Widget Pilots’ GVUL – Part 1

As if their new contract wasn’t good enough already, starting November 1st the Delta pilots get their first (annual) opportunity to switch from their old term life insurance policy to a new Group Variable Universal Life (GVUL) plan.

This article is not tax, investing, or insurance advice. That said, I have yet to hear a reason to not opt in to the new plan.

And yes, you must take active steps to opt in. You’ll have to fill out one web form to opt in with Delta between November 1st and 15th. Then, you’ll have to go to fill out a separate web form with MetLife shortly thereafter. Screw up either of those and you’ll be stuck in the legacy term plan until next year. (If you have questions, just call your MEC. They’ll help you get sorted.)

If that’s all you needed to hear, you can quit reading here and go back to scrolling the only thing on Facebook with any redeeming value.

If you want an overview from an official source, check out Episode 38 of the Engage Podcast. If you’re interested in some deeper discussion of the GVUL’s benefits, keep scrolling.

Episode 38 of the Engage Podcast covers much of what you’ll read here. The guests include a MetLife rep, and the Delta ALPA MEC’s Retirement & Insurance Committee volunteers who helped set this plan up. It’s worth a listen.

Why is GVUL Better?

The new GVUL plan offers several advantages over the old term insurance plan.

First, one of the biggest drawbacks of the old plan is that the IRS holds your insurance premiums against you. Delta Air Lines pays those premiums on your behalf, which is nice, but the IRS counts those funds as “imputed income” and requires you to pay income tax on them…even though that money never touched your bank accounts. I know plenty of progressive pilots, but I don’t think I’ve ever met one liberal enough to like these imputed income policies.

Through some legislative wizardry, the GVUL gets a loophole. For the GVUL only, the IRS only views a portion of Delta’s premiums paid to the GVUL as imputed income. Yes, Delta still pays 100% of those premiums until you leave or retire.

This is a huge bonus for Delta pilots.

The website set up specifically to explain GVUL basics for Delta pilots suggests that pilots my age will see their tax bill decrease by $768 per year, thanks to the reduction in imputed income. Senior Delta pilots will effectively get a $5,318 annual raise the moment they opt in to the GVUL.

Note that this is for the exact same basic coverage as the term life insurance. The Delta pilots’ contract sets that death benefit at “2,500 times the 12-year Captain hourly rate on the highest paying aircraft type outlined in the PWA in effect on January 1st of each year, rounded to the nearest $1,000.” Thanks to the United pilots negotiating to intentionally trigger the Delta pilots’ “me too” clause, this will look like:

2,500 x $447.24/hr = $1,118,100
(round down to the nearest $1,000)

So, let’s summarize the GVUL benefits so far:

  1. The Delta pilots get the exact same death benefit
  2. Delta continues to pay all premiums while pilots are employed at Delta
  3. Unlike the legacy term plan, premiums paid into the GVUL are not counted as imputed income, so opting in to the GVUL essentially gives a pilot an immediate raise.

We’ll discuss some more benefits, but if you weren’t already convinced, this could easily be all you needed.

Lower Coverage

One strategy some Delta pilots have used to reduce their imputed income burden was to decrease the amount of their coverage under the legacy term life insurance plan. This saved on taxes now, but left some families exposed to increased risk. Thankfully, this is no longer necessary at all. There is almost no benefit to opting for lower coverage since most of Delta’s premiums are no longer counted as imputed income.

Another problem with the legacy plan is that the moment a pilot retires, their death benefit immediately drops to $250,000. It then decreases by $50,000 every year until the final year it becomes and stays $10,000.

The GVUL improves on that by allowing a pilot to keep their existing coverage, if desired. Under the old plan, a retiree at age 66 has a death benefit of $200,000. A pilot under the GVUL could still have that death benefit of more than $1.1M. I hope none of us actually needs an extra $900K in death benefit at that age, but this provision alone could be salvation for a family in a tough spot.

And yet, this is where we see one potential drawback. Under the GVUL, retired pilots will have to cover their own premiums. Based on the less-than-transparent charts provided by MetLife, those premiums would be not less than $14,000 per year! However, retirees also have to pay a surcharge on top of those premiums. If a pilot has known issues and may not be around long, the GVUL provides a magnificent way to take care of their family when they pass away. Whether you continue coverage or not will be a rather detailed conversation with professional financial and tax advisors.

