Raiford does not recommend a variable universal policy for those aged 60 and older.
The tax advantages and the opportunity to build wealth made the variable universal product attractive to Ron Tigner, president of Georgia Certified Development Corp. in Atlanta. But it took some persuading by a financial adviser to get the former whole life policyholder on board.
“The potential for rapid appreciation affords me the protection I want,” says Tigner, 54. “The objective is to defer taxes as long as possible. It’s a way to invest with no immediate tax consequences.”
Tigner’s company provided him with a variable universal life policy for $150,000 about seven years ago, and then another for $750,000 about two years ago, replacing the whole life policy he had purchased previously. He also has a 401(k) plan, a Roth IRA, and a 475 plan. The average return from his variable life policy is 8.45%, after the cost of insurance. (Cost is determined by the age and health of the policyholder.)
“The return is the same as you can get in the market,” says Jan Williams, financial adviser for AXA Advisors in Atlanta, “minus the cost of insurance and administrative fees. As with a 401(k) plan, the return depends on the options you select.”
Even with the risk, the variable universal product is recommended for most clients instead of whole life as a wealth-building tool, Williams says. He advises meeting with a financial adviser at least twice yearly to monitor and maintain the investment component of the policy.
Whole life insurance
Whole life insurance also has its benefits. It’s less risky than variable life, buyers receive a guaranteed or fixed amount of money, and premium payments do not change over the life of the policy. Whole life insurance policies are often popular among consumers close to retirement age. The downside: it costs more. But as with other life insurance products, the premium payments often can be suspended when the cash value increases enough to cover those payments. “You’re paying more in terms of premiums today,” Eaton says, “but you have reassurance.”
With whole life, policyholders don’t direct where the money goes; the insurer chooses the stock investments. Hunt says his firm invests 85% of the premiums into fixed-income options and 15% into real estate, stocks, and other areas. The rate of return among whole life policies could be 4.5% or higher over 25 years, says Eaton, who is also a financial representative of Guardian Life Insurance Co. in New York. Hunt notes that whole life isn’t for everyone; he sees it as more of an enforced savings plan than an investment vehicle.
Consumers shouldn’t buy life insurance if they can’t commit to paying the premiums for 15 years or more, adds Eaton. If you don’t keep up the payments, the policy could be canceled, and you could lose what you’ve paid out. If you cancel the policy within the first 10 years, you could incur heavy surrender charges, Raiford adds.
Insurers are creating more options, or riders, to make whole life more flexible. Riders such