100 Why We Hate Variable Universal Life Insurance

It’s always a bit disturbing when there is a headline that makes such a bold and definitive statement. Just makes me cringe.

However, in this case I can honestly say that the title of this procast episode is not done to be sensational in any way.

No—it’s spot on. Exactly how we feel about variable universal life insurance.

Why do we feel so strongly you ask?

We feel that the point behind using life insurance as an asset class is to offer a safety mechanism that just doesn’t exist in other types of savings instruments. It is intended to be a low risk asset that takes advantage of scale.

What do I mean by this? The life insurance companies are able to benefit from the massive depth of their asset pool to make investments that wouldn’t otherwise be available to you and me. This is made possible by virtue of using its general account. If you want to read more about this you should read this post.

VUL eliminates this significant advantage. It’s neither low risk, nor taking advantage of an insurer’s investing leverage.

Why pay morality and expense (M&E) charges, sub account fees, and 12b-1 fees? You can skip the M&E part by simply investing in mutual funds. Of course, you get to keep the 12b-1 and advisor fees 😉

Why not take advantage of the solid returns from whole life and indexed universal life insurance that skips the sub account fees and 12b-1 fees altogether?

When it comes to universal life insurance (UL) it’s all about minimizing the net amount at risk to take advantage of tax benefits and other life insurance benefits.

VUL makes this mitigation tricky, it also places you in a somewhat perilous situation. Think about this for a second—if the sub account value drops, and the death benefit stays the same, the net amount at risk has now increased, which means the cost-of-insurance (COI) has now increased.

And with each new policy year, the cost per $1,000 of death benefit (that’s how life insurance company price their product) increases. This will cause significant problems with the viability and the cash accumulation of the policy long-term.

Not to be a fear monger—it won’t always create a situation where the policy is in danger of lapsing, however, it does increase the likelihood if you aren’t monitoring the situation closely.

A couple of other things to consider regarding Variable Universal Life Insurance:

1. Most VUL products have considerable higher internal expenses regarding COI and administrative expenses as well as per 1,000 fees vs. UL and IUL.

And…

2. Loan interest rates for outstanding balances can be punitive since they assume traditional market assumed returns (8% or more). Now, this isn’t across the board but something to be aware of.

We just don’t think the theoretical reward is worth the increased risk. Creating wealth is not a matter of always seeking the maximum return, it’s a function of making sure that you save enough and that you control your downside risk.

Participating whole life insurance and indexed universal life insurance (when structured correctly) achieve this goal very well.


4 Responses to “100 Why We Hate Variable Universal Life Insurance”

  1. Bob Rutter says:

    I am one of your “three listeners” and I truly enjoy hearing what you have to say about life insurance as a tool to investment hard earned dollars (no offense FINRA). After listening to the podcast today – that’s right, I listen on the day it’s published, I hear what you’re saying about the hidden costs of a VUL and the risk associated and wonder how you feel about iUL’s. Clearly some are better than others, but are they all as bad in your opinions as VUL’s?
    Curious in Ohio
    Bob

    • Brantley Whitley says:

      Hi Bob–thanks for the kind words and for openly confessing your fondness of our podcast. That makes it easier to keep going for sure.

      As for question regarding how we feel about IUL–we are quite fond of IUL and have quite a few clients who use it on a regular basis. It works incredibly well for cash accumulation, provides great funding flexibility and fantastic income scenarios when you’re ready to retire. However, you are definitely correct in saying that “some are better than others”. We only recommend a handful of them from highly rated companies.

  2. Ron says:

    Thanks for the well written article Brantley! I’ve had similar thoughts, just never had the reasons put to words so clearly.

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