Printer Friendly

Chapter 18: Variable and variable universal life.

WHAT IS IT?

Variable Life

Variable life (VL) insurance combines traditional whole life insurance with mutual fund type investments. Basically, it is a whole life policy where the policyowner may direct the investment of cash values among a variety of different investments.

VL has a guaranteed minimum face amount and a level premium like traditional life insurance, but it differs in three respects:

1. The policyowner's funds are placed in separate accounts that are distinct and separate from the company's general investment fund.

Premiums, less an expense or sales load and a mortality charge, are paid into a separate investment account. The policyowner may choose to invest premiums and cash values among several mutual fund type alternatives, typically including stock funds, bond funds, and money market funds. Many companies that market VL offer a broad array of investment options such as foreign stock funds, bond funds, GNMA funds, real estate funds, zero coupon bond funds, and specialized funds such as small capitalization stock funds, market index funds, and funds that focus on specific sectors of the economy or industries (medical, high tech, gold, leisure, utilities, etc.). Some companies offer a managed fund option where the company's investment manager assumes the responsibility for apportioning investments among the various alternative funds. Some VL policies also offer a guaranteed interest option similar to the declared interest rate on universal life policies. Policyowners may typically switch or rebalance their investments among the funds one or more times per year.

2. There is no guaranteed minimum cash value.

The cash value at any point in time is based on the market value of the assets in the separate account. VL policyowners bear all the investment risk associated with the policy.

3. The death benefit is variable.
   The face value may increase or decrease but
   not below the guaranteed minimum (based
   on a formula that relates the investment performance
   of the separate account to the face
   value). Companies use two methods to establish
   the relationship between the investment
   performance and the face amount. Under what
   is called the "corridor percentage approach",
   the death benefit is periodically adjusted so
   that it is at least equal to a specified percentage
   of the cash value, as required by current
   tax law. (1) The mandated corridor percentage is
   250% until the insured reaches age 40 and then
   gradually declines to 100% by age 95.

   Example. Assume the cash value is $40,000
   at the beginning of the period and $50,000 at
   the end of the period. The insured is 60 years
   old. The initial death benefit is $52,000 and the
   corridor percentage factor is 130%. At the end
   of the period, the death benefit will be $65,000,
   or 130% of $50,000.


The death benefit under what is called the net single premium approach "is periodically adjusted" so that it matches the amount of insurance that could be purchased with a single premium equal to the cash value, assuming guaranteed mortality rates and a low rate of return, typically 4%.
   Example. Assume the net single premium
   factor in the example above is 0.65374. That is,
   it takes $0.65374 to buy $1 of insurance for life.
   At the end of the period, the death benefit will
   be $50,000/0.65374, or $76,483.


Although both methods are equally valid, most policyowners find the corridor percentage method easier to understand.

VL has most of the usual features of traditional level premium life insurance including guaranteed maximum mortality charges, nonforfeiture values, a policy loan provision, a reinstatement period, and settlement options.

Also, VL policies may be participating or nonparticipating. In contrast to traditional par policies, dividends paid on par VL policies depend only on possible mortality and expense savings and include no element of excess investment earnings. Excess investment earnings, less an asset management fee, are reflected in the value of the separate account.

Similar to other traditional forms of insurance, various options or riders are available including waiver of premium, guaranteed purchase or insurability, and accidental death benefits.

Insurers that market VL often offer a number of premium payment plans including single premium, limited pay (for a specified number of years or until a specified age), and lifetime pay plans.

Variable Universal Life

Variable universal life (VUL), which is also called flexible premium variable life or universal life II, is a combination of universal life and variable life. VUL offers policyowners the flexibility of universal life (UL) with respect to premium payments and death benefits. Specifically, VUL owners can:

1. determine the timing and amount of premium payments (within limits);

2. skip a premium payment if the cash value is sufficient to cover the mortality and expense charges;

3. adjust the amount of the death benefit in response to inflation or changing needs (subject, generally, to policy minimums and, with respect to increases, evidence of insurability requirements);

4. withdraw money without creating a policy loan and without an interest charge if there is sufficient cash value to cover mortality and expense charges; and

5. choose between two death benefit options similar to options A (or I) and B (or II) for UL policies. Under option A, the death benefit remains level, similar to a traditional policy. Under option B, the death benefit is equal to a level pure insurance amount plus the cash value.

The death benefit of a VUL policy is not "variable" in the same sense as the death benefit of a VL policy. Under option B, the death benefit will vary directly, not indirectly by formula, with changes in the cash value. Under option A, the death benefit is level. However, the death benefit of VUL policies is flexible or adjustable, within limits and subject to insurability requirements, at the discretion of the insured.

VUL policyowners receive periodic reports that explicitly show mortality and expense charges and changes in the investment value of their accounts.

Since variable life products are considered securities, prospective purchasers must be given a prospectus. The prospectus contains the identity and nature of the insurer's business, the use to which the insurer will put the premiums, financial information on the insurer, and the investment characteristics of the product, as well as the policy's expenses, fees, loads, and policyowner rights. In addition, the agent must be properly licensed to sell security products.

WHEN IS THE USE OF THIS TOOL INDICATED?

Variable life products are most suitable for those individuals who want control over their cash values and need or desire increasing life insurance protection. They should have a basic understanding of investments and believe they are capable of making good investment decisions. They must be willing to bear the entire risk of their investments, since cash values are not guaranteed. If the need for death protection is expected to grow, VL death benefit levels will increase with favorable investment experience on the underlying assets. However, there is no assurance that this growth will be consistent. There is a risk that the market value of the underlying assets, and therefore the death benefit level, will be depressed when the insured dies.

VUL offers greater certainty of death benefit levels than VL as long as premiums continue to be paid at the level necessary to maintain the death benefit. Under option B, death benefit levels are more certain to increase. VUL also permits the policyowner to increase the face amount of coverage with evidence of insurability.

Given the risks and uncertainties associated with both cash values and death benefit levels, variable life products can be attractive supplements to an existing life insurance plan that assures a minimum required base level of coverage. It is less suitable as the means of providing the minimum basic level of coverage.

VL and, more particularly, VUL are especially suitable for many business insurance needs where flexibility and growth of cash values and death benefits are necessary or attractive features. It can be used to provide potentially higher tax-deferred cash value accumulations in nonqualified deferred compensation plans than traditional policies or UL. With successful investment of cash values, the death benefit levels of variable products are more likely than those of traditional products to keep pace with increases in the values of closely-held business interests when a variable product funds a buy-sell agreement. VL and VUL may be equally attractive for key person insurance and other business applications or in insured pension plans.

