RETHINKING VARIABLE UNIVERSAL LIFE

-by Walt Helms, CFP ®, and Wayne Tonning, FSA

(The Wealth Channel Magazine, Spring 2015)

Nease, Lagana, Eden & Culley, Inc.

2100 RiverEdge Parkway
Suite 200
Atlanta, Georgia 30328
Phone: 770.956.1800
www.nlec.com

The following materials prepared by Nease, Lagana, Eden & Culley, Inc. include discussion or application of current generally accepted legal, accounting or
actuarial principles intended to assist you in your planning efforts. These materials represent our understanding of such principles and are not intended to
constitute advice or opinions on legal, accounting or actuarial matters. Tax laws, accounting principles and other governing regulations are subject to periodic
changes. You should consult private counsel for advice on the application of legal, tax, accounting and actuarial laws, regulations and practices to your
specific factual situations. Securities offered through M Holdings Securities, Inc., a registered broker dealer, member FINRA / SIPC. Nease, Lagana, Eden &
Culley, Inc. is owned and operated independently from M Holdings Securities, Inc. Nease, Lagana, Eden & Culley, Inc. is a member of M Financial Group.
 SPRING | 2015 OF FINANCIAL SERVICES ®

CONNECT. CREATE.
COLLABORATE.
RESEARCH

Walt Helms is an insurance

advisor with Nease,
Lagana, Eden & Culley,

Rethinking Variable Universal Life

Inc., an M Member Firm in
Atlanta, GA. He specializes
in creating customized
wealth transfer plans for
Variable universal life is more than an equity-linked product. affluent families.
Walt.Helms@wcinput.com
By Walt Helms, CFP®, and Wayne Tonning, FSA

Advisors and consumers often think of variable universal life (VUL) as just an equi-
ty-linked product. But for many, VUL is much more than that.
This article seeks to encourage a rethinking of VUL as a unique life insurance product
that provides control, flexibility and transparency in a low cost product chassis, while
providing the potential for enhanced returns through access to equity investment
allocations.
Wayne Tonning is director,
VUL has been primarily defined as an equity-linked product, and historical indus- product management
& sales support, for
try VUL sales tend to follow stock market results—VUL sales are up when the stock M Financial Group in
market performs well and vice versa. However, it is interesting to see the lasting impact Portland, OR.
Wayne.Tonning@
of the 2008 financial crisis: even as subsequent stock market returns (e.g., S&P 500) wcinput.com

ARTICLE REPRINT | The Wealth Channel Magazine | Spring 2015 | Published by The American College
RESEARCH Rethinking Variable
Universal Life

have been positive, VUL sales have continued to decline. (Eight CONTROL
percent VUL sales distribution in 2013, compared to a high of
Relative to other types of life insurance, VUL affords
36 percent in 2000—see Historical VUL Sales Distribution Versus
the policyowner utmost control. VUL policyowners can
S&P 500 Returns). allocate the cash value among numerous available invest-
VUL sales for the ultra-affluent, as measured by M Financial
ment options. Contrast this to other product types,
Group sales, tend to follow stock market results to a lesser
such as whole life (WL) and universal life (UL), where
degree than industry sales. VUL remains the product of choice
only one investment option is available (the general
for the ultra-affluent, with a 43 percent sales distribution in
account), which is managed by the insurance company.
2013. Advisors to the ultra-affluent—and consequently, the
Some may argue that UL and WL avoid the investment risk
ultra-affluent themselves—are more aware of the other attrac-
of VUL, but this is not the case. There is investment risk with
tive attributes of VUL, which will be covered in this article.
WL and UL (e.g., declining dividend interest rates and credit-
The following chart shows historical VUL sales distribution
ing rates) and the carrier maintains investment control. With
and S&P 500 returns. VUL, policyowners can
determine the amount
Historical VUL Sales Distribution Versus S&P 500 Returns of investment risk based
on their specific financial
40% situation and objectives,
35%
30% while having the oppor-
25%
20%
tunity to benefit directly
15% from their decisions.
10%
5%
0% FLEXIBILITY
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
-5%
-10% In a dynamic investment
-15%
-20%
environment, flexibility
-25% is an advantage. UL
-30%
-35%
S&P 500 LIMRA VUL products only offer the
-40% general account, and
Source: LIMRA Technical Supplement – U.S. Individual Life Insurance Sales
indexed UL (IUL)
products offer indexed
accounts and the general

Most are aware that VUL offers the poten- Historical S&P 500 (with Dividends) Compound Annual
tial for enhanced returns through access to
Growth Rates Through December 31, 2014
equity mutual funds. While historical results
16%
do not predict future performance, they can
provide perspective. See S&P 500 historical 14%

returns to the right, where long-term (20 years 12%

or more) annual returns are in the 10 percent
10%
range. Also note the recovery since the 2008
financial crisis, with the annual return over the 8%
last five years in excess of 15 percent.
6%
But the advantages of VUL go beyond
access to the equity markets. The strength of 4%

