Author Topic: Variable Universal Life Insurance-Did 2013 me fall for a scam?  (Read 3409 times)

greggieP3

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Variable Universal Life Insurance-Did 2013 me fall for a scam?
« on: September 14, 2016, 03:42:41 PM »
Hi Mustachian friends, first time poster hoping for some advice to either stop worrying or quickly fix a (likely) mistake I made about 3 years ago. Here's the background info: (apologies in advance for the length)

I graduated college in December 2012 at age 22 with no student debt, an innate desire to live within my means, and a steady $40,000 entry-level job. I decided I'd like to start saving for retirement in addition to contributing 4% to my company 401(k), which was the level required for a 3.5% employer match.

So, in August 2013, being young, impressionable, inexperienced, and totally ignorant about investing, a friend/former college classmate convinced me to take out a Variable Universal (Cash Value) Life Insurance policy with the company he worked for.

He said that the policy was designed to supplement retirement savings, and that the "cash value" component would grow over time. I had some reservations given the general reputation of the insurance industry, but since he was a friend and genuinely nice guy (and good salesman), I signed up for $500/month.

Because of that, I currently receive:

-$600,000 worth of life insurance
-a lifetime guarantee that my coverage will be based on the physical I took as a healthy 23 year-old
-In my friend's words, a conservative projection that my $6,000/year contribution will grow to just under $500,000 by the time I'm 60, in the year 2050.

Here's are the caveats:

-The money doesn't start to grow exponentially until the policy has been in effect for many years
-The "guaranteed" growth by 2050 is only $277,000 (I've recently read that these policies often don't live up to their projections)
-I'm not projected to break even until I've contributed to the policy for 13 years ($78,000 contributed)
-I'm not guaranteed to break even until 22 years have passed and $132,000 contributed
-Only 92.5% of the "cash value" can be withdrawn at any one time, or the policy collapses and the government comes after you for trying to circumvent the $5,500 Roth/IRA annual contribution limit

After discovering MMM in February of this year, I've kicked my savings into overdrive, maxing out my 401(k) for this year, maxing out my Roth IRA for this and last year, and purchasing $3,000 of VTSMX with an additional $100 added each month. I've also learned a lot more about investing since February, reading all 500+ of MMM's posts, the jcollins stock series, "The 4 Pillars of Investing," and "The Intelligent Asset Allocator," both by Bill Bernstein.

My question is this: In the opinion of the Mustachian community, is CVLI a scam? Should I take a loss and ditch my policy, or keep it as part of my portfolio?

I could currently withdraw about $11,000 of the $18,000 I've contributed. If I do that, the other $7,000 is a loss. So, should I take the $7,000 hit and put the remaining ~$11,000 straight into Vanguard's Total Stock Market Admiral shares? I would then sell my existing VTSMX shares to purchase VTSAX shares due to the lower fees and start contributing $500/month to VTSAX instead of the CVLI.

I'm now in the mindset trying to achieve FI by 40 (or earlier), rather than trying retire at 65, which is where my head was at when I started the CVLI policy. Now, I feel that even if the money does grow to the $500,000 that is projected, I could get a lot better return elsewhere. Plus, needing to leave 7.5% of the money I contribute in the fund at all times seems to cancel out most of the return I'll get, and I have absolutely zero need for life insurance.

I was only doing this for the retirement savings, and a $7,000 loss now may be the smart choice in the long run. According to at least one compound interest calculator, a $10,000 principal with a $6,000 annual addition at a 7% rate would yield over $900,000 by 2050. Still way later than I want to retire, but at that rate, cancelling the policy seems like a no brainer to me.

What do you all think? Does anyone recommend keeping this policy?

Thanks for the help!

-Greg

For those interested, here are my vital stats:

-~$15,000 in checking/savings (I know that's too high, I'm going to figure out where I should put about $10k of that very soon)
-~$3,100 in VTSMX (opened in Aug 2016)
-~$11,500 in Roth IRA opened in Feb 2016 and maxed out for 2015 and 2016
-~$32,500 in 401(k) from an employer I left last week (Balance now needs to be rolled over to a Vanguard IRA)
-~$11,000 in "cash value" of life insurance that could be withdrawn
-$0 in mortgage, credit card, student loan, or auto debt
-$72,000 annual salary, sort of (Full salary severance package started this week, runs until January 30th, 2017, weighing options for new job)
-Annual expenses of ~$25,000 with some DEFINITE room for improvement since I'm not married and have no kids

MsPeacock

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Re: Variable Universal Life Insurance-Did 2013 me fall for a scam?
« Reply #1 on: September 14, 2016, 03:48:26 PM »
Cancel it.