ADVANTAGES

1. Policyowners have control over how premiums and cash values are invested. They may generally allocate their investments as desired among a variety of mutual fund-type investment accounts.

2. Switches or transfers between funds are permitted at least once and usually more times per year, usually with no charge.

3. Switches or transfers between funds are tax-free.

4. Cash values of VL and VUL policies are more secure in the event of insurer insolvency than cash values of other types of policies. Assets backing VL and VUL policies are in separate accounts that are segregated from the general investment portfolio of the insurer. Cash values are also based on the market value of the assets in the separate accounts. Therefore, cash values are readily available in the event of insurer insolvency. In contrast, since cash values in other types of policies are not adjusted to the market value of the assets in the insurer's general portfolio, in the event of insolvency, the general portfolio may not have sufficient assets to cover cash values.

5. Earnings on the assets underlying the policy cash values accumulate tax-free or tax deferred, depending on whether gains are distributed at death or during lifetime.

6. VL provides some measure of automatic increases in death benefits that may keep pace with inflation. Death benefits of VL policies are tied to changes in the underlying value of the assets backing the policy. Since the rate of return assumed when setting the guaranteed minimum death benefit is relatively low, death benefits should generally trend upward and provide some measure of inflation protection.

7. A VUL policyowner has wide discretion or flexibility in selecting the timing and amount of premium payments. Provided that there is enough cash value to cover mortality and other account charges, the policyowner may even skip premium payments. In contrast with other types of policies, skipping premiums does not result in the creation of policy loans.

8. VUL permits the policyowner to change the level of death benefits. Decreases in the death benefit are permitted at virtually any time. However, policyowners who reduce death benefits within the first seven years of issue may be subjected to adverse tax consequences under the modified endowment contract (MEC) rules. Increases in face amount are generally permitted, subject to evidence of insurability. Increases in the death benefit may also subject the policy to a new test period under the MEC rules. (See discussion under "Tax Implications," below.)

9. VUL policies are transparent. Annual reports break out and report each of the policy elements separately. This unbundling allows the policyowner to specifically identify and track premiums, death benefits, interest credits, mortality charges, expenses, cash values and to check projections with actual performance over time.

10. Most VUL policies offer two death benefit patterns, called option A (or I) and option B (or II). Option A, similar to a traditional whole life policy, offers a fixed or level death benefit. As cash values grow larger, the net amount at risk, the pure insurance, is reduced to keep the total death benefit constant (unless the cash value grows to an amount where the death benefit must be increased to avoid classification as a MEC). Option B operates in a manner similar to the death benefit one would receive from a traditional whole life policy with a term insurance rider that is equal to the current cash value. Under option B, the death benefit at any time is equal to a specified level of pure insurance plus the policy's cash value at the time of death. Therefore, the death benefit increases as the cash value grows.

11. Some companies offer cost of living riders to VUL option A policies that, without evidence of insurability, automatically increase the policy death benefit periodically by the increase in the CPI. The increasing death benefit associated with option B generally makes the need for a cost of living rider under this option moot.

12. In contrast with most traditional whole life policies, many VUL policies use back-end loads, rather than front-end loads, to recover the initial policy expenses. Consequently, most or all of the policyowner's initial premiums go into cash values subject, of course, to regular annual expense and mortality charges. Therefore, cash values build more quickly than with traditional whole life policies.

13. Policy cash values can be borrowed at a low net cost. Although policyowners must pay interest on policy loans, the cash value backing the loan is credited with an interest rate slightly lower than that paid by the policyowner on the loan. Consequently, the actual net borrowing rate is less than the stated policy loan rate.

14. In most VUL policies policyowners may withdraw a substantial portion of their cash value without surrendering the policy. However, if money is withdrawn, the pure life insurance portion of the death benefit is often reduced by the amount of the withdrawal. In addition, withdrawals may be subject to income tax. (See discussion under "Tax Implications," below.)

15. Life insurance proceeds are not part of the probate estate, unless the estate is named as the beneficiary of the policy. Therefore, the proceeds can be paid to the beneficiary without the expense, delay, or uncertainty caused by administration of the estate.

DISADVANTAGES

1. The policyowner bears all investment risk. There is no minimum schedule of cash values as with UL or traditional whole life policies. Instead, cash values are equal to the market value of the policy assets in the separate accounts.

2. VL death benefits depend on the investment performance of the assets underlying the policy. If market values are down when the insured dies, the death benefit may be less than anticipated, but not less than the guaranteed minimum benefit.

3. If the investment performance of a VUL policy is poor, the policyowner may be required to pay additional premiums to maintain the face amount of coverage.

4. VUL policyowners must accept all responsibility for premium payments. This can be a disadvantage since policyowners can too easily allow their policies to lapse. There is no forced savings feature, since premium payments are not required as long as there is sufficient cash value to carry the policy. To reduce the likelihood of lapse, most companies "bill" policyowners for a target premium set by the policyowner.

5. VL and VUL policyowners bear some mortality and expense risk since these policies are "current assumption" policies with respect to mortality and expenses. VL and VUL only guarantee that mortality charges and expense rates will not exceed certain maximums. In contrast, traditional participating whole life policies guarantee mortality and expense charges. Consequently, policyowners bear more of the risk of adverse trends in mortality or expenses than if they owned traditional whole life policies. However, is also true that if the trend of mortality costs and expenses improves, policyowners may participate in the improvement through lower charges.

6. Lifetime distributions or withdrawals of cash values are subject to income tax to the extent attributable to gain in the policy.

7. Realized capital gains on the underlying assets when taking withdrawals or surrendering the policy are taxed as ordinary income. Effective federal income tax rates on ordinary income may be as high as 35% or higher (depending on phase outs of personal exemptions and itemized deductions). In contrast, capital gains recognized on sales of similar mutual fund shares are treated as capital gains generally taxed at a maximum federal tax rate of 15%. In addition, capital gains can be used to offset other capital losses if from a mutual fund but not if from a life insurance policy.

8. Surrender of the policy within the first five to 10 years may result in considerable loss since surrender values reflect the insurance company's recovery of sales commissions and initial policy expenses. In addition, most VUL policies levy surrender charges rather than up-front fees or loads. These surrender charges generally decline each year the policy is held. Generally, after about seven to 10 years no explicit charges are assessed if the policy is surrendered.

