Evaluating an inherited variable appreciable life insurance policy

Evaluating an inherited variable appreciable life insurance policy

In a previous post, I delved into the details of a universal life insurance policy from my parents. Here, I will do the same for an inherited variable appreciable life (VAL) insurance policy. The numbers completely confirm the White Coat Investor’s take: it provides over-priced insurance and investments. As our life insurance coverage grows beyond our projected working horizon, this will be the first policy to go.

Disclaimer: this post is only an example and is intended to be educational and not specific or individual advice. You should evaluate your life insurance and investment needs with a trusted adviser.

My other life insurance coverage

Before making any decisions to change or cancel an existing policy, make sure you have other policies in place that provide adequate coverage. You can see my other coverage in the previous post.

Details of the variable appreciable life policy

Variable appreciable life insurance policies are a (poor) combination of insurance and investing. Some of the premium goes to cover the policy expenses, and the rest goes into the investment (cash value) account. Since the policy owner can choose from the limited investment options, it is actually quite straightforward to evaluate the investing part of the policy. But first, here’s how I looked at the insurance coverage.

Efficiency as life insurance

To evaluate the life insurance policy, I compared the premiums for this policy against the premiums for my 30 year term policy. To make a fair comparison, I divided the premium payment by the death benefit as follows:

cost for coverage = annual premium / death benefit

I only used the portion of the VAL premium that goes toward expenses, not the part of the premium that goes directly into the investment account; the latter will be evaluated separately below. Using this method, it turns out that the VAL policy costs about 30% more than my term policy. Sure, the VAL policy lasts longer than the 30 year term policy. But that is still quite the surcharge for coverage that I most likely don’t need.

Efficiency as an investment

The investment account associated with the VAL policy has around 15 funds to choose from. I invest in a stock fund and bond fund according to our target asset allocation. The fund total expense ratios are as follows:

  • Stock fund expense ratio: 0.31%. Compare this to Vanguard total stock market index (VTSAX) expense ratio of 0.04% . The VAL fund charges 7.75x what I would normally pay for this asset.
  • Bond fund expense ratio: 0.44%. Compare this to the Vanguard total bond market index (VBTLX) expense ratio of 0.05%. The VAL fund charges 8.8x what I would normally pay for this asset.

Not only are the expense ratios higher than necessary, but there were also sales loads applied to the investments. I won’t even try to figure out the sunk cost from the sales loads; it’s already clear that this is not a great place to hold investments. On the bright side, since I’ve had the policy longer than ten years, I won’t be hit with an early surrender charge when I drop the coverage.

Why this is my least favorite policy

The VAL and universal life policies clearly cost more than simply buying term insurance and investing the remainder in a taxable brokerage account. But the VAL policy strikes me as being worse than the universal; with the VAL, the cash value can only be invested in inefficient funds that mirror the rest of our portfolio. At least with the universal policy, the cash value returns a minimum of 4% interest. This mimics a fixed income investment (such as bonds), but with a higher interest rate than is currently available in the market. It therefore provides some level of diversity to our portfolio.

What I’ll do with this variable appreciable life policy

My total coverage is 10x my salary, so once we project less than ten years to FI–and have ruled out all the appropriate uses for permanent life insurance–I will drop this VAL policy first. It is my smallest (covering only 0.4x my salary) and least favorite (see above). So while the intentions were good and it is not that bad of a policy at this point, I won’t miss it too much.

Disclaimer: this post is only an example and is intended to be educational and not specific or individual advice. You should evaluate your life insurance and investment needs with a trusted adviser.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Close Menu