What to do with VUL policy?
What to do with VUL policy?
New member and would appreciate thoughts on what to do with my variable universal life policy. Not looking to debate the lack of wisdom or cry over the “spilt milk” having bought the product as all of that is pretty clear. Details: $2M VUL policy with Penn Mutual. Converted from 10 year level term and VUL now in force another 11 years. No surrender charges at this point. Cash value $435K. Basis $330K. Invested in 5 sub-accounts (large, mid, small cap, flex managed and EM). 10 year average annual return 17%, 6%, 8%, 12%, and 1.5% respectively. Various Expense ratios, all way too much. Annual policy expenses/ cost of insurance right now ( and will increase) $4800 per year. Per $1000 factor at .380 and looks to increase .01 per year. Probably no real need for life insurance anymore. Some coverage through work. Best exit strategy ?
Emergency fund: $100K
Debt: None (forever home, recently updated, cars, kids’ education through grad school, couple of weddings, all paid for).
Tax info: MFJ, 37% federal, no state tax.
Ages : 57/56
AA: 70/30
Current Assets:
Tax deferred: $2.1M
Taxable: $525K
Variable Universal Life (cash value $435K, basis $330K)
Mortgage receivable (kid’s house) : $475K (3.5%, 30yr)
Non-qualified deferred compensation $900K right now
Expenses: Core expenses last 3 years average about $100K, plus mostly non-recurring lumpy items for house remodel and kids thru launch. Projecting need for $150K per year in retirement including health/taxes.
Contributions: Will save about $200K per year over next 6years.
Other information: Plan to work until 62ish. Can likely work as long as want/able at high salary and really have not decided. SSA estimate at FRA, $3000/$1500. Kids fully launched, professional degrees and married similarly situated so not likely any return to the nest.
Question: what do I do with the VUL policy? 1) surrender now, pay ordinary income tax on additional $105K, put it into AA, move on? 2) same as number one but wait until retirement when income lower? 3) leave it alone, keep the coverage, pay the cost of insurance/higher expenses, and either family collects the $2M or I take loans out tax free as pitched. 4) partial surrender or some combo of above? 5) 1035 exchange it into annuity product? Thanks for reading. Love the forum. Pretty sure number one is the best option and likely will do that next year.
Emergency fund: $100K
Debt: None (forever home, recently updated, cars, kids’ education through grad school, couple of weddings, all paid for).
Tax info: MFJ, 37% federal, no state tax.
Ages : 57/56
AA: 70/30
Current Assets:
Tax deferred: $2.1M
Taxable: $525K
Variable Universal Life (cash value $435K, basis $330K)
Mortgage receivable (kid’s house) : $475K (3.5%, 30yr)
Non-qualified deferred compensation $900K right now
Expenses: Core expenses last 3 years average about $100K, plus mostly non-recurring lumpy items for house remodel and kids thru launch. Projecting need for $150K per year in retirement including health/taxes.
Contributions: Will save about $200K per year over next 6years.
Other information: Plan to work until 62ish. Can likely work as long as want/able at high salary and really have not decided. SSA estimate at FRA, $3000/$1500. Kids fully launched, professional degrees and married similarly situated so not likely any return to the nest.
Question: what do I do with the VUL policy? 1) surrender now, pay ordinary income tax on additional $105K, put it into AA, move on? 2) same as number one but wait until retirement when income lower? 3) leave it alone, keep the coverage, pay the cost of insurance/higher expenses, and either family collects the $2M or I take loans out tax free as pitched. 4) partial surrender or some combo of above? 5) 1035 exchange it into annuity product? Thanks for reading. Love the forum. Pretty sure number one is the best option and likely will do that next year.
-
- Posts: 1436
- Joined: Mon Jul 24, 2017 12:25 pm
Re: What to do with VUL policy?
Haven't crunched all the numbers / details but agree #1. If for some reason you don't want to take a tax hit I also think #5 is not crazy bad but in the long run the unfavorable tax treatment is just a killer (dwarfing the marginally higher expense ratios).Retrotied wrote: ↑Sat Jul 24, 2021 4:33 pm New member and would appreciate thoughts on what to do with my variable universal life policy. Not looking to debate the lack of wisdom or cry over the “spilt milk” having bought the product as all of that is pretty clear. Details: $2M VUL policy with Penn Mutual. Converted from 10 year level term and VUL now in force another 11 years. No surrender charges at this point. Cash value $435K. Basis $330K. Invested in 5 sub-accounts (large, mid, small cap, flex managed and EM). 10 year average annual return 17%, 6%, 8%, 12%, and 1.5% respectively. Various Expense ratios, all way too much. Annual policy expenses/ cost of insurance right now ( and will increase) $4800 per year. Per $1000 factor at .380 and looks to increase .01 per year. Probably no real need for life insurance anymore. Some coverage through work. Best exit strategy ?
