After a wild ride during the bull market, when investments returned so much that investors grew accustomed to 20% and even 30% returns, variable universal life insurance suffered an equally wild drop during the bear market. Those high returns had kept many purchasers from fully realizing the costs and risks involved with VUL policies, but once the safety margin disappeared, VUL insurance took a beating. According to LIMRA International, the life insurance trade group, sales of VUL policies rose 28% in 2000. But then the bottom fell out: sales were down 10% in 2001, 23% in 2002, and in the first three quarters of 2003, they were down a stunning 36% (actually, LIMRA’s figures show the low point apparently in the second quarter of 2003, when premiums were down 41% from where they were in the second quarter of 2002; third-quarter premiums in 2003 were only off 32% from third-quarter results in 2002; the jury’s still out on the fourth quarter’s results, as data is still being compiled).
While VUL might have an image problem–deservedly so, many say, due to expenses and risks that are inappropriate for many to whom it was sold–a number of advisors have stepped up to say that not only do they recommend it for client portfolios, they’ve done so for years, and are still using it in the ways that were appropriate before the market’s recent gyrations.
You Gotta Know the Territory
Joseph Murtagh, a planner at the SOURCE in Goshen, New York, had his beginnings in the life insurance business in 1970, became a CLU in 1975, and had been doing financial planning “for a number of years” when VUL came out. As a planner, he says, he appreciated that it was “a very different type of insurance product” that continues to be a good product, if used by the right person for the right situations. “Every product can be abused, and certainly VUL has been abused,” but he maintains that VUL is still as appropriate today as it’s ever been. He points to its use in the estate planning area, with irrevocable life insurance trusts, to pass wealth along to future generations.
Citing the maxims that “owners of securities do twice as well as loaners,” and “stocks do better than bonds, and bonds do better than cash,” he says that VUL’s opportunity for self-direction of the investment portion is another of its attractions. The tax-deferred nature of VUL that can be used after IRA and tax-qualified plan limits have been exhausted, he points out, is also a highlight of its usefulness. “Being able to withdraw from these contracts tax-free until you’ve withdrawn your entire basis for your investment is another good feature,” he adds, “and then the ability to borrow from the account and pay only interest” is yet another, though he argues that VUL makes a great deal of sense “to many; not all, but to many.”
The problem, he says, is that the industry was selling it as a retirement product, an inappropriate use. And despite owners of those policies taking medical exams and being screened in a manner appropriate for purchasers of life insurance, Murtagh says he is still bewildered by policyholders who said they didn’t know they were buying life insurance products.
His own clients, says Murtagh, suffered no such lack of clarity, although he adds that when the market tanked in 2000, he had to call or meet with many of his clients who had VUL products to make sure they understood they would have to put in more money to keep their policies. “And because they understood that the policy was a combination of life insurance and an investment account, no one lapsed or gave up their policies during these very trying three years in the market.”
The Right Stuff
Royce Monk of The Consulting Group in Nashville, Tennessee, is another planner who believes in the virtues of VUL, under the right circumstances. “It works well when you can fully fund it,” she points out. If a client is looking for a policy with minimum premiums, she warns, “you don’t want to do that. You’re better off to buy term.”
VUL turned out to be ideal for several of her clients, she says, and tells about the one who was young, single, and with plenty of excess income. He’d maxed out his pension plan, she says, so she put him into a VUL policy. Now that he’s married and has two children, she adds, the insurance part of the VUL policy isn’t adequate, and he bought additional term insurance for protection. She notes that the VUL policy still has cash building up that he could withdraw tax-free.
The client is in the music business, and when his record company was bought out and he found himself out of work for two years, he had a cushion. “It’s a cash pool,” she explains. “Obviously, in times like this, he couldn’t have qualified for a loan at the bank; he could have been his own banker.” Another client she had was under a lot of stress at his job and was unable to get decent disability insurance. He had a large amount of cash in money markets, she says, so she suggested that he consider funding a VUL policy to build up a reserve from which he could draw if he did become disabled. “It was as good as what we could buy from the disability company,” she says, and adds that the policy also provided protection for his wife, who came from a long-lived family. “She knew that she most likely would outlive him, and it would be an extra pool of money if he predeceased her.”
Passing the Test
Alan McKnight, a planner in Atlanta who went fee-only five years ago and who used to sell insurance, says that he looks at VUL not so much as an investment as insurance that will also serve as a “second- or third-tier investment vehicle.” However, he says that he makes sure that the client’s fundamental insurance needs are met before he brings in VUL. He too relies on VUL as a possible solution for a client who’s maxed out her 401(k) or IRA options and needs “discretionary dollars and life insurance.”
McKnight puts his clients through a checklist to be sure that VUL is the right solution to their problem. First, he makes sure the client is in good health. “I want to make sure they get a good rating, preferred, not just standard or substandard.” His concern exists because VUL is not an efficient wealth accumulator, he says. With the costs associated with the insurance product, he says, it’s best to get the most dollars into the investment vehicle as possible. “I don’t want the insurance costs to eat up all the premium dollars.”