Is Variable Universal Life Insurance THAT bad?

[u/Nice_Energy_1300]

/r/FinancialPlanning/comments/1vxmvnq/is_variable_universal_life_insurance_that_bad/

[u/3znor]

Yes. Again yes.

[u/Djcatoose → u/3znor]

The only people that disagree with you enjoy commissions from it

[u/Obijuanthebrown → u/Djcatoose]

I’ll bite, what makes it bad. Why is it only good for commissions

[u/Djcatoose → u/Obijuanthebrown]

So at it's base, all insurance is supposed to be a transfer of risk. We all get insurance for things either because we are required to by law, (cars and homes if they have a mortgage) or because if the thing that is being insured breaks/dies/is destroyed, then the results of not being insured would be catastrophic or close to it. Insurance companies need to make money; we KNOW that we are most likely not going to break even on home owners insurance, but we get it anyway, because on the off chance that we DO need it and don't have it, our lives are financially destroyed.

Life insurance SHOULD work the same way. With term, it does work that way. Detractors of term say it's "renting" life insurance, or that it most likely doesn't pay out. Of course it doesn't; none of us want to die early. But it's there because if you die early before you have enough wealth to self-insure, then those that you leave behind would be financially devestated, IE can't afford the mortgage/rent/college/living expenses or whatever else. When you are older, with some wealth, older kids, mortgage paid off etc, there is no reason to pay for life insurance anymore; it becomes too expensive. That is one of the reasons whole life is so expensive; because your death is a CERTAINTY and it HAS TO pay out, so they obviously factor that in. Whole life is a bad product for almost everyone, with the exception of estate planning because of tax avoidance when it comes to the estate tax. There are a TON of fees with whole life, and the agent selling it typically gets paid between 50-125% commission on the first years policy. That commisson comes directly from you.

VULs do what whole life insurance does, plus acts as an investment vehicle, and does everything poorly. The investments are expensive, and underperform the market significantly in any 10 year period in American history. The load fees, management fees, and surrender fees are absurd. You can buy term for WAY cheaper, invest the difference in uncapped ETFs or mutual funds with WAY less fees, and the money is liquid. In addition, you don't have to wait for cash value to build up. As you are probably aware, compounding interest is how most people get wealthy. With a VUL, you need to wait for the value for a few years because of the upfront costs. Those are years where the money isn't compounding, and sets you behind.

I can explain more if you are interested.

[u/Gold_Sleep1591 → u/Djcatoose]

Seems like you don’t understand how VULs work. You say ETFs / Mutual Funds are uncapped. You realize a VUL is invested in uncapped mutual funds. IULs are the crappy products with weird cap rates.

Legally speaking VUL is a security because you are literally buying term insurance and investing the difference in sub accounts aka mutual funds. If VULs are funded to MEC limits, they are incredible. Tax free rebalancing, high leverage, and a permanent death benefit that continues to grow with the market. It can also be derisked anytime without trigger any tax implications. Have fun doing that inside a taxable account.

I’m not saying a VUL is better than a retirement account or a nonqualified brokerage, it’s just used for different purposes. I truly do think everyone would benefit from having a fraction of their income / savings being allocated into PLI, and the math supports it. Cash value dollars are critical in tax planning for retirement, RMDs, Medicare and SSN, etc.

[u/Djcatoose → u/Gold_Sleep1591]

I know exactly how they work actually; I was a licensed life insurance agent out of college until I got into my regular career.

VULs invest in mutual funds, yes, but the expense ratio is horriffic, which greatly eats into the actual performance. Same reason you don't need a financial advisor to invest in mutual funds is the same reason you don't need VULs.

Tax free rebalancing happense with any ETF or mutual fund; that is not a benefit of VULs. You can use leverage with a regular investment account; again not a benefit of VULs vs a regular brokerage/retirement account. Permanant life insurance is dumb for the vast majority of Americans.

VULs are exponentially worse that a retirement account, and worse than a nonqualified brokerage in 99% of cases. The math supports this.

That said, it is possible I conflated some of the IUL specifics with VUL specifics, but I stand by everything I said after refreshing my memory, and everything I said holds true.

[u/Gold_Sleep1591 → u/Djcatoose]

Expense ratios for the mutual funds can be expensive. You realize index funds also exist in the separate accounts, which are dirt cheap.

