Benjamin Graham, legendary investor and co-author of the 1934 classic, “Security Analysis,” once noted that investors “do not succeed in forecasting what’s going to happen to the stock market.” Yet, as the Dow Jones index hovered flatly between 10,500-11,000, bullish investors tempered their participation, uncertain of the market’s direction.
Even in a flat or uncertain market environment, however, a variable universal life policy can play a key role in a client’s long-term strategy for wealth protection and supplemental retirement income.
VUL insurance combines the protection and tax efficiencies of life insurance with the investment potential of a comprehensive selection of variable investment options. The insurance component provides death benefit coverage, and the variable component gives clients the opportunity for growth potential and cash accumulation.
Concurrently, a VUL is akin to other life policies in that it is also used to protect and provide for the insured’s family or business.
It must be made clear, however, that poor investment performance will require increasing premiums to keep the policy in force. That is why some VULs offer death benefit guarantees and other riders that can mitigate these risks.
As interest rates shifted and market performance declined in recent years, there has been increasing interest in policies with guarantees that can provide more reliable and therefore, manageable outcomes and requirements. For clients on fixed incomes and with less flexibility to respond to market conditions, guaranteed death benefits are the best strategy.
In addition, the insurance industry has adapted to provide a range of conservative to aggressive investment options to suit a client’s comfort level. In essence, “one size does not fit all.”
These investment options are well-managed like their mutual fund counterparts. However, advisors should point out the daily valuations of VUL investment options are not available to the public and cannot be tracked like a mutual fund, by looking at the published net asset value. (This is sometimes confusing to clients who have selected an option with the same management team and a name similar to a retail mutual fund.)
For confident investors, the short-term effects of market uncertainty do not dissuade them from understanding the value of equity allocations. For more risk-averse clients who are unwilling to tolerate market fluctuations, however, we recommend they do not purchase VUL policies.
The financial professional must have the skills to match the client with the proper type of insurance vehicle. The professional must also manage client expectations skillfully since variable insurance products are subject to investment risk, are not guaranteed and will fluctuate in value.
Industry observers often say the best time to get into the equities market is when clients have not only money to invest but also the risk tolerance to handle the risks selected. It also has been said that there is a best time for clients to get out of the market–i.e., when they need the money.
That speaks to a key feature of many modern VULs: The products offer a range of asset allocation tools to help producers and clients monitor the policy’s “variable” nature–so clients can get in and out with comfort. For example, some insurers offer VULs containing investment options that invest in asset allocation funds, or a “fund of funds.” These companies use the expertise of investment professionals, who keep their investment models current with market conditions.
Asset allocation can be a beneficial investment and risk management strategy to help preserve VUL cash value, too. And the asset allocation options make it easier for producers to adjust periodically a client’s portfolio to maintain the stated risk profile. However, clients need to know that using diversification/asset allocation as part of the investment strategy doesn’t guarantee better performance or protect against loss in value.
Many investors take out life insurance for the policy death benefits–to provide for loved ones. The advisor also can leverage a carrier’s marketing materials and technology-driven illustrations to remind clients of the tax-deferred nature of VULs and their cash-value accumulation feature.
As financial intermediaries, we are keenly aware that our clients’ financial situations may differ. Even so, many share the same goals: to protect their families and work to provide themselves with a comfortable retirement. This is why we believe VUL is a viable product to recommend, even in a flat market. It offers the protection of life insurance with the potential for cash accumulation, plus the added advantage of long-term upside potential via the investment options.