Variable Universal Life Insurance
Variable universal life (VUL) insurance is sold as life insurance with the opportunity to achieve market type returns in the cash value that are tax free to the variable life insurance policy beneficiary.
A variable universal life policy differs from a whole life policy in four main respects:
- VUL's have a separate account which present a variety of investment options;
- The VUL policy value may fluctuate based on the performance of underlying mutual fund sub-accounts;
- a minimum guaranteed death benefit is included; and,
- a VUL is a security.
Before investing in a VUL, a broker should determine whether or not the VUL investment is suitable given the customer age, investments needs, station in life and risk tolerance.
- Do you need access to cash?
- Does the investor have a present need for income?
- Is the investor risk adverse?
- Do the heirs of the investor need the death benefit or life insurance coverage?
- Does the investor already have adequate life insurance coverage?
- Is the coverage proposed by the financial planner excessive?
If you have answered yes to any of these questions, a VUL may not be a suitable investment for you.
Some VUL policies are structured through the payment of a single premium and later a call for additional premium dollars is made because the mutual fund investments have not appreciated enough to service the premium needs of the policy. Other VUL policies require annual premium payments that may become burdensome over time, especially if the policy provides a death benefit that it is excessive compared to your estate planning needs. Variable universal life coverage that requires premium payments that a client cannot afford either on a one-time basis or annually may be unsuitable.
The investor in a variable life insurance policy is required to pay a set premium on a scheduled basis. In the variable life insurance context, however, the insurance company places the VUL premium payment into a separate account specific to the policyholder which may be invested in different class of mutual funds. These are typically known as mutual fund sub-accounts.
The insurance policy will provide a minimum guaranteed death benefit as agreed to by the insurance company and the policyholder and the funding of the death benefit will be determined by using an assumed rate of interest. If the performance of the VUL mutual fund sub-accounts exceeds the assumed rate of interest, the death benefit increases accordingly. Should the separate account performance be less than the assumed rate, the death benefit would drop from the previous year. However, the death benefit will never drop below the guaranteed face amount of the variable life insurance policy.
The separate account can invest in common stock, bonds, money-market instruments or other securities to achieve potentially higher gains than a fixed interest rate. Thus, the term ‘variable’ life insurance. As the markets move up and down, the separate account values (i.e., the cash value) will fluctuate in value accordingly.
VUL policies are considered both insurance contracts and securities and are regulated by both the Securities & Exchange Commission and the state insurance commissioner. An agent authorized to sell variable life insurance must be licensed by the state as well as by the National Association of Securities Dealers (NASD) as a registered representative.
As a security, variable insurance products are regulated by the Securities & Exchange Commission which brings out a new set of agent requirements dealing, primarily with full and fair disclosure laws. For example, any sales presentation must be preceded by or accompanied by a prospectus approved by the SEC. All materials used in selling and promoting these products must also be approved prior to use by the SEC.