt who some refer to published another article. In it he is more positive towards VUL then WL or other ULs given the current economic climate. Still the bottom line to me with all these things is that you must need (which almost nobody does) or want (knowing that likely you will have/give less money if you live a long life as projected) permanent insurance but want that guarantee.

      • Thanks Rex. You’d understand the framework. Our goal is to break down the various components of cost in a non-qualified environment and in a VUL environment. Then it is a simple side by side comparison once long term costs are factored in. It’s just breaking down those costs into various components that is the challenging factor but we are close.

        You raise some questions I’ll respond to:
        – Trust: this takes time and you and I got off on the wrong foot when I was disappointed that VUL was the paragraph you singled out when critiquing our book. You’re probably a much better guy than I initially gave you credit for. I suspect you’d find the same if you took the time to get to know me as well. I brought my initial bias into some of my previous responses to your comments and should have been more kind.
        - In general I believe the higher the income the more likely VUL will be a viable solution. Many physicians earning $200k aren’t maxing out 401ks, back door Roth IRAs, or making 529 contributions. Those would typically be better alternatives to VUL funding. For those that are, that have appropriate time for funding, and good health, then the question of funding VUL would really hinge on what they expect future taxes to look like and what their alternative investment expenses would be elsewhere. Sometimes VUL would make sense and sometimes it wouldn’t. Those statements don’t contradict my previous statements that most people should not be using VUL. At $200k of income we are still talking the top 1% of the population. I’d say excluding 99% of the population is right in alignment with my previous comments. Many non-academic physicians have access to profit sharing plans or 1099 income which would expand their tax planning options beyond just the 401k. I’m suggesting it is very much a case by case basis.
        - I can walk you through numerous case studies where funding below the MEC limit is the preferred course of action initially. Again, it’s a case by case basis but if you’d like to walk through the case studies I’ll take the time to do it with you.
        - We’ve had most of the data on a broad basis all along. What I’ve not had is a way to break down the various components to answer some of the issues posed by the editor. Ex: how much cost do his mountain climbing hobbies actually add? How much does age matter? I’ve avoided VUL for older clients based on my assumption that the cost would be too prohibitive but what if age only adds .10% to the cost? In my practice, when in doubt, I can always err on the conservative side, but that doesn’t hold true when publishing to the world. I’m forced to go deeper in answer questions than I’ve needed to on a day to day basis previously. And that goes back to my point that if we’re doing the work anyway, then we should do it right and submit to the academic community for critique. That’s the best way to expand our current body if knowledge.
        - I appreciate you sharing the link to Mr. hunt’s article. I’m a fan of his work and am deeply familiar with it. He’s actually helped to shape a portion of our philosophy and offers some of the best insight around into the likelihood of the guaranteed costs materializing in an insurance policy. I still don’t like Linton Yield analysis because it doesn’t line up with what I see played out in the day to day lives of investors.

        I’m not sure where you’re from, Rex, but I’ll block out a day if you want to come to town. People need a better way to evaluate this stuff and you could be part of the solution

        Thanks Rex!

        • FWIW – I remain very skeptical that a VUL would be part of the solution for those making less than $600K or so, but I’m reserving judgement until I see the numbers run in a fair way. Here’s the way I look at it: If you’re making $300K and saving adequately for retirement you might be putting $60K per year toward retirement. Most docs have some type of profit sharing plan that allows for a $51K contribution ($56.5 if over 50) plus another $5500 ($6500 if over 50) for a backdoor Roth IRA and another $5500 for a spousal backdoor Roth IRA. You may even have access to an HSA, a defined benefit plan, or a solo 401K (for an unrelated job) above and beyond that. That easily gets you into the $60-70K range or higher. Even if you only get close, there are some benefits to having a small taxable account. Certainly there’s no room for a $30-60K/year VUL policy. Even many employees limited to $17.5K in the 401K/403B are often offered a 457 (another $17.5K) or another type of pension which gets you pretty close. Their spouse may also have retirement plans available. It really takes a lot of income with a decent savings rate to get into the range where it should even be considered. At $600K, if you want to save 20% ($120K), and can get $70K or so into a 401K/Backdoor Roth IRAs etc, then I think there’s some room for considering a $30K or so VUL policy. But it still has to make sense when compared to a taxable account. It doesn’t necessarily have to beat it from a pure investment standpoint, if it gives that particular investor estate planning or asset protection options that he values, but it ought to be pretty close. Given that the average physician income is down in the $200-300K range, I can’t imagine a VUL is a good move for the vast majority of doctors (much less the rest of America.) But I can’t say a “good VUL” doesn’t make sense for a back surgeon making $1 Million a year.

          I’m disappointed to hear Larson advisors are selling VULs to folks making $200-300K a year. I find most doctors aren’t even aware of many of the retirement accounts available to them, much less maxing them out, and that’s assuming a good savings rate (which most docs don’t have.) While every situation is unique, it doesn’t pass my sniff test for the average doc to be using this thing. But I’ll reserve judgement until I see the numbers run. There certainly are a lot of moving parts with a VUL (and the complexity generally doesn’t favor the client.)

          • White Coat,

            I think we’re saying the same thing here so I’m not sure I understand the disappointment. The Medical University of South Carolina is a great example. We do have access to all of those things so VUL hasn’t been an option on the table. I think you know my passion for the Individual K based on our correspondence (especially now that the TPA fees no longer apply).

            If the VUL compares favorably against a non-qualified account and they’d already exhausted their alternatives (as I’ve already suggested they likely need to), then it follows that it wouldn’t matter if a physician were making $200k or $800k. If they still want to save additional long-term money, then that’s where the VUL would come into play.

            From an anecdotal standpoint, I can’t immediately think of any client I personally have earning $200k that is using a VUL. From $200k-$300k, I can only think of one that fits the mold I described to Rex of only having a 401(k) available with no additional 1099 income, no HSA option, and are already maxing out their Backdoor Roth IRAs. The wife is a stay-at-home mom and the client is saving an additional $15,000 per year in the VUL. He also has a sizeable non-qualified account from an inheritance. He believes he’s unlikely to have a low tax rate in the future and wanted to have more tax-sheltered options. VUL was a good match. Just an example where it made sense in this specific case.

            From a firm-wide standpoint, the average family we serve has an income approaching $500,000/year (Just to clarify, the $1.1mm I previously referenced was my personal average for my Top 28 clients – I’m being consistent in my statements.) In doing a quick data search we have far more clients in the $200-300k income range who are not using VUL than who are.