In an ideal world, no pilot would ever need this benefit.

So, (Why) Do I Even Need Life Insurance?

Personally, I believe that life insurance is important for many people. You need to talk with a finance professional to decide whether you’re one of them. Ideally, that answer will change over time.

The whole point of life insurance is that if the primary bread-winner in a family passes away, their surviving heirs will be able to cover their expenses. In many cases, like the benefit available to Delta pilots, that $1.1M should be enough to pay off the mortgage on your home, pay off existing car loans, fund at least some college for your kids, and/or cover some years of living expenses.

In a family with no other savings, the surviving spouse will eventually still need to get a job, but with a paid-off house and cars, a family in this position could potentially get by on Mustachian levels of spending.

However, in an ideal world, a pilot will have spent their career filling up their Treasure Bath. Even a relatively new pilot at a major airline should have a lot of money socked away in some combination of IRAs, TSP, 401k, HSA, regular brokerage accounts, and/or alternative investments. The longer you’ve spent making major airline pilot pay, the more money you should have been shoveling into these bathtubs. If a pilot nears the end of their career without at least a few million dollars in these accounts they’ve been doing it all wrong.

(Yes, I’m judging you…unless you have a family member with severe medical issues…or you’ve blown all your cash owning and operating a fleet of P-51s. In either of those cases, you have my utmost admiration.)

As the size of your nest egg increases, your family will find themselves increasingly able to pay off any outstanding debts and cover living expenses after inheriting your nest egg. They won’t need a big insurance payout. Under the Delta pilots’ legacy term plan, it might have been valuable to decrease coverage over time as an individual pilot’s net worth increased. This would simultaneously decrease that pilot’s imputed income tax burden.

As we mentioned, that kind of strategic reduction is no longer necessary for Delta pilots because their imputed income is so much lower. They might as well keep the full benefit until retirement. At that point, it may be worth dropping the plan altogether to avoid some very steep premiums.

Eventually, a pilot should reach the point where their nest egg was worth more than their life insurance payout. At that point, the insurance is just gravy. This is why airlines have typically provided their pilots with term life insurance plans. The plans make sense for newer pilots with low net worth and lots of time ahead of them. The GVUL just improves on that model.

It’s important to note that while the GVUL has a longer scope than a term life insurance policy, it’s not whole life insurance…and thank God!

Whole Life Insurance – Waste or Outright Scam?

I don’t talk about it much because I don’t even think it deserves my conscious thought, but I believe most whole life insurance policies are a bad deal.

Unlike term insurance, these policies are for your whole life…they’re a guaranteed payout. As such, they’re a unique type of asset. You can borrow against their value, and there are ways to cash them out early.

This all sounds great until you ask about fees. And this is the biggest problem because those fees tend to be so high they’re borderline-unethical.

A typical whole life policy might start with an up-front fee in the range of $40,000 or more…and then you have to continue paying premiums every month or every year! Yes, this could immediately give you access to a $1M+ asset, but those fees are outrageous.

If you’re working with a financial advisor who starts pushing you hard to buy a whole life insurance policy, I would consider walking away immediately. At the very least, put your foot down and say, to their face, that you will walk if they ever mention such a thing again. Then, start shopping for someone better anyway. I can recommend a few good advisors.

Unless you’re in danger of dying in the next few years, you’re far better off investing that upfront $40K fee and your premiums almost anywhere else. Those investments would likely surpass the value of your life insurance payout long before you pass away.

If you’re in danger of dying soon, you’d be better off with a term life insurance policy anyway. It’s far cheaper and shouldn’t include such ludicrous fees.

Some people on the internet try to sell whole life insurance policies by preaching what they call the “infinite banking concept.” I’m unimpressed. It is a viable way to access capital early in your life to start investing. However, the fees benefit the person selling you the policy far more than the “easy” money benefits you. There are so many other ways to get capital for alternative investments! Don’t take money this expensive unless you’ve exhausted absolutely every other option…including just putting your nose to the grindstone and doing some extra flying for a couple years to save up what you need!

Why Would MetLife Offer GVUL?

I’ve encountered a few people asking why MetLife would offer Delta pilots a plan like the GVUL. MetLife is also the provider of their old term insurance policy, so how do they benefit from pilots switching? Inquiring minds also wonder why the government is suddenly willing to excuse these premiums from imputed income.

Part of me says: “Don’t know, don’t care.” It’s a benefit to pilots, so why not take it?

