I've been offered a Variable Universal life insurance and i'm not sure if im making the right choice by investing on this. I was told that by 7 years of investing, i can "withdraw" my money back and an additional cash depending on our stock market. I know the risk here is the stock market, but for me, it feels like a too good to be true scenario where i get my life insured while my money "works for me". Can someone explain some good/bad points on VUL?
The basic argument against purchasing life insurance that isn't term insurance is that you are mixing two very different products that don't need to be mixed.
Decide how much life insurance you need. Base this on who needs money if your were to die. Look at their ages, their needs such as college or long term care if any have a disability, and the income you are trying to replace. Purchase term insurance accordingly.
Then decide how much you need to save for retirement. Then put money into a retirement fund such as a 401K or an IRA.
Then decide what other big things you need to save for. The obvious one is a college fund for your children, but there can be other things such as a down payment for a house. Find the appropriate savings vehicle for your goals. It can be a 529 plan for college, and a money market account for a down payment.
VUL tries to combine all of these into one plan. But that doesn't mean that it does any of these things well. Also remember that your needs in each of these categories could change over time, so why would you want to lock these different categories with different timelines into one product.
You will find that the only person who is guaranteed to make money with VUL is the sales person.
With whole life insurance, you get either the insurance or the "savings", but NOT BOTH. If you die before you cash out, the savings goes away.
Too many people look at life insurance as either a lottery ticket or an "investment" without considering the costs and knowing that there are other investments that will perform better (unless you die, of course). In reality, you can get BOTH by separating them into distinct products.
Therefore, the way to measure whole life is to compare the additional premium that is charged over an equivalent amount of term insurance. The term to use is dependent on how long someone is dependent on your income to live. Once your kids are grown and you have enough retirement or other savings to live, then your need for life insurance goes away.
So say your whole life costs $200 per month, and they expect the cash value to grow by 3% per year (net of premiums and fees). After 15 years, you'd have a value of about $65K, for a net gain of about $16k. If equivalent term only costs $50 per month, you could invest the other $150 into relatively safe mutual fund that historically return 10% per year, and after 20 years you'd expect to have _over $100,000, with a net gain of $67k! The response I get is usually "but the insurance goes away!". My answer is with whole life, at some point, you'll either die or cash out. If you cash out, the insurance goes away anyways, and you have less to show for it. If you die, the 40K you spent in premiums disappears. You'd be better off either self-insuring with the $100k in your investment account.
I've done this several times, and every time, the return ("cash value") you get for the money you put is horrible. Plus, if you cash out, you lose the insurance. Salesmen push term insurance hard because the commissions are great (which means the margin for the insurance company are huge) and most people aren't informed of the difference between the whole and the sum pf the parts.
The bottom line is that life insurance is not an investment. It is a necessary expense if anyone depends on your income. Combining it with a bad investment vehicle is not a good idea.