            I’m not sure disappointment is appropriate when it is the exact same logic at $600k as $300k. If in fact the VUL is favorable to a non-qualified account, then someone desiring to save $60k per year that is maxed out at $28,500 (401 + Roths) could still have $30k to put toward VUL if it fits as a good option in their plan. I’m with you that this is rare as you are correct that many physicians have far more options available than they realize. I think we’ve demonstrated far more competency than most firms in seeking these options out and understanding how to get access to them.

            The average advisor has little knowledge about 457 plans and our advisors are all trained heavily in 457(b) / 457(f) / governmental vs. non-governmental aspects / vesting / etc. We also have access to manage these plans through most hospitals or universities and are often able to get access to Vanguard/DFA even if the primary plan doesn’t provide these options.

            Just wanted to clarify that I think we’re on the same page here and at the $200k income level, I’m agreeing it would be rare when a VUL would be in play and that’s the evidence I see demonstrated in our business. Hope that helps a bit.

            • I’m pleased to see very few docs in the $200-300K range at your firm are being offered VUL. Aside from other investment options, the other factor affecting docs in the $200-300K range is that they’re in lower tax brackets. My gross was in the upper part of that range last year and I ended up with a 25% marginal rate when all was said and done. The lower the tax bracket, the less useful avoiding those taxes becomes.

              I also don’t think “exhausted other options” is quite appropriate, since you never exhaust a simple taxable account. It’s important we remember that a taxable account isn’t some horrible way to invest. If bought and held in a tax-efficient investment, tax loss harvested, and especially if used for charitable giving or inheritances, a taxable account can be exceedingly tax efficient, flexible, and useful in estate planning. It’s asset protection aspects leave a lot to be desired, but most docs will never have a need for asset protection not covered by insurance. It’s a great default option, especially when someone isn’t sure about something like a VUL. If you choose a taxable investment and decide to go VUL next year, no big deal. If you decide VUL this year, and wish next year you were using a taxable account, well, you’re kind of hosed.

              As I said above (and in our email correspondence), it’s a very different story at $200K as at $600K. Since most docs make far less than $600K, most docs aren’t maxing out better investing options, and many docs, if fully informed, would prefer to avoid the additional issues brought on by mixing investing and insurance (lack of flexibility, need to be insurable at reasonable rates etc), it would seem to me that it ought to be a pretty small percentage of doctors using VULs. Now I know your firm skews toward high earning physicians (for the same reason financial firms like to target physicians to begin with), but even among your clients I would expect it be pretty rare. Anecdotally from what you’re describing and what others are saying they’re seeing among your clients, it doesn’t seem to be that rare.

              Perhaps your data will demonstrate that it shouldn’t be as rare as I imagine. I’m patient enough to wait and see prior to criticizing.

          • BTW: Numerous references available if you want to speak with clients in the $300-400k range where we’re not recommending VUL. There are many cases like this where other options take precedence. Ex: We’re seeing more universities add the Roth 457(b) option (whereas previously it was just an option on paper but I’d never seen it available in practice). This is a certainly a solid alternative to VUL (asset protection, tax benefits, investment options, etc.) and I hope we’ll see it put in practice at more and more institutions moving forward.

            • Hi Tom,
              This is kind of an old blog post but I have been reading through them recently because I was recommended a VUL plan by one of your advisors. I am trying to educate myself on them to decide if it is the right choice for me. With my wife I am in the 400-500k range and will max out my 401k/roth conversions. She works part time and has her own LLC.
              I am not sure why they recommended a 30K a year VUL as opposed to us increasing 401K through her LLC.
              I don’t really want to make a life long commitment at this point and term life insurance seems fine to me for now.
              While I do have confidence in my advisor, I would like your feedback.

              • I’m not Tom, but I’m confident he would agree that you should be maxing out all available retirement accounts (such as your wife’s 401(k)) prior to using a VUL. You need to be comparing it to a taxable account, and preferably a taxable account on which you’re paying advisory fees, for it to possibly look good under reasonable assumptions.

              • Hi Noob,

                I can’t make a formal recommendation without knowing all of the facts so if you’d like something more specific than what I’ll share below, then please reach out to me via email or phone (both can be found on our website) and I’ll be happy to take a closer look.

                In general, if I were trying to accumulate tax-advantaged/tax-free money for retirement, my preference would be to max out a solo Roth 401(k) prior to funding the VUL. That would take care of $17,500 of funding.

                After that, it’s less straight forward where you’d go next with funding and truly becomes a case by case decision.

                Please feel free to hit me up. Happy to take a second look but would want to understand the full situation to get more specific than this.

                Thanks Noob!

  21. Thanks Mike.

    The same offer I extended to Rex is available to you and I hope you’ll take me up on it. It would only make the project better to have your perspective at the table moving forward. We’re working on some great stuff with the goal of really making a huge impact on the industry.

    To respond to a couple of the questions you raised:

    - $200-300k of income could easily be in the ballpark for VUL depending on someone’s situation.

    Ex. The Medical University of South Carolina gives access to a 401(a), Roth 403(b), and Roth 457(b) – someone earning $200-300k at that institution would have little cause to use life insurance in their investment mix because they likely have more than enough tax-sheltered options to support their savings needs. To my knowledge, of all of our clients at MUSC, we’ve not utilized VUL for any of them at this point because there hasn’t been a need for it due to this issue.

    However, if a physician was working at a hospital that only provided a 401(k) and they’d already maxed that out and their backdoor Roth IRA, and still wanted to save another $40k per year (not unheard of for someone earning $300k), then depending on their situation, VUL might be a great option. I can definitely see where VUL could be a fine solution in a case like that.

    I think we’d agree there’s no cookie cutter solution out there that works for everybody. Every case is unique and should be looked at on its own merits so I’m unwilling to make any absolute determinations on what income would be the right cutoff. Rather, the better focus would be on what other viable alternatives are in play for that specific case.

    And yes, Mike, I’m suggesting we’re looking at things through a very different approach than the industry currently does.

    To be more specific:
    - When you examine their side by side comparisons, often insurance companies assume that all gains in the non-qualified account should be taxed each year. It is also often assumed that the gains are ordinary income in nature rather than dividends or long-term capital gains. Both of those issues can hurt the hypothetical non-qualified account far more than should be.

    - Further, agents often promote the growth rate of the cash value as the ROI on the total premium when this isn’t the case. Ex. I encounter physicians on a regular basis that have been told they are earning 7% on their whole life policy. They genuinely believe this is the rate of return they are earning on their money… even if they’ve lost 92% due to insurance expenses. That’s certainly not the right way to look at it and yet that continues to be the industry norm experience for many investors.

