Variable Universal Life vs. Student Loans

[BundaNC]

Hey All,

I've been reading MMM since darn near the beggining and am trying my best to exercise my frugality muscles and grow my 'stache.  I'm newer to the forums though, but it looks like it's very healthy and active.  I'm looking forward to participating.

My situation is likely a no-brainer, I'm just looking for some independent verification that I'm making the right move.  I have roughly $7k left in student loans, $1,500 of which is at a 4.8% rate and the remainder of which is at a ludicrisly low 0.04%.  I have the ability to knock out the remaining $1,500 and I would like to do it by surrenduring my $250k death benefit Variable Universal Life policy.  I took this policy right out of university as I was starting from roughly zero and didn't want to be a burden on the family if I died without enough to cover burial costs/medical expenses.  Looking back, I should have gotten a term policy.  Now that I have a growing 'stache and I'm still a health, unmarried, childless man I don't see a need to continue making the insurance payments.  To boot, the VUL investment vehicle is crappy and lacks any good investment options. 

My plan is to cancel the policy and cash out the surrender value on the VUL (lesson learned), using a portion to pay off the remaning higher rate student loans and placing the remainder into higher return investments.  I don't see the need to pay off the rest of the student loans since it is essentially free money.  I would likely just make the minimum payments for the remainder of the loan.  This will actually free up an additional $300 a month between the VUL monthly and what I have been paying extra towards the student loans to crush the higher interest rate portions.

This seems like a solid plan in my own mind since I will be cutting an under-performing investment loose (roughly $8k paid in premiums/investments; only $5,800 in value; $3,650 in surrender value), knocking out the last significant chunk of students loans, and freeing up additional cash flow for real investments.  Does anyone think this is not a good plan?  Could I be missing something I should be taking into account?  Thanks!

[arebelspy]

VULs in general are poor deals.  They can pay off over a long enough time period.  How many years into it are you?  What would be the impact of paying in another few years past the breakeven point?

Do you have a need for life insurance (dependents)?

Off the cuff, with no information other than what's provided in your post, I'd say cancel the VUL, take the 3650 and pay off the 1500 student loan, stick the rest in an emergency fund, and start 'staching that 300 cash that was going to the VUL.

[stashette]

I hate that people scam new grads with VULs--the same thing happened to me.  I'd say to cash it out, BUT make sure that you look into all surrender fees as well as any taxes you will owe on your "investment". Just losing $3650 doesn't sound too bad just to get out since that is just a year's worth of premiums.  Once you cash it out, I don't think that you need any life insurance at all with no dependents.

With a crazy low 0.04% interest rate, I'd hang on to that student loan forever!  The 4.8% one isn't too bad, but it's reasonable to just get rid of it.

[James]

I agree, it doesn't sound like you need insurance so cashing it out wouldn't be a bad idea, just make sure you read everything to and know the terms of cashing it out.

I would throw the remainder in a Roth after paying the $1500.

[BundaNC]

Thanks for the replys!  I'm going to cash out the surrender value and move along with my plan.  A Roth seems like a good option.

BTW stashette, I feel your pain.  I definitely feel like I was scammed for a quick commission.  I should have been smarter than the guy across the table and walked away to do some research before signing up.  Chalk it up to experience and don't forget it.

[Mr Mark]

I hate that people scam new grads with VULs--the same thing happened to me. 

Me too. New grads beware!!  It can' t be accidental.

I actually complained and got the thing refunded.

If (with hindsight) you were subject to deliberate miss-selling, maybe see if you can get more that way, by contacting complaints?

But agree, stop the insurance, maybe get a small term policy, and repay the expensive part. Keep the .04%   :-D

[rusty]

As an insurance agent, I would recommend cancelling the VUL (make sure you do not have surrender fees that may impact the cash value).  If you do get additional insurance, get some term, but less than $250k.  You probably only need $100k at this point, and most companies don't offer term under 100k.  If you are here, you will probably never need whole life unless you run into an estate planning issue later in life (hopefully you will have that "problem").  If you do, you may have time to get your own license and write your own policy.

Pay off the higher interest debt and start working hard on saving cash.  THis is a great place to exchange ideas.  Also learn from other people thought processes and points of view.