1. You don't need life insurance

2. I purchased insurance at age 39 with negative risk factors for less than 500 per year and a higher amount of coverage. Buy a term policy, for the amount you need, when you need it, for the length of time you need it for (eg 20 years).

You should definitely not continue to put 500 a month into a bad investment.

Get your money out, consider it a sunk cost (and lesson learned) and move on.

boarder42

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Re: Variable Universal Life Insurance-Did 2013 me fall for a scam?
« Reply #2 on: September 14, 2016, 03:56:23 PM »
at 7% interest if you took that 11k out now and then the 6k per year for the next 34 years it would be worth almost 1MM in today dollars.  i assume it was 500k in future dollars worth so really at 10% over 34 years it will be worth 1.9MM dollars so its a 1.4MM dollar swing assuming you invest it in a low cost index fund like VTSAX

TexasRunner

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Re: Variable Universal Life Insurance-Did 2013 me fall for a scam?
« Reply #3 on: September 14, 2016, 04:09:28 PM »
I'm 25 with term life insurance of 300,000$ costing 236$ per year, expiring in 18 years...
My vested costs:  4720$ over 20 years (worth it IMO to protect my family).  I plan to be FIRE by the time it expires.

You're 26 with a lifelong policy that will cost you AT LEAST 34,236$ in opportunity costs if you pull out everything at year 22 (which you cant according to their rules).

If you keep investing 500$ per month, at year 22 you **may** end up with 132,000$ if you trust them and their investment methods.  If you were to put 500$ a month into the market with 6.5% return and 2.5% inflation (pretty conservative numbers), you would have 166,236$ in 22 years (edit: in today's dollars, for clarity)

Unfortunately you are in a losing position...  But if you pull now, you will lose 7000$.  You can buy a term life insurance policy of 600,000$ for roughly 9,440$ (just a guess based on my numbers and our comparable age).  "Matching" the insurance outside of the plan will cost you 16,440$.

BUT staying in the plan for 22 years will cost you at least 34,000$ in lost opportunity, and even more if (1) the company goes under, (2) they are terrible with investing and actively manage, (3) they don't return a full 132000$ at year 22.  The third one is especially likely since the guaranteed growth in 2050 is less than the deposited amount in 2050.

Yes, pull out.  You said you don't need insurance so that just enhances the financial decision to do so.  Sorry about the lost costs...  Tuition paid I suppose.

No they aren't *technically* a scam.  Yes, I think they should be illegal (and some states are working on it).  They most certainly prey on the financial illiterate.

patchyfacialhair

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Re: Variable Universal Life Insurance-Did 2013 me fall for a scam?
« Reply #4 on: September 14, 2016, 04:26:12 PM »
Not a scam; just a shitty product.

Cash out. You read the blog post about "if you wouldn't buy it today, sell it." Same thing here. An expensive lesson, but chump change in the long run.

Look at it as an extremely expensive life policy that you just so happened to get some money back after cancelling.

Buy an actual term life policy when you eventually need one (dependents that require your income if you pass is pretty much the only reason).

englishteacheralex

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Re: Variable Universal Life Insurance-Did 2013 me fall for a scam?
« Reply #5 on: September 14, 2016, 04:26:35 PM »
Oh man this is horrible. $500/month for life insurance as a person with no dependents. I hope the guy isn't your friend anymore. For God's sake cancel this nonsense.

I have a husband and two kids and only when I gave birth to the first did I finally get term life insurance at $312/year.

Kakashi

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Re: Variable Universal Life Insurance-Did 2013 me fall for a scam?
« Reply #6 on: September 15, 2016, 02:46:42 AM »
No, CVLI is not a scam.  There are very specific uses for CVLI for the right people in the right situations.  It is a financial planning tool and a legit one.

However, you got scammed by your former friend.  The new agents that join insurance brokerages are all told the same thing...reach out to your friends/family everyone you know and sell them life insurance.  Your friend was in no position to counsel you on the proper uses of CVLI, but wanted to make money off of you and further his career. 

Given what you wrote, I don't think you are the right individual to whom CVLI benefits.  So I personally I would take the hit and cancel the policy. 

