What Is A Vul Or Eiul And Why Are They The Best Retirement/insurance/tax Advantaged Hybrid?
Posted by BradH Date: Thursday, August 27, 2009
Categories: Universal Life
Tags: EIUL, Variable Universal Life Insurance
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VUL= Variable Universal Life. Part of your premium buys life insurance and part of it goes into a side account that works like buying mutual funds. It is invested in the market, so it can go up and can go down.
EIUL=Equity Index Universal Life. Again part of your premium buys the life insurance and part of the premium is tied to the S&P and/or NASDQ but usually indexed products have a floor, meaning you get the upside of the market but you have a minimum return the will never go below 0.
The IRS allows money to build up in a life insurance policy on a tax deferred basis and when you take the money out, depending on the method, you may be able to take it out tax free and you beneficiary can receive a tax free death benefit.
Read the below articles for outsiders opinions on these policies.
Your premiums go two places with these policies: Cost of Insurance and Savings. The insurance type the compnay uses is Annually Renewable Term- each year the premium will go up, thus annually renewable term. The rest, will go into the savings. However, due to aging each year, less and less of your premiums goes into savings. About twenty years out, your cost of insurance will EQUAL your premiums, NO money will go into savings that year. Starting the following year Cost of Insurance will be MORE than your premiums. By signing for your policy you agreed that if there was not enough money for premium you allow the company to take from savings. Between 25-30 years, there will be NO savings left meaning no insurance. You get a letter telling you this. They are asking for a huge amount to keep policy in place.
There are 5 rules to these policies, may or may not have all 5. 1) For first couple,but probably 4 years, there is NO money in cash value, expeneses to company and commissions to agent. 2) When it does start to grow, you earn between 1-4% interest per year, still due to fees and commissions. 3) You can access the cash value by taking a loan out. This is what they mean by tax advantaged. No taxes on this as long as you don’t take all out to cancel and anything over total put in as premiums would be taxed. 4) The company can make you wait for up to 6 months before you receive the money. 5) you get either face amount of policy or cash value, unless you pay extra in premiums for beneficiaries getting both. You pay for two things and they receive one or the other.
Variable Universal Life and Equity Index Universal Life.
Variable Universal Life, you control what mutual funds and/or other investment options with part of your premium dollars. The other parts go to cover administrative costs, cost of insurance and the required reserve fund.
EIUL or simply UL, the insurance company does the investment for you.
When there is enough money or cash value in your bucket, you could use it to help fund your retirement via withdrawing a portion (set by federal guidelines) tax free first and, then, take a loan against the death value to fund the rest. Since you are taking a loan, the feds can’t tax you. And, because you are your insurance company’s client, the interest rate is usually much lower than what the market charges. Thus, you’ve arrived at an tax advantaged situation and you’ve saved money from an lower interest rate. What ever death value is left when you die is subtracted to cover the loan and, then, your beneficaries gets the rest tax free.
Both methods are very dangerously attractive because you literally don’t have to put forth much money (you could choose to pay the minimum) or any money when your premium comes due. You’ve got flexibility on your side. However, consistently underfunded policies will loose cash value or the fuel that is used to maintain the policy and it will only be time when the policy dies. If so, you’ve just wasted your time and money to feed a really expensive term policy. So, in order to make either policies work, it is always best policy to feed either with as much perimum as the law allows and, just like any other investiment, you want to be in it for the long haul. Otherwise, you are much better off buying the biggest term you need (10 years is most sufficient) and wisely convert it to a whole life product when you are ready. This way, you’ve given yourself the time figure out what to do with your money and, most important, when you convert, your insurability with the company stays. This insurability stays factor, my friend, have already saved you much. Do not dismiss whole life. It may be a bit slower than VUL or UL but it is stable and consistent and, yes, you can also leverage it to give you the same tax advantages you seek. Also, if you fund the VUL or UL at or near the maximum, you will find that, at the end, the cash value will be almost identical as a consistently funded whole life. In fact, you may end up having more in the whole life. So, which one is the most suitable for your current life situation and your future financial plans? That should be your question. The most best insurance policy is the one that is the most suitable for you.