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.
He says he questions the suitability of that policy.
The CFA offers consumers a policy-analysis service to evaluate new or existing VUL policies for a fee of between $55 and $75.
The American Council of Life Insurers, Washington, says in a statement that the CFA report contains a considerable amount of good advice.
“However, it misses a key point when attempting to reduce this form of life insurance into a savings vehicle that appeals to consumers simply because its cash value receives tax-deferred treatment,” the ACLI says.
“CFA overlooks the fundamental feature of the product, the feature that makes life insurance unique, which is its death benefit,” the ACLI adds.
The CFA offers consumers several specific recommendations for consumers considering a VUL purchase.
First, the CFA says, consumers should determine the amount of premium they want to pay and the frequency.
Second, the CFA says, consumers should decide on the amount of insurance they want to have and whether to select Option A (a level death benefit) or Option B (the death benefit plus the policy value before the surrender charge).
The CFA suggests that, to maximize the tax advantages, consumers should ask for the lowest Option B amount that is not a modified endowment contract and ask that Option A be illustrated beginning in policy year eight.
In addition, the CFA suggests that consumers eliminate any riders, which usually offer poor value.
Consumers should also request an illustration at some hypothetical gross earnings rate, such as 8%, the CFA says.
The illustration should assume, the CFA adds, that 100% of investment allocations will be in the lowest-cost index account, even if the consumer later decides to make a different selection.
Finally, the CFA says, consumers should compare the column of cash surrender values for competing illustrations. In general, the CFA says, the higher the surrender values, the better the policy.