Life Insurance

A Closer Look at Variable Universal Life Insurance: Doing What is Important, Not What is Popular
by Paul A. LaPiana, CFP®,

Clients may be tempted to avoid any variable products in times of market volatility including variable universal life (VUL) insurance products. While this may be a popular way of thinking, it may not be the best strategy and your clients may be missing out on some opportunities. In 2008, the Dow Jones industrial average saw its worst year since 1931, dropping 33.8%. The Standard & Poor’s 500-stock index was down 38.5%.  But these declines only tell half the story. While the Dow had two days with its steepest point losses, it also set records for its three largest single-day point gains. Such dramatic swings can cause concern among clients and most are probably reluctant, at best, to invest in this type of environment.

In light of this, presenting VUL to clients may seem like swimming upstream. It’s a difficult sale, but as an advocate for your client, you have the responsibility to help them make the decisions that are right for them. Despite what may be going on in the economy, a VUL policy may offer your clients the opportunity get in and stay in the market, taking advantage of buying low and selling high, while offering some protections. By helping your clients do what is important, but not popular, you will position yourself as a trusted advisor.

Depending on your client’s situation, a VUL policy may be the most appropriate recommendation to satisfy long-term needs, despite the state of the market. VUL products have always provided clients with a flexible life insurance policy that has great long-term cash value accumulation potential from the equity markets and many tax advantages. Because of today’s turbulent markets, clients are also looking for death benefit guarantees to help them ride out the volatility. Today’s VUL products offer all of these: death benefit guarantees, cash value potential and tax advantages.  

The Advantages of VUL

To start, it is important not to overlook the flexibility that VUL contracts offer for premium payments. Clients may be able to skip premium payments; stop payments; and increase or decrease them as long as the required minimum premium is paid to keep the policy in force. Clients can take advantage of this flexibility in the early years of the policy by paying higher premiums and over funding the contract. This can build a reserve for your client that can help protect against lower investment returns or increased insurance charges.

VUL products take advantage of dollar cost averaging, which can help avoid the pitfalls of trying to predict market highs and lows. With a VUL product, your clients invest a set amount of money, of their choosing, at regular intervals for an extended period regardless of the market price. During down markets, clients can purchase more shares when prices are low and purchase fewer shares when prices are high when the market recovers. This can enhance the value of your client’s investment over the long term by smoothing out the average share purchase price over time.

Some VUL products offer enhanced dollar cost averaging (EDCA). A large premium can be deposited into an EDCA account; the money is then transferred into any one of the available investment options. The EDCA account typically receives a higher interest rate than does the policy’s fixed account.

Rebalancing is another tool you can use to help your clients weather market turmoil. Appropriate rebalancing helps you stay the course and it reinforces buying low and selling high. VUL contracts make it easy by allowing you to reallocate your client’s assets across investment options without incurring any tax liability.

For additional peace of mind, clients can also take advantage of optional features to enhance the protection of their VUL policy. These features may be available as riders and may have an added cost. Some VUL policies offer death-benefit guarantees. These guarantee provisions provide a guaranteed death benefit based on premium payments made, regardless of investment peformance. Some VUL contracts offer provisions that could prevent the policy from lapsing. Offering a paid up insurance benefit may help your client avoid the tax consequences that can come from lapsing with an outstanding loan on the policy. VUL policies may also offer the option of disbursing the life proceeds from the contract in the form of a monthly income rather than a lump sum death benefit. In addition, some insurers may offer favorable terms for loans if the VUL policy is held for a predetermined period. This may be in the form of a zero cost or “wash” loan, in which policyholders are allowed to take a policy loan at the same rate being earned by the loan fund.

VUL and Diversification

Look at VUL as you plan your client’s diversification strategy to create a combination of retirement assets that can be depleted through withdrawals and others that should be depleted as pensions. Individuals can pay additional premiums in the earlier years of their lives to create emergency funds that can be used to help pay for a child’s education or to help supplement retirement income. 