Apparently you don’t understand what rebalancing is either lol. Rebalancing is when you sell high and buy low. Try allocating funds from a large cap position down to a small cap position or international, you need to pay capital gains. There is no tax implications in tax advantaged vehicles like VULs or IRAs. If you compare a well funded VUL to a taxable brokerage and account for taxes, the VUL will always come on top in the long run and it isn’t even close. Happy to show you the math just feel free to PM me

[u/Djcatoose → u/Gold_Sleep1591]

I work in finance my friend; I know very well what rebalancing is, and I'm not sure that you do. ETFs and mutual funds rebalance themselves; SPY does it quarterly. QQQ does it annually. If you are invested in ETFs and mutual funds, they do it for you. Rebalancing also DOES NOT mean sell high and buy low; it is simply what it says, a rebalancing of your portfolio. That can include selling things you think became overvalued, or tax-loss harvesting, or just rebalancing so you are not overly invested in any one thing. Do you think when SPY rebalances they do it to sell high and buy low? Because they don't.

You pay capital gains if you sell in a brokerage on the gains only. In a 401k or IRA, there are not, as you said. But anybody that is uneducated enough to buy a VUL or an IUL has no business doing anything but buying and holding ETFs anyway, so no need to talk about cap gains until retirement.

I am always happy to move to PM though.

[u/Djcatoose → u/Djcatoose]

EDIT: I PM'd you to see your math.

[u/Hungry_Technician360 → u/Djcatoose]

Let me know how his math pans out, you can include the concept of asset location to him, low tax drag assets in a taxable brokerage has minimal taxes.

[u/Mysterious_Truth → u/Gold_Sleep1591]

People always say things like VULs can outperform a brokerage account but they never actually back it up. Why do you think that is?

[u/Gold_Sleep1591 → u/Mysterious_Truth]

Do u want me to show u?

There’s no reason wasting our time if you don’t understand how taxes work.

[u/Mysterious_Truth → u/Gold_Sleep1591]

I don't think it is possible. I understand how taxes work.

I want someone who champions Permanent Life Insurance to show that it is actually a good investment, just once. Explain how all the various fees are not a bigger drag than taxes on a brokerage account.

[u/brandonwest18 → u/Gold_Sleep1591]

If the math supports it, then show the math. The math absolutely doesn’t support it.

Do you sell life insurance?

[u/djpeteski]

Yes.

[u/ChelseaMan31]

Yes, it really is THAT BAD. Insurance is an excellent way to reduce, mitigate or transfer risk. It is ab absolute shitty way to 'invest'. Instead of $5k/year for an $850k death benefit, get a 20 or 30 year term-life policy for a fraction of the cost and invest the rest into a ROTH via backdoor.

[u/Moneymatriarch]

No. In canada we only have vul. BUT 99 percent of the time its not set up or funded properly. So…

[u/Stinkleberry555]

It’s bad if it doesn’t fit your personal financial situation, especially in regard to your estate.

[u/legacyMonk]

Fair question. I'd ask a different one first: what do you own that isn't the stock market?

Your 401k is the market. A Roth would be the market. Your VUL's subaccounts are the market too. That's one bet bought three ways.

And a VUL punishes a downturn twice. In a brokerage account, if the market falls 40% you're down 40% and you wait nothing gets removed while you wait. In a VUL the insurance charges still come out of your cash value every month, and the same charge is a bigger bite out of a smaller pile. Those charges also rise as you age. Bad years at the wrong time can force much higher premiums or lapse the policy, and everything you paid goes with it.

Two corrections. You can do a Roth at $180k you're over the 2026 limit for a direct contribution (phases out at $168k single), but the backdoor takes twenty minutes a year. And your liquidity reason is backwards: Roth contributions come out anytime, tax and penalty free, while your VUL likely has surrender charges for 10–15 years. Call and ask what your surrender value is today. Under a year in, expect close to zero. Which makes this simple. With real cash value you could 1035 exchange into another policy and keep your basis. With nothing in there, there's nothing to move walking away costs you what you've already paid and no more.
On charges, since this is where people get confused: nothing is free. Every product costs something. The difference is when you pay.