    - The industry still leaves the most important pages from illustrations as “optional” (the ROI and expense pages) thereby making it much more difficult than needed for an investor to understand the true potential hit to his or her ROI being caused by the internal insurance costs.

    - Additionally, the insurance companies often show the cost of term insurance as their own cost of term insurance when the reality is that I could likely get solid coverage less expensively elsewhere instead so a less-expensive alternative might be the better comparison. Many investors don’t need life insurance for whatever reason (single, dual income, etc.) and yet the term insurance is often demonstrated as a saved cost even in these scenarios. Again, this can hurt the non-qualified account in comparison far more than it should.

    - The academic literature is out of date as well. I mentioned this in my post to Rex but Linton yields are still the primary comparison tool utilized (from the 1930s) and they give credit for saved term insurance costs when it is often unwarranted as described above. Linton yields are also referred to frequently through a sense of “it’s too complicated to explain” and I believe we as an industry can demystify things much better through a more practical comparative framework.

    Our intent is to go much further under the hood than is currently readily available to be able to answer some critical questions:

    - How much does age really impact potential results? When is the cutoff where my tax savings has too low a probability of offsetting my insurance costs and therefore I’m now “too old for VUL”?
    - What about gender? Can I save .10% in long-term expenses by putting the coverage on my wife or is it better to have the investment coverage on myself?
    - Do all companies have a poor definition of disability for their waiver of premium riders or are their some out there where it is really worth the extra expense? How much does that extra expense impact my potential return? How does the expense compare to acquiring more individual disability insurance instead?
    - What companies have index sub-account options that line up with the investment platform I care about philosophically? (Vanguard / DFA) How do the internal expense ratios of those sub-accounts compare to the internal expense ratios outside of the VUL?
    - Which companies have increased their costs of insurance whereas which have not? In other words, when I see the higher expenses illustrated, which companies have strong track records of avoiding those and which do not?
    - Which companies offer a wash-loan throughout retirement and which companies profit from a spread when I try to get access to my cash?
    - In what states is it preferable to work with an insurance company that averages state premium tax rates rather than providing state specific charges?
    - Are fee-based policies better equipped to get me more cash throughout retirement or do the front-loaded policies provide better long-term results? How does this answer change given various other factors: health, gender, age, etc.?
    - What could my potential impact be if Congress changes things and taxes my VUL?

    This is just a small sample of multiple issues we’re exploring, Mike. We know these answers with the companies we interface with most often but I’m more interested in benchmarking the industry as a whole to make it much easier for any investor to lift up the hood to understand what’s causing an impact to their results. Thus far, the answers above are not easy to come by at the industry level. It takes reading the prospectuses and contracts, analyzing investment options, verifying historical costs, and running enough scenarios with each company to get a real breakdown of industry trends.

    That’s just to get the answers I want on the VUL side of things. Then there’s the whole other issue of getting a solid comparison from the non-qualified account. These are a few of the items we’ve been researching through Vanguard and DFA:

    - Of the gains in any given year, what portion came from qualified dividends vs. what portion was from non-qualified dividends?
    - What are Vanguard and DFA’s track records for avoiding realized gains for non-qualified investors. What impact has this slower re-balancing caused on the returns investors have received?
    - What are the typical investment expenses that investors are paying for their non-qualified accounts? At various income levels, how much of these expenses are tax-deductible? At various income levels, what proportion of the investors are getting hit by AMT tax, therefore causing them to lose the deduction of their investment expenses? How will this issue likely change as a result of the tax legislation passed on 1/1/2013?

    Again, just a sampling of the issues we’re looking at, Mike, but all of this data is critical to get a valid side by side understanding of the options our clients have. If this stuff was readily available then our conversations would be unnecessary. Since it’s not, this is where our efforts are being spent. My hope is that we can peel VUL back enough to make it more of a commodity and less of a black box. That serves clients and the industry very well.

    Make no mistake, thus far, all data confirms what we’ve already known to be true. The key moving forward is to break the data down into a way that it can be used by everyday investors to help them make more-informed decisions. That’s a worthy pursuit and I hope you and Rex will be willing to join me in that endeavor.

    Thanks Mike! Genuinely appreciate your feedback and hope your week was great!

  22. i have a strong feeling i already know why you think starting below MEC limit is okay. Im not going to agree especially since most VUL polices lapse or fail and that just sets too many people up for more disaster. If someone is going with an intial higher death benefit so that they can later on put more money into the plan (ie overfund it more later based on the hope of making more than what they make today since there is only so far you can overfund a policy before becoming a MEC) or doing so to make a better bandwith of pricing on insurance, then id say they arent in a good position to use a VUL. Just too much risk to begin with.

    This article which is from an insurance pro biased source helps illustrate why IULs and VULs arent going to live up to expectations.
    http://issuu.com/innm/docs/innm_0713/26
    Granted here they are talking about just keeping it in force and not necessarily overfunding from the start but once you start taking out loans, the same problem exists. In their study, only 10% of polices would be “successful” in real world scenarios.

    i should also add on to wci’s comment about once purchased. You are stuck and anything that isnt guaranteed is fair game. Just take a look at what they are doing with variable annuities when some factors arent working out as they planned. They arent necessarily going to increase the COI (since id bet that would be harder to defend in court with mortality improving but of course im not a lawyer). They will use indirect methods if they need or want to make more money and one has very little recourse. The idea that you can pick a company based on their history of cost changes (COI or otherwise) is false since these products really took flight in the 90s and there isnt enough data to know what they would do. Really isnt a stretch to add such issues to VULs.
    http://www.bogleheads.org/forum/viewtopic.php?f=10&t=117726

  23. Not to stir things up again, but I am a physician in the $200-300K range and was offered a $60K/year VUL by Larson. They are good people and I know they are looking out for my best interests and I can see why it sort of makes sense for me–I’m currently limited to a 401k and a backdoor Roth. But in about a year my defined contribution plans will kick in, and I’ll be able to max those out at $51k. The problem with the 401k and defined contribution plan is it is still only tax deferred money, and it comes out as ordinary income later. If you really sit and crunch the numbers, the VUL probably comes out ahead in my situation, but there are just too many assumptions involved in arriving at that number, and it only makes sense if I overfund it for 20 years and then stick with it. That’s just too big of a commitment for me. What if I want to use that money for something else, like investing in tax-advantaged multi-family commercial real estate (which may arguably be a much better asset class than stocks and bonds), donating to charity, saving up for sending my kids to college, or just simply having liquid assets to handle whatever life throws at me? At $200-300K a year, I won’t have enough to do that AND fund a VUL at $60K/year, AND fund my tax-deferred accounts at $51K/year. Not to mention that I wouldn’t even break even on the VUL until about year 12, and the even if you stick it through until the end, the realistic internal rate of return after expenses and fees is in the 4-6% range. Yes, the taxable account sucks in terms of taxes, but I like having the freedom and liquidity. If I come out with less money in bitter end when I’m 75 and too old to do anything fun anyway, I’m OK with that. The final blow is that I can’t stand the idea of giving away my money to an insurance company in commissions and fees. I’d almost rather give it to the government and hope a fraction of it gets put to good use.

