The Dark Side of Annuities and Variable Universal Life
As a Certified Financial Planner™, nothing makes me cringe more than the words “Annuity” or “VUL” (Variable Universal Life). These are financial products which combine life insurance, investments, and guarantees. They are hard-sold by commissioned brokers who earn commissions as high as 8% per contract sale. Often the pitch is that these products can solve all of your financial problems by eliminating your downside investment return risk, providing tax-free investments and income, and protecting your loved ones when you pass. The main problem with many of these products is that they come with a hefty annual fee which can range from 2.50% to 4.50%. With an expense hurdle so high, it is hard to see your investments grow in value, and you are generally overpaying for the life insurance and the investment component.
What’s even more difficult with these products from a financial planning standpoint is that they generally have a long (7-10 year) surrender charge period. Remember, the insurance company pays the broker a hefty commission up front so they need to make sure they make their money back. This makes it hard to change your financial plan if the annuity or VUL no longer benefits you or meets your financial goals.
There can be a few valid reasons to purchase an annuity or VUL, but they often involve complex estate planning issues with high net worth individuals. However, for most people, you can accomplish everything you need financially outside of an annuity, or a VUL, for a lot less cost and a lot more flexibility. Especially when it comes to pure life insurance!
If you or a family member already owns an annuity or a VUL product, then my advice is to have it reviewed by an independent agent. There are a few VULs and annuities that are far superior to others regarding fees and performance. It is possible to do a 1035 exchange into another product. Or, the analysis may determine you would be better off cashing out the policy. For example, TIAA-CREF offers a level fee, non-commission and no surrender charge VULs and annuities which we think are some of the best of these products out there. We have had success switching clients with existing VULs and annuities over to TIAA-CREF and saving them thousands in fees and lost investment returns.
If you have a particular case that you would like to discuss, or you want to get a second opinion, please don’t hesitate to call me.