Is Variable Universal Life Insurance right for us?

My wife and I recently started variable universal life insurance policies. We are paying about $600 a month toward the policy on top of what we are each contributing to our 401k plans. We are both under 30 yrs. old, and are trying to get a good start on our retirement. Should we be investing in IRA's or something else instead? We both supported ourselves before we got married, so do we even need life insurance right now since we don't have children yet? Our advisor works for New York Life, and he's telling us that the variable universal policy is the best first step. I feel like he is just trying to maximize his commision instead of doing what's best for us. I know, we shouldn't have gone to an insurance salesman, but he was recommended by a close friend. What should we do? Combined, we make $85,000/yr. I contribute 6% to my 401k, and my wife contributes 1%. We are homeowners, not renters. Other that that, we don't have any other investments.

Public Comments

1. Don't you get life insurance through your jobs? How is putting $600 a month into life insurance going to benefit you? You can get a much better policy through you work benefits for much less money.
2. How much do you make? What other savings do you have? Are you going to be in a high tax bracket forever? Dave Ramsey provides great advice for what you should fund first, second, third etc. I am guessing VUL may be close to last or second to last on the list. It should still be on the list, but not a #1 priority for anyone EXCEPT your captive, New York Life agent that will get to pocket 40% + of your first years commission, I mean premium. I wouldn't cancel anything until you paid another $600 to a fee based financial planner to put together real plan for you and your wife. That way, you can see if VUL does make sense. Then it is up to you to talk to your New York Life insurance agent (don't call them an advisor).
3. I was an insurance salesman myself about 10 years ago. I was selling a lot of the VUL as it was a hot item back then. And you're right, we were (and probably still are) driven by the high commission coming out from that particular product. Just so you know, the first 2 years of your contribution will be going towards the commission and other expenses to open your account. So don't count on withdrawing from it during that time, because your surrender value is close to nothing. Back then I also convinced myself it was the best investment ever because of the tax shelter when you "withdraw" your money a the time of retirement. Couple years later as I grew up in the financial world, I discover it wasn't necessary true. The VUL provides you with a limited numbers of funds, therefore you will lack of choices. You might also find that the premium of the insurance portion on a VUL is higher than a premium for a term life. And remember that too much fees (insurance, mutual funds, etc..) will reduce your investment gains and over the long term, instead of earning the 8% typically used, you might be reduced to a 7% or 6%. Remember that you can only receive either the money from the insurance or the money from the invesment, not both. So I think you and your family will be better protected if you were to keep the insurance separated from the investment(s). Since the Roth IRA came along, you will still be able to withdraw your investments gain tax free after the age of 59 1/2, and your contribution anytime without being tax or penalty. Of course, there is a limit of how much you can contribute into the Roth ($4k in 2006), and your adjusted gross income must be less then $160k if you and your wife file jointly. As always, the rule of thumb of an investor is to diversify his/her investments to reduce the risk. If that $600/month is high to you, you should consider changing the policy and reduce it to $300/month (because you're still convinced VUL is a great product for you) and use the remaining $300 to another investment type such as a Roth.
4. No, life insurance of any kind is not appropriate if you don't need it. If someone does need life insurance I recommend a term policy (cheaper & more coverage). I used to work at a life insurance company and it is ridiculous what agents make on commission. The advisor may be a complety trustworthy person, but he is thinking about his bottom line not yours. Put the money in a Roth IRA, and you will be far better off in the long run.
5. wow, lots of things ... first your answers (as best i can) and in the meantime to comment on some other comments. first, whether a VUL is appropriate ... well, we cant really know though i appreciate you adding as much information as you have. PERSONALLY, i would rather see you doing a roth ira and maxing out your 401k PRIOR to "overfunding" a VUL. a life insurance policy can be a powerful component to an overall portfolio, but it is usually a little more costly to make it work properly. lets use the cheaper alternatives first is how i see it. if you are not confident with your advisor's recommendation, then i agree with Good Time that you should get a second opinion. i disagree with Good Time in that (depending on the individual) your person at NY Life is quite likely an "advisor" by both licensing and vocation. a couple of NY Life tidbits - which you can check on the web. they are a comprehensive financial services company and their advisory personnel are (generally) not "captured" meaning they can sell insurance from any carrier they want to. however, NY Life is recognized by all the independent rating agencies (and their competitors) to be top of the heap. so, if you NEED insurance, you cant go wrong with a policy from this company. the question still remains, do you need insurance? finally, financial guru is far from one. you can "need" insurance for a variety of reasons. in some cases the only option to satisfy a need is a permanent policy (VUL is considered permanent insurance). for him to state otherwise indicates a lack of understanding in the full planning process. i hope i answered your question and by addressing other advice you received here, clarified your decisionmaking process on this matter.
