futurereti...[at]hotmail.com,

What are the chances that your need for "income replacement insurance"
will decline while your need for "estate tax liquidity insurance"
increases? I agree spot on with most here (and in particular Cal) that
investing and insurance should be kept separate. I also agree that if
your need for insurance will go away, term insurance is the way to go.
But are you sure your needs will go away.

You have significant savings for someone in their mid-30s, you are
still saving respectable amounts, and you have no inclination towards
an early retirement. You could be well on the way to retiring a multi-
millionaire. That means estate tax issues. If that is a genuine
concern, level premium UL may be better. All the same, I would be
leary of VUL in your case.

On Tue, 21 Aug 2007 04:19:15 -0500, futureretiree[at]hotmail.com wrote:

- quote -

I would not call this "concrete" numbers. Besides marginal rates and
tax rules, we can't predict ANYTHING about the future. That's why I
get the willies every time someone takes irrevocable action now that
will affect them in unknown ways in the future. And creating a
lifetime liability for yourself is pretty irrevocable.


-HW "Skip" Weldon
Columbia, SC

On Aug 20, 12:15 pm, Tad Borek <bore...[at]pacbell.net> wrote:

- quote -

I did not mention my current tax bracket because
it seems irrelevant to the discussion.
Whether I continue with saving in a taxable account or
put money in a VUL instead, either will be funded with
post-tax dollars.

The key variable and the big unknown is my marginal tax
rate 30 years from now, when I actually access the money.
If the tax structure stays the same, with relatively low
capital-gains rates, taxable accounts look pretty good.
But if taxes are going up (and my gut is telling me that
they are heading way up, what with the budget deficits
and social security shortfall and socialized medicine on the
horizon),
VUL - or any kind of investment vehicle that will not be taxable
on the back end - starts looking better and better.

I understand that nobody can tell me what the tax rates are
going to look like in the distant future, nor promise that
accumulation inside insurance policies will remain tax-free forever.
But this discussion has been useful in helping me work
through some concrete numbers.

futureretiree[at]hotmail.com wrote:
- quote -


I haven't read all the posts but did you mention your marginal tax
bracket anywhere? How much state + federal tax are you paying on an
"extra dollar earned"? It seems odd to be so focused on tax savings
unless you are high bracket (e.g. NYC and top federal bracket). Quite a
bit can be accomplished by being tax-efficient with your investment choices.

It seems you're aware of the principal disadvantages of VUL as an
accumulation vehicle...high costs, limited investment alternatives,
illiquidity, and the need to keep it in force until death to realize the
full tax benefits. This last one seems to doom it for most people, and
the first calls the tax savings into question -- don't take it for
granted that there's a net benefit, compare "pay the tax" vs. "pay the
costs". Number two is hard to swallow for investment control freaks
(like me).

I could see some interesting uses for VUL, an example being: a wrapper
for tax-inefficient asset classes, as part of a succession plan for a
high net worth small business owner where there will be estate taxes
owed. But I think it's oversold as a garden-variety accumulation vehicle.

-Tad

On Aug 20, 6:30 am, joetaxpayer <joetaxpa...[at]nospam.com> wrote:
- quote -

I looked through the prospectus and did not see any extra fees other
than the ones listed. The subaccount fees would be the mutual fund
expense ratios. There's 10 index funds offered with a range of 0.06%
to 0.29%. Small Cap, Large Cap, Social Index, Bond and Money Market
funds have ERs of 0.06%-0.10% -- these are even lower than Vanguard
ETF classes. Growth, Growth & Income, Value, Real Estate,
International with ERs of 0.23%-0.29% which is the same range as
Vanguard investor classes. They also have 50 other non-index funds --
higher ERs of course but usually picking the lowest-cost class. For
example, PIMCO institutional classes at 0.175%-0.25% or Credit Suisse
Commodities fund at 0.50%. (The cheapest commodity ETF you can get is
0.75%-0.80%!)

For a VUL, this does sounds too good to be true but I think we have to
remember that TIAA-CREF is shareholder-owned organization. So beyond
the product fees and the salaries of the people working there, who
would be getting the benefit of extra expenses? All that would do is
go right back into the investment pool. No commissions for salespeople
-- you either call them up directly or work with a fee-only planner.

futureretiree[at]hotmail.com wrote:
- quote -

I need to read the book. I see one that was published 2002 "The new life
insurance investment advisor".

By now I think you have the tools to make your decision. Cal, who sells
insurance, wasn't too positive about this approach. And while I
appreciate wyu's numbers, I don't quite see where he accounts for the
extra expenses within the insurance wrapper and sub accounts.