9. The flexibility with respect to premium payments and death benefits in VUL permits policyowners to change the policy in such a way that it may inadvertently become a modified endowment contract with adverse tax consequences.

10. Expense loadings are generally greater than with other types of policies.

TAX IMPLICATIONS

General Tax Rules

VL products that do not violate the modified endowment contract rules are taxed in the same manner as other types of life insurance policies. Death benefits are usually paid free of any federal income tax. Variable life insurance policies are subject to the same income, estate, gift, and generation-skipping transfer taxation rules as all other types of life insurance policies.

Living benefits from VL products are also taxed in the same manner as living benefits from other types of life insurance policies. Annuity-type distributions are taxed under the cost recovery rules of Internal Revenue Code Section 72, which states that the policyowner's investment in the contract (generally, total premiums paid less prior nontaxable distributions) is recovered ratably over the expected payout period.

Interest paid on or credited to living benefits held by the insurer under an agreement to pay interest is immediately taxable in full. All other types of living benefits are generally taxed under the cost recovery rule. The cost recovery rule, which is sometimes called the FIFO (first-in first-out) rule, treats amounts received as nontaxable recovery of the policyowner's investment in the contract. Only after the policyowner's investment is fully recovered are additional amounts received treated as taxable interest or gain in the policy. Included in this category of living benefits are policy dividends, lumpsum cash settlements of cash surrender values, cash withdrawals and amounts received on partial surrender. Such amounts are included in gross income only to the extent they exceed the investment in the contract (as reduced by any prior excludable distributions received from the contract). In other words, nonannuity distributions during life are generally first treated as a return of the policyowner's investment in the contract, and then as taxable interest or gain.

Exception to the Cost Recovery Rule

There is an important exception to the general cost recovery rule for withdrawals within the first 15 years after the policy issue date that are coupled with reductions in death benefits. Since death benefits are generally reduced in an amount equal to any withdrawal of cash values, these withdrawals will generally be fully or partially taxable to the extent of gain in the policy.

Such withdrawals are taxed in whole or in part as ordinary income to the extent "forced out" of the policy as a result of the reduction in the death benefits. The taxable amount depends on when the withdrawal is made:

* Within first five years--If the withdrawal takes place within the first five years after policy issue, a very stringent and complex set of tests applies. (2) Potentially, a larger portion, or perhaps all, of any withdrawal within the first five years will be taxable if there is gain in the policy.

* Fifth to fifteenth years--For withdrawals between the end of the fifth year and the end of the fifteenth year from the issue date, a mathematical test applies. Essentially, the policyowner is taxed on an income-first basis to the extent the cash value before the withdrawal exceeds the maximum allowable cash value under the cash value corridor test for the reduced death benefit after the withdrawal. (3) Frequently, only a portion or none of the withdrawal will be taxable in these cases.

Changing from option B (increasing death benefit) to option A (level death benefit) will trigger a test to see whether any amount must be forced out of the policy. In general, option B contracts allow for greater cash accumulations within the policy than option A contracts. Consequently, if a policy with option B has close to the maximum permitted cash value, a switch to option A will generally trigger a taxable distribution. (See Chapters 19 through 25 for a complete discussion of the taxation of life insurance.)

Caveat: Potential Taxation under the MEC Rules

The flexibility inherent in VUL policies with respect to changes in premiums and death benefits raises the possibility that the policy could become a modified endowment contract (MEC). (4) The penalty for classification as a MEC relates to distributions. If a policy is classified as a MEC, "distributions under the contract" are taxed under the interest first rule rather than the cost recovery rule. In addition, to the extent taxable, these distributions are subject to a 10% penalty if they occur before the policyowner reaches age 591/2, dies, or becomes disabled. So MEC categorization of a VUL contract means both faster taxation of investment gains and a possible penalty tax for "early" receipt of that growth.

"Distributions under the contract" include nonannuity living benefits (as described above), policy loans, loans secured by the policy, loans used to pay premiums, and dividends taken in cash. "Distributions under the contract" do not include dividends used to pay premiums, dividends used to purchase paid-up additions, dividends used to purchase one year term insurance, or the surrender of paid-up additions to pay premiums.

Changes in premiums or death benefits may inadvertently cause a VUL policy to run afoul of the MEC rules in basically three ways:

1. An increase in premium payments during the first seven contract years may push the cumulative premiums above the amount permitted under the seven-pay test. (5)

2. A reduction in the death benefit during the first seven contract years triggers a recomputation of the seven-pay test. The seven-pay test is applied retroactively as of the original issue date as if the policy had been issued at the reduced death benefit.

3. A "material" increase of the death benefit at any time triggers a new seven-pay test which is applied prospectively as of the date of the material change.

When issued, most VUL policy illustrations show the maximum amount (the seven-pay guideline annual premium limit) that may be paid within the first seven years without having the policy classified as a MEC. If a policyowner inadvertently exceeds that maximum, MEC status can be avoided if excess premiums are returned to the policyowner with interest within 60 days after the end of the contract year in which the excess occurs. The interest will be subject to taxation. (6)

In general, a reduction in death benefit within the first seven contract years that is caused by and equal in amount to a withdrawal is less likely to cause the policy to fail the recomputed seven-pay test than a death benefit reduction without a withdrawal. However, a policy will fail the seven-pay test if, in any year, the cumulative premiums paid to that year exceed the sum of the seven-pay guideline annual premiums to that year.
   Example. Assume the guideline annual premium
   is $10,000 based on the original death
   benefit. The policyowner pays $9,000 each year
   for the first 6 years. In year seven, the policyowner
   withdraws $36,000, with a corresponding
   decrease in the death benefit. The recomputed
   guideline premium is $8,000. The policy now
   fails the seven-pay test and is a MEC since cumulative
   premiums paid in just the first year,
   $9,000, (and through year 6 as well) exceed
   the sum of the recomputed guideline annual
   premiums of $8,000.


Any reduction in death benefits attributable to the nonpayment of premiums due under the contract will not trigger a recomputation of the seven-pay test if the benefits are reinstated within 90 days after being reduced. (7)

A change from option B (face amount plus cash value) to option A (face amount) appears to be a decrease that triggers the look-back rule and a retroactive reapplication of the seven-pay test. In general, one would not expect the switch in options to result in a lower seven-pay limit unless the face amount of insurance was also reduced to less than the face amount at the time of issue. Therefore, switching from option B to option A should not, in general, cause the policy to be reclassified as a MEC.