Emergency fund: $100K
Debt: None (forever home, recently updated, cars, kids’ education through grad school, couple of weddings, all paid for).
Tax info: MFJ, 37% federal, no state tax.
Ages : 57/56
AA: 70/30
Current Assets:
Tax deferred: $2.1M
Taxable: $525K
Variable Universal Life (cash value $435K, basis $330K)
Mortgage receivable (kid’s house) : $475K (3.5%, 30yr)
Non-qualified deferred compensation $900K right now
Expenses: Core expenses last 3 years average about $100K, plus mostly non-recurring lumpy items for house remodel and kids thru launch. Projecting need for $150K per year in retirement including health/taxes.
Contributions: Will save about $200K per year over next 6years.
Other information: Plan to work until 62ish. Can likely work as long as want/able at high salary and really have not decided. SSA estimate at FRA, $3000/$1500. Kids fully launched, professional degrees and married similarly situated so not likely any return to the nest.
Question: what do I do with the VUL policy? 1) surrender now, pay ordinary income tax on additional $105K, put it into AA, move on? 2) same as number one but wait until retirement when income lower? 3) leave it alone, keep the coverage, pay the cost of insurance/higher expenses, and either family collects the $2M or I take loans out tax free as pitched. 4) partial surrender or some combo of above? 5) 1035 exchange it into annuity product? Thanks for reading. Love the forum. Pretty sure number one is the best option and likely will do that next year.
My 2 cents.
Re: What to do with VUL policy?
I vote for option 1, unless you think there's a chance you retire much sooner, like next year. in that case i'd wait and do option 2. but i wouldn't mess around with anything else. just bite the bullet and move on with one less thing to worry about.
60-20-20 us-intl-bond
Re: What to do with VUL policy?
Welcome to the Forum!
No way I’d keep the VUL policy in force any more.
If you want the cash now and are willing to pay taxes on the $105k gain, pick option 1
If you’d like to defer the tax hit into the future a little bit, then consider a 1035 exchange into either a low cost variable annuity or one or more multi year guaranteed annuities. For example, Fidelity has a VA that has a 25bp maintenance fee and reasonable fund fees. You’ll need to keep the money in there until you’re at least 59.5 to avoid a 10% penalty tax on earnings, but you could withdraw quickly (or slowly) after that. Alternatively, buy one or more MYGAs with a term that goes out beyond your age 59.5. You can take the money from the MYGA without surrender charges when it matures, or roll it into a new annuity for a new period.
The advantage of the 1035 exchange in my mind is that it lets you decide when to bring in the taxable income.
Post back if you want to explore 1035 exchanges more.
No way I’d keep the VUL policy in force any more.
If you want the cash now and are willing to pay taxes on the $105k gain, pick option 1
If you’d like to defer the tax hit into the future a little bit, then consider a 1035 exchange into either a low cost variable annuity or one or more multi year guaranteed annuities. For example, Fidelity has a VA that has a 25bp maintenance fee and reasonable fund fees. You’ll need to keep the money in there until you’re at least 59.5 to avoid a 10% penalty tax on earnings, but you could withdraw quickly (or slowly) after that. Alternatively, buy one or more MYGAs with a term that goes out beyond your age 59.5. You can take the money from the MYGA without surrender charges when it matures, or roll it into a new annuity for a new period.
The advantage of the 1035 exchange in my mind is that it lets you decide when to bring in the taxable income.
Post back if you want to explore 1035 exchanges more.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Re: What to do with VUL policy?
+1 An excellent time to get out of a VUL. You indicate you don't need insurance and the cost of the insurance component of VUL is high and goes up every year. The insurance component is annual renewable term insurance so as you age the cost of insurance goes up. In many policies the costs of insurance become so high that it begins to absorb the cash value of the policy. With the various sub-accounts there are a lot of costs and fees that are not always easy to discern.Stinky wrote: ↑Sat Jul 24, 2021 9:17 pm ...If you want the cash now and are willing to pay taxes on the $105k gain, pick option 1
If you’d like to defer the tax hit into the future a little bit, then consider a 1035 exchange into either a low cost variable annuity or one or more multi year guaranteed annuities...