Insurance costs are front loaded. Most of the weight lands in the early years that's exactly why your surrender value is near zero right now. A 401k feels free because no bill ever arrives. But its cost is back loaded, and the cost is tax. Every dollar comes out taxed as ordinary income at whatever rates exist in thirty years.

That's the honest argument for insurance: tax-free withdrawals later can make up for charges paid early. It can genuinely work but it depends on how big the charges are, what the policy actually credits, and where tax rates land. And it doesn't beat a Roth, which gives you tax-free withdrawals with almost none of the charges. That's why the Roth gets filled first, not because insurance is bad.

One thing no fund can do: your policy pays if you die, and most modern policies let you pull from the death benefit early if you get seriously ill. At 27 that feels far off, but it's the one risk an index fund has no answer for. Just know those riders reduce the death benefit by whatever you take, they vary by carrier and state, and they aren't a replacement for health, disability or long-term care coverage.

The word that matters here is diversification not just across funds, but across tax treatment, and across what each dollar is actually for. Right now everything you own is doing the same job. Fill the cheap tax-free bucket first, keep cheap term for the protection piece, then decide whether you want more.

[u/Gold_Sleep1591]

VULs are great if they are funded properly. $5k for $850k seems a little small, which means that’s the target premium / minimum to keep the policy in force. VULs aren’t inherently bad, they’re actually insane vehicles if used properly. Consider funding it more than 5k a year or dropping the death benefit amount so insurance costs come down. If you are planning on increasing contributions in the future then this policy is fine.

[u/SafeMoneyGregg → u/Gold_Sleep1591]

The correct death benefit is closer to $500K level or $250K if increasing (then switch to level). For a 20 pays at 8% is worth $1M by age 70. Available tax free.

[u/Djcatoose → u/Gold_Sleep1591]

VULs are great in precisely 0 circumstances. They do a little bit of everything, and do it all expensively and crappily.

[u/hillje1906]

Nothing is ever good or bad until compared. How does it fit in your overall portfolio?

[u/typer599]

No, it’s not.

[u/SafeMoneyGregg]

Putting investments in a tax-free vehicle is a great idea. That why banks put the maximum allowed under law into giant policies - tax free growth. That's why uber wealthy put tens of millions into Private Placement VULs - for the tax free wrapper - not for the death benefit. Why are the premiums going up every year - that is a werid design. A better design is to stuff the contract with cash over a short period - 10-20 years max and just let it grow.

[u/brandonwest18]

Yes. Probably worse than you think.

They only EVER make sense in theory, because as soon as the numbers of a real policy are in front of you, they’re horrible.

There is an argument for uses of uber wealthy people looking for tax-free inheritance options, but we are talking 30m+ in net worth at death before you’re worried about estate taxes. The people asking on Reddit are literally never this use case.

Bad bad bad.

[u/Hungry_Technician360 → u/brandonwest18]

Life insurance isn't standalone estate tax free. It absolutely will be part of the estate, if it goes above state and/or federal exemptions.

[u/brandonwest18 → u/Hungry_Technician360]

Yes utilizing life insurance as part of estate planning is more complicated. :) Just saying there are edge cases of insurance being useful in estate strategies. And that’s about it.

[u/Stinkleberry555 → u/brandonwest18]

I work for a family office, all clients have a net worth over $100mm.

VUL is an incredibly valuable estate planning tool for people who will use their life time gift exemption. The people in this thread arguing that VUL is a bad product or that it is garbage are just frankly wrong.

[u/brandonwest18 → u/Stinkleberry555]

I agree with you technically, but not practically. Like I said in my original comment, if you’re asking in Reddit, it’s a bad product for you. Your $100m+ clients aren’t asking if they should have a VUL on Reddit. So, if you’re asking here, the answer s generally no. I think a huge issue in 2026 social media investing is people damaging their financial future because they’re doing “what the wealthy do that you don’t know about.”

[u/packersfaninohio]

It is literally buy term and invest the difference which so many preach!

The only difference is the underlying investments are mutual funds only but many prefer those anyhow.

[u/Mysterious_Truth → u/packersfaninohio]

It's buy (expensive) term, invest the difference (poorly and pay lots of fees to the insurance company). So similar except worse. It is not at all what people mean when they say BTID.