    I read all of the comments above, and to be honest, who cares if you are losing money in insurance expenses vs. giving it away to the government in taxes? I think what Tom is saying is the bottom line is which one comes out ahead in the end, and which one makes sense for your situation. I decided not to go with the VUL at this time for the reasons above.

    • Love it! Sounds like you made a great, educated decision, Anonymous! The important thing is that you are saving money and if you’re saving that percentage of your income that will make you more successful than anything else.

      My only follow up thought is that perhaps the fee-based VUL option would be a better fit in your circumstances because you desire liquidity. The long-term expenses are higher (why I personally have a front-loaded product) but it would still come out favorably compared to the taxable account and give you liquidity from day one if you need to decrease contributions in a few years or if you want cash available for real estate investing. There are some interest rate arbitrage strategies that make the combination of real estate and VUL a great combo. In the fee-based option, break-even happens in year 1. Just expect higher long-term expenses than you would find in the front-loaded products. We’re working with these companies to try to get the fee-based products inline with the front-loaded ones but the industry just isn’t there yet.

      This option is newer to our lineup for 2013, and I haven’t done the official training with our advisors yet because there’s a small spread on the loan withdrawal rate in retirement that I don’t like (normally I expect “wash loans” to be available). I’ve been working with the company to see if they can fix this in their contract before we make it an official option. Even with the small loan spread, it still comes out better than a taxable account and gives the early liquidity I think you’re looking for.

      Hope this is helpful for you and let me know if I can assist further.

  24. I have done some research on VUL and noticed that Peter Katt, who is a fee only life insurance advisor not affiliated with any life insurance co in practice for 30 years, has written multiple articles on VUL in the AAII journal and the Journal of Financial Planning. The AAII journal often has excellent articles on life insurance and annuities so that’s why I was looking there.

    He has been consulted numerous times on VULs that were about to implode because of market downturns. What may look good on paper with various projections never plays out truly in the real world.

    I have spoken to him personally on the subject and he recommends that physicians stay away from VULs and stick with whole life from the big mutual cos if they decide cash value life will be beneficial for them. I asked him to contribute to this discussion but is not interested. His articles (at least 100 of them) are all available on his web site.

    http://www.peterkatt.com/articles/AAII_nov2003.html

    http://www.peterkatt.com/articles/AAII_sep2010.html

  25. Thanks for your post, Greg. I’ve been a big fan of Pater’s for years and closely follow his work. I think it’s important to note that a well-funded plan, that follows sound investment fundamentals (two key caveats that I realize are often overlooked), would not implode. The ones that implode are the ones that neglect one of those two key components.

    Whole life insurance, in general pays no more than 3% in actual ROI. If safety is the goal (and market risk is seen as something to be avoided), then I’d submit there may be better ways to get a 3% return than whole life.

    It’s also important to note that to date, I’m not aware of any research from Mr. Katt that considers a well funded VUL (with low-cost Vanguard funds) as compared to a taxable account (using similar funds) for a high-tax bracketed investor. I’ve also not seen any research showing the impact of a volatile market on the performance of a well-funded, properly diversified VUL. That’s actually Phase 3 of what we’ve been up to over the past 4 months. We hope to publish by the end of the year and we’ll certainly be looking deeper into that issue than anyone has done in the past. On the surface, the theory is already wrong because we could use a fee-based VUL product that spreads the expenses out long-term and then the volatility of the market becomes no more relevant than it would for a taxable Vanguard account. The question we have is if a product with front-loaded expenses causes a bigger risk during the first 10 years due to market volatility. It seems on the surface the answer should be “no” because there is much less value in the policy during the first 10 years but this is something that to our knowledge has yet to be well investigated. After the first 10 years, the expenses should be low enough, that again, market volatility would have no more impact than on a normal Vanguard account. It makes sense, but I don’t want to claim it definitively until I actually see the data.

    I’ll easily agree that a poorly funded policy is a huge ticking time bomb. I’ll also agree that most people should stay away. My favorite journal post about life insurance claims, you should avoid it as an investment as the default unless your situation proves otherwise.

    I’m just advocating that we all actually look at it from a scientific perspective to see what actually happens under the hood. When I examine data (and the academic evidence), a well-funded policy avoids the problems often associated with it.

    We have to separate the portfolio risk issue from the VUL concept. We have the same risk either way, the question is just whether the expenses impact things on the early end. If so, then the fee-based products are the easy solution, although they increase long-term expenses (albeit still less than a taxable account).

  26. I dont quite understand it, but the second article speaks to how to astutely manage a VUL policy. It seems way too complicated and I think it should be avoided by most. Describing an ideal VUL on a theoretical basis is one thing, and how they would perform in the real world is much different. Even if you could manage one for most of your lifetime who would manage your clients’ policies correctly 30 yrs in the future?

  27. We have a VUL and regret buying one because it was not the right thing to invest in. Now, what do we do?

    Cash it out – There will be tax implecations from this (ironically, because it was marketed as a tax-free investment)

    Leave it in – Continue with the tax free benefit – $880K

    • I also forgot to mention – Northwestern Mutual claims they are the best VUL and they aren’t like the rest of the 90%, which don’t perform as well

    • Hi Chris,

      Sorry to hear about your experience with your VUL. Unfortunately, we see this a lot. There are a lot of neat ways to turn a relatively bad situation into a decent one but it’s not usually a 1 direction answer.

      This is the decision framework I usually take a policy through if someone comes in and is wondering what they should do:

      1. I double check that it’s really a bad investment. I had a client 2 weeks ago that had VUL from a previous advisor and wanted to cancel it. After looking into it, it was set up great, had excellent index fund investment choices, long-term low costs, etc. The real issue was that they could no longer afford the same deposit. Rather than canceling the policy, we were able to help them reduce their premiums. Since it was a long-term reduction, we also reduced the death benefit. That solved the problem.

