Convert Variable Life Insurance to Roth?

[Guest James_R_Olson]

I have one of those variable life insurance policies, sold to me as a "tax free" method of saving for my son's college expenses. Contributions to it are after tax, and gains and earnings are tax-deferred until I close the account. I was wondering if there's any way to convert the money into a Roth IRA when I close the account so I don't lose any of the capital gains I've made to income taxes. I'd then like to use the Roth account several years later in order to pay for the education expenses. I could just keep paying into the insurance fund until he enters college, but the insurance part of my payment is getting to be too expensive compared to a term policy. I could probably do better on the annual returns and gains with the money elsewhere as well.

[BPickerCPA]

You CANNOT convert the insurance to a Roth. The insurance program was probably a bad deal for you, but it may be too late now to get out.

Were you informed that in order for the money you take out to be "tax free" you have to take it as loans, which means keeping the insurance policy in force?

If you just cash out the policy, the gain is taxable.

[Guest Mark L]

Mr. Olson. I agree with Mr. Picker and with Mr. Slott on the answers they provided to your question.

[John Olsen]

As was noted by other repliers, you cannot "convert" that VUL to a Roth IRA. First, because surrender of the policy will trigger tax on any gain, and, second, because the VUL is not IRA money and cannot be converted to a Roth OR contributed to a Roth, beyond the $2K/yr annual contribution limit (for ALL IRA accounts combined).

However, I question why you say that the term cost is becoming more expensive than a term policy would be. If the VUL is on the "Option B" basis (where the total death benefit is the SUM of the original face amount PLUS the cash value of the policy), you're paying COI (cost of insurance) on that entire original face amount each month, at a rate which, for MOST vul policies, is roughly equivalent to a decent term policy rate.

If the policy is on an "Option A" basis (where the total death benefit is only the original face amount), you're paying Cost of Insurance only on the DIFFERENCE between that death benefit and the cash value. That should produce a cost of insurance that is LESS than a term policy with a LEVEL death benefit (at least, after the VUL has been in force for a while).

Have you relayed your concerns to the agent who sold that policy? I'd suggest that this is a place to start.

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John L. Olsen, CLU, ChFC

Olsen Financial Group

St. Louis, MO