Variable universal life (VUL) remains a niche product. LIMRA reports that VUL represented just 8 percent of life sales in 2014, but sales are growing. According to Karen R. Terry, LIMRA’s assistant managing director of insurance research, VULs had annualized premium sales growth of 24 percent in 2013 and 17 percent in 2014. The first quarter of 2015 also saw good results with 21 percent growth.
One possible reason for the relatively low market penetration is that VUL also generates strong reactions: some advisors swear by it while others swear at it. Advisors who recommend the policies highlight its benefits.
Lillian Meyers, a financial planner with Meyers Financial in Sonoma, California cites the product’s value as a supplement to other retirement savings plans, in addition to the available insurance benefits.
“Let’s say you’ve got the 401(k) but [not] a pension,” she says. “[Buying a VUL policy] would be a good way to make sure that you are well covered in the retirement area. But, there are a lot of riders involved, as well, for more guarantees.”
Other advisors like David Demming, a financial planner with Demming Financial Services Corp. in Aurora, Ohio, are highly critical. Demming previously worked with VUL but does not now. “As fee-based planners, we are very vocal in our condemnation of these overpriced products,” he wrote in an email.
How it works
Joe Miscolta, assistant vice president with Pacific Life Insurance Company’s investment marketing unit-life division, provided the following details on the policy’s structure. VUL is a form of universal life insurance (UL) in which the contract’s earnings rate is based on the performance of the selected subaccounts.
Variable subaccounts invest in insurance dedicated funds, so their performance will change daily with the market. The variable subaccount assets are held in a life insurance company’s separate account, which is kept separate from its general account, and protected from the life insurance carrier’s general creditors.
VULs also offer access to a fixed account that works the same way as a UL policy. Its earnings rate is determined by the life insurance company and the declared rate will never be lower than the policy’s minimum guaranteed rate. All assets in the fixed account are part of the insurer’s general account. VUL products typically provide a wide range of investment options in their subaccounts.
Miscolta says that Pacific Life’s current VULs offer 95 variable subaccounts, including several nontraditional and alternative investments. Two indexed accounts with crediting rates based in part on the S&P 500’s price return, with a cap and minimum guaranteed rate, are also available.
Sources agreed on the basic suitability profile for an ideal VUL buyer. The ability to tolerate investment market volatility is essential; otherwise, the client may cancel the policy in a downturn and incur investment losses.
G. Scott Cahill, managing director with Fulcrum Partners LLC, cites examples of clients who couldn’t tolerate the equity markets’ volatility in 2008 to 2009 and surrendered their contracts with resulting losses. An adequate time horizon is also required, says Brian Kazinec, a financial advisor with Prudential Advisors in Atlanta, Georgia.
“These contracts need time to ‘stew and brew’ so you don’t want to utilize these contracts for somebody that’s going to (buy) and then retire in two years,” he says. “There’s not enough time and flexibility and ability to put in money over a short period of time. So, I like to use these for people that have approximately at least eight years, 10 years before they’re going to need to utilize the assets out of these contracts.”
Consistent and adequate funding is important. Wes Shannon, a financial planner with SJK Financial Planning, LLC in Hurst, Texas, typically shows illustrations with amounts at or close to the maximum funding allowed under IRS modified endowment contract (MEC) guidelines.
The policy’s death benefit is important, he says, but the emphasis is different with VUL.
“For VUL, most of the time, you’re looking at the tax-advantaged and the favored protection of the cash value,” he says. “You have to maximum fund [the policy] for it to work. If you’re looking at trying to just buy a death benefit for a reasonable cost, VUL should not be your instrument.”