What's everyone's beef with VUL?

Hi,

I'm new to this community. For full disclosure, I'm a securities registered principal and life & health licensed agent. I come across many posts on the internet painting VUL in a negative light. Why is that?

Thanks.

because VUL is oversold to the public. there are A LOT of companies that have VUL as their one-trick pony. Ameriprise to name one (and there are MANY MANY others). they have a cap on the amount of term they can sell and (i believe) offer no whole life whatsoever. so, as a result, it gets sold to every client without regard to need.

by the way, i absolutely LOVE VUL ... but only when it is the right fit for the client and the desired outcome. thankfully, there are some great companies that use VUL in the right way.

I too love VUL, but yes, there is a need for a diversified product offering including EIUL, UL, term, mutual funds, UITs, separately managed accounts, annuities, etc. In fact, I rarely sell VUL by itself, often including term riders to give clients proper coverage without some crazy premium.

Also, I've seen some fully-funded VULs that beat the buy term and invest the difference in index funds philosophy on an after-tax basis and yet all the popular literature point in the direction of the term-index fund combo. What about the reality of it all where people buy term and spend the difference instead?

in fact, virtually EVERY vul funded the same in a buy term and invest the rest scenario should beat the invest the rest scenario. since by using VUL you are in fact both buying term and investing the rest inside an insurance wrapper. that is what VUL is!

however, for reasons i have stated in other threads, equity indexed universal life (or equity indexed annuities) are a rip-off (as the contracts are presently written).

Don't know about other VULs but I do know about Ameriprise's and these are the negatives with a VUL.

1) Cost of insurance is typically more expensive than term.
2) COI increases as you get older.
3) 5 percent load on any premiums paid so if you give them 1000 each month you pay 50 bucks a month which in some cases a comparable term policy itself will be cheaper than the monthly load.
4) M&E charges which run 0.9% for the Ameriprise VUL
5) Management fees on the sub-accounts which can run anywhere from 1-5%.
6) Limited choices on sub accounts to about 50
7) Steep surrender charge for 10 years which locks you in for 10 years and AMP can change the T&Cs and you can't do a thing about it.
8) If the policy is below a certain value you'll pay an extra 7.50 per month.
9) Confusing product for example depending on which option you select you'll have to worry about it becoming a MEC
10) Product is used as a cure-all for retirement, saving for a house, college education, etc.

Bottom line, very expensive and it has to do very well each year just to break even.

I'd say that about covers it.

yea, i should have caveated my statement with every GOOD vul. those companies that use VUL for everything usually have funky products. ameriprise is one of the companies where vul is their one trick pony. they only offer it and they offer it to everyone and they offer it to meet every financial need. i stand corrected.

that said, GOOD vul's are excellent products when used "as prescribed".

Once again, I will have to agree with 1MO, Ameriprise does seem to recommend VULs as a blanket solution. This observation is based entirely from the experience I have had reviewing clients/former client of the firm. Sometimes the VUL was a good/great option, but many times...not so much.

VULs have a very specific niche in a financial plan, and when you see the majority of people doing it, someone is not doing things in the best and most efficient way possible.

Regarding EIUL, there are products out there that, given historical returns, would average 7.5-9% IRR net of all fees at a max-funded level free of market risk. You just have to do the research and find 100% participation rates, high cap rates, high minimum guaranteed rates, and low to no sales loads.

Regarding VUL, there are VUL/term blends with certain providers that are even cheaper than buying straight term. Also, there are providers with low M&E, no sales loads, and index fund options for the cost-conscious. Generally, I'm not the cost-conscious type. I'd rather pay a little bit extra in operating expenses to go with a fund family that has a demonstrated system of historically low volatility and market-beating returns.

Regarding UL, there are guaranteed UL products out there whose premiums will beat the pants off any whole life, thus relegating whole life to the dinosaur age once and for all.

great post max_irr, you got me agreeing and disagreeing at the same time.

first, if EIUL did everything you stated EXCEPT the "high cap rates" then i might be in your corner. that said, the CAP RATES are one of the primary features that makes it suck. EIUL is in fact a variable product and to say otherwise is disengenuous. as a result, it should have no cap. everyone thinks that the market returns 12% returns. in reality, many years are into the 25% range. if you have a 15% cap it sounds like a good product but you will lose out on 10% when that happens. until i find a EIUL that has metrics in favor of the client, then i must still be against EI anything.

second, i totally agree with you about about being cost-conscience. i dont care a flying-monkey about costs. fees for GOOD service and fees for GOOD performance and fees for QUALITY companies ... bring em on. i am happy to pay. even for someone like me in the business, i fight against my human inclination to be penny-wise and pound-foolish.

finally, if you are looking for STRAIGHT life insurance, i will agree with you about NLG-UL. but, again, WL offers many basic features that a NLG UL cannot. i think that most professionals would disagree with you and pile on that not only is WL the trusty old standby but that it is the most effective of all the permanent insurance products. it is kinda surpising to find you seeing it as antiquated.

just cause something is "old" doesnt mean it aint good. please refer to:

My Grandma!
Love!
Christianity!
Manners!

and i could go on.

