Agent commentators say the horror stories on VULs are caused by other bad agents selling VULs to the wrong clients who are not in the best position to take advantage of VULs, or that the VULs aren’t configured correctly. I agree. The sad reality is that too many badly configured VULs are sold to the wrong clients who shouldn’t be in any VUL in the first place — they haven’t maxed out their 401ks and IRAs; they don’t have the extra cash to overfund their policies. I trust all of you are working in your clients’ best interest, that you are doing it right. The bad agents outnumber you ten to one. They are giving you a bad rep. Please be mad at them, not at me.

I will address the specific point David in comment #121 raised. I outlined the options to a policyholder still in the surrender period. Doing a 1035 exchange is part of Option 2, since in a 1035 exchange the surrender fee will still have to be paid. David also said it would be best if clients read some books and understand it before buying a policy. That’s great, but people only Google VUL after they are sold a bad policy and locked into a long surrender period.

I stand by my original thesis. For the policyholders who got into a policy they shouldn’t have, and that’s the vast majority of VUL policyholders, the premiums paid in the first year are gone, no matter what they do. That is still the $10,000 lesson on VUL. VUL itself may still be good, when it’s correctly configured, sold to the right clients, but to the policyholders not meeting these conditions, that fine distinction makes little difference to them.

“Brian – I’m sorry to see the same happening to you. You basically have the same three choices as I outlined in the post: (1) Keep paying into the policies and get plucked by high fees (not good); or (2) Cancel the policies now and pay the surrender charge (not good); or (3) Stop paying premiums and let the policies wind down by themselves (not good). There is no good option. Depending on how far out the surrender charge period lasts, one option might be slightly better than the other two.”
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To the finance buff and to all other people having trouble with their VULs–I’m very sorry that a financial “professional” did not help you and instead (apparently) used a product in lieu of an actual solution . I’ve no idea of the date of this posting, but if anyone else finds this post hopefully this helps. There are some very good points in the comments section and some not so good points.

First, to the Finance Buff: This is the problem I have with some self-proclaimed experts. Your analysis of VULs is just not complete, and somewhat misleading. I’m not a huge fan of these policies, and there are many instances when they’re not appropriate. Still, I have seen some policies which provide really interesting ways to minimize fees and other expenses. Mainly, this comes from Ameritas but they haven’t cornered the market on low-cost VULs. Secondly, as someone pointed out, it really depends on how a person uses a VUL. If an agent minimizes the death benefit and maximizes the cash value (a particular way of funding the product, also called “overfunding”), they will pay premiums to the policy in excess of the “target premium”. This really minimizes the costs associated with the death benefit (annual renewable term) portion of the policy. It doesn’t do much for the mutual funds in the policy, but there might not be anything that can be done there. Some policies just aren’t that great, and I’d say most of them do carry significant costs for the sub-accounts.

Your 3 solutions don’t really help anyone. In fact, one of your solutions involving cashing out the policy might actually put them in a WORSE position by creating a huge tax liability on all of the gains in the policy. After, taking a hit on their gains from a surrender penalty, that’s some salt in the wound.

There is a solution which you are either not aware of or neglected to mention. Clients may perform a 1035 exchange into an annuity, either fixed or variable (probably fixed, if they didn’t like the variable life insurance product). They may also use a 1035 exchange to purchase a different type of life insurance policy, either a nice paid up whole life policy or a guaranteed universal life or something suitable for their situation. That’s a real solution that relieves the “pain” being felt by your readers. I hate to say this, but when you start talking about a subject which you clearly don’t have expert knowledge in, it’s misleading to call yourself a “buff”, particularly because other people are relying on you for accurate and complete information to help them…and you’re not giving it to them. You’re ignorance can actually hurt people.

Incidentally, it is the kind of advice you’d get from a friend, a non-knowledgeable one. I hate to be so harsh, but the reality is that your advice doesn’t help them anymore than the abusive agent who improperly sells products before figuring out a client’s goals first. I’m sure you really are trying to help, but you really need to understand the issue in full before you start giving an analysis and posting about “$10,000 mistakes”.

To clients and commenters: VULs aren’t the devil, but you’d be hard-pressed to find a decent contract in the marketplace. Cash value insurance, in general, is a touchy subject and bad math (and poor assumptions) abound on both sides of the argument as to which is better (term vs cash value) are commonplace. I would recommend that you do not throw the baby out with the bathwater here and write off all permanent life insurance, because I know there is a tendency–after someone gets burned by a life insurance salesman–to find the “anti-life insurance” in the investment world. But, the same thing happens in the mutual fund/equities world as well. People get burned by mutual funds, stocks, whatever, and try to find the safest investment in the world or the “anti-mutual fund”.

This approach, in general, is bad practice. Your best bet is to try to find good sources of information for leaning about how insurance works prior to buying a policy. Amazon has some very good books written by actuaries and the “mother” of all life insurance books would probably be “Life Insurance” by Kenneth Black, Jr. and Harold D Skipper, Jr. Nothing less than comprehensive education will help you out.

I also agree that that a well structured WL policy can really do wonders for the bond portion of the portfolio.