The closest helping hand is at the end of your own arm.
Re: What to do with VUL policy?
A minor enhancement on my idea
Partially surrender the $330k basis out of the VUL now. No tax is due now. Then 1035 exchange the remaining $105k, which is all gain, into one of the annuities mentioned.
The benefit of this approach is that it will liberate about 75% of your total cash value right now, with no current taxes paid.
Post back with questions.
Partially surrender the $330k basis out of the VUL now. No tax is due now. Then 1035 exchange the remaining $105k, which is all gain, into one of the annuities mentioned.
The benefit of this approach is that it will liberate about 75% of your total cash value right now, with no current taxes paid.
Post back with questions.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Re: What to do with VUL policy?
DarkHelmut, CChrissyy, and 123, thank you all for your replies. Very tempting to just follow KISS principles, and simply bite the bullet and pay the tax. Every day I keep it in force, it is losing some fractional cost to clear and hidden fees. I had buyers remorse year one and thought about surrendering it and taking the surrender charge hit. I got a printout of how the clock worked on the policy over 10 years which did disclose a lot but I just kept it rather than lose $30K. The funds would have earned more elsewhere, but at least it is ahead of the illustration, and it worked like forced savings. But, now it is time to get out.
Stinky, thanks for pointing me to the Fidelity product (Fidelity Personal Retirement Annuity was the one I looked at). I have accounts at Fidelity already. Your second post answered my first question before I could research and respond; could/should I surrender up to the basis to free up the majority. Sounds like I can do that and like the idea of just putting that in taxable AA. I saw some reference to a 1035 exchange not being basis first out like a distribution so was not sure.
Can you help me understand the logistics? My thoughts: 1) liquidate the sub accounts to cash, 2) contact Penn Mutual to partial surrender up to basis, 3)contact Fidelity to arrange 1035 exchange into their annuity. 4) select the annuity investments as part of my AA, probably bond funds since deferred. Is there a separate Fidelity account set up to hold that annuity (would not seem to go in either my taxable or tIRA but maybe)? Will Fidelity pull directly from Penn like a rollover ? I’m sure Fidelity can answer all this too but I always like to know the answers first. Thanks for your time.
Stinky, thanks for pointing me to the Fidelity product (Fidelity Personal Retirement Annuity was the one I looked at). I have accounts at Fidelity already. Your second post answered my first question before I could research and respond; could/should I surrender up to the basis to free up the majority. Sounds like I can do that and like the idea of just putting that in taxable AA. I saw some reference to a 1035 exchange not being basis first out like a distribution so was not sure.
Can you help me understand the logistics? My thoughts: 1) liquidate the sub accounts to cash, 2) contact Penn Mutual to partial surrender up to basis, 3)contact Fidelity to arrange 1035 exchange into their annuity. 4) select the annuity investments as part of my AA, probably bond funds since deferred. Is there a separate Fidelity account set up to hold that annuity (would not seem to go in either my taxable or tIRA but maybe)? Will Fidelity pull directly from Penn like a rollover ? I’m sure Fidelity can answer all this too but I always like to know the answers first. Thanks for your time.
Re: What to do with VUL policy?
Option 1
Don’t kick the can down the road
Don’t kick the can down the road
Re: What to do with VUL policy?
That’s a creative idea.Stinky wrote: ↑Sat Jul 24, 2021 9:40 pm A minor enhancement on my idea
Partially surrender the $330k basis out of the VUL now. No tax is due now. Then 1035 exchange the remaining $105k, which is all gain, into one of the annuities mentioned.
The benefit of this approach is that it will liberate about 75% of your total cash value right now, with no current taxes paid.
However, you would have to weigh the benefit of avoiding current taxation on the gain against both the expenses of the annuity and continuing to convert the future growth to ordinary income and giving up the basis step-up (on the future growth) at death.
Re: What to do with VUL policy?
Yes, the Fidelity Personal Retirement Annuity is the correct product to be looking at.Retrotied wrote: ↑Sun Jul 25, 2021 7:14 am Stinky, thanks for pointing me to the Fidelity product (Fidelity Personal Retirement Annuity was the one I looked at). I have accounts at Fidelity already. Your second post answered my first question before I could research and respond; could/should I surrender up to the basis to free up the majority. Sounds like I can do that and like the idea of just putting that in taxable AA. I saw some reference to a 1035 exchange not being basis first out like a distribution so was not sure.
