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February 25, 2003 at 07:00 PM
NU Online News Service, Feb. 25, 3:58 p.m. — Washington
Most consumers don’t understand variable-universal life insurance well enough to compare policies and make good purchasing decisions, the Consumer Federation of America says.
“Even most financial planners don’t understand it well enough,” says Stephen Brobeck, president of the Washington-based group.
VUL can provide good value if intelligently purchased, held and managed, Brobeck says.
However, says James Hunt, the CFA’s life insurance actuary, those seeking tax-sheltered investments should look first to 401(k) plans, individual retirement accounts or Roth IRAs before examining VUL policies.
Hunt says few consumers understand the surrender charges and other expenses associated with VUL policies.
These charges often exceed the tax benefits of VUL policies, Hunt says.
Indeed, he says, consumers who buy VUL policies should be prepared to hold them at least through the surrender period.
In addition, Hunt says, consumers should never surrender a VUL policy with a loss, which is the excess of premiums over the surrender value, without looking into a transfer of the loss to a variable annuity.
Because a VUL policy is a security, insurers include full disclosure of the charges in the prospectus, but the disclosure may be difficult to understand, Hunt notes.
Most consumers, he says, don’t understand that they must keep the policy in force until death to retain most of the tax benefits.
Hunt adds that this could be explained better by agents selling VUL.
Hunt says the suitability requirements for VUL sales are not well-enforced.
Hunt cites the example of a consumer who asked him to review a variable policy for which she was paying $23 per month, of which $2 “came off the top” before other premium deductions.
