Is a variable universal life policy worth buying?

NEW YORK (Money Magazine)

Rarely, says Glenn Daily, an insurance consultant in New York City. VUL, he says, is a poor retirement savings vehicle, though often sold as such.

It's useful primarily, he says, in solving estate planning and asset protection problems for wealthy individuals.

VUL mixes permanent insurance with mutual-fund-like tax-deferred investments, building a cash value you can tap (earnings are taxed as income) or borrow against.

VUL's problems lie in its complexity -- comparison-shopping is difficult -- and fees, which Consumer Federation of America actuary James H. Hunt says can cut up to three percentage points from annual returns.

Related: What type of insurance do you need?

You're better off buying term life, which has no extra cash value, and investing your premium savings in a taxable account. Index funds, given their low turnover, will minimize your tax bill.

VUL vs. Term Life Insurance

In most cases, you'll make more with term life and tax-efficient investments than with a variable universal life policy. Below, the costs and investment balance, after 20 years, on $1 million policies.

VUL	$7,500	$0	$205,600
Term life	$900	$6,600	$291,800

NOTES: Assumes 40-year-old male in 25% tax bracket, returns of 8% before fees and expenses, 20-year term policy; savings invested in stock index fund.
SOURCES: Glenn Daily, Vanguard