Last point, I promise - we don't know what tax rates or structure will
be. The death tax is due to revert to $1M exemption in 2010, and who
knows if they'll 'fix' that.
You need to be aware that when you die, the insurance is part of your
estate and *may* take a hit that undermines all your planning. There are
methods of setting up a trust which owns the insurance, and on your
passing, the increased value stays within the trust, not your estate,
and while your wife would have access, it falls out of her estate as
well, benefiting your child. Think on this, it could have a greater
impact on your family wealth than the other choices discussed here so far.

JOE

On Aug 19, 5:48 pm, joetaxpayer <joetaxpa...[at]nospam.com> wrote:

Joe, your points about about not letting the tax tail wag the
investing
dog and the significant expenses of investing through an insurance
policy are well-taken. Let me just clarify one thing:

- quote -

To make this clear, I was asking about VUL (variable universal life),
not a variable annuity. The idea - assuming I did not misunderstand
what I read (as I said, life insurance is very new to me) - is to
*avoid*
any taxation on the back end by letting the cash value accumulate
tax-free for, say, 30 years, and then borrowing against the cash value
(also tax-free), leaving enough money in the policy to keep it in
force.
The loans would be repaid from the death benefit when I sign off.

I agree that if I were to pay ordinary income taxes on policy
loans, investing through an insurance policy doesn't make
a ton of sense.

On Aug 19, 11:19 pm, w...[at]talisys.com wrote:

- quote -

Thanks! Numbers like these are exactly what I need to make
the decision. Do you know if there is a calculator or a software
program I could use to run various scenarios for myself?
Basically, I'd like to play with various assumptions.
For example, 10% return seems fairly optimistic, while
25% effective tax rate 30 years from now feels too low
(I have a gut feeling that taxes are heading way up).

To answer another poster, I am not working with
a planner / insurance salesman yet. With a baby
coming soon, I started looking for term insurance,
but then decided to read up about other types of policies,
too, and VUL - in particular, tax advantages of overfunding
the policy and then borrowing against the cash value -
caught my eye in Baldwin's book.

On Aug 19, 10:28 pm, Dave Dodson <dave_and_da...[at]Juno.com> wrote:
- quote -

The TIAA-CREF policy is liquid enough in my opinion. You can cash out
anytime as TIAA-CREF has no surrender fees. However, cashing out the
policy then converts gains to income tax which then becomes a big hit.
To keep the tax advantage, you'd have to limit yourself to borrowing
85%-90% of the cash value and then letting the policy pay the loan
back when you creak leaving 10%-15% payout to your heirs. The tricky
part is limiting yourself -- ie, keep your hands off the remaining
10%-15%. If you can't keep the policy in force, everything you
borrowed becomes income taxable at that instant which will completely
blow up in your face.

On Aug 19, 11:19 pm, w...[at]talisys.com wrote:
- quote -

It looks to me that VUL compensates only $800/year average ($24K over
30 years) for giving up your liquidity. That wouldn't seem like enough
compensation to me. Who knows... maybe 10 or 20 years from now you
will want some liquid assets with which to start a business or
something. Wouldn't you like to have the ability to tap this asset if
something "interesting" comes up?

And this supposedly is a best-case scenario, probably not available if
you already are involved with a planner.

Dave

On Aug 19, 12:34 pm, futurereti...[at]hotmail.com wrote:
- quote -

Since both you and your wife both max out work retirement plans, it
sounds like both of you make decent money so you would need 400K each.
But let's see what it looks like if we do 400K using TIAA-CREF. TIAA-
CREF will probably be the lowest-expense option you can get for a VUL.
I believe below are all the fees but there may be some items I've
overlooked.

http://www.tiaa-cref.org/products/in...gent_life.html

State premium tax: 0%-3.5%
Mortality Risk Expense: 0.65% years 0-20, 0.35% years 21+
Max monthly contribution for $400K policy: $1250/mo

If you put this money into a taxable account where you have a balanced
portfolio, the numbers assuming 10% return, 25% effective tax rate,
20% distribution per year:

10 years: 167K
15 years: 272K
20 years: 415K
25 years: 641K
30 years: 997K

If you use the consolidated portfolio view where retirement accounts
get high distribution holdings and taxables only hold tax-efficient
classes, the numbers assuming 10% return, 25% effective tax rate, 5%
distribution per year:

10 years: 182K
15 years: 276K
20 years: 427K
25 years: 669K
30 years: 1056K

Now let's see what happens if we put the same money into a TIAA-CREF
VUL using a 90% borrow rate. I will assume the cost of insurance is
the same whether you get a VUL or term so the 1250/mo is after the COI
deduction. I don't know what state you are in so I'll use 2% as the
state premium tax.

