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VULs Can Weather Storm Of Market Swings

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Investors all over the world are looking for reassurance after the recent sell-offs that occurred throughout the international markets this March.

The latest market decline firmly reinforces the fact that investors are now participants in a global economy.

While domestic economic data still carries its fair share of weight with the United States markets, this most recent slide demonstrated just how much the international markets can weigh on our domestic markets.

Less than favorable economic news out of China, coupled with a dissenting opinion from former Fed Chairman Alan Greenspan (which he has since revised), quickly led to the huge sell-off that occurred.

While market declines do affect the current value of investments, they also present an opportunity for those investors who employ dollar cost averaging, which is often available at no cost within variable universal life policies.

This investment strategy calls for investing fixed dollar amounts at fixed time intervals.

Electing to have premiums dollar cost averaged into VUL subaccounts will help policyowners buy more shares when the price is low and fewer shares when the price is high. So, when the market declines, as it did recently, the policyowner is buying more shares with each purchase. Then, as prices recover and rise, more shares will be available to appreciate.

VUL policies are for the long-term, so they can withstand market fluctuations and take advantage of market declines through dollar cost averaging.

But dollar cost averaging is not enough by itself. It is also important to have proper diversification and asset allocation within the subaccounts. This will ensure that the client is not putting all eggs in one basket.

Research has shown time and time again that diversification helps to reduce (but not eliminate) a portfolio’s total risk.

For advisors and customers who are not comfortable with managing the investments on their own, using the model portfolios available with the VUL policy is a great way to achieve automatic diversification. These portfolios are structured around the investor’s anticipated risk tolerance and so appropriately allocate money to the underlying subaccounts.

No one likes a down market, but that doesn’t mean there aren’t ways to weather the storm. The best course of action is to make sure the client elects dollar cost averaging and is well diversified. This will help keep the client from falling prey to panic selling into a down market.