The term "material" change is not defined in the statute. However, the statute states that it "includes any increase in future benefits under the contract," (8) but not increases attributable to dividends (for paid-up additions), increases in the policy's cash surrender value attributable to the investment performance of assets underlying the policy, increases necessary to maintain the corridor between the death benefit and the cash surrender value required by the definition of life insurance, (9) or cost of living adjustments.

Clearly, increases in death benefits attributable to cash value increases from favorable investment performance will not trigger testing under the material change rules. Whether changing from option A to option B constitutes a material change in death benefit is unclear. Other increases in death benefits that require evidence of insurability will be considered material changes that invoke a new seven-pay test. See Chapter 19 for more information.

Taxation of Capital Gains on the Underlying Assets

Capital appreciation on the assets underlying a VL or VUL policy loses its character as capital gain. To the extent taxable, withdrawals or surrenders are taxed at ordinary income tax rates. The maximum federal tax table rate on ordinary income is 35%, but effective tax rates can be even higher due to the phaseout of personal exemptions and itemized deductions. In contrast, capital appreciation recognized on the sale of similar mutual fund investments is treated as capital gains. The maximum federal tax rate on long-term capital gains is 15%. In addition, capital gains may be used to offset capital losses.

Taxation of Transfers between Investment Funds

Transfers or switches between one fund and another offered by an insurer under a VL or VUL policy are tax-free. In contrast, similar switches between funds in a family of mutual funds are treated as taxable sales and repurchases. However, in recent years, legislation has been proposed to tax transfers or switches between one fund and another under a VL or VUL life policy or annuity in a manner similar to switches between funds in a mutual fund family. Although these proposals have never survived legislative debate, the possibility clearly exists that such proposals could be enacted in the future.

ALTERNATIVES

VL is the insurance industry's answer to the "buy-term-and-invest-the-difference" strategy. It provides investment options similar to those available from mutual funds, but wrapped within the insurance policy. The loadings and expense charges in the VL policy typically exceed the combined loadings and expense charges of a buy-term-and-invest-in-a-mutual-fund strategy. However, investment earnings within the policy are tax deferred and death proceeds are received tax-free. In contrast, mutual fund dividends and realized capital gains are taxable when received or recognized. For long-term insurance/investment needs, the benefit of a VL policy's tax deferred accumulation will typically overcome the cost of the higher loadings and fees.

A VUL policy's premium payments and death benefits can be theoretically configured to resemble virtually any type of life insurance policy, from annually renewable term life to single premium whole life. As a practical matter, most VUL policies are issued with target premiums at least equal to a lifetime payment plan of insurance. Consequently, any other type of policy that meets a policyowner's needs may be a suitable, and perhaps preferable, alternative if the VUL's premium and death benefit flexibility is not desired or the policyowner does not wish to bear all the investment risk. However, a number of other types of policies or strategies offer some of the features of VUL and not others, if only certain features are desired.

1. Traditional universal life--UL offers the same premium and death benefit flexibility as VUL, but it also provides a minimum cash value guarantee. If the insurer's general portfolio has the risk and return characteristics desired by the policyowner, UL may be a better alternative than VUL. Policy loadings and expenses are generally lower on UL policies than on VUL policies.

2. Adjustable life (AL)--AL combines elements of traditional, fixed premium ordinary life insurance and the ability, within limits, to alter the policy plan, premium payments, and the face amount. AL can be viewed as VUL without the investment options.

3. Flexible premium variable annuity (FPVA) combined with term insurance--A combination of a FPVA with level term can generate cash value accumulations and death benefit levels similar to VUL under option B. A FPVA combined with a decreasing term policy is similar to VUL under option A. The FPVA, however, has less favorable tax treatment for withdrawals and loans than a VUL policy.

WHERE AND HOW DO I GET IT?

Many life insurance companies, including some of the largest, are marketing variable life products. Variable life products are also marketed by most of the major stock brokerage firms. Agents who sell variable life products must be properly licensed to sell security products.

WHAT FEES OR OTHER ACQUISITION COSTS ARE INVOLVED?

Fees and charges on variable products tend to be somewhat higher than on traditional products because of the additional expenses of registering the contracts with the Securities and Exchange Commission and the additional administration, record keeping, and reporting responsibilities associated with the products. In contrast with traditional life products, the securities laws require extensive disclosure of fees and charges in the offering prospectus. VL and VUL policies have two broad classes of fees--charges to the policy and charges to the cash value account. Because of differences in the way premiums and face amounts are handled in VL and VUL policies, some of these fees and charges are treated differently in each type of policy.

Charges to VL Policies

Charges to VL policies include sales loads, a onetime policy fee, annual administration charges, a state premium tax charge, a risk charge and, in some cases, switching fees.

Most companies levy sales loads (principally to pay commissions) in the first year of not more than 30% of the premium. The percentage is generally lower on higher-premium limited-pay policies than on lifetime pay policies. The sales load on premiums in the subsequent years typically grades down from a maximum of 10% in the second year to 7.5% or lower in later years. In general, SEC rules prohibit aggregate fees and charges from exceeding a reasonable amount in relation to the services provided and the risks assumed.

Policy fees generally range from $3 to $10 per $1,000 of guaranteed face amount. Annual administrative charges typically range from $5 to $70, often with a higher charge in the first year and lower charges in subsequent years. The premium tax charge varies by state but is usually about 2% to 2 1/2% of each premium. Risk charges, which are assessed to compensate the company for the risk that the insured may die when the death benefits are below the guaranteed amount, are often specified as a percentage of the premium ranging from 1% to 3%. Alternatively, some companies compute the risk charge as a dollar amount per $1,000 of guaranteed face amount with charges generally ranging from $0.50 to $1.50 per thousand of face amount. Most companies permit one or more switches or transfers of money among the various accounts each year without fees. Additional switches are generally permitted but the company usually charges from $5 to $30 for this service.

Charges to the VL Cash Value Accounts

Charges to the cash value account include the cost of insurance (mortality charges), mortality and risk expense, and investment management fees and expenses.