10 years: 175K
15 years: 275K
20 years: 430K
25 years: 681K
30 years: 1080K

So we can see in the best case scenario, the TIAA-CREF VUL matches
taxable index funds roughly about 15-16 years assuming no major bear
markets and you keep your policy in force to avoid income tax. If it
becomes a MEC, the numbers are ugly.

If you bump up the policy to 500K, the M/E expense drops to 0.35% for
entire lifetime instead of just years 21+. That would change the
numbers to:

10 years: 179K
15 years: 284K
20 years: 450K
25 years: 714K
30 years: 1133K

Ok. 2 out of three ain't bad. Rule of 25 (or the 4% solution, whatever
the readers prefer), and the insurance on the wife. I aim not to show
off what I know, but to try to mention what might otherwise be missed.

So I'll make 2 points in reply:
Run a spreadsheet such as http://www.joetaxpayer.com/saving.xls just so
you know when you cross over the threshold. Liking your job and not
yearning for early retirement is great, really. Knowing when you CAN
retire is just a good data point.

On the tax deferral issue - don't let the tax tail wag the investing
dog. Fellow readers here know of my maniacal obsession with tax
management/mapipulation. But that tend to be independent of proper asset
allocation, or shall I say parallel to it. Today, the 28% bracket kicks
in at $128,500. Add to this a Standard deduction of $10,700, and two
exemptions, $3400 each. Total $146,000. It would take $3.65M in pretax
retirement accounts for the 4% rule to create the $146K withdrawal to
get into that bracket at retirement. Tax deferral is great when you can
put money away at one rate, and withdraw it at another, lower rate. But
the VUL runs the risk of doing the opposite. Taking money you can tax
manage, paying 15% as you go, and having it taxed at ordinary rates 30
years hence at the ordinary income marginal rate, doesn't appeal to me.
Typically these accounts will have annual expenses that exceed what you
would pay in a post tax account (or even in your IRA) by at least a
percent. Pay an extra percent every year to delay the ordinary tax that
will be due anyway, and you've squandered half your gains.

I don't claim to know what tax rates, ordinary income, or cap gains will
look like in 2 years, let alone 25 years hence. But I cannot see how the
VUL would benefit you in either case.
(see http://www.fairmark.com/refrence/index.htm to easily see the
bracket you fall into.) Lastly, I suggest you pay attention to your mix
of Roth vs other accounts, there you will get a bigger bang for the buck
as your saving rate will risk putting you into a high bracket at
retirement.
Just my two cents. I'm certain the VUL salesguy has a different spin on
this. I'm all ears, mostly.

JOE

On Aug 19, 8:33 am, "Cal" <cal-les...[at]comcast.net> wrote:

- quote -

Cal, I learned a lot from your posts by lurking here over the years,
so I have a lot of respect for your opinion. Let me ask you this:
do you think that a term policy might suit me better because my real
insurance needs are not permanent, only for 20 years or so,
but to take advantage of the tax benefits of permanent insurance
I would need to keep it in force forever?

This is certainly an important consideration in my mind. The way
I look at it (and once again, I only recently started learning about
these products, so my opinion is very naive), once I no longer
need insurance, the cost of insurance will be just an expense,
which I view as the price of tax exemption.

It *seems* that in 20-30 years, the tax advantages will outweigh this
cost,
especially if by then the death benefit consists mainly of the
accumulated
cash value, but I admit that I haven't done proper calculations. I
looked
for a good calculator online, but didn't find anything.

- quote -

Yes, I am aware of this. I read about tax disasters that occur
when someone borrows so much from the policy that the cash value
no longer supports the death benefit, and the policy lapses with
all previous "loans" immediately becoming taxable income.

On the other hand, reading Ben Baldwin's book, it seems that once
I am in my 70s, I can keep the death benefit just above the cash
value,
minimizing the risk of policy lapse.

- quote -

The reason I started looking at VUL and not UL is that
I feel - perhaps too optimistically - that over 30 years I can beat
the current interest rates by investing in the stockmarket.

