Is CV a marketing gimmick in VUL?

[Guest]

Friend of mine (not a client) OWNS a paid-up $500K VUL on her father's life... with the CV in a money market and some fund (I forget which). It does not pay much but there is about $105,000 of CV.

She took a loan on policy (of CV) of $20,000 about 10 years ago at about 5.30% interest. She has never paid a dime back into it and now she owes about $40,000 meaning her DB will be $460K.

Yes she has CV but it would be crazy to take $100K now an give up $460K later on (her dad is in early 80s). She can't afford to pay off the $40K loan and she is concerned that it is just eating away at the DB.

She asked if her CV could be used to pay off the loan. I told her I didn't believe so, but it was not my area of expertise and I'm not licensed to do variable anything and sent her to someone else. That agent told her the CV is basically worthless in her case unless she got in dire straights and had to have $100k quickly (she has a job and health insurance, home equity, etc... kids are grown... no need for CV.)

WL is sold with the concept of "Wow, you get this CV if you need it." But is it really a huge benefit? True, it could have been a term policy on her dad and he could have outlived it and not been able to get additional coverage at age 80.

I'm not against WL, I just don't see where the CV is all that great a selling point for HNW people. I think it is a gimmick.

Now IF she could use the CV to pay off the loan, that would be GREAT. But the only thing you can do with CV is borrow it... or get it via surrender.

A life settlement might be worthwhile but she will probably lose 30% of her DB, maybe more.

Fortunately she does not need the money now... but she is not happy with the broker who sold her the policy 15 years ago!

Comments welcome. Like I say, this is not my area of expertise.

Al

 

[MIBizInsurance]

Al,

Walking out the door so real quick-

Seliing purely on CV is as much of a gimmick as is "buy term invest the rest"

As many have mentioned there are many reasons to buy term and buy a form of WL.

There should be reasons to buy a WL policy. I never sell it as - " Well look at the CV you will have 20 years from now"

It's more like - "As your worried about estate taxes lets look at WL to provide tax free funds to deal with that"

Thats pretty simple but think you get the point.

It's only a gimmick if sold in a gimmicky way.

For me its the agent that sells WL with a /wink under the guise that it's an "investment"

Just as bad as the agent who sell term and only term then bashing WL at any chance they get.

 

[LGilmore]

"But is it really a huge benefit?"

can be..

"Just as bad as the agent who sell term and only term then bashing WL at any chance they get."

excellent point..

al3, why do I get the feeling you are on a fishing trip?

what company is the policy with and what's the policy label(brand name ie truvision 3000, etc..) with and what are the loan repayment options within the policy?

 

[djs]

In some cases, you can change the loan to a withdrawal (watching tax implications) and decrease the death benefit appropriately so it stays paid up, i.e., not eating the CV to pay the insurance part, but only the income portion.

You can't pull money out of your savings account and not have some consequences. You can't pull money out of a life policy and not have some consquences, it comes from somewhere.

Your friend found a perfect use for CV, she was able to borrow some (yeah, it's her money anyway), and never pay back a dime of the loan. Try doing that with the bank. Even if you have a savings account, you take out a loan, you have to pay it back.

Dan

 

[Dave020]

I think that using proper terminology helps clear up misconceptions about life insurance. In the case of permanent life insurance, you will find all documentation (legal) refers to Cash SURRENDER Value, not Cash Value or CV. Lots of people throw the term CV around like it is some kind of interest-earning savings vehicle. It is a Surrender value that is paid to the insured at the surrender of the policy, and of course will vary depending on type and performance of the policy.

So, any activity on the cash surrender value of a policy that does not include the surrender of the contract is going to have reprecussions. In this case, a large loan was taken out and neither principal nor interest were paid back. The only way to remove cash surrender value monies from a policy without these issues is to then reduce the death benefit of the policy to correspond to the reduction in the surrender value (a kind of reverse corridor effect).

With a variable policy, the policy owner is subject to the whims of the market. It is possible that the sub accounts in the policy could produce enough increase in the cash surrender value to break even or exceed the costs of the policy loans. Given the rather flat performance of the market (if the sub accounts are even investment grade choices), the 5-8% annual interest rates may exceed the earning of the surrender value. Thus a negative situation is created.

So, yes, there are agents out there who sell the "CV" because it is sexy and can be sold. Of course there is often little or no real explanation of the consequences of taking out loans against such a policy.

If you really want to see some sh*t, talk to someone who has been caught in a "surrender squeeze". That is a nightmare that can occur with borrowing from your csv. And it usually happens when the client is very old and not usually financially able to absorb the capital gains tax or pay premiums on the policy.

And, no, you cannot use the assets in the CSV to pay off a loan. That simply creates more loan. However, it may be possible to take a reduced benefit to eliminate the loan and stop it from continuing to erode the death benefit and policy value.

 

[Guest]

It is possible that the sub accounts in the policy could produce enough increase in the cash surrender value to break even or exceed the costs of the policy loans.