I think part of the reason that MetLife likes this plan is it includes a completely separate and completely optional provision: the ability to invest money in the stock market, with some big tax advantages. MetLife will make money by charging fees on those investments.

Let’s reemphasize: you can opt in to the GVUL and get all of its insurance benefits without using the investment part of the plan at all. Whether the investment side of things is a good deal or not, it doesn’t affect the value of the insurance side of the GVUL.

I’m putting together a fancy calculator spreadsheet to illustrate the tax benefits on the GVUL’s investing option. The calculator will also account for MetLife’s fees. That discussion is involved enough that I want to save it for later. My calculator also still needs a little work.

Thankfully, there’s no rush. The open enrollment windows for the GVUL won’t end for about a month, and then you’re free to invest as much or as little as you want at any time.

In the meantime, I simply cannot find any harm in opting into the GVUL for life insurance.

(So why is Uncle Sam suddenly giving us such generous tax breaks through the GVUL? I cannot fathom anything except the right legislators getting the right number of fancy steak dinners and other thank-yous from insurance industry lobbyists. You might be tempted to tell me to stop binging House of Cards. However, I would then ask if you’ve been following the drama over the conflict of interest concerns currently under scrutiny for Supreme Court Justice Clarence Thomas. Do I like lobbyists being able to exercise such strong influence on our government for relatively tiny special interest groups or even individuals? Well, no…except that I benefit from such things in many areas of my life. Will I use these kinds of loopholes to my advantage when I can? I guess so, and I guess I hope we can eventually find a better way to run our country.)

Parting Shot – Soft Pay Matters in Pilot Contracts!

Before we go, let’s consider how great this insurance benefit is for Delta pilots. Their contractual death benefit is 2,500 times the top line Captain pay rate for all pilots.

Airline execs and union bosses love to throw around the phrase “industry-leading contract” these days. No individual contract is likely to ever be the true best in the industry in all areas, so a leader (or in our industry more likely: manager) of integrity should probably qualify such statements with a caveat like “in most areas,” or “from pay, to vacation, to scope, etc.”

As a case in point, the United pilots just secured a great new contract valued at an increase of $10B. This contract is a victory that includes great gains in many areas. Before I go further, I’ll say that I think United is an excellent company where any of us would be lucky to work. They constantly push Delta to be better, and are probably Delta’s most worthy and threatening competitor. If I’d been dead-set on settling in Denver, Houston, Chicago, DC, or northern California, United might have been my #1 choice.

However, the United pilots’ life insurance benefit is drastically inferior to both what the Delta pilots had in their old contract, and what they get under the new GVUL.

In Section 24-I-1-a of the United pilots’ TA, a United pilot’s “Basic Life Insurance” benefit is “equal to the Pilot’s hourly pay rate times 2,052.” For a United new-hire FO, this looks like:

2,052 x $116.05/hr = $238,134.60

Remember: that new-hire FO’s peer at Delta starts with $1.1M in coverage from day one, more than 400% the coverage.

If the most senior pilot at United decided to be a B787 FO for Quality of life reasons, their death benefit would be:

2,052 x $305.50 = $626,886

Yes, that’s a lot of money, but it’s still barely more than half what the most junior Delta pilot gets from day one. Then, consider all the other tax advantages and benefits that Delta pilots enjoy under GVUL. This highlights a stark difference between these two contracts. 

This is why soft pay matters in a pilot contract, and why only a great fool would evaluate a pilot contract based entirely on something as insufficient as straight pay rates.

If you’re deciding which airline to join, ask around about soft pay before you bite off on a contract with fine print that fails to meet your needs. If you’re already at your forever home, pay attention to discussions of soft pay at other companies and ensure that your union reps know what kinds of soft pay increases you expect in your next contract. For airline pilots, “industry-leading” pay rates are table stakes. Demand that your union negotiates to ensure that you get Scope protection, Quality of Life, and Soft Pay benefits that push the meaning of “industry-leading” as well.

Thanks for reading. If you’re eligible for Delta’s GVUL, November 1st is the start of the two-part opt-in window. Yes, you have to actively opt-in, or you miss out for a year. No, I cannot find a reason to not opt-in.

Standby for a discussion on the investing side of the GVUL. It may not be a usable benefit to for you, but the tax advantages and access to more of Delta’s money may make it very valuable for many pilots.

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