      2. Sometimes, though, it really is the wrong fit and there’s nothing that can be done to fix it. Assuming that’s the case, there are several options to consider and which path would be very different based on your situation. Here are other options.

      A. If the policy has a large gain (worth way more than you put into it originally), then you could do one of the following:

      i. Roll to a low-cost variable annuity (Jefferson Nat’l would likely be my current choice with $240 in annual administrative expense). This would be done through a process called a 1035 exchange (simple to do). In doing so, you would not owe any tax on the “rollover” and then once in the annuity it would continue to grow tax-free until you withdrew the money later. Note: I’m not trying to get exhaustive about the tax issues here so if you go down this road, make sure you understand them fully.

      ii. Roll the money into a paid up life insurance policy. There are some options out there where you can get a paid up death benefit by rolling over the cash. You give up access to the cash but we’ve had a few people do this because they knew they wanted to leave money to their kids or a charity anyway. The longer you live, the lower your rate of return on the cash will become (typically dropping below 5-6% in your 80s). If you want to leave it to a charity, there are some current tax benefits you could probably get to do this.

      iii. You can do the same 1035 exchange and roll the money over into long-term care insurance. I haven’t actually ever done this with a client, but it’s conceivable if this is an important issue for you).

      iv. As White Coat mentioned, you could do the 1035 exchange into a better VUL that fits your needs more appropriately.

      (Typically few people want to cash out their policy if they are at a large gain, so although the above are fun, they probably aren’t aligned with your issue…)

      B. Instead, what if the policy is worth a lot less than you put in originally. Then the following would be items I’d consider:

      i. Cashing out locks in your losses and you’re not able to deduct them on your taxes. This is probably a bad option but it’s there if you need the cash.

      ii. Rolling to a low-cost variable annuity (see Jefferson Nat’l example above) would allow you to retain your loss. You wouldn’t owe gains on growth in the annuity until you’d recovered your original deposits from the life insurance. Sometimes people at a loss “roll” the money to the annuity (same 1035 exchange process) and then let it sit until it gets to a break-even point). Then they cash it out and in effect they’ve gotten the full benefit of the loss they had in their life insurance by using it to offset future gains.

      iii. A more aggressive variant of ii above is to “roll” the money to the annuity, and then cash out the annuity in the near future. Some accountants are comfortable with you claiming the full “loss” on your taxes. (i.e. including the life insurance loss) There’s historically been some gray area here so this isn’t a recommendation but I’ve seen it done at least a dozen times. The idea is that you actually end up getting to deduct the loss that was caused by the life insurance but since you can’t deduct the life insurance loss directly if you cash it out, instead you do the 1035 exchange to the annuity and then deduct the loss after you cash the annuity out. As of 3 years ago when I last spoke about this with some tax attorneys, the IRS had not provided clear guidance. That may have changed so seek good counsel before you consider going down this road.

      iv. The same concept from ii applies if you 1035 exchange the money into a new, better suited VUL. You’d get to benefit from the losses in the old policy by having more access to eventual tax-free cash in the new policy since the loss would transfer over.

      IMPORTANT CAVEAT:
      Sometimes it is best to time when you cancel your old policy. I had a recent example where a new client wanted to get out of an old policy. We found that just by leaving the policy alone, his surrender penalty was dropping by much more than his annual expenses. In other words, he could shut the premiums off entirely, allow the policy to pull the expenses from his existing cash, and still have his year end cash increase (due to the surrender charges being reduced due to the specific timing). In that case, it made the most sense to wait for 3-4 more years until cashing out the existing policy because he was getting a reasonable return on his cash by simply keeping the policy in existence – although the premiums had been turned off completely.

      Wish I could give you a quick answer with 1 specific solution but this is one of those situations where every case has to be evaluated on it’s own merit. Feel free to shoot me an email if you want me to take a closer look. Unfortunately your statement will rarely show your cost basis so you’ll need to call the insurance company and ask. As soon as you do that, they will likely alert your insurance agent that you’re making calls so be prepared for the reactionary phone call asking what you’re up to.

      Again, I’m a fan of keeping it simple so if we’re not talking a lot of money, then cashing it out might be the easiest answer. Just make sure you understand the tax consequences of doing so.

      Best Regards!

  28. To all,

    Here is my VUL story with the Larsons…

    The Larson brothers, as we know by now, are big proponents of this. I was a resident when the Larsons gave their pitch. It sounded good to me since I knew nothing about finance. I was pretty scared to tell you the truth since I was heavily in debt and was starting from scratch. I had a 250K loan obligation. My staring salary was 250k with a 10K signing bonus when I began my career. I was working with Jeff/Paul depending on their schedule. They looked at my 401K and were not impressed by it since my company did not match. We had no other retirement benefits. Yes, I know, this group was terrible when it came to that. They did inform me about Roth IRA for two years since the IRS was allowing this for high earners. But, they never mentioned to me about the back door IRA for the other years.

    They were very enthusiastic about this VUL as a retirement policy. It sounded good to me. I knew nothing about M and E charges, front load charges, exp ratio, COI, and Issue charges. The problem with me is that I was naive. I only have myself to blame for not asking more questions about this policy. I trusted that the Larsons were doing their “fiduciary” duty by telling me my best options. In fact all their in force illustrations had the policy giving me a 10% return. This is ridiculous now that I have educated myself the best that I can.

    This is to Tom: I feel pretty ripped off by this policy. I feel you guys did not do your fiduciary duty by putting me in this confusing, complicated, expensive, and outdated policy. Can I sue you guys? I feel like Larson has a really good thing going: prey on financially naive doctors like me who know nothing about this stuff. You guys know this and Introduce VULs. I cannot find one damn article that says anything positive of VULs. My cousin who married a guy who works in senior management at an insurance company told me to stay away from VULs. He said VULs are there biggest money makers! Every guy I know that knows a lick about finance says that VULs are a rip off. I even had Schwab and Vanguard do a three way, separately, with my Life insurance company to help me get out of it. I’m too far into it for anyone to give me what direction to go.

    And by the way Tom, were the Larsons asking me to pony up another $2000 a year for estate planning and the such. I think that should have been done with the 1.25% you guys were charging me. A lot of FA told me this added fee seemed ridiculous.

