Last week’s topic was indexed universal life insurance. This week we will address variable life insurance. Like IUL, this is an extremely complex product that obviously cannot be fully explained in 400 words. The prospectus that must accompany every solicitation often exceeds 100 pages, so treat this for what it is, a brief overview.
I will state up front that I am not a fan of variable life insurance. It sounds good in theory. It provides the opportunity to invest the cash value in equities, and the policy owner gets to choose the allocation. What's not to like?
First, let's look at how the policy works. Actually, there are two types of variable policies. The most common is variable universal life (VUL), in which both the premium and death benefit are flexible, but there is also a much less common variable life policy that carries a fixed premium, sometimes referred to as variable whole life.
In the 1970s, the life insurance industry introduced universal life insurance (in response to the disintermediation in interest rates), which “unbundled” the life insurance contract. Both the premium and death benefit are flexible. After the various expenses and cost of insurance are deducted from the premium, the balance earns the current declared rate of interest.
The evolution to variable life was simply the option to have the balance invested in mutual fund type investments (called separate accounts). This feature places these products under the purview of both the SEC and FINRA, in addition to the insurance regulators.
So why am I not a fan? First, the product is extremely labor intensive, as it must be reviewed on at least an annual basis. This entails re-projections at various assumed rates of return. If the underlying investments have underperformed the initial assumptions, the premium may have to be increased.
Second, this type of policy carries high expenses, usually the highest of any type of policy. The argument is that the returns will more than offset the high expenses. Obviously, that may or may not prove to be true.
Third, life insurance is supposed to alleviate risk, not create risk, which variable life certainly does.
For these reasons, I believe that variable life is not the product that best addresses permanent life insurance needs.
It works in theory, but in theory, communism works.