After rebounding slightly in 2004, sales of variable universal life (VUL) insurance policies dropped 11% in the first three quarters of 2005, according to LIMRA International, the life insurance trade group. While VUL sales have been consistently off their 2004 pace, insurers are optimistic that VUL sales will turn around once advisors realize VUL is an effective retirement planning tool.

VUL essentially allows for tax-deferred growth, says Naveed Irshad, VP of product management at John Hancock Life Insurance. “We position [VUL] as supplemental retirement income if someone has maxed out on qualified plan opportunities,” he says. “VUL is a very good alternative in allowing for tax-deferred growth and [providing] income, potentially on a tax-free basis.”

As it stands now, Irshad says, insurers are designing two types of VUL products: high-cash value retirement funding, or accumulation VULs; and VUL policies that offer substantial death benefit guarantees, or no-lapse policies. Len Scholl, assistant VP of Individual and Small Business Markets at Sun Life Financial in Wellesley, Massachusetts, says the advent of no-lapse universal life insurance policies coupled with stock market volatility have curtailed VUL sales. In 2000, VUL accounted for 36% of all life insurance sales, Scholl notes. Today, by contrast, VUL sales have dropped to just 14% of all life insurance sales. But “the most significant innovation in VUL products today has been the addition of a no-lapse type feature in a variable life contract,” he says. The no-lapse provision provides for a guarantee of the death benefit regardless of market performance. “As long as you pay your premium, you’ve guaranteed the death benefit,” Scholl says.

Irshad adds that the market volatility over the past few years “has shown that some of these guarantees are very valuable and make a lot of sense on a VUL chassis, especially those built for death benefit protection.” John Hancock’s Protection VUL offers a death benefit with a no-lapse guarantee, Irshad says, but “unlike most of our competitors’ products, it also allows you to participate in 100% equity allocation while having a very attractive death benefit guarantee.” Sun Life Financial’s VUL products offer a no-lapse guarantee “of 20 years or up to age 80,” explains Scholl. “For customers wanting a longer guarantee period, a universal life product is a better fit and more efficient than VUL.” Sun Life’s Futurity Protector II VUL is designed to provide a death benefit for a given premium with lower accumulation of the cash values.

A Tax-Free Income Generator

Ray Trueblood, VP, Life Insurance Marketing Strategy at Jackson National Life Distributors in Denver, says that he’s noticed more advisors are moving away from using VUL as a low-cost death benefit and recommending VUL for accumulating retirement income. VUL is a great tool for planners to use as they help their clients shift from the accumulation phase to the distribution phase, Trueblood says, because it can generate tax-free income. “As more investment related planners start discovering VUL and how powerful a tool it actually is, we’re convinced that more of them will be using VUL in the future,” he says.

Indeed, Scholl says he expects VUL sales to rise as the markets continue to do well and because younger to middle-aged folks are faced with building their own retirement nest egg. “With Social Security concerns, the elimination of DB plans, and other retirement concerns, VULs can play an important role in an individual’s overall retirement plan,” Scholl says.

Last month, John Hancock launched a product called Accumulation VUL designed to provide “strong cash values and income for retirement,” Irshad says. Some features include a zero net cost loan, dollar cost averaging, and automatic asset rebalancing allowing for significant cash value growth. Sun Life’s Futurity Accumulator II is designed for higher cash accumulation so clients can supplement their retirement income, adds Scholl.

Jackson National, a late entrant to the VUL market, introduced its first product, Perspective Investor VUL, in March 2004. Trueblood says the policy offers a “strong distribution strategy,” and “competes really well” when a client is planning to use the provisions of the policy loan.

In January 2005, Jackson National introduced two more VUL policies, Ultimate Investor VUL and JNL Advisor VUL. Trueblood says Ultimate Investor is an innovative product that’s experienced “huge success” because it pays compensation similar to an A-share mutual fund. JNL Advisor VUL, on the other hand, is a no-load product designed for fee-based planners. Trueblood says Jackson National hasn’t received a groundswell of interest from planners. “I think fee-based advisors are still in tune with managed investment portfolios [rather] than wrapped products,” he says.

Because VUL is a complex product, Trueblood says, Jackson National is providing advisors with a multimedia, 10-minute video presentation that they can use to explain VUL to their clients. “I think advisors understand the product, but the key is how to get a client interested in VUL.”

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Washington Bureau Chief Melanie Waddell can be reached at mwaddell@investmentadvisor.com.