    Lastly, to all my fellow doctors out there, please learn about finance and retirement. Don’t be lazy by thinking that your advisor is taking care of everything. Who is watching them and making sure you don’t get ripped off? You should!!! Once they realize you know somethings about this stuff, they get scared. Don’t be naive like me. Get other people to evaluate your portfolio. And read read read!!! The only person that can get you financial freedom in YOU! Thank you WCI! You were the 1st source and well as an article by cnn/money that opened my eyes. I started educating myself with things you recommended

  29. Hi Billy,

    We have a firm policy to not respond to anonymous complaints after learning that a competitor was smearing us anonymously lobbying all kinds of false accusations.

    So, I won’t speak to your case but would encourage you to give me a personal call so that I can understand your situation better. I’ll be glad to help however I can.

    Some general feedback:
    The long insurance costs that you mention often average out to less than 1% (as a hit to your ROI) long-term so it may not be nearly as bad as you think but I can’t know without looking at your actual file. The key is that you’re trading heavier up front expenses for very low long-term expenses. Since this was a retirement vehicle that could be a fair trade.

    There are numerous journal articles that speak highly of VUL when used properly. Both Mayo and Cleveland Clinic provide VUL to physicians as a solid retirement option so there is more merit than many people realize on the surface. (although I don’t personally like the structure of their options)

    To your friend’s advice, it holds true that VUL can be either really good or really bad depending on how it was initially designed. The long-term carrying costs could hurt your returns by 5% or 1% or less so I can never lump the two together because they lead to very different outcomes. One would indeed be a big money maker for the insurance company and the other would not.

    I don’t know your case, Billy, so I can’t speak to your specifics but I’ll do anything I can to help. I’ve had the opportunity to take many sophisticated clients under the hood as deep as they want to go with their policy and the normal response is that the better they understand it, the more they appreciate it.

    Seriously, give me a call. Even if you understand it better, and still don’t want to use it, there are often better ways to disconnect than simply shutting it down outright. Hopefully Schwab and Vanguard outlined several options as the decision tree includes at least 6 and a quick “cash out” is rarely optimum.

    Hope you’ll reach out, Billy.

    • Tom,

      1st of all, this VUL had a 5% front load. Secondly, the Larson bros always used 10% returns for everything, including the VUL. A 10% return in today’s world is really pushing the optimism button. I’m sorry to say that they didn’t really tell me to max out my 401K, at least for tax saving purposes. They thought the mutual funds available in them were weak. I really don’t think a guy with a large debt of 250K and 250K annual income should have been started in a VUL so quickly. My interest rate was low on my debt, about 3.5%. But according to them, paying off debt was a dumb idea since my return would be 10% based on returns from WW II. I think we live in a new world now. Expecting 10% return with today’s volatility and liberal politics is unrealistic. By the way, I never knew about the costs of insurance from the bros, other than they would decrease the death benefit at year 10 to increase the investment portion. I truly believe they did not explain the cons of this. I was very uneducated back then in terms of my finance. Not anymore. Cost are important. I feel Frontlines PBS special called the Retirement Gamble opened my eyes as well. What pisses me off so much now is the fact my collegues make very little effort to educate themselves. I’m a firm believer that in this country, the ONLY way to make money is to do it yourself . This holds true whether it’s owing a McDonalds or picking mutual funds or stocks. I have yet to see an example of where you give your money to someone for any type of investments and come out ahead. I understand that people want to spend time with family and go on missions. But, this is no excuse for closing your eyes and hoping for the best when age 65 rolls around.

  30. Hi Billy,

    I’d like to help and hope you’ll reach out.

    It’s easy to run everything with a lower expected return to understand the impact. I routinely run them at 7% to make sure that it still functions as a sound investment and it does it.

    I share that to say, even if you don’t like the return example that was used initially, that doesn’t make it a bad policy.

    The front-load doesn’t make it bad either. My personal policy is front-loaded at 8% year 1 and 6% thereafter. That load only applies to deposits and doesn’t cover all of the expenses. The best way to analyze the true impact of all of the insurance costs is to look at the ROI pages.

    Take your gross return (whatever you want to plug it in at) and then subtract the ROI. This ROI accounts for all of the expenses of the policy. The difference is the hit the expenses are causing to your rate of return (easily calculated by subtracting to get the difference). This can then be compared with alternative options like paying down debt, funding the 401(k) with whatever options exist, funding a taxable account, etc. Once you know your cash on cash return (after all expenses) it is easy to compare alternatives.

    By checking the costs this way, the insurance costs often average out to be very low long term. My personal policy has a front load that hurt my returns by more than 18% in year 1. Why would someone do that? Because the trade off is that long-term the insurance costs should average out to a hit of only 1% against my return. To get to a 1% average down the road, after an 18% hit in the first year, the costs by definition are getting very small. Often less than .1% per year by the time you get to your retirement years. This is what can be compared to the alternatives.

    Again, big picture is I’d like to help. I’d be happy to walk through things to understand your situation better. I just don’t jump to conclusions until I see all of the facts. Then I can understand the best option available and how sound the advice was on the front end.

    Just want to be clear that neither the 10% example or the 5% up front load mean that you have a bad policy. There are easy ways for me to check but not without seeing your actual stuff.

    You’re good to question this stuff. You’re right on that people need to be more involved. But to do that, we need to have solid resources out there for people to get good advice. The average investor isn’t spending their time in the journals and conferences the way White Coat does. I spend a large portion of my time fixing the mistakes of do-it-yourselfers that have cost them hundreds of thousands of dollars. It can definitely be done but it takes a solid commitment.

    I’m thankful for this blog being such a great resource. Just wish more physicians would take the time to read it!

    Give me a call if you’d like me to take a look. Decent chance you’ve got something much better than you realize and even if not, then there are decent options for winding it down. Thanks Billy!

    • Tom,
      My only question to you: was it wise for me to be put in a VUL when my starting salary was 250K, 250K in student loan repayments, 3K/month in VUL premiums, no family or kids? I know you dont want to comment on individual cases, but the best thing and most fiduciary thing for Larson Financial to have done was to put my 3K/month in low cost index funds like Vanguard. You guys dont actively trade stuff around anyway. The costs of this policy were NEVER explained to me. The only thing that was explained was that I can borrow money at no interest after year 10. Im sure you guys have now “boned up” in regards to these lack of clarity to your new clients. However, I was feel like a sacrificial lamb in all of this. You guys know that most of us are lacking in knowledge regarding finance. I feel it was strategic on Paul’s part to work with phyicians only. We are high earners with severly poor knowledge of money. We blindly give our hard earned money without knowing the costs of giving our money

      • There are many times where this could make sense, Billy. That’s why I can’t comment specifically to your situation without understanding it in full – which is why I’m giving you an open invitation to schedule a complimentary review.

