Life Solutions

Protect What Matters
Indexed Universal Life Doomed for Failure                                                            Part 5

The second attempt at Universal Life came in the late 1980’s; this time it came with a different name. It was called Variable Universal Life (VUL). What was different this time? Well, this time, the geniuses behind universal life decided that instead of crediting the cash value account based on interest rates, that they would take the funds in the cash value and invested directly into the stock market using sub accounts, better known as mutual funds. Why did they do this? Well, in the late 1980’s and into the early 1990’s the stock market was performing really well; interest rates were high and they were yielding high returns. This time, the geniuses thought the VUL will be the best performing asset of all time and it would have tax advantages as well. Guess what? The Variable Universal Life policy became the next flavor of the month, the trending product, the hot product. And, you guessed it, agents began promoting this product and selling it like hot bread right out of the oven.


What happened this time; did it work? Was the VUL able to do what its early cousin was unable to do? The answer is a big NO! Why not? Because the VUL was based on the same model as the original UL. The only thing that changed was the crediting method to the sub account (the cash value account). The VUL retained the annual renewable term insurance, and it retained the same philosophy that this time the cash value would grow substantially through the performance of the stock market. Does this sound familiar? What do you think happened? You guessed it again. The stock market did not generate those high returns. Now, why was it necessary to obtain those 8%, 9% and 10% returns? Because of the annoying, ever-increasing cost of insurance. See, if the geniuses had incorporated an insurance type that had level cost of insurance, then those high returns would not be essential. The excess premiums could be invested in safe investments generating 7%, 6%, 5%, 4%, 3%, 2%, 1%, even 0% and the policy would not lapse. Why? Because the premium paid would be enough to pay for the cost of insurance every time. Can you see how the VUL was also doomed to fail? It had the same two flaws as its predecessor, the UL.


Another problem with the VUL was the fees incorporated into it. The VUL has some of the highest fees you can find in a life insurance product. There is a management fee paid to the mutual fund company for the sub-account, a management fee to the insurance company, and a mortality and expense fee among others. Those fees would total close to 5% of the total premium. My guess is that the geniuses behind the VUL thought that the market returns were going to be so high, that the high fees would go unnoticeable.


VULs are still being sold today. I personally don’t know anybody who’s bought one lately or who is still buying them. To those agents that are still selling them, shame on you. For those people that are buying them, I feel sorry for you.


So, there you have it. Another UL product, another failure. Let’s call this strike two!


Is there a strike three? Let’s find out…