By using VUL, you can take advantage of asset allocation and diversification to help manage the risk of a volatile market. VUL allows you to access a variety of professionally managed funding options to build a personalized investment allocation for your client’s policy. You and your client select which funding options to use and what portion of the cash value should be allocated to each. The success of your client’s strategy will come from how the assets are allocated, not from specific fund performance. By keeping your client’s asset allocation in line with their risk tolerance, you may be able to offset prolonged market downturns while offering the potential to capitalize on market upswings.

You can further diversify your client’s portfolio using VUL by looking at tax diversification and time diversification strategies. Tax diversification means using a mix of taxable, tax-deferred, tax-favored and tax-free vehicles. In a VUL policy, your client’s cash value grows on a tax-deferred basis. Transfers within the VUL policy do not create a taxable event unlike most investment vehicles. Properly designed VUL policies also allow for tax-free disbursements from the policy’s cash value and any capital gains in a VUL contract are deferred until the income is taken out.

VUL contracts offer more flexibility than do tax-deferred retirement accounts, such as IRAs and 401(k)s. There are generally much higher funding limits, so clients can overfund the contract as they wish, by making additional premium payments or paying higher premiums. Many VUL products even reward clients for overfunding, by lowering or waiving charges, such as front-end premium sales charge and/or mortality and expense charges. You can use VUL contracts as part of a time diversification strategy for your client, creating different buckets of money for use in various periods over the course of your client’s life. Unlike other retirement accounts, there are no tax penalties for taking withdrawals from a VUL contract before age 59½ and there are no forced income requirements at age 70½.
 
Overcoming Objections to VUL

The target audience for VUL products can vary, and a VUL policy can be used to help clients at all stages of life.  Younger clients may be interested in this product so that they can build up cash to use later in life. Executives can use VUL to build up supplemental income outside of qualified and non-qualified plans or older clients can use VUL to build up cash quickly and have access to this money while enjoying the protection of a death benefit.

Before moving forward with your clients, it is important to sit down to educate them about the product, the opportunities and the basics of investing. In order to manage expectations, you should address potential market volatility in your initial conversations. Clients who purchase VUL products should be comfortable with investing and willing to accept the risk because of the potential return. Take the time to understand your client’s investment philosophy and to clearly explain the pros and cons of the product. Make sure that your clients understand the fundamentals of how the market works and how their life insurance can be affected.

If clients are hesitant, remind them that they are in the market for the long-term and that their strategy has a long time horizon. Over the long term, the market outperforms other investment vehicles. We’ve been through this before and it is vital not to let emotion dictate their actions in the market. Emotional investing leads to buying high and selling low. You can help clients recognize the role emotions can play in investing and help them to make smart decisions. It is especially important to maintain your strategy in down markets. Remind your clients of the basic principles of investing: have faith in the future, be patient, don’t time the market, and most importantly, stay disciplined.
No matter what is going on in the markets, VUL can still be a staple of your life insurance offerings for clients who want to take advantage of market opportunities. VUL policies combine protection, tax-advantaged growth potential, premium payment flexibility and guarantees to help clients achieve long-term investment goals through continued market participation while ensuring that coverage will last through all market cycles.

Take the time to learn more about VUL and its advantages. Talk to clients about VUL and the protection it can offer. Now is the time to do what is important for clients, not what is popular. Today, investing may not be very popular, but it is important. Help your clients make the best decisions for their needs by looking into how VUL can fit into their long-term strategy.
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Paul A. LaPiana, CFP is senior vice president and head of wholesaling and marketing for MetLife’s retail life insurance, long-term care and disability income insurance.  He is responsible for the development and oversight of product sales and initiatives for Life & Protection Solutions for MetLife’s Individual Business organization.  He is an active member of several industry organizations including the Association for Advanced Life Underwriting, the National Association of Independent Life Brokerage Agencies and the National Association of Insurance and Financial Advisors.