        Your policy probably has index fund sub accounts inside of it that would be comparable to Vanguard funds. So the real question is which would be worse – the cost of your long-term future taxes or the cost of your up heavy up-front and lesser ongoing insurance costs? It’s not difficult to calculate the break even point. It would depend on what state you live in but at your income level your break even point is probably somewhere between year 8-10. Until that point, you’d have been better off with the index funds outright – after that point, provided taxes remain similar, then you’d probably be better off with the VUL. (I’m assuming a 7% return here – if it were above that, then you’d break even sooner)

        Journal of Risk and and Insurance:

        “Since the tax advantage of the life insurance policies increases with the holding period of the policy, there is often a specific holding period after which investment in the universal/variable life insurance policy dominates an alternative unbundled investment strategy without the life insurance tax advantage.”

        “In general, universal/variable life insurance policies must be kept in force for at least eight years before providing a greater return than comparable investment strategies.” (Written at a time when most tax rates were lower than today so the break even point can be even quicker now sometimes. With the no-commission version of VUL that we’ve recently brought on, the break even point is often year 1 but then the long-term expenses are higher than the front-loaded policies – this is why I personally own the front-loaded version instead of the no-commission version though most likely there was not a solid no-commission version at play when you took out your policy – that’s an update in the market place that’s occurred very recently and we’ve been on the front end of pushing for this on behalf of our clients. It’s just not better long-term but it takes away the complexity of having to stomach the front-end costs so I like it as a viable option. And it includes Vanguard index sub-accounts…)

        The fact pattern I have thus far:
        - low student loan rate with no specific aversion to debt
        - high income
        - 401(k) with no match and poor investment choices
        - using backdoor Roth
        - lower up front VUL loads than my own policy

        Based on this I don’t yet see any problems with a properly structured VUL being part of the plan. You don’t need a death benefit but nor do I. I use it for the tax benefits so being single isn’t a specific problem for you. There are numerous other things I’d need to understand to better provide individual insight but nothing you’ve shared would lead me to believe this would be a poor option to have on the table.

        Now, if this wasn’t money for retirement, that would be a whole different issue, but you’ve already stated that these funds were earmarked for retirement and therefore we have a long-term time horizon. So it seems an 8-10 year break even point could be reasonable to have 40-50 years of being ahead when using similar index funds outside the policy compared to inside of it.

        Again, big picture is that I want to help. It seems perhaps you’ve already drawn your conclusions but possibly prematurely without fully understanding what you had. I can assure you, Billy, that I don’t want my legacy to be associated with defending the merits of life insurance as part of the investment portfolio but its one of those products that has a bad stigma because its done poorly so often. I get that, but it all comes down to the design at the individual level. If its designed well, life insurance can be a great option for many high income earners. If its not designed well, then index funds would likely prove far better outside the policy instead of inside of it.

        It all comes down to design and that’s the part we’re trying to push the industry as a whole to get far better at explaining/educating consumers about. You can imagine the resistance of the industry when this means that profit margins will decrease. We have a great track record for solid design and as such, I have clients routinely calling to ask if they can put more money into their VUL because they got a bonus.

        You’ve touched on two key issues for the industry though, Billy:

        1. People have to understand this stuff better. I’m working on that. Once most people fully look under the hood, they want to put more in.

        2. To help people look under the hood easier, we have to have a better process of analysis. You’ve probably read earlier in this post but the main method of analysis still used today was developed back in 1932 and it gives credit for the death benefit in the comparison when I don’t think that’s often appropriate. We’ve got to fix this and we’ve done so internally but it takes a while for things to circulate through the world of academic publishing. It’ll get there eventually.

        Until then, I’m happy to take you under the hood as far as you’d like to go if you’re open to better understanding things. If you’ve already cashed it in, there still might be options on the table.

        Thanks again, Billy. I genuinely want to help. Please give me a call so we can look at it together so I can fully understand and provide a more confident assessment and recommendations.

  31. Billy

    I think you should let Larsons fix your VUL policy. A VUL definitely requires regular reviews and meetings to keep it funded correctly. If they cant fix it, maybe they can refund you on commissions they earned on it.

  32. Tom and Greg,

    First of all, I had a bunch of different financial advisors look at my policy, from Schwab, Vanguard, ING, TransAmerica and Salmons. They all felt that it was an expensive policy and not worth it. Each of them did a 3 way conversation with me and they basically felt bad for me because it was a lousy deal. Basically, a bad policy to begin with. Tom, you talk about using the cheaper sub accounts that are indexed in my VUL. OK, tell the Larson boys that then. The majority of my sub accounts were in funds that had an exp ration > 1.0 I basically re-allocated my own account to cheaper index funds. But these index funds are not cheaper than Vanguard index funds that you claim. The cheapest index fund is an S&P 500 fund that had an exp ration of 0.25 -that’s 2x more expensive than the Vanguard Index funds. Also, this is a fund of funds. You pick an allocation from conservative to aggresive. And, these allocations have a damn high exp ratio…around 0.75. Tom, these costs were never explained to me ever by Larson Financial. It was like it did not matter. The problem with financial advisors is that they only care about returns. Thats what was explained everytime I met up with the Larson boys. No one ever talks about the costs of these instruments. I want you to realize this Tom. Cost is important. Very important. They never explained to me the cost of may accounts. Looking back, that was en egregious omission. colst

  33. I have to agree with Greg in every way. I started with Larson during residency and just 3-4 months of a steady income, and I was being sold VUL insurance, even before looking into all the other options for a $200k salary. It was stupid on my part because I should have asked more questions and trusted less. And reading through this entire post (including trying to decipher what [post deleted due to rude comment] could have said), has made me realize what a sham VUL insurance is for someone in my position. It’s disappointing to have this kind of experience especially when you think you can trust your advisor but I think it speaks for most financial advisors and not just Larson. It is a business after all, and what they really want (and no, it’s not for the client to get the best possible outcome) is to get paid. Fair enough.

    And Tom, I’m sorry to say this especially when you’ve been so great and professional with all your responses but I completely and wholeheartedly disagree with you in your stating that Larson is not selling VUL to doctors with incomes between 200-300k. WCI, don’t be reassured. See Greg’s post above. Read mine. And there are several other clients that are friends who have been approached to buy it also. I just think you need to look into the company’s happenings and see what’s really going on.

    • Trust me when I say I don’t delete anything of substance when deleting the rare rude comment. They’re generally personal ad hominem attacks.