Can you help me understand the logistics? My thoughts: 1) liquidate the sub accounts to cash, 2) contact Penn Mutual to partial surrender up to basis, 3)contact Fidelity to arrange 1035 exchange into their annuity. 4) select the annuity investments as part of my AA, probably bond funds since deferred. Is there a separate Fidelity account set up to hold that annuity (would not seem to go in either my taxable or tIRA but maybe)? Will Fidelity pull directly from Penn like a rollover ? I’m sure Fidelity can answer all this too but I always like to know the answers first. Thanks for your time.
I'm not sure why you'd want/need to liquidate the subaccounts to cash first. It seems to me that you could request that the exact dollar amount of your basis, down to the pennies, to be paid to you as a partial surrender of the VUL product. I expect that the insurance company could do that in one step - that is, make a partial surrender without a pre-conversion of the required amount to cash.
If you go the Fidelity route, there will be a separate Fidelity Variable Annuity contract. I expect that it would appear as a separate line item on your statement. I expect that Fidelity would pull funds directly from Penn Mutual, once you inform Fidelity that you want to go that route.
If you're looking to invest your annuity money in a bond fund, you might make a little more money by purchasing one or more multi-year guaranteed annuities (MYGAs). That way you can have a guaranteed fixed rate for a definitive amount of time, and the fixed rate is likely higher than on current bond funds. Fidelity sells MYGAs - here's a link to the Fidelity page on products offered. https://fixedincome.fidelity.com/ftgw/f ... bannuities Fidelity only sells MYGAs from very highly rated companies - you can find more companies, and many higher rates, at www.blueprintincome.com
As I see it, a significant benefit a doing a 1035 exchange of the current VUL policy "gain" is that it allows YOU to decide when to take the income. If you'll be in a lower tax bracket in the foreseeable future, then a 1035 exchange may make a lot of sense. Please realize two things, however: (1) any distributions of "gain" prior to your age 59.5 will incur a 10% tax penalty, and (2) you are delaying taxes, but not avoiding them. Even if you die, your beneficiaries will owe tax on the gain in the annuities.
Please post back with questions.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Re: What to do with VUL policy?
The drag from expenses on the annuity is real. OP would need to weigh the cost of the annuity expenses against the tax savings by being able to take the income in a future year when his income (and tax rate) is less. OP could also consider a MYGA, which has no expense charge (see my recent post).bsteiner wrote: ↑Sun Jul 25, 2021 7:36 amThat’s a creative idea.Stinky wrote: ↑Sat Jul 24, 2021 9:40 pm A minor enhancement on my idea
Partially surrender the $330k basis out of the VUL now. No tax is due now. Then 1035 exchange the remaining $105k, which is all gain, into one of the annuities mentioned.
The benefit of this approach is that it will liberate about 75% of your total cash value right now, with no current taxes paid.
However, you would have to weigh the benefit of avoiding current taxation on the gain against both the expenses of the annuity and continuing to convert the future growth to ordinary income and giving up the basis step-up (on the future growth) at death.
OP said that he would likely invest the annuity in fixed income. I agree that it would be less tax-efficient to invest in equities in the variable annuity, since ordinary tax rates would apply to the gains in the VA and there is no step up in basis at death.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Re: What to do with VUL policy?
"Kicking the can down the road" could potentially result in $1,000s, or even $10,000s, of tax savings for OP, if he is able to defer recognition of the income within the VUL product until a year when his taxable income and tax rate is less.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Re: What to do with VUL policy?
I agree.bsteiner wrote: ↑Sun Jul 25, 2021 7:36 amThat’s a creative idea.Stinky wrote: ↑Sat Jul 24, 2021 9:40 pm A minor enhancement on my idea
Partially surrender the $330k basis out of the VUL now. No tax is due now. Then 1035 exchange the remaining $105k, which is all gain, into one of the annuities mentioned.
The benefit of this approach is that it will liberate about 75% of your total cash value right now, with no current taxes paid.
However, you would have to weigh the benefit of avoiding current taxation on the gain against both the expenses of the annuity and continuing to convert the future growth to ordinary income and giving up the basis step-up (on the future growth) at death.
Just more support for my original thought to cash in the policy, pay the taxes and move on.
