Legacy planning comes in a variety of forms when we think about life insurance. As everyone who has read one of my articles will know, I espouse VUL solutions and, in today’s marketplace, a correctly structured VUL product is the best solution in either creating a guaranteed legacy or managing an effective wealth transfer solution. It is important to make sure the solution itself is designed to be the best option for the insured and not solely focused on the product that illustrates the best.
The goal of legacy planning is to create a pool of money to be passed on to loved ones or a charity of some kind. The general idea is to do this as cheaply and efficiently as possible. If we knew when a client was going to die, we would use term insurance that would run until that particular date of death. However, since we don’t know when a client is going to die, and the legacy plan is designed to last until death, we need to use a permanent policy to accomplish this planning goal. Together with declining interest rates and the NAIC discussion of retooling AG 49 to change the way IUL can be illustrated, guaranteed VUL products will outperform fixed products for the foreseeable future. Variable universal life products are usually cheaper because of the reserving requirements created under AG37 and AG38. More specifically, the net amount at risk is the only component that needs to be reserved for in a VUL policy, whereas the entire amount needs to be reserved for in fixed products since they are held at the general account of the carrier. This fact reduces the premium needed for any level of death benefit for VUL, which we’ve seen as especially applicable in the lifetime no-lapse VUL space. With VUL, there is also the ability to grow some cash value in later years which is not an option in a guaranteed UL contract. This cash value gives the owner options down the road if their goals change or if the tax laws change making another alternative more attractive. Without any cash value, a GUL must either be continued or surrendered without any other choices available.
Given the new accumulation structures for VUL products and the recently added “multipliers and bonuses” in IUL, I expect that accumulation VUL will be the more predictable of the two and will be the best funding vehicle for wealth transfer. It is important to make sure the accumulation VUL is structured correctly to get the best results in a volatile market similar to what we see now. Setting aside the cost-of-insurance payments in a money market sub-account or assigning it to draw from a conservative bucket has significant impact on the cash value if the market drops in the first or second year of the policy. Also, using the dollar cost averaging option will improve the returns for the life of the policy. The one thing that history teaches us is that the markets go up and down, and yet the reality has been the market lows of the future will be higher than the market highs of today. This is why VUL policies that have been correctly funded and structured have always outperformed all other types of cash value policies over complete market cycles. In studies conducted comparing historic returns over time, the correctly structured VUL policies have met or exceeded illustrations almost 60 percent more often than similarly funded IUL policies. With interest rates projected to remain low for five or more years, the actual future results could be even more skewed toward VUL over other products. I believe that the concept of IUL is very valid and has a place for very risk-averse clients, but I don’t think it should be used as the primary option for most people.
Since all life insurance accumulation structures are designed to be long term with an assurance of death benefit if the insured person doesn’t live long enough to need the living benefits, there is nothing besides cash value life insurance that can build tax advantaged accumulation for wealth transfer and still maintain the ability for clients to access some or all of the money along the way. I believe that VUL will provide the best opportunity to grow the cash value and in turn can increase the ultimate death benefit transfer to beneficiaries. The historical argument that life insurance should not have risk if other assets are invested in the markets sounds reasonable until you realize that in a low interest rate market, insurance companies will need to charge more to make a profit. In VUL, the only moving parts are M&E and the cost of insurance. In IUL, the insurance carrier can and will adjust caps, participation rates, as well as M&E and COI to make up for low rates. To take this a step further, if we move to a European situation of negative interest rates, fixed products will be forced to become much more expensive in order to be maintained or exist in general. Our job is to help clients find the best tool to reach their goals. With the ability to have the asset allocation set up and rebalanced by the insurance company automatically for VUL, it reduces the risk and increases the probability of realizing the goals our clients are trying to accomplish when they buy permanent life insurance.