Volatility is an issue, of course, but I started investing back
in my early 20s, and invested steadily every month all the way
through the dot-com boom, collapse and the new boom, so
I am not very afraid of volatility (maybe I'd feel differently
if the market were to drop 90% over the next 10 years

My other concern with UL is that, given all the charges,
I need a relatively high rate of return (as high as 8%)
to get ahead. Unless inflation rears up in the coming years,
I don't see insurance companies paying nearly as much
on fixed-rate policies... but then again my crystal ball
is muddy

On Aug 19, 9:30 am, joetaxpayer <joetaxpa...[at]nospam.com> wrote:

- quote -

That's exactly the advice my CFA friend gave me
The reason I am intrigued by VUL policies after reading Baldwin's
book is the tax advantages, which seem pretty unique (okay, Roth-like,
but I am already maxing out all Roth vehicles available to me).

Maybe I am not seeing the forest behind the tax trees, but my hunch,
based on the state of the economy and political sentiment and
my trusty crystall ball, is that tax rates are going higher, possibly
much higher in the coming years, and that I cannot count on a
20% capital-gains rate 30 years from now. *Assuming* that I am
right and *assuming* that the tax treatment of life insurance doesn't
change (big assumptions, I know), the ability to squirrel away
some tax-free savings is tempting.

- quote -

I haven't thought much about this. I really like my job, so early
retirement is not in my plans. For what it's worth,
most people in my line of work seem to retire in their 70s.

- quote -

Good point. I haven't thought about this, but in her case it seems
that term insurance would fit the bill perfectly.

And thanks for the "rule of 25" suggestion. I have heard about it
before, and used it to calculate my current insurance needs
(expenses * 25 - current savings = insurance gap).

On Aug 19, 1:08 pm, w...[at]talisys.com wrote:

- quote -

I see your point. I certainly would not want to set up a VUL which
I cannot overfund to the legal maximum.

But 1M seems like a lot. My real insurance needs (basically, the gap
between our current savings and the capital my family would need to
replace my income should something happen to me) is only $400K or so.
So my idea was to set up a VUL with, say, 350K face amount,
and contribute around 1K to it every month to get it fully funded
as soon as possible.

- quote -

As I said, we are in our mid-30s, so I don't expect needing the money
for another 30-35 years.

My insurance needs, however, are probably much shorter - 20 years
if we have more kids or even less, if we don't. So I can definitely
see myself being stuck in my 50s paying for expensive insurance
I don't need. On the other hand, I hope that by then the tax-free
growth in the cash value will offset the cost of insurance, and since
the policy will be beyond the surrender period, I will be able
to reduce the death benefit without penalty.

Lots of assumptions and uncertainties here, I know...

On Aug 19, 3:24 am, futurereti...[at]hotmail.com wrote:
- quote -

At some point, putting enough money into a VUL will let tax-deferred
growth overcome fixed fees -- but not at your level. For a 1M VUL
policy, you'd need to put in about 3K per month for the first 7 years.
Then after about 15 years, a VUL would catch up to taxable
investments. Which means to account for possible down market cycles,
you need a time horizon of 30+ years.

futureretiree[at]hotmail.com wrote:

- quote -

I'd go with that gut reaction.
I haven't read Ben's book, but I'll take a look to see if it changes my
mind. I've always advised to keep insurance and investing separate.
You have no mortgage, no debt, putting $35K/yr into retirement accounts,
and still have extra to invest. That's great.

What are your retirement goals? Specifically, how much per year do you
need to live on? If you are on a path to being able to retire in your
40s, your need for insurance may not be 20-30 years, but maybe 10-20, or
less. Also, don't ignore that you need to insure your wife as well. A
single earner couple has to value the cost of 'replacing the services'
of the stay at home spouse. Cost for a nanny or day care, after school
care, etc.

Take your expenses today (i.e. eliminating any savings, you don't budget
for savings while retired), and multiply by 25. Inflate that number
3%/yr, and see when your savings is forecast to meet that number. To be
very conservative add 5 years. That's about how long a term policy you
need. As for the value, subtract your current savings, and the balance
in a term policy will let your wife 'retire' if you perish.

JOE

<futureretiree[at]hotmail.com> wrote in message
news:1187504606.681467.294650[at]d55g2000hsg.googlegroups.com...
- quote -

Your first impulse was a good one. I am a strong advocate for Permanent
Life Insurance, but in your expressed current position, I do believe
that
a TERM policy might suit you better.


- quote -

This is absolutely TRUE (except substitute the word GROW for COMPOUND)
The Cash Value in a Life Policy does GROW Income Tax Excempt. HOWEVER
when withdrawn (other than a Death Benefit) any amount over & above the
amount
PAID in Total Premiums, would be Income Taxable.



- quote -


Once again TRUE, "P R O V I D E D" that there is sufficient
cash
value in the contract to keep the policy alive, until YOUR DEATH. There
MUST be a Death Benefit paid in order to escape the Income Tax penalty.



