Consumer Groups Report On VUL: Not Well Enough Understood
Most consumers dont 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 dont understand it well enough,” says Stephen Brobeck, president of the Washington-based group, who released the report during a press briefing.
VUL can provide good value if intelligently purchased, held and managed, Brobeck says.
However, adds James H. Hunt, CFAs life insurance actuary, those seeking tax-sheltered investments should look first to 401(k) plans, individual retirement accounts or Roth IRAs before examining VUL.
Hunt says many people dont understand the array of charges associated with VUL policies, particularly the surrender charge.
These charges include taxes, mortality and expense and investment management as well as surrender charges, Hunt says.
These charges, he says, often exceed the tax benefits of VUL.
Indeed, he says, consumers who purchase 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.
Hunt notes that since VUL is a security, full disclosure of of the charges is contained in the prospectus. Nonetheless, he says, these are difficult to understand.
Most consumers, he says, dont 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.
While there are suitability requirements for VUL sales, he says, they are not really enforced.
Hunt cites one 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.
Hunt says he questions the suitability of that policy.
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,” ACLI says.
“CFA overlooks the fundamental feature of the product, the feature that makes life insurance unique, which is its death benefit,” ACLI adds.
CFA errs in its assumption, ACLI says, that the sale of VUL is primarily related to the tax advantages.
CFA offers consumers several specific recommendations when considering a VUL purchase.
First, according to CFA, consumers should determine the amount of premium they want to pay and the frequency.
Second, 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).
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, CFA suggests that consumers eliminate any riders, which usually offer poor value, such as spouse riders.
Consumers should also request an illustration at some hypothetical gross earnings rate, such as 8%, according to CFA.
The illustration should assume, CFA adds, that 100% of investment allocations be in the lowest cost, index account, even if the consumer later intends to make a different selection.
Finally, CFA says, consumers should compare the column of cash surrender value among competing illustrations. In general, CFA says, the higher the surrender values, the better the policy.
Hunt adds that if Congress enacts President Bushs proposal to create a new array of tax-free savings vehicles, it would certainly hurt the life insurance industry.
However, he says, he believes the life insurance lobby is far too powerful to let that happen.
Reproduced from National Underwriter Edition, March 3, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.