Mortality charges are based on the company's current mortality rate as applied to the net amount at risk (the difference between the death benefit and the cash value). Current mortality rates will vary depending on the company's experience but are guaranteed not to exceed certain maximums at each age as specified in the contract. The mortality and risk expense charge is taken against each account within a policy for the risk that the insureds as a group will live for a shorter period of time than estimated and the risk that the administrative expenses will be greater than estimated. This charge usually ranges from 0.1% to 0.9% of the assets in the account. Management fees and expenses vary by the type of fund and the investment activity within the fund and are similar to those fees and expenses associated with mutual funds. For instance, money market funds, bond funds, and stock index funds have lower management fees and expenses than general stock funds, which also have lower fees and expenses than real estate funds and foreign stock and bond funds. Management fees typically range from 0.25% to 2% of the assets in the fund. Expenses, expressed as a percent of assets in the fund, similarly range from about 0.25% to 2%.

Charges to VUL Policies

Policy and account charges on VUL policies are similar to those on VL policies with the exception of the sales loads. Similar to regular universal life, VUL policies charge front-end and/or back-end loads or surrender charges to recoup commissions paid to the selling agent and the expense of issuing the policy. Most companies levy a surrender charge of up to 25% if money is withdrawn in the first year. The surrender charge generally declines in later years. Surrender charges often start declining yearly after about the fifth policy year or sooner and reach zero in from 10 to 20 years. As a result of competition in the industry, the trend has been towards starting the phaseout of surrender charges sooner and more quickly.

HOW DO I SELECT THE BEST OF ITS TYPE?

The key factors in choosing the best VL or VUL policy are the policy loadings and expenses, the suitability and variety of the investment options, and the relative performance of the company's alternative investment accounts. The prospectus must list and explain the various loadings and charges. However, since there is a great deal of variability in these loadings and expenses, it is difficult to determine which policy provides the lowest effective "package" of fees over the long term. The best procedure is to ask for policy illustrations with equal face amount and rate of return assumptions and to compare future cash value accumulations. This is not without its problems, however, since the companies may have different current mortality assumptions and may or may not be assuming future improvements in their mortality experience.

Some companies offer a broader array of investment options than others. All else being equal, the company with the broadest array of offerings should be preferred.

The relative performance of the various investment accounts can be evaluated in much the same manner as one would evaluate mutual funds. The prospectus provides historical information about total returns, expense ratios, and turnover rates. In addition, it must describe the investment management fees. One should compare similar types of funds offered by each company to control for risk. For example, only compare long-term bond funds with long-term bond funds or diversified stock funds with diversified stock funds. A sophisticated analysis would compare risk-adjusted returns, but that can be a daunting task for less knowledgeable investors. (10)

All else being equal, look for companies offering funds with the lowest management fees, the lowest turnover rates, the lowest investment expense ratios, and the highest total returns (or best risk-adjusted return).

How to Navigate Through a Variable Life Ledger Statement

The principal source of information regarding a new policy is the policy illustration or ledger. Figure 18.1 shows an annotated policy illustration with the following commentary. (11)

1. Initial death benefit is $100,000; plan of life insurance is variable life.

2. Gender and issue age-male, age 45.

3. $2,394 is the annual premium.

4. Projected dividends are determined by mortality and expense factors used to purchase variable benefit paid-up life insurance. The projected dividends are small (e.g., at the beginning of the second year--$490; at the beginning of the fifth year--$592; at the beginning of the tenth year--$652; and at the beginning of the twentieth year--$453).

5. End-of-year ledger statement. This means the initial death benefit of $100,000 is assumed to be paid at the beginning of the year. Subsequent death benefit, depending upon the interest assumption (e.g., 0%, 6%, and 12%), is assumed to be paid at the end of the year. Cash values (the assumed values of the separate investment account-0%, 6%, and 12%) are calculated as of the end of the year.

6. Out-of-pocket cash payment is $2,394 each year, paid on an annual basis.

7. 5% interest assumption column. The value of $2,394 compounded at 5% if not used to purchase life insurance.

8. Death benefit increase because of the projected dividends purchasing additional paid-up life insurance. In the absence of dividends, the death benefit would not increase because the separate investment account must produce a rate of return in excess of 4% in order for the death benefit to increase.

9. Death benefit increases due to the projected dividends purchasing additional paid-up life insurance and the 6% interest assumption.

10. Death benefit increases due to projected dividends purchasing additional paid-up life insurance and 12% interest assumption.

11. This column has a value even at 0% interest assumption because not all of the premiums paid were required to meet the insurance company's expenses.

12. The projected value of the separate investment account (cash value) based on a net investment return (after expenses and deductions) of 6%.

13. The projected value of the separate investment account (cash value) based on a net investment return (after expenses and deductions) of 12%.

14. Annual premium for $100,000 variable life is $2,394. The monthly premium by automatic deduction from checking account is $211.10.

15. The underwriting requirements (medical, social, and economic) of the insurance company must be met, in order for the insurance to be issued.

16. Insurability status--e.g., nonsmoker or smoker, or rated (extra charge because of being a higher risk for medical or occupational reasons). Select for this company means nonsmoker, nonrated. It is the company's best insurability classification.

17. Statement about dividends, assumed investment returns (e.g., 6% and 12%) and loan interest of 8%. In addition, there is a statement pertaining to the prospectus which clearly indicates that variable life is considered a security and as such must be registered with the Securities and Exchange Commission (SEC).

What Ledger Statements Do Not Tell

You should be told either verbally or in writing the following additional information:

* The separate investment account, which is analogous to the reserve (cash value) of traditional whole life, graded premium life, interest sensitive, and universal life, is made up of four divisions: (1) stock; (2) bond; (3) money market; and (4) master portfolio. The master portion typically consists of common stock, other equity securities, bonds, and money market instruments. Inquire about what percentage of your net premium can go into each. In addition, find out how often you can change from one to the other.

* Note whether the various expenses and deductions are contractually guaranteed not to increase. For this company, variable life policy charges to the policy are: sales loads, policy fees, annual administration charges, state premium tax, and risk charge. Charges to the separate investment account are: cost of insurance (mortality charges), mortality and risk expense, and management fees and expenses. Ask for a total disclosure of each.

* The rate of return expressed in terms of compound interest should be given either on the ledger statement or by the life insurance agent. Ideally, it should be provided for each year.

* The rate of return upon death for this policy for sequential years is as follows:
Year                   Rate of return

1                      4,141.10%
5                         86.94
10                        30.81
20                        14.25


* The above rates are based on a 12% interest assumption death benefit.