6. Okay- I'm going to try to take this a piece at a time without going on and on forever. 1st- you've received a few good ideas here, but they're only good in-so-far as they go and some of them don't address the downsides to what they discuss. There are also a few not-so-good answers here as well. Personally, I agree with your advisor. A VUL is a great first step. As you're aware, the $600 you're funding it with is NOT going to the insurance costs alone. In fact, at your ages, I'd assume (with no health challenges), that your cost of insurance (COI) is fairly minimal. Then there are whatever fees, etc.. that your company uses to fund itself - I don't know your particular policy fees so I'm not going to comment on them except in a general way. Let's look at some of the answers you've gotten and try to check both sides of them. 1st - Maxing out your 401k. I'd agree with this only up to the company match of funds. If your company doesn't match, I wouldn't contribute at all. Here's why. Remember 401k's are tax deferred vehicles - not tax advantaged ones. That means you ARE going to pay taxes on what you've earned in them when you pull that money out (I am not discussing the new Roth 401k's that began this year). Are those taxes going to be higher at your retirement than they are right now? I don't know, I'm not psychic - and I'll likely be long dead when you retire, so I'll never know. However, I'm just guessing they will be at least the same if not more. Right now, you're likely getting a tax advantage when you put your money into your 401k. However, it's minimal to the tax you're likely going to pay on the far side. If you were in front of me, I could show you some numbers on that. You might want to ask your own advisor locally to do just that. Ask him to show you what you'd potentially be paying - even at the same tax rate you're in now - at retirement, when you pull your money out of the 401k - and run those numbers over say the projected 20 years or so of your life after retirement. Then ask yourself if you'd be willing to give up the rather small saving in the front to potentially save the large one on the back end. The good point to a 401k is that your money does grow without being taxed as it grows. The bad point is that it's now taxed after it grows big and you pull it out. The good point is that if your company matches you say dollar for dollar or maybe even fifty cents to the dollar, then that money will basically handle the taxes down the road. That match is pretty much free money, grab it. However, a lot of employers don't even match that much now and some don't match anything at all, or if they do, they only match a small percentage of what you contribute. There are other potential down sides to a 401k, but since you seem to be interested mainly in retirement instead, I'm not going to go into them here. Roth IRA - yes, you can pull this money out tax advantaged on the far side after 59 1/2. A ROTH can be an extremely useful thing for someone your age (it's likely not as useful for someone older who needs to put away more money to catch up for what they haven't done earlier.) However, the down side to the ROTH is that for most purposes you can't touch that money until you are 59 1/2 without penalty. Life sometimes has an annoying tendency to make it necessary to access certain money before then, even if you do have other money available in an emergency account (which you should have as well) What if you decide to retire at 50 or 55 instead of after 65? Your VUL also has some up and down sides as well. The upsides are that it's basically a ROTH on steroids. You're not capped out with the ROTH limits on putting money away. The money in the subaccounts grows tax advantaged and it can usually be accessed without taxes. Depending on your policy itself, the growth is usually available up to about 90% of the cash value -- and it may be accessed before you're 59 1/2. This could be wonderful if, e.g., you want to retire at 50 or 55. It could also be very important if you want to access it for any reason for an emergency - say at 47, etc. You say you don't yet have any children, so I'm assuming that at some point you will want some. Let's say 20 years down the road, you have your first child going off to college. The cash value in your VUL won't be considered when and if this child applies for college grants while the cash value in your 401k and ROTH would be. Another advantage of the VUL is that it is permanent insurance. You've gotten it now, while you're young and healthy. You will definitely not always be young, and you may not always be healthy. The downside to a VUL is that it is insurance, so you have to qualify for it. (You've already done that.) There are fees involved in keeping it going for the next umpteen years of your life. (At least in the policies I've seen, these are always way less than the potential taxes that would hit you outside of the policy are.) The largest problem that I see in your question is not the question about the VUL itself. Not even the concern about which strategy might work well for you; it's the fact that you don't seem to trust the person you're working with. Before you make any decisions for your life based on anything you read in this forum - including anything I say - remember that a lot of the folks here (not all) may have their own agenda. I suggest that you might like to either check your library or a bookstore for a copy of: "The New Life Insurance Investment Advisor: Achieving Financial Security for You and your Family Through Today's Insurance Products" by Ben Baldwin. I, personally, think you will find your friend did you a great service by recommending this man to you. Obviously, though, that's a decision you and your wife will determine. However, I strongly suggest that you read the book before you make any decisions. It won't hurt and it might just help you in that decision. Good luck.
7. Insurance salesman have a bad rep but is someone doing something bad for you if they're selling you a product that's in the best interest of your family? You might as well get the life insurance now while you're healthy because who knows what can happen in the future. I have a VUL with New York Life and it's doing great. It's doing better than my mutual fund account which I started earlier and have put more money into. My broker charged me a portfolio management fee, plus sales charges I paid for the mutual funds, plus the taxes I'm paying for gains - I'm actually not gaining too much by leaving it in the account. With the VUL I can still take out some of my money plus it grows tax free and no sales charges on the mutual funds. I think the 401k is a good idea to contribute if your employer matches your contributions. If they don't match - it doesn't make sense to put money into a financial vehicle where I'm putting away money now in a low tax bracket and with experts saying the tax brackets will go higher pulling money out in a higher tax bracket.