Variable vs Term Life
Raymond Yu
Hi,
A friend of mine recommended me to consider buying variable life
insurance
to maximize growth, minimize taxation, plus death benefits and others
as
bonus. But after reading some articles and listening to MoneyTalk on
KGO
for awhile, most advisors recommendation is:
If I don't need life insurance, don't buy it and
invest everything in mutual funds and 401k.
If I do need life insuarence, buy term life and invest the rest
in mutual funds(equity funds) and 401ks.
I am 27, so I don't need life insurance and I have disability insurance
at work.
The thing that attract to me about variable life is:
1. I can invest in mutual funds within the insurance company
2. all money in the account is tax-deferred
3. I can loan up to 90% of the money in the account, tax-free
4. all money in my account is private money, the court can't
take it.
Are the above 4 statement true? Are there any catches? Thanks.
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Raymond W Yu <ra...@cup.hp.com> [PGP Public Key]
Engineering Services, Hewlett Packard Co.
408-447-4050
ra...@cup.hp.com
http://alumni.cse.ucsc.edu/~rayyu
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Chuck Weinstein
Raymond,
Don't believe everything you hear on the radio. You should maximize
your contribution to your 401(k), first of all. That is before tax
money. All of the reasons you listed for buyiung variable life
insurance are true, with the possible exception of number 4. Cash
values of life insurance can be taken under some very limited situations
(tax liens, etc.) However, they are much harder to get at than other
assets. Look for a good policy with low expenses and one you can
greatly overfund, since you probably don't need much in the way of a
death benefit. Just don't overfund it too much or you will lose some of
the benefits. Also, make sure there is a good variety of fund types
available to meet your investment philosophy. Good luck to you.
Chuck Weinstein, CLU, ChFC in San Francisco
cm...@ix.netcom.com
ski...@swcp.com
> Raymond Yu <ra...@hpindda.cup.hp.com> writes:
> The thing that attract to me about variable life is:
>
> 1. I can invest in mutual funds within the insurance company
> 2. all money in the account is tax-deferred
> 3. I can loan up to 90% of the money in the account, tax-free
> 4. all money in my account is private money, the court can't
> take it.
>
> Are the above 4 statement true? Are there any catches? Thanks.
In strict legal terms, you are not investing directly in the mutual funds, in
most cases, but in a subaccount that invests in the mutual fund. You do
not own shares in the mutual fund, but, rather, in the subaccount. For
most practical purposes, this is not important.
The GAIN, or GROWTH, of the fund is tax deferred.
You can BORROW up to 90% from many variables (not all) The loans
are, of course, income tax free. However, if the policy is ever cancelled,
or allowed to lapse, all those loans become, retroactively, taxable, even
if the loan(s) were taken years before. Taking 90% of risky!!! A few bad
years of market performance could put you in the position of having to
feed the fund more money.
There IS some protection, but the courts might be able to get at the fund.
I don't think there IS such a thing as "the court can't....."
Bottom line
There are warts and risks, of course.
Many people buy variables because of the tax shelter and good performance.
The insurance, in those cases, are merely the price of the tax shelter. If
that shelter, given equal performances, gives you better after tax income
at retirement, it doesn't make any difference whether you need/want the
insurance. Don't let "moral" judgements, i.e. "If you want insurance, buy
insurance" sway you. That statement is a value judgement, not necessarily
good advice for all parties.
Hope this helps,
Cheers, skibum