* The rate of return upon death can be used when comparing various variable life policies among respected companies. (It can also be used for any life insurance policy.) Consider the following example:
                       Cost per $1,000
Rate of return upon    of life insurance per
death in year 20       year for 20 years

14.25%                 $ 9.34
14.23                    9.36
13.25                   10.59
13.00                   10.93


* How were these numbers determined? $1,000 is the future value (death benefit) to be paid, 20 years is the time. Interest is known (14.25%,

14.23%, 13.25%, 13%). You then solve for payment--how much must be spent each year to accumulate $1,000 in 20 years at the various interest rates?

* Once the rate of return upon death is known, then it can be determined what would have to be earned before taxes in other financial services products such as mutual funds, certificates of deposit, real estate, or commodities to duplicate the tax-exempt rate of return provided by life insurance. (For this purpose, it is assumed that the death benefit is considered life insurance proceeds and as such not subject to federal or state income taxes.) The before-tax rate of return is determined by dividing the life insurance rate of return by the marginal tax bracket subtracted from 100% (for 15%, the factor is 0.85; for 25%, 0.75; for 28%, 0.72; for 33%, 0.67; and for 35%, 0.65). The result is shown in Figure 18.2.

* The rate of return upon surrender should also be provided. When the rate of return upon surrender is positive, it means that taxes are due. Taxes are due on the difference between the cash-surrender value and the premiums paid. The result before taxes is as follows:
Year              Rate of return

1                 -49.67%
5                   1.64
10                  7.05
20                  8.95


* The above rates of return are based on a 12% interest assumption separate investment account performance. The rate of return upon surrender even before taxes never equals the separate investment account investment performance of 12%.

* The Premiums Accumulated at 5% column on the ledger statement replaces the Interest Adjusted Index. This is what your money would be worth at 5% net after taxes if not used to purchase life insurance. In order to net 5% after taxes, the before-tax rates of return in the following tax brackets are:
15%          25%          28%          33%          35%
taxpayer     taxpayer     taxpayer     taxpayer     taxpayer

5.88%        6.67%        6.94%        7.46%        7.69%


* The ledger statement should be the official ledger statement produced by the computer service of the life insurance company. It should be "bug-free."

WHERE CAN I FIND OUT MORE?

The following references may be useful:

1. Lawrence J. Rybka, "A Case for Variable Life," The Journal of the American Society of CLU & ChFC (May, 1997).

2. Ben G. Baldwin, "Understanding and Managing VUL," The Journal of the American Society of CLU & ChFC (September, 1996).

3. Gary Snouffer, Variable Life Essentials (Cincinnati, OH: The National Underwriter Company, 1998).

4. Carl E. Anderson and James B. Ross, Modern Mutual Fund Families & Variable Life: Tools for Investment Growth and Tax Benefits (Homewood, IL: Dow Jones-Irwin, 1988).

QUESTIONS AND ANSWERS

Question--What are the mechanics of the VL contract? How does it actually work when a client pays a premium?

Answer--The VL contract works like this:

1. Premiums (less an investment expense and/or sales load, state premium tax, and a mortality charge) are paid into separate investment accounts.

2. The policyowner selects among several "separate accounts." These include mutual-fund type alternatives such as stock funds, bond funds, and money market funds to invest the remaining premium.

3. Policyowners may typically switch or rebalance their investments among the funds one or more times per year. The insurer may or may not charge a fee for each such movement of cash.

Question--What is the single most important way a VL contract differs from the traditional life policy?

Answer--The single most important distinction between variable life and traditional whole life is in the investment flexibility and the consequent shifting of the investment risk from the insurer (with classic whole life) to the policyowner (with variable life). In the variable life contract the policyowner's funds are segregated, since they are placed in accounts that are distinct and separate from the company's general investment fund.

Question--Exactly how does the insurer determine the death benefit increase or decrease?

Answer--In a very general sense there are two death benefits under a VL contract. One provides for a minimum payment and is guaranteed. The second will be paid if and only if the actual investment return on the separate account exceeds the assumed rate of return. Excess interest credits are used to buy additional "blocks" of insurance under this "second" death benefit. (12)

Technically, the face value may increase or decrease based on a formula that relates the investment performance of the separate account to the face value. Companies use two methods to establish the relationship between the investment performance and the face amount. Under what is called the "corridor percentage approach", the death benefit is periodically adjusted so that it is at least equal to a specified percentage of the cash value, as required by current tax law. (13) The mandated corridor percentage is 250% until the insured reaches age 40 and then gradually declines to 100% by age 95.

The death benefit under what is called the net single premium approach "is periodically adjusted" so that it matches the amount of insurance that could be purchased with a single premium equal to the cash value, assuming guaranteed mortality rates and a low rate of return, typically 4%.

Although both methods are equally valid, most policyowners find the corridor percentage method easier to understand.

As mentioned above, there is a floor that protects the beneficiary of a variable life contract. The death benefit cannot fall below a guaranteed minimum, the initial face amount of the policy. If the return on the selected portfolio called a "separate account" is greater than the rate of interest assumed at the inception of the contract, the actual death benefit may increase beyond the policy's scheduled face amount.

Question--How does a VL contract compare with a traditional plan with respect to the typical legal protections afforded policyowners?

Answer--Of course, there is no schedule of guaranteed cash values. But otherwise, the VL policyowner is provided with most of the usual features of traditional level premium life insurance including guaranteed maximum mortality charges, nonforfeiture values, a reinstatement period, and settlement options.

Options or riders available under VL contracts include waiver of premium, guaranteed purchase or insurability, accidental death benefits, and disability income.

Question--Do variable life contracts pay dividends?

Answer--VL policies are issued in both participating and nonparticipating forms. But dividends paid on par VL policies are based solely on favorable mortality and loading experience and include no element of excess investment earnings. Excess investment earnings, less an asset management fee, are reflected in the value of the separate account.

Question--Do variable life contracts allow policy loans?

Answer- Loans are allowed from VL contracts. But policy loan provisions are not, however, the same as in the traditional insurance policy. This is because a loan equal to the full cash value could leave the insurer with less than complete security for the debt if the value of the underlying portfolio dropped after the loan was made. For this reason, most insurers limit loans on VL products to about 75% of the policy's cash values (compared with about 92% on traditional contracts). If a policyowner makes a loan, the insurer will credit the loan with a lower rate than the full portfolio investment rate, usually a percent specified in the policy.