1MO, I have to disagree with you on one of your points. You said that you don't care about cost, which is wrong. You DO care about cost; it's price that you don't mind. If I have to pay a higher PRICE for lower COST, then I'm all for it. I would venture to say that you are the same. Semantics, I know, but there's a difference.

-Joe

i am both arrogant and disagreeable by nature so it pains me to state that i stand corrected. thanks for the correction joseph.

Fortunately, I gathered from your posts that you are (in addition to arrogant) teachable.
Now, about your website; it doesn't seem to be working. I have clicked it at least twenty times. Could you provide some technical support? I am needing some cheap term so I can invest the difference.

-Joe

its all fixed. please try again, now.

1MO, here's my take on life insurance. If I need life insurance just for the sake of life insurance, I'd get a term or NLG-UL. If I need tax-advantaged growth for the sake of future access to cash surrender values, I'd go with a VUL with a wash loan feature, dialing the portfolio risk to my particular risk tolerance at any given point in time; or if I want to rid myself of market risk altogether, I'd go with EIUL. I really don't see the need for whole life except that it pays more commission than any other life product.

Regarding the removal of a cap rate on EIUL, this would only serve to bring the average return on an EIUL lower as the removal of a cap would necessitate either a lowering of the minimum guaranteed return or the participation rate since there is a cost to guaranteeing no market risk, and since there is no market risk, it is not a variable product. To illustrate the effect of removing the cap rate, let's take a look at the underlying derivatives mechanism: a bull call spread, though it caps upside potential while limiting downside risk, is cheaper than a simple call option as there is no cap on the potential return in a call option. The option premium would be greater with the simple call option, thus lowering the minimum return, and in turn, the average return on this strategy. This is basically what's happening behind the scenes in an EIUL. It's not meant to beat out the potential returns of a VUL, but it does allow a potentially higher return than standard fixed products. That said, I'd be shocked if I saw a non-EI fixed product generate higher long-run returns than the 7.5-9% of the better designed EIUL products.

Regarding EIA, not a fan at all, as there are VAs with guaranteed growth features and full market participation.

max-funded level free of market risk. You just have to do the research and find 100% participation rates, high cap rates, high minimum guaranteed rates, and low to no sales loads.

If, if, if, the problem is that you and I know what to look for but the "average joe" does not. You have a company like Ameriprise who markets themselves as providing financial advice when in fact they're just insurance sales people. The client thinks hey they're providing me financial advice so this VUL is what I need. They signup and get a 175 page prospectus that they can't make heads or tails of what it means. Soon after they see these fees draining their account and they look for an exit but can't because of the surrender charge. Consumer Reports did a study and found that 50% of ALL Vuls are terminated within 10 years.

These products are very complicated and when rubber meets pavement the one who's going to be on the short end will be the owner of the policy

Very new to forum, but am an insurance agent that sells VUL. I had to get in here like Max becasue of all the negativity on these forums and websites that I have come across about VULs. I believe every scenario is different but the point of life insurance does stay the same. To protect your family in case of an untimely death. I am younger and have a VUL on myself and I read where people say that is not the way to go, or I am throwing that money away. I understand how much term I can get for that price but don't want to be in the situation 20 or 30 years from now to where I wish I would have gotten a permanent product. So that is why I think term and perm is the way to go if it makes sense for the client, and they can get some of each to take care of that need and help on the premium. Then when the term drops off in 20-30 years that VUL is still there and building cash value the whole time. I agree with some of the postings above about term riders on the VULs casue your taking care of that need. Trust me when someone dies and you show up with that check no one is asking whether it was a term policy or a VUL, they just want to know that something was in place. So with all the companies and products availbalbe I can imagine how confusing it can be for someone who is starting out looking into life insurance and what the right way to go is. Especially if they get caught up in reading all this information. The way I sell something to someone will be different than most people who are in the business, and not to say that is wrong we all believe in different stuff, it is whether the clients needs are getting considered and not the agents out there that are trying to pay for that new sports car! Lastly the whole statement of "buy term and invest the rest" I think is an old saying that needs to be done away with. If that statement held true then why wouldn't mortgage lenders be telling people that are looking to buy a home to go rent and invest the difference? I beleive it was said above but yeah isn't a VUL a term and investing the rest? In the long run when the term runs out or are able to renew at the ungodly rate, that VUL will still be there the same premium (along with the flexibility of your payments) and yes there are no guarantees but one is that it will pay out someday!

The problem with the term and invest strategy is that it is only a theory, and in reality it does not come to fruition...ever. As professionals we have the luxury of examining real-life case studies by the hundreds over the course of a few years. What the T & I individuals of today don't realize is that even the most successful and wealthy individuals that are staring "drop your insurance because you don't need it" are entirely reluctant to do so. In the end, they seek out MORE insurance if they are healthy enough to do so. I have clients paying over $15000 per year for 20 year term policies that could have been paid up permanent policies for the same face amount at the same crossroads. Hindsight is 20/20, so it easy to see how those who do planning for a living see the value where others do not.