However, it's not the worst thing just to continue with it.  You can't think of CVLI as an "investment".  When you compare the CVLI to VTSMX, that is comparing zebras to spiders.  That is the fault most people use when then analyze CVLI.  Understand the CVLI will still be there for you when you are 85 yo as an additional source of income in case you miscalculated your finances, or will be there for your family member that's disabled long after your passing.  I would read about CVLI before you make a decision.

DoubleNickels

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Re: Variable Universal Life Insurance-Did 2013 me fall for a scam?
« Reply #7 on: September 15, 2016, 12:29:41 PM »
There is one caution about "waiting until you need it, to buy it."   Unless you can guarantee you will be in good health "when you need it,"  waiting until "then" to buy it could result in either a) not being able to get it (due to health) or b) not being able to afford it (due to health and now jacked up costs). 

If you are reasonably certain you will be FI before you "need it, then this might be a moot point.  I see no probably buying a 10 or 20 year term at relatively low premiums.  You can probably do so for not a lot of money. 

arebelspy

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Re: Variable Universal Life Insurance-Did 2013 me fall for a scam?
« Reply #8 on: September 22, 2016, 09:50:42 AM »
So, should I take the $7,000 hit and put the remaining ~$11,000 straight into Vanguard's Total Stock Market Admiral shares?

Yes.

It'll achieve much better growth on that 11k, but more importantly, let you put the 500/mo (6k annual) towards a real investment as well. Don't throw good money after bad.
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catccc

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Re: Variable Universal Life Insurance-Did 2013 me fall for a scam?
« Reply #9 on: September 22, 2016, 10:48:41 AM »
My mom bought a VUL for me what I was a teen, she really thought they were good products, unfortunately.  I'm 37 now and last year I told her to please cash it out for whatever it was worth (and keep it for herself.)  At that time she was looking at something like a $4K loss, having put in about $11K and the CV being $7K.  IDK what the premiums were, but they were just being paid out of the CV for a long time.  Anyway, it's a bummer to have the loss, and it sucks that she made a mistake, but at the time she really thought it was a good product.  She's learned her lesson.  So yeah, get out now.

greggieP3

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Re: Variable Universal Life Insurance-Did 2013 me fall for a scam?
« Reply #10 on: September 22, 2016, 07:08:39 PM »
Thanks for the help everyone! Looks like it's pretty unanimous. I have a meeting set up with him on Friday to cancel everything. Expensive lesson indeed, but worth it in the end, I think.

chasesfish

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Re: Variable Universal Life Insurance-Did 2013 me fall for a scam?
« Reply #11 on: September 23, 2016, 06:18:34 AM »
No, CVLI is not a scam.  There are very specific uses for CVLI for the right people in the right situations.  It is a financial planning tool and a legit one.

However, you got scammed by your former friend.  The new agents that join insurance brokerages are all told the same thing...reach out to your friends/family everyone you know and sell them life insurance.  Your friend was in no position to counsel you on the proper uses of CVLI, but wanted to make money off of you and further his career. 

Given what you wrote, I don't think you are the right individual to whom CVLI benefits.  So I personally I would take the hit and cancel the policy. 

However, it's not the worst thing just to continue with it.  You can't think of CVLI as an "investment".  When you compare the CVLI to VTSMX, that is comparing zebras to spiders.  That is the fault most people use when then analyze CVLI.  Understand the CVLI will still be there for you when you are 85 yo as an additional source of income in case you miscalculated your finances, or will be there for your family member that's disabled long after your passing.  I would read about CVLI before you make a decision.

+1.  This isn't for you today.   You have too long of an investment window and the expense ratios alone in vanguard are enough of a reason to move these funds into a mutual fund and just buy term life insurance.

Need2Save

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Re: Variable Universal Life Insurance-Did 2013 me fall for a scam?
« Reply #12 on: September 23, 2016, 06:28:40 AM »
I'm so very sorry to hear that your friend put his/her financial interests before yours.  These policies make money for them, not you!

You have no spouse or children to rely on your current income so there is no need for life insurance currently, right? If you later get married or have kids, you can find a cheap term policy for a shorter duration which covers only the period that you are in your accumulation phase (relying on current income flow).  Pretty good chance you could get a term policy like that through your job.  Are you really very concerned about your health in 5 or 10 years from now?

Cancel it.  Invest what you can get out of it.  You'll likely come out ahead with such a long horizon and $500/month to invest.