Archive for May 2024
A few weeks ago, I told you about Jon, a long-time reader of my newsletter. His Edward Jones financial advisor was trying to sell him a Variable Universal Life (VUL) policy, and he asked me for my 2nd opinion. Instead of writing my opinion, however, I posted his question to my newsletter readers, and asked you guys to make an assessment.
A few of you came back with the answer of YES since the $2mm death benefit is huge, and the annual premium payment of $17k appears to be quite reasonable. On top of that, the buyer gets the flexibility to skip payments as well. I believe this view of the product is exactly what the insurance company wants but it is misguided.
To answer Jon’s question, I first talked to him to determine his family’s actual need for life insurance. He has two teenage kids and he and his wife already both have 20-year term life insurance policies, each with a $2mm death benefit. They clearly have no need for additional life insurance.
Now let’s look at the product itself. A VUL policy is a combination of two components – life insurance and investment. The product is not entirely under the oversight of the SEC, therefore there is a huge regulatory loophole that the insurance company can use to take advantage of the buyers.
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Recently, a long-time reader of my newsletter came to me for a second opinion financial review. His current financial advisor from Edward Jones had highly recommended a Variable Universal Life Insurance policy as an awesome investment vehicle for his family.
This reader of mine, I’ll call him Jon, is married with two teenagers. Both are very healthy and will go to college in a few years.
The pitch his advisor made for this product includes: 1) it is very flexible, you can decide when and how much to make the premium payments; 2) you can invest in the stock market through various mutual funds to build up cash value, and 3) with this product, you can achieve tax-free growth of the cash value.
I went over the list of available mutual funds and the one with the lowest expense ratio is the Fidelity VIP 500 Index Fund at 0.35%. About one-third of the funds have an expense ratio higher than 1% however.
For this policy that pays a death benefit of $2mm, Jon needs to pay about $17k per year until he is 70, after that, he can stop paying and the policy will remain valid, according to the policy illustration.
Do you think Jon should buy this VUL policy as an investment or not? If you think the answer is yes, reply and give me three reasons. If it’s no, also give me three reasons. Next week I will share my thoughts.
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I was invited to a dinner by a client couple of mine. Their youngest daughter has been accepted to three universities and they are having a hard time picking the right one and they wanted my help.
Universities A and B are both out-of-state Ivy League universities that cost more than $60k a year in tuition. University C is an in-state university that costs only $15k. I listened to their reasoning as to why it is so hard to make a decision. They really want to give the best to their daughter and besides, an Ivy League university would give them a lot of face (there you know they are a Chinese American family) since their peer families all brag about their children’s academic achievements and they feel pressured to keep up.
Before I said anything, I forewarned them that the choice of university is a very personal one for them and their child so they should take my words only as my observations and not as my professional advice.
First, since universities A and B are four times as expensive as university C, do they provide four times more value? By this I mean, would their child acquire four times as much knowledge or earn four times as much after graduation? (I will get to this point later.) If not, they would be paying the extra just for the bragging rights.
Second, what financial values do they want to impart on their children? That they should borrow money to pay for something they can’t afford just for vanity? Would such a value system not lead to financial ruin for their children down the road?
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