Are Universal Variable Life Insurance Plans A Good Deal?

The agent would tell you this type of insurance will give you great flexibility, multiple options, and controls. She will also mention the tax-benefits of investing within the insurance policy. The truth is, the cost of insurance, asset management fee, and early withdrawal fee will be much greater than the tax you will ever have to pay with any other type of investments.

Of all types of life insurances, such as term, whole life, and universal life, variable universal life insurance is most expensive. You will have to pay more cash to ensure the policy keeps running, especially when the economy is bad.

Variable universal life insurance is the latest answer from the insurance industry to the decades of cry out for "buy term and invest the difference" from the smartest insurance buyers and credible financial experts. This policy has term insurance component and investment component to it, just like universal life insurance. By combining term insurance and investment within a policy, while allowing the insured to somewhat control and choose the investment options in separate accounts, they claim to provide the advantages of "buy term and invest the difference".

Unlike whole life insurance and universal life insurance, this time the policyholder will get to keep the cash value, and if she dies, her beneficiaries will get both the death benefit and the cash value. It seems like a major improvement.

But is it?

Ok, I just mentioned that for variable universal life insurance, you actually get to keep your cash value, but what is the catch?

There is no jackpot that governments won't tax, including cash value in an insurance policy. The tax department of both Canada and the US will determine whether you make more money than what you put into the cash value, and if you do you will be taxed.

In my previous article, "Life Insurance With Cash Value", I fully explained the tax-benefit of life insurance and how agents can sell this feature in misleading ways to make sales.

It is unlikely that you will make any significant profit from investments within a variable life policy anyway, because your fund will be charged at least twice before it gets back to you. The insurance company usually provides investment options from external investment firms such as mutual funds companies; therefore, both the insurance company and the external firms will make a cut from your fund before it is invested in the market.

So why don't you invest in the outside firms to begin with, instead of letting the insurance company to be the middle man? All she does is providing you products from professional investment firms and earn ongoing referral fee as long as your policy stands.

To prevent you from canceling the policy, they usually have heavy penalty for cancellation or cash value withdrawal to ensure they keep earning referral fee for the work they don't do— asset management.

The cost of insurance for variable universal life insurance usually increase yearly, because the term insurance component of the policy isn't level term, but is annually renewable term (Or they might call it yearly renewable or other synonym).

The problem with that is the cost of insurance will get astronomical by the time you get older and has less income due to retirement, which is when you need money the most. The insurance company will take money from your cash value to pay for the insurance cost if you don't have enough cash to pay, until the cash value runs out and the policy will lapse, which is what happened to many retired policyholders.

You may cancel the policy and withdraw the cash value before it happens, but there will be cash surrender charge, and the cash value you can take out is usually less than half of the face value of the policy even if you have been funding the policy for decades.

Beside, they can increase the administration fee anytime they want, subject to the maximum allowed in the contract. Usually when the agent tries to sell you a variable universal life policy, they will show you an illustration with the beginning administration fee and cost of insurance, but with the most optimistic return rate possible (12%).

Variable universal life insurance isn't a good deal because:

1) They charge your investment fund twice before it reaches the market, first by the insurance company, and second time by the external firms that the insurance company partners with. You can actually invest in the firms directly.

2) The administrative expense and cost of insurance will increase dramatically as you age and earn less.

3) The lapse rate of this type of policy is high because of the reasons because policyholders can no longer afford it when the economy becomes bad or when they retire.

4) Variable life insurance is the most perverted version of the good old "Buy Term And Invest The Difference". I suspect this product is actually designed to confuse the customers into believing that it provides the same advantage of the said concept. Click the link to read what it is if you need insurance to protect your income for your loved ones.