Question--VL and VUL are sometimes described as life insurance wrapped around a mutual fund investment and as better alternatives than a buy-term-and-invest-the-difference strategy. How does the investment performance of the funds offered by life insurance companies compare with the performance of mutual funds?

Answer--There have been numerous studies measuring the investment performance of mutual funds, but far fewer studies have assessed the performance of other institutional investors, such as the separate accounts of life insurance companies. However, one study examined the attractiveness of the stock portfolios of life insurance companies as an alternative investment to mutual funds. (14) Using testing methods similar to those used to evaluate mutual funds, the study concluded that on the basis of risk-adjusted investment performance alone, both life insurance and mutual fund portfolios yield similar returns. However, as life insurance contracts offer the opportunity for individual investors to defer taxes, these investment vehicles offer an edge over mutual funds when performance is considered on an after-tax basis.

Question--What investments other than the normal stock, bond, and money market separate accounts are available?

Answer--For the more aggressive or knowledgeable investor, some companies now offer GNMAfunds, real estate funds, and zero coupon bond funds. Some specialized funds such as small capitalization stock funds, market index funds, and funds that focus on specific sectors of the economy or industries (i.e., medical, high tech, gold, leisure, and utilities) are also available.

Some companies offer a managed fund option where the company's investment manager assumes the responsibility for apportioning investments among the various alternative funds. Some VL policies also offer a guaranteed interest option similar to the declared interest rate on universal life policies. Recently, some insurance companies have offered investments in "hedge funds" for policyowners who meet certain income and net worth requirements. Hedge funds are investment companies that are generally unregulated by the SEC; hedge funds may use high risk techniques, such as borrowing and short selling, to make higher returns for their investors.

Question--Is there a fixed and increasing schedule of cash values in the variable life contract?

Answer--Unlike the traditional whole life policy, in the variable contract there is no guaranteed minimum cash value. The cash value at any point in time is based on the market value of the assets in the separate account. VL policyowners bear all the investment risk associated with policy. So cash values can grow well beyond the assumed rate or not at all. There can even be negative growth. That is to say that it is possible in a variable life contract for the policyowner to lose the entire amount in the selected portfolio.

Question--How do the key features of universal, variable, and variable universal life compare?

Answer--Figure 18.3 compares and contrasts the key features of universal, variable, and variable universal life. As the table shows, variable universal life combines most of the advantages of universal and variable life.

Question--How does one properly compare a variable universal life product with a universal life product?

Answer--A VUL prospectus generally discloses more about expense charges than is disclosed in a UL policy illustration and contract. VUL has higher expenses resulting from the need to prepare prospectuses, to register with the SEC, and to provide investment flexibility. These additional costs are offset somewhat by lower profit requirements on VUL, where the investment risk is assumed by the policyowner.

Front-end sales loads, premium tax loads, and administrative charges on VUL and UL do not differ materially. Surrender charges on VUL policies are generally lower than those on UL to enable the VUL to comply with SEC limits on sales loads. Investment expenses are higher on VUL because the fee paid to the investment manager is usually higher than the typical investment expense for a UL policy. Profit margins are slightly less for VUL than for UL.

Figure 18.4 shows how VUL and UL compare from an investor's perspective.

Question--Why must a prospectus accompany information on variable and variable universal products?

Answer--Since variable life products are considered securities, prospective purchasers must be given a prospectus. It contains: the identity and nature of the insurer's business; the use to which the insurer will put the premiums; financial information on the insurer; the investment characteristics of the product, expenses, fees, and loads; and the rights of the policyowner. In addition, the agent must be properly licensed to sell securities.

CHAPTER ENDNOTES

(1.) IRC Sec. 7702(d).

(2.) IRC Secs. 7702(f)(7)(B), 7702(f)(7)(C).

(3.) IRC Secs. 7702(f)(7)(B), 7702(f)(7)(D). The cash value corridor test is discussed in Chapter 21.

(4.) In cases where there are extreme reductions in the death benefit or very large premium payments, it is even possible for a policy to fail the tests for life insurance under IRC Section 7702 with much more disastrous tax consequences. See the discussion of the definition of life insurance in Chapter 21.

(5.) IRC Sec. 7702A(a)(1)(B). Classification as a MEC occurs in the year when seven-pay test is first violated and for each year thereafter. See Chapter 19 for a more complete discussion of the seven-pay test.

(6.) IRC Sec. 7702A(e)(1).

(7.) IRC Sec. 7702A(c)(2)(B).

(8.) IRC Sec. 7702A(c)(3).

(9.) IRC Sec. 7702. See Chapter 21.

(10.) An excellent book on this subject is Modern Mutual Fund Families & Variable Life: Tools for Investment Growth and Tax Benefits, by Carl E. Anderson and James B. Ross (Homewood, IL: Dow Jones-Irwin, 1988).

(11.) This illustration is adapted from William D. Brownlie and Jeffery L. Seglin's treatise, The Life Insurance Buyer's Guide (new York, NY: McGraw-Hill Publishing Company, 1989).

(12.) Black and Skipper, Life Insurance, 12th ed. (Englewood Cliffs, NJ: Prentice-Hall, 1994), pp. 114-115.

(13.) IRC Sec. 7702(d).

(14.) Robert T. Kleiman and Anandi P. Sahu, "Life Insurance Companies as Investment Managers: New Implications for Consumers," Financial Services Review: The Journal of Individual Financial Management, Vol. 1, No. 1, 1991.
Figure 18.1

LEDGER STATEMENT FOR VARIABLE LIFE

$100,000 Variable Whole Life Plan 1
For Age 45 Male 2
Annual Premium $2,394 3

                  4

Dividends Used to Purchase Paid-up Additions

5              6              7

                                 Premiums
End of              Annual    Accumulated
Year               Premium          at 5%

1                   $2,394        $ 2,514
2                    2,394          5,153
3                    2,394          7,924
4                    2,394         10,834
5                    2,394         13,890
6                    2,394         17,098
7                    2,394         20,467
8                    2,394         24,004
9                    2,394         27,717

10                   2,394         31,617
11                   2,394         35,712
12                   2,394         40,011
13                   2,394         44,525
14                   2,394         49,265
15                   2,394         54,242
16                   2,394         59,468
17                   2,394         64,955
18                   2,394         70,716
19                   2,394         76,766
20                   2,394         83,118
60@                  2,394         54,242
65@                  2,394         83,118
75@                  2,394        167,007