I have heard that investing through cash-value life insurance is
- quote -


Once again TRUE. However MOST of the above can be eliminated
with the purchase of a U/L policy rather than V/U/L. In the U/L policy,
the accumulated Cash Value receives a Guaranteed Interest, PLUS
a CURRENT Interest rate, INSTEAD of being INVESTED in the
MARKET.............

- quote -


Good, with the above caveat



- quote -

As I stated earlier, I am NOT an advocate of V/U/L
I would suggest U/L


- quote -


Continue on the same path. Research carriers & agents ON-LINE.


Kalman J. Lester CLU

I learned a lot by lurking in this group, so I reckon it won't hurt to
ask for advice

My wife and I are in our mid-30s, with our first baby arriving soon.
I have a reasonably stable job, although the salary will not be
increasing significantly in the future. Wife worked until the last
year,
but now plans to stay at home. With a baby on the way, my thoughts are
turning to financial planning and life insurance

A little bit about our financial situation:

- Our main asset is the house, which we own free and clear (no
mortgage).

- We have around $500K in savings, spread across several stock and
bond
mutual funds and bank savings accounts. In addition, I have around
$250K in various IRAs, 403(b) and 457 plans - some with the current
employer, others left from previous jobs.

- I am maxing out both Roth 403(b) and 457 plans at work (for a total
of $31,000 this year), and both of us contribute full $4,000 to Roth
IRAs.

- After the living expenses, we are usually left with $500-1000 in
free
money every month, which we usually add to our mutual fund accounts.

- No debts.

Now that we are expecting a baby, and considering that both my wife
and
the baby will be dependent on my income for the foreseeable future,
I am thinking of getting some life insurance. I currently don't have
any
insurance, except the usual health and long-term disability insurance,
both of which I get through group plans at my employer's.

My first impulse was just to get term insurance for 20 or 30 years.
But
then I started reading about insurance (in particular, Ben Baldwin's
book), and variable universal life (VUL) caught my eye.

It seems (and forgive me if I am wrong - I am very new to all this)
that
if I put more money into a VUL policy than insurance actually costs,
this extra money will compound tax-free. So it looks like I can kill
two birds with one stone: get both the insurance I need and tax-free
compounding that would not be available to me otherwise.

Moreover, it looks like in 20 or 30 years, when my insurance needs
will be
much less, I can reduce the death benefit so that it is barely above
the
accumulated cash value, and thus minimize the cost of insurance. With
relatively little cash value needed to keep the insurance in force,
I can withdraw and then "borrow" the extra cash value tax-free, which
is very attractive to me. Taking tax-free compounding into account,
it seems that, on the after-tax basis, this will be more advantageous
than selling mutual funds.

I am aware that a policy lapse would be an epic tax disaster, so if
I go down this route, I fully intend to maintain the policy in force
forever (presumably, once my death benefit is reduced to just above
the
cash value, it'll be relatively easy to maintain).

A couple of things worry me about this strategy:

- I have heard that investing through cash-value life insurance is
an expensive way to invest, with the insurance company charging heavy
annual fees, sales commissions, etc. On the other hand, tax-free
compounding should offset this to some extent. Also, if I do get
a VUL, I would choose one that has a reasonable selection of funds.
Another possibility I have seen promoted is equity-indexed universal
life, which is a little less attractive to me because of the lack of
transparency / control over investments.

- My main motivation to invest through life insurance (assuming I
understand correctly how it works would be to get tax-free
withdrawal
on the back end by borrowing against the death benefit.

This is a bet that the tax treatment of insurance won't change in the
next 30 years, and I am not entirely comfortable with this assumption.
On the other hand, capital-gain tax rates could go up, too, which
would make my current savings fare even worse on the after-tax basis.
This is perhaps the biggest source of uncertainty for me: what will
the tax structure look like 30 years from now?
Y'all got a crystal ball?

So, should I get a VUL or not? What about equity-indexed UL?
Any advice on choosing the insurance company (apart from the financial
strength ratings)? Presumably, I'd need to locate an agent who carries
the right kind of product - how do I go about this? I've never worked
with a financial advisor or agent before; all of my investments have
been self-directed so far.

Another consideration is that I may need the money to set up a 529
college savings plan for the kid. I am a little cautious about this -
what if he ends up not going to college, or goes to college in another
country (we are not American by birth). It seems that in a pinch,
I could withdraw/borrow against the insurance to cover college costs,
too, if needed.

P.S. The email address is a spam trap; please respond to the group.