How does that help the owner of the policy? She can't get the monthy/yearly interest/dividends from the sub-accounts, can she? I thought it all goes into the CSV bucket. If you never plan to borrow from the policy (or more accurately, never DO borrow from it) this is just "mythical money." I'm sure it is nice in an emergency, but I wonder how many people actually borrow the limit or surrender their policies.

If you buy a policy strictly for the DB (which is what you should do) it would make no difference if the CV was in a money market or a mutual fund since the chances are that you will never see that money.

Al

 

[Guest]

al3, why do I get the feeling you are on a fishing trip?

what company is the policy with and what's the policy label(brand name ie truvision 3000, etc..) with and what are the loan repayment options within the policy?

I have a copy of the last quarterly statement:

I don't see a "Policy Label"

Plan is with Merrill Lynch Life Insurance Company
Effective date Jan 22, 1996

Investment: Blk Mon Mkt Port (Blackrock Money Market)
Price 37.519
Quantity 2798.600
Value 105,002.07
Total Investment Base Value $105,002.07

Total Payments to date: 169,666.50
Net LI Benefit: 462,630
Net CSV: 104,801.08
Loan Outstanding (+ interest) 37,370.35
Loan Collateral (+ credit) 37,169.36
Net Loan Cost: 200.99


Activity During Last Qtr:(need to use ='s to get space for columns)

============== Inv. Base ========Surr. Value
Value as of
7-22-07 =======106,174.44 =======106.041.18

Invest. Rtn====== 1102.30 =========1102.30
Cost. Ins.======= (2274.67) ======= (2274.67)
Net Loan Cost ======N/A ========== (67.73)

Total Net Chg.====== (1172.37) ======= (1240.10)

Value as of
10-22-07 ========105,002.07 ======104.801.08

That's all I know.

Al

 

[LGilmore]

"I don't see a "Policy Label""

what is the policy called?

ML ever3000?
Hal2000?

Polices are given product names. Knowing the name can help you find the details (policy provisions) that tell you contractually how the policy is set up. It would be VERY bad for you to offer any advice without knowing what policy you were kicking in the backside... especially if you are considering replacement.... I would ask to see the actual policy itself and go for a bit of a read... then I would call ML customer service and simply ask them how best to solve the problem she has...

Here's why.. none of us here know exactly how this contract is set up and advantages/disadvantages it has..for you to give any kind of advice puts you at risk, cause you don't really know, you have a quarterly statement, that's not enough information to advise anybody. Find out more about the product..google it.

Am I correct in seeing all the funds are in a mmarket account? why?
why is the share price 37.519 for a mmarket account? I don't know of any mm accounts that trade for anything other than a dollar.

Lucy, got some xplainin to do.....

 

[Dave020]

How does that help the owner of the policy? She can't get the monthy/yearly interest/dividends from the sub-accounts, can she? I thought it all goes into the CSV bucket. If you never plan to borrow from the policy (or more accurately, never DO borrow from it) this is just "mythical money." I'm sure it is nice in an emergency, but I wonder how many people actually borrow the limit or surrender their policies.

If you buy a policy strictly for the DB (which is what you should do) it would make no difference if the CV was in a money market or a mutual fund since the chances are that you will never see that money.

Al

Increases in CSV accounts (sub accounts) in excess of losses to loans would propel the DB of the policy upwards regardless of the interest on the loans. It is called the CORRIDOR EFFECT and relates to the proportion of CSV in policy to the overall death benefit. Quick increases in CSV will require the db to increase at the same rate to avoid a MEC. It is the way policies are supposed to work unless the agent sets it up intentionally to MEC (very seldom done and then only for certain reasons).

The difference it that you don't need a variable contract if you are not going to take advantage of the investment subaccount options. MM earns less than the crediting divident from the big mutuals so why bother. You can get a better internal ROR on any big mutual whole life than on a variable life with MM only investment subaccount.

Secondly, while db is the purpose of life insurance, it can be moved to an annuity should the db or some portion of the db not be required. For example, a variable policy could work as follows:

Buy $1M DB Variable policy $4,000 premium
Invest in 3 or 4 sub accounts for growth (tax deferred)
30 years subaccounts are worth $750k and DB is $1.75M
Client needs $500k DB max.
Agent reduces paid up policy to $500 and rolls excess CSV into an annuity (1035 exchange)
Client has DB paid up and now gets income from the annuity as well.

 

[djs]

Buy $1M DB Variable policy $4,000 premium
Invest in 3 or 4 sub accounts for growth (tax deferred)
30 years subaccounts are worth $750k and DB is $1.75M
Client needs $500k DB max.
Agent reduces paid up policy to $500 and rolls excess CSV into an annuity (1035 exchange)
Client has DB paid up and now gets income from the annuity as well.

I need some of these customers.... I know they exist, but they don't come out of the woodwork.

Dan