14 Insurance Premiums

                  4

Dividends Used to Purchase Paid-up Additions

5                        8              9             10

                            Death Benefit *
                      Assumed Investment Returns

End of
Year                    0%             6%            12%

1                 $101,367       $101,391       $101,532
2                  102,707        103,880        103,510
3                  104,024        104,471        105,962
4                  105,304        106,157        108,904
5                  106,549        197,941        112,382
6                  107,749        109,818        116,420
7                  108,910        111,797        121,060
8                  110,023        113,872        126,335
9                  111,088        116,046        132,287

10                 112,107        118,327        138,968
11                 113,068        120,705        146,416
12                 113,961        123,176        154,678
13                 114,772        125,729        163,796
14                 115,490        128,357        173,818
15                 116,104        131,052        184,800
16                 116,604        133,808        196,801
17                 116,984        136,624        209,890
18                 117,238        139,502        224,146
19                 117,359        142,443        239,654
20                 117,334        145,442        256,496
60@                116,104        131,052        184,800
65@                117,334        145,442        256,496
75@                112,535        180,166        527,026

14 Insurance Premiums              Annual        Mo. ISA

                                 2,394.00         211.10

                  4

Dividends Used to Purchase Paid-up Additions

5                       11             12             13

                                Cash Value *
                        Assumed Investment Returns

End of
Year                    0%             6%            12%

1                  $ 1,103        $ 1,154        $ 1,205
2                    3,145          3,372          3,606
3                    5,164          5,700          6,268
4                    7,156          8,137          9,216
5                    9,201         10,776         12,572
6                   11,214         13,536         16,286
7                   13,190         16,422         20,395
8                   15,126         19,434         24,935
9                   17,013         22,573         29,949

10                  18,853         25,845         35,485
11                  20,634         29,248         41,591
12                  22,351         32,782         48,320
13                  23,999         36,451         55,733
14                  25,570         40,255         63,896
15                  27,055         44,192         72,874
16                  28,444         48,262         82,743
17                  39,727         52,460         93,580
18                  30,891         56,784        105,469
19                  31,923         61,230        118,496
20                  32,806         65,790        132,756
60@                 27,055         44,192         72,874
65@                 32,806         65,790        132,756
75@                 34,997        118,565         74,646

14 Insurance Premiums

Subject to Underwriting Limits 15
Select 16

17 * Dividends based on current scale-1988 issue. Not an estimate
or guarantee of future results. Hypothetical investment results are
illustrations only and should not be deemed representative of past
or future investment results. Results illustrated assume no loans.
8% loan provision. The illustration must be preceded or accompanied
by a current prospectus.

Figure 18.2

              15%          25%          28%          33%          35%
Year     taxpayer     taxpayer     taxpayer     taxpayer     taxpayer

1       4,871.88%    5,521.47%    5,751.53%    6,180.75%    6,370.92%
5         102.28       115.92       120.75       129.76       133.75
10         36.25        41.08        42.79        45.99        47.40
20         16.76        19.00        19.79        21.27        21.90

Figure 18.3

KEY FEATURES OF UNIVERSAL, VARIABLE, AND VARIABLE UNIVERSAL LIFE

Feature                                    UL     VL     VUL

Death benefit guaranteed while the         Yes    Yes    Yes
  policy is in force
Premium amounts are flexible               Yes    No     Yes
Policyowner chooses how premiums are       No     Yes    Yes
  invested
Policyowner may vary frequency or          Yes    No     Yes
  amount of premiums paid
Policyowner may use cash values to pay     Yes    No     Yes
  monthly deductions
Policyowner may increase or decrease       Yes    No     Yes
  death benefit
Death benefit options A and B available    Yes    No     Yes
Cash values fluctuate depending on         No *   Yes    Yes
  performance of underlying investment
Guaranteed minimum interest rate on        Yes    No     No
  cash values
Partial withdrawals from cash value        Yes    No     Yes
  allowed
Cash value grows on tax deferred basis     Yes    Yes    Yes
Annual statements detailing monthly        Yes    No     Yes
  deductions and cash value growth
Considered a security                      No     Yes    Yes

* The current interest credited to cash values of UL policies
fluctuates with the performance of the insurer's general portfolio,
but cash values, once accumulated, do not fluctuate in value with
fluctuations in the market value of the assets in the general
portfolio.

Figure 18.4

VUL COMPARED WITH UL FROM THE INVESTOR'S PERSPECTIVE


Characteristic           Universal Life

Investment Control       Generally intermediate maturity
                         fixed income assets. Control is
                         with the insurance company.

Asset Security           Assets are part of general account
                         and, as such, are chargeable with
                         all liabilities arising out of the
                         general account. Liabilities also
                         are part of the general account and
                         therefore are backed by all the
                         assets of the general account.

Market Value of Assets   Principal is guaranteed and cash
                         value is not marked to market.
                         Interest guarantee is at 4% to 5%.
                         Credits once earned are not
                         forfeitable.

Variations in Charges

  Mortality Charges      Charges are subject to modification
                         up to guaranteed maximum, now
                         generally the 1980 CSO table.

  Expense Charges        Current and guaranteed expense
                         loads sometimes identical.

  Investment Return      Charges are subject to modification
                         up to guaranteed maximum, now
                         generally the 1980 CSO table.
                         Current and guaranteed expense
                         loads sometimes identical.
                         Generally, all earnings above a
                         guaranteed rate of 4% - 5% are
                         declared at the insurer's discretion.

Characteristic           Variable Universal Life

Investment Control       Choice of investment vehicle
                         (equities, fixed income) left to
                         policyowner.

Asset Security           Separate account assets are not
                         chargeable with liabilities arising
                         out of any other business the
                         insurer may conduct. Separate
                         account cash value liabilities are
                         backed by separate account assets
                         only. Separate account death
                         benefits in excess of the cash value
                         are backed by the assets in the
                         general account.

Market Value of Assets   Assets are marked to market daily,
                         thus creating volatility. No cash
                         value guarantees.

Variations in Charges

  Mortality Charges      Charges are subject to modification
                         up to guaranteed maximum, now
                         generally the 1980 CSO table.

  Expense Charges        Current and guaranteed expense
                         loads sometimes identical.

  Investment