VUL can also be seen in three areas: control, 2%

flexibility and transparency in a low-cost product
0%
chassis. 30 years 25 years 20 years 15 years 10 years 5 years

Source: Yahoo Finance

ARTICLE REPRINT | The Wealth Channel Magazine | Spring 2015 | Published by The American College
account. VUL is unique in that it offers
maximum flexibility with access to
all three available investment account
options: 1) general account, 2) indexed
account and 3) separate account.
1. The general account is managed by
the insurance company, where typically
more than 80 percent of the portfo-
lio distribution is investment grade
bonds and mortgages. The general
account provides a crediting rate based
on portfolio returns with book value
accounting (less volatility) and provides
protection with a guaranteed minimum
crediting rate floor (e.g., 2 percent).
2. Indexed accounts provide crediting rates
based on equity returns (e.g., S&P 500),
subject to a participation rate (e.g., 100
percent), a cap rate (e.g., 12 percent),
and a floor (e.g., 0 percent).
3. The separate account can offer numer-
ous investment choices, including
bond and stock mutual funds. These
accounts allow the policyowner expo-
sure to financial markets in an amount
and risk level at their discretion.
Combining these investments options
with #1 and #2 above may generate
higher returns with acceptable risks.
Most VUL products today offer sepa-
rate account and general account options,
with more and more VUL products also
offering indexed accounts. The VUL
products offering all three investment
options enable the policyowner optimal
flexibility so that allocation adjustments
can be made as market conditions—and
personal objectives and needs—shift.
TRANSPARENCY
Within the separate account, VUL is
the only product to provide transpar-
ency of the underlying asset allocation
and results—there is no “black box.”
Investments are directed by the policy-
owner and market values are reported
and credited to the policy cash value.
LOW COST
The initial VUL products introduced
in the 1980s were expensive and came
ARTICLE REPRINT | The Wealth Channel Magazine | Spring 2015 | Published by The American College
with high product charges. This
reputation still lingers, but the reality
is VUL products offered today have
charges that are comparable to UL (i.e.,
not necessarily more expensive). As a
result, VUL does not necessarily require
a high return in order to compete with
other products. Depending on the
product, VUL may only require a 4.5 to
5.5 percent return to compete with UL,
and still offers an upside performance
opportunity with potentially higher
returns from the underlying investments.
BREADTH OF INVESTMENT
OFFERINGS (EQUITIES AND FIXED INCOME)
In addition to investment flexibil-
ity, today’s most sophisticated VUL
products offer a wide range of invest-
ment alternatives. Some of the more
popular VUL products feature more
than 80 subaccounts managed by
investment firms such as Vanguard,
T. Rowe Price, Dimensional Fund
Advisors and other respected firms.
A common fallacy when discussing
VUL is to associate the investment risk
to equity financial markets only. This
is not the case as a VUL policy’s cash
value can be allocated among equity and
fixed income options, not unlike a typical
401(k) plan. For example, a policyowner
can implement a balanced allocation
with 60 percent equity exposure and 40
percent fixed income exposure to take
advantage of long-term equity returns
while reducing volatility with fixed
income investments. Fixed income expo-
sure can generally be obtained via bond
subaccounts or direct investment in the
carrier’s general portfolio via allocation to
the general account.
Many VUL products also offer invest-
ment choices commonly found in 401(k)
plans for those who may be uncomfort-
able managing asset allocations:
• Portfolio optimization asset
allocation models ranging from
conservative (e.g., 20/80 stock/bond
allocation) to more aggressive (80/20
stock/bond allocation);
• Life Cycle funds, which automatically
reallocate to more conservative invest-
ments as the policyowner reaches
retirement.
Many VUL products also offer auto-
matic portfolio rebalancing to provide
ongoing targeted diversification.
MANAGEMENT OF VUL
As with any investment, VUL policies
must be managed appropriately and con-
sistently to maximize long-term benefits.
Important issues to consider and manage
include premium funding, investment
allocation and policy performance. It is
recommended (and common) to assume
what may be considered a conservative
growth rate assumption, such as 5 or 6
percent, and fund the policy accordingly.
If actual investment performance exceeds
the assumed rate, future premiums
could be reduced or even eliminated.
Performance of a financial invest-
ment—both equity and fixed
income—will vary over time. It is
important to review the investment
selections regularly (e.g., semi-annually)
and adjust as needed based on an agreed-
upon investment philosophy. Actual
investment performance in a VUL policy
will directly impact policy performance.
This impact—both positive and neg-
ative—should be monitored at least
annually. This does not necessarily mean
that action should be taken every year,
but the policyowner should understand
how investment returns are impacting
policy performance so that he/she will be
ready to take action when needed.
CONCLUSION
VUL is much more than an equi-
ty-linked product. In the interest
of your clients, take some time to
rethink VUL as the only product
type to offer control, flexibility, trans-
parency and low cost designed to
address their needs and objectives.