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December 09, 2001 at 07:00 PM
New Design Combines Best Of VAs And VULs
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The complexity of life insurance–especially variable universal life with its myriad charges (e.g., cost of insurance, etc.)–has been a major impediment to expanded sales.
Another key impediment has been the complexity of the fulfillment process.
The rather daunting nature of these two factors has kept many producers away from VUL, even though they recognize its superior benefit structure and tax advantages.
One resolution to this conflict is emerging, however. It is a new type of product that combines the simplicity of a variable annuity and the tax advantages of a non-modified endowment VUL. It provides the best of each type of policy and mitigates the factors mentioned above that keep producers away from life insurance sales.
Before seeing how that happens, its helpful to review the relevant issues.
Many producers and investors are attracted to VAs sold by stock brokerage firms because they are easily understood, the contract owner can readily manage the fund mix or use asset allocation models, and the asset-based charges are similar to those of other investments.
Other attractions: the fulfillment process is quite simple for VAs; the investment gains, even when moved from one fund to another, are tax deferred; and the products are one-ticket sales (i.e., no need to resell each year as the premium comes due).
Yet VAs do have major downsides that limit their effectiveness in a number of sales applications. For instance, at death, the annuity value is subject to income tax on the gain. Also at death, the annuity value is includible in the estate.
Furthermore, as a retirement vehicle, VA distributions (other than as annuity payments) are taxed on a very unfavorable last in, first out (LIFO) basis.
And, although VA owners who annuitize are assured of not outliving their assets, the possibility of potentially losing all the assets is a big obstacle.
Contrast this situation to a life insurance contract, especially the VUL contract. Is that product ever complex! As noted earlier, the complexity is what keeps so many fine producers away. (A typical estimate is that 80% of producers dont write life insurance.)