In short, our exposure to real clients with real lives, during all phases of one's financial life allow us to "see" each theory as it exists in real time.

In the end, successful financial plans are a calculated mixture of theory, assets, and hedging. Permanent and term combinations respresent all of these. It still surprises me that investment strategies without diversification are considered foolish, but an insurance plan without diversification is not. Is it not the same concept?

VUL is buy term and invest the rest. in my general opinion, it is best used with individuals who are young and disciplined or for those who are rich and disciplined. even using VUL, there are many many clients who end up imploding their policies because of a lack of discipline.

whole life is permanent ... and guaranteed. no other life insurance is guaranteed to be there until death. the only question is, how much risk and how much work do you want to accept to ensure you have permanent lifetime coverage.

"i want no risk, i want it no matter what:" whole life.*
"i will accept some risk to have coverage at my death:" vul.
"i want to lay in a pit of vipers and juggle bowling pins - i am special:" buy term.

*a universal life (not a variable universal life) with NLG (no lapse quarantee) will also provide a permanent death benefit. it will do so with a premium less than whole life. however, it offers less flexibility for other of life's challenges and opportunities. it will also likely to be more expensive over the life of the policy.

Life insurance should be called the Hindsight 20/20 policy. I agree discipline is very key in a VUL and if no discipline then term is your best bet, at least have option of coverting to permanent!

With all these enteries there is also the examples of the policies that ware started and then the guy dies 6 months down the road, in his case he made the best investment with the greatest return out of everybody. All our examples are for whoever lives past 65 onward to 90, which isn't the case and hence why we get the stuff in the first place. Everyone won't believe in it and you can just say you tried to do your job and move on with the comment of "Don't go dying on me now, ya hear!" All in All great points and think that everyone does have their preferences and beliefs! Pricespector you make great points in your analogy above!

Regarding EIUL, there are products out there that, given historical returns, would average 7.5-9% IRR net of all fees at a max-funded level free of market risk. You just have to do the research and find 100% participation rates, high cap rates, high minimum guaranteed rates, and low to no sales loads.
.

I recently purchased an EIUL policy with:
-100% Participation
-12.5% Cap
-1% Minimum
-Don't know what the sales load is.

Would this be a good buy?

we cant say whether it is a good buy for you or not. i will say these two things:

1. you have a 12.5% cap. that SUCKS! before anyone gives me any crap on this, i ask that you actually RUN THE NUMBERS!!! use the last 1,2,3,5,10 years of the market and tell me if that 12.5% cap doesnt screw you. by the way, the 1% minimum offsets the screwing, but only by about 1% (wink).

2. FINRA (NASD) has some issues with the sales of EI products. click here: http://www.finra.org/web/groups/rules_regs/documents/notice_to_members/p014821.pdf

now, this is about EI annuities, but the EI part applies to insurance products as well. it is a good recap of thier "concerns".

regarding the 12.5% cap rate and 1% floor with 100% participation rate, the long-term yield on this baby would have been 7.5% since the inception of the S&P 500 index assuming no sales load. Not bad at all for market risk-free. I'm assuming that the equity index is pegged to the S&P 500 so forgive me if it isn't. Also, regarding back-testing, even 10-yr periods are too short a timeframe to judge the efficacy of an EIUL as major market cycles run over the course of 30-50 years. The last 25 years have been unusually good and really should not be used as an indication of future performance. Therefore, you really wouldn't be missing out on much upside. In fact, volatility is likely to increase over the next few decades, and so the minimum floor, in such a case, would allow for a more consistent return in light of this. btw, is this policy with Western Reserve?

regarding the 12.5% cap rate and 1% floor with 100% participation rate, the long-term yield on this baby would have been 7.5% since the inception of the S&P 500 index assuming no sales load. Not bad at all for market risk-free. I'm assuming that the equity index is pegged to the S&P 500 so forgive me if it isn't. is this policy with Western Reserve?

Yes this is a WRL policy
This really does suck. The average 7.5% yield isn't terrible, I can live with that, but by the time you include fees (I'm assuming insurance fees eat up 2% of gains), all you have is a glorified money market account.

it saddens me that WRL peddles this junk. i considered them a quality organization when i looked into them a few years back.

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After the recent market collapse, iul probably in hindsight was not so bad. Btw, if you max fund the wrl iul, the long-term cost should be less than 1% per year so it'd be more comparable to a muni on steroids than a money market as the latter has a greater difference in tax treatment wrt iul.

And traditional par whole life was the hand's down winner!

This really does suck. The average 7.5% yield isn't terrible, I can live with that, but by the time you include fees (I'm assuming insurance fees eat up 2% of gains), all you have is a glorified money market account.

Very true, that is typically what causes a variable policy to not be able to stand up to a traditional life policy and the difference in premiums invested in the market in a no load fund. In theory, VUL can make sense but when fees are taken into consideration it seems to rarely be a good choice IMO.