When a person s need for life insurance is ended, maintaining a policy is a waste of money. Optimizing taxes on the gain may not make up for the high carrying costs. Simplify your situation and invest the life insurance cash value in index funds.
When I dropped my life insurance policies around age 50, one of my agents made a 120 mile round trip to meet me at my office one day to discuss this move. After a very comfortable conversation where I gave him a limited amount of information regarding our finances, he agreed with my decision to terminate his policy.
Just to reiterate, if one doesn t need the insurance, keeping a policy for an investment is a bad choice.
Re: What to do with VUL policy?
OP wants to cancel the life insurance policy. I absolutely agree.
However, if OP chooses to optimize taxes by moving the taxable gain from a high-cost VUL to a low-cost (or no-cost) annuity and then time withdrawals from the annuity to minimize taxes, I think that is a prudent move.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Re: What to do with VUL policy?
And if he can’t find a “bad year” then the tax problem is even worse.
Unless you feel highly certain about that coming up, don’t do it.
Most people who are big savers will not benefit from kicking the can.
Not even considering increase in taxes nor loss of step up at death
Re: What to do with VUL policy?
Thanks for all of the replies. I understand the issues. I was a little afraid of the 1035 exchange into an annuity because I only knew about traditional annuities and did not want to follow up one bad decision by making another. Stinky, thanks for highlighting the Fidelity product for me to look into further. I think bsteiner, Rex66, and bltn all stated what I need to evaluate further as well.
I could 1035 exchange and save down the road on taxes, or not. I really like the idea of better controlling the timing of the taxes with the 1035. But, there are other moving parts you all pointed out to include pure simplification, step up in basis, and and ironically “hoping” to be in a lower bracket down the road. For me, how well it works tax wise depends how long I realistically might work, factor in timing of the deferred comp payouts (which is compressed at 4 years post-exit), and a very likely (though not considered other than to tax plan) inherited IRA somewhere in that same window +/- $1M to empty over 10 years.
So, lots to think about. Either way you answered the question about how best to get out of the VUL. No one said keep it and take loans. There is an opportunity to optimize for taxes, it might or might not work out, and it might or might not be worth the effort. Will let you all know somewhere down the road. Thx
I could 1035 exchange and save down the road on taxes, or not. I really like the idea of better controlling the timing of the taxes with the 1035. But, there are other moving parts you all pointed out to include pure simplification, step up in basis, and and ironically “hoping” to be in a lower bracket down the road. For me, how well it works tax wise depends how long I realistically might work, factor in timing of the deferred comp payouts (which is compressed at 4 years post-exit), and a very likely (though not considered other than to tax plan) inherited IRA somewhere in that same window +/- $1M to empty over 10 years.
So, lots to think about. Either way you answered the question about how best to get out of the VUL. No one said keep it and take loans. There is an opportunity to optimize for taxes, it might or might not work out, and it might or might not be worth the effort. Will let you all know somewhere down the road. Thx
Re: What to do with VUL policy?
Thanks for your thoughtful response. You’ve got the facts, and you’ve got a lot to chew on.Retrotied wrote: ↑Sun Jul 25, 2021 12:05 pm Thanks for all of the replies. I understand the issues. I was a little afraid of the 1035 exchange into an annuity because I only knew about traditional annuities and did not want to follow up one bad decision by making another. Stinky, thanks for highlighting the Fidelity product for me to look into further. I think bsteiner, Rex66, and bltn all stated what I need to evaluate further as well.
I could 1035 exchange and save down the road on taxes, or not. I really like the idea of better controlling the timing of the taxes with the 1035. But, there are other moving parts you all pointed out to include pure simplification, step up in basis, and and ironically “hoping” to be in a lower bracket down the road. For me, how well it works tax wise depends how long I realistically might work, factor in timing of the deferred comp payouts (which is compressed at 4 years post-exit), and a very likely (though not considered other than to tax plan) inherited IRA somewhere in that same window +/- $1M to empty over 10 years.
So, lots to think about. Either way you answered the question about how best to get out of the VUL. No one said keep it and take loans. There is an opportunity to optimize for taxes, it might or might not work out, and it might or might not be worth the effort. Will let you all know somewhere down the road. Thx
Let us know if you have any more questions. And please post back when you’ve made a final decision as to how to proceed.
PS - Glad that you’re going to get rid of this filthy, dirty VUL product. Happy that you’ve recognized the money pit that it is.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”