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April 02, 2006 at 04:00 PM
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.)
