VAL as an investment

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KMK
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VAL as an investment

Postby KMK » Sun May 06, 2007 9:05 pm

Is anyone familiar with VAL Life Insurance? I was given this as an option of one place to invest money when I make too much for a Roth IRA. As far as life insurance in general, I am an only child, single, and planning on not having kids, so it is not a big priority for me at this point.

I do trust my financial advisor, but since this is something I've never heard of before, I thought I'd solicit some second opinions. Thanks.

MossySF
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Postby MossySF » Sun May 06, 2007 9:50 pm

Basically, the V in the acronym stands for Variable. Standard cash value insurance policies usually have fixed or semi-fixed (floor + ceiling) returns. Throw in the V (you may also see acronyms like VUL or VL) and that means your return depends on the performance of the mutual funds you pick. Because the mutual funds are wrapped around by an insurance policy, gains are tax-deferred until you take money out of the policy. There's also the option of borrowing money against your cash value and allowing the death benefit payout to repay the loan -- this in effect gives you tax free gains.

That's the good. The bad -- fees. There are multiple fees associated with insurance polices.
* Commission based on your contribution
* Commission based on the initial policy death benefit
* Fixed expenses
* Fund expenses
* Mortality Risk expense based on your total cash value
* Surrender fees (withdrawing money early in the policy)

For most people, the plethora of fees makes it a truly bad deal. For a limited subset, it can be a good deal if you pick a policy that overweights their fees to fixed amount categories -- and then you put in a ton of money to overwhelm the fixed amounts. If you contribute just the "target premium" amount, you may end up paying as much as 20% in commissions+fees. If you contribute the maximum the IRS allows, it's possible to reduce this amount to 2% and at this level, it can beat taxable accounts over the longterm (15+ years).

Ask your trust advisor to give you multiple options and break down all the above costs. Find out what the target premium and IRS 7-pay limits are for your age + health class + death benefit. With those numbers, you should be able to calculate what the overhead is for your investment amounts.

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Dylan
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Postby Dylan » Mon May 07, 2007 5:19 pm

MossySF wrote:the plethora of fees makes it a truly bad deal.


YES, YES, YES!

My general philosophy on insurance and investing is: when you need insurance, buy it; when you don't need insurance, don't buy it; and, when you want to invest, don't use insurance.

Brokers get paid more to sell a variable life insurance policy or annuity than they do to sell a stock of mutual fund. Why? Because the insurance companies need the extra incentive to get brokers to sell it. Why do they need that extra incentive? Because it is generally not the best investment option. And, despite popular belief, a "financial advisor" employed by a broker/dealer is not obligated to act in your best interest, nor do they have to verbally disclose that fact; it only must appear as a line in their lengthy customer agreements.


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