      I think I’ve been pretty clear in the past that I don’t like the vast majority of VUL policies. I also think I’ve been pretty clear that I don’t think investing in insurance is a good idea generally, especially when a doctor is passing up a more traditional retirement account.

      I’m also disappointed to learn that at least some Larson advisors make a habit of pushing VULs to relatively low income doctors and that some of the VULs are composed of high income funds.

      This post was about whether it was possible to design a VUL that would actually be beneficial to a physician investor instead of using a taxable account. I think the answer to that is yes. That has little to do with whether any particular VUL sold to you by Larson or anyone else will actually be beneficial to you. I don’t own a VUL and don’t plan to buy one…ever, for several reasons: Plenty of available retirement accounts, high insurance costs due to bad habits, dislike of mixing investments and insurance, a particularly tax-efficient way to use taxable accounts (tax loss harvesting losses and donating gains to charity) etc. But if costs are kept very low, it is mathematically possible for the tax advantages of the VUL to overcome the additional insurance costs of the policy.

      I’m not sure how I can “look into” the company’s happenings to see what’s really going on. If Tom wants to send me data about how many of its clients have VULs and what VULs they have, I’m more than willing to publish it. As far as I know, he’s still working on the promised paper about analyzing VULs. I found the preliminary data I looked at intriguing. But that data shows low cost Vanguard/DFA investments in the VUL, which is not what has been described. I think the anecdotes people like you and Greg have been sharing are just as useful at cautioning readers that they need to be informed consumers of any financial advice.

  34. Does anyone have information on TIAA-CREF VUL polic? I looked at the prospectus, but it didn’t elucidate anything. Specifically, what makes it the Vanguard of VULs? If anyone has this policy or knows about it, please share.

    • Here’s a link to the prospectus:

      http://www1.tiaa-cref.org/public/prospectuses/ivul_policy.pdf?fundclass=LI

      Here’s a link to the investment returns:

      https://www.tiaa-cref.org/public/pdf/performance/ivul_performance.pdf

      You’ll notice there are quite a few TIAA-CREF and DFA funds in there.

      The fees section is usually where I spend time when looking at these things:

      Here are some quotes:

      We make certain charges and deductions under the Policy. These charges and deductions compensate us for: (1) services and benefits we provide; (2) costs and expenses we incur; and (3) risks we assume. Charges and deductions allow us to provide you services, but have the effect of reducing your Policy Value and death benefits.

      Prior to allocation of Premium, we deduct a specific Premium Tax Charge from each Premium to compensate us for certain taxes applicable to the state of contract issue and credit the remaining amount (the Net Premium) according to your allocation instructions. Premium Tax Charges vary from state to state and can range from 0.00% to 3.50%.

      The Monthly Charge has three components:

      a monthly Policy Fee (applicable only to Policies issued on a single life basis, and applicable only to certain Issue Ages on such Policies)

      the monthly Cost of Insurance charge; and

      charges for any Riders (as specified in the applicable Rider).

      Monthly Policy Fee. We assess a monthly Policy Fee only on Policies issued on a single life basis to compensate us for certain administrative and operating expenses of such Policies with younger Issue Ages.

      The annualized Policy Fee of $120 applies for Issue Ages 0–17.

      PARTIAL WITHDRAWAL CHARGES

      We will deduct $20 for a partial withdrawal.

      DAILY CHARGES

      We deduct daily charges from each Investment Account (but not the Fixed Account) to compensate us for certain mortality and expense risks we assume, and for certain expenses we incur.

      The mortality risk is the risk that an Insured will live for a shorter time than we project. The expense risk is the risk that the expenses that we incur will exceed the charges we set in the Policy. Currently, we deduct this Mortality and Expense Risk Charge daily at the following annual rates:

      0.95% if the value of Units in all Investment Accounts is less than $100,000;

      0.65% if the value of Units in all Investment Accounts is from $100,000 to $500,000; and

      0.35% if the value of Units in all Investment Accounts is over $500,000.

      In Policy Years 21 and later, the annual rate is 0.35% regardless of the value of Units in all Investment Accounts.

      We charge you interest in arrears (the “charged interest rate”) on a loan at a current interest rate of 5%. We also credit interest on amounts in the Loan Account (the “earned interest rate”) at a current fixed annual earned interest rate of 4.35% for Policy Years 1-10. For Policy Years 11 and thereafter, we will credit interest on amounts in the Loan Account at a current annual earned interest rate of 4.80%

      In certain situations, as agreed to between you and a registered investment adviser, Advisory Fees may be deducted each quarter from specified Allocation Options to compensate an adviser for any management of your Policy. The fees may be deducted from the Fixed Account and/or all of the Investment Accounts (except the Loan Account) in proportion to the Policy Value in each Allocation Option (pro rata) or they can be deducted from designated Investment Accounts as specified by you. These fees may be considered withdrawals from the Policy for tax purposes. Please see “Federal Tax Considerations” below and consult with your personal tax adviser. These fees will go to individual registered investment advisers who are not affiliated with the Separate Account or the Company. These fees are not the investment advisory fees paid by the underlying Portfolios.

      Each Investment Account purchases shares of the corresponding Portfolio at net asset value. The Portfolios deduct management fees and other expenses from their assets. The value of the net assets of each Investment Account reflects the management fees and other expenses incurred by the corresponding Portfolio in which the Investment Account invests.

      So you’re paying the ER on the underlying funds, any advisory fees, the costs of insurance, an annual $120 fee, $20 per withdrawal (that’s quite an ATM fee), up to 0.95% for “mortality and risk charge” and up to 3.5% for premium tax charges. I’m not sure I would use “The Vanguard of VULs” to describe those fees. Your all in fees could be as high as 5% per year. That’s pretty tough for a tax benefit to overcome fees of that level.

  35. WCI,

    Thanks for the information. This sounds similar to my policy, except the borrowing rate in policy year 11 sounds better with Tiaa. John Hancock told me it’s 1.25% before or after year 10. This is after the kick
    back interest rate they help me out with

  36. I just posted my story on Larson Financial and VUL in another spot on this website, before realizing there was a fervent discussion going on over here. I would agree with the posts made about Larson pushing VUL inappropriately. I asked for a refund of surrender charges and was denied by Larson Financial. Has Tom ever given you his “promised paper about analyzing VULs?” I would stay away from Larson Financial. They tout themselves as being named among the best financial advisors for doctors, which sounds impressive, until I looked into it, and realized it was just an advertisement for which they had paid.

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