Variable Universal Life Insurance

Variable Universal Life Insurance or VUL policy was the hottest selling policy in the life insurance industry a two decades ago. People were sold on the possibility of the stock market helping them build their solid nest egg and paying for only 15/16 years as it matured. Fast forward twenty years, most VUL policy holders have either lost money or entire policy. Any stock-related product must be carefully reviewed to ensure the volatility of the stock market should not put your life insurance policy in big jeopardy.

This is not to say variable universal life is not a viable retirement supplement and life insurance option, when variable universal life is used in the correct circumstances, with the right selection of investment funds, and funded with the insurance companies’ guideline premiums. It is then that these policies can fulfill their intended purpose of providing life insurance protection with an opportunity to increase its value over time. Unfortunately, most life insurance agents sell variable life insurance policies with the minimum required premium, making them look less expensive initially but creating a higher risk of termination policy in the policy.

Normally, life insurance agents sell these types of variable life insurance policies projecting an 8% to 10% rate of return on your investment within the policy. These kinds of projections make variable life insurance illustration or presentations or a policy chart look very attractive. But most of these variable universal life policies are a ticking time-bomb waiting to explode not only because of the investment risk (it will not earn the projected rate of return) but because of the increasing “cost of insurance” within the policy.

Variable universal life is a un-bundle product – meaning you would be able to see the exact cost of insurance, administrative and investment management fees like mutual funds. This kind of policy contains annually renewable term (ART) life insurance inside the policy. So the cost of your life insurance inside the policy increases every year – yes – you guessed it right – it is very low when you are young but it will become VERY expensive when you grow old. I mean the cost of insurance will increase by 200%, 500% and even 2000%! You can see all these payment amounts by reviewing your policy documents – usually on 3rd or 4th page of a variable universal life policy.

If the mutual fund investments contained within the policy have dropped in value significantly there may not be enough value in the cash value account to offset the rising cost of the annually increasing term life insurance the variable universal life policies use. This would mean that during the later stages of the variable life insurance policy (and the insured’s life) increases in the premium amount would create a situation where there is not enough cash value left in the policy to pay for the rapidly increasing cost of insurance. That means you would either have to come up with additional premiums or the policy would be cancelled, leaving the individual without life insurance policy and potentially a large phantom income tax bill.

So, when you talk about variable life insurance policy pros and cons, there are not many pros except all the pros of permanent life insurance policies like tax deferred growth of cash value and it can be taken out of the cash value without paying any taxes via policy loans. Variable universal life policy is VIOXX (I am sure you remember Faulty medicine!) in the life insurance world. It was introduced hastily in seventies when in general; the life insurance industry was under attack by “Buy the Term Insurance and Invest the Difference into Stock Market” notion by the then current investment lobby. Permanent life insurance in general is a great tax efficient savings tool but unfortunately the construction of variable universal life policy ruins all the benefit of permanent life insurance.

By comparison, whole life insurance (another kind of permanent life policy) is a much more conservative product with guaranteed premiums (not to change ever), guaranteed death benefit and guaranteed cash value inside the policy. This traditional whole life policy provides THREE guaranteed, while variable universal life policy provides NO guarantee and passes the risk on to the policy holder. In whole life there is no stock market involved in the cash value projection and no annually increasing term insurance cost.

Whole life insurance is a bundled product meaning you cannot see the cost of the life insurance or any other expenses very much like a bank CD. A whole life policy provides a very attractive internal rate of return (net to all the costs and expenses) of approximately 4 to 5% NET over the long term period, usually 20 years or more. So, there are no more sleepless nights worrying about whether the stock market is up or down. Whole life insurance also gives you the peace of mind that life insurance will always be there as long as guaranteed premiums are paid.

Asking the right questions and carefully selecting the right insurance will not only prevent financial turmoil, it will also help you to create substantial wealth for you and your loved ones. If you own a Variable Universal Life Insurance (the policy with a stock market component) we strongly suggest you review it and ask your insurance company to provide you an “In-force Illustration” with conservative rate of return (6%) and with guaranteed maximum expenses. If you need any further help, please call (877) 972-3262 or contact us.

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