Give the WL a try, it’s pretty awesome and reduces our clients risk.

RWW

But what about the 45 year old surgeon who makes $450,000 and maxes out his 401(k) at $16,500 and cannot participate in a Roth IRA? Would you suggest he put the remaining surplus appropriated for retirement, say $60,000 per year, into a Whole Life policy? That is probably not an appropriate asset allocation mix for his age. Plus, what about using an IUL where there is market participation but also a floor and ceiling to the returns. I think the standard right now in the industry is a 0-2% floor and a 10-14% ceiling. Most of those products have yielded 7.5-8% 20 year IRR’s, even with the last 2 market dips, which certainly beats even the most overfunded whole life product. As Anonymous CFP was saying (although I agree that his criticism was a bit harsh…. this is a comment thread on VUL’s after all) there are situations in which different strategies make sense and others where they do not.

By the way, I totally agree with your statement about the main threat inherent in VUL’s being improper servicing by the agent or advisor (as well as inappropriate selling tactics). That’s just always going to be one of the flaws of the industry and the reason advisors get such a bad rap. Doesn’t change my opinion that they can be a good product. Yes, VUL’s were terrible in the 1980′s, but they were also a pretty new product. When you take a poorly designed (new) product along with 1980′s era interest rate assumptions and typically strategies that didn’t involve overfunding, of course you are going to have policies self-destructing all over the place. Also, I have the same designations that you do. I just don’t like broadcasting it. Everyone should be free to comment, but I think the facts presented should speak for themselves, rather than designations, sales, or experience. This is a personal finance blog, not a competitive forum. That type of stuff just dilutes and changes the tone of the discussion and the typical person reading this type of a blog just doesn’t care.

I guess that you think that we are not doing the full planning for our clients??? That was not the discussion nor the point of this thread. This thread is about VUL.

My stance is that it is a dangerous product sold to an underinformed public, rarely monitored by people that sell this stuff who often times never see their clients again. They may leave the business, retire or move away. We all know that about 10% of recruits amke it in our business, so who is servicing and monitoring all of the business that was sold by those agents who are now gone?

None of this presents a pretty picture with something as volatile and dangerous as VUL. There are just much better options out there. Why would we put our clients into a risky product? Isn’t it our job to reduce their risk, not increase it. Don’t most people have the bulk of their money (401(k)’, SEP, IRA’s, Roth’s, etc) in the market? Does it make sense to put ALL of it in and just say “Damn the torpedoes”? Where’s the balance and asset allocation in that?

This argument is really out of place and will ultimately give the uninformed public the wrong idea for either argument. There’s more to financial planning than “this product sucks”, or “you’re better off just doing etc. etc.” It’s the job of the financial planner to dig into the details and find out what picture needs to be painted. How much capital do we have to work with, what’s the life insurance need, time horizon, current tax bracket, projected tax bracket, estate tax issues, is the insurance being held in a trust or qualified, and on and on. VUL’s absolutely have their place, but they are definitely complicated and need to be monitored and manipulated to serve the purpose they are being used for. Comparisons are not always term+ side fund vs. VUL. Those also need to be looked at based on the whole picture. If we want to argue the reasons for and against, we can be here and run around in circles. Every case is different. Find a good experienced Financial Advisor or Financial Planner that you trust and let them do their job for you. I know that my clients who trust me and work with me because of my experience, end up getting the most out of me, because I can focus on what I get paid to do instead of having them confused because they read a bunch of information thrown at the fan, like in here.

And after all is said and done, experts will agree and disagree & argue all over again. It’s like medicine and cancer treatments. Every expert has their own preferences based on the diagnosis, and their patients end up working with their Dr. because they trust that the Dr. will try his/her best, not because the cure is guaranteed. Find someone you trust and don’t always believe everything you read on the internet.

I realize that you wholesale UL and VUL. No offense, but I wouldn’t sell those to my worst enemy. They are dangerous and should be heavily regulated if not outlawed. I have never met a person that had one of those products that ever had been told that the product was engineered with increasing internal mortality charges. Charges that eventually skyrocket on the unsuspecting owner of the contract. Clients are always amazed to find this out and invariably ask how it is legal to sell something this bad. If it’s such a great product why do reps never explain how the contract really works?

Whole Life and Secondary Guarantee UL (basically permanent term) are the only permanent life insurance products that I will sell. Period.

So the issue is will the dividend cover the prem? Yes probably at some point in the future, when who knows – one looks at the illus based on “current dividend assumptions” just like the VUL illus is based on current charges & ROR assumptions…. I used to work for one of the co’s I mentioned & know how whole life is (& has been) sold. Unfortunately, I’ve reviewed hundreds of whole life policies where clients were led to believe the dividend would cover prem in yr 18…. and since dividend rates have declined since the policy inception, a new inforce reflects that day has been pushed back to yr 25+….

To say a single product fits all is too narrow-minded…… not to say I’d like to hear those advisors answer the compensation question of why only present whole life when there are alternatives….. Yes whole life fits, but so does VUL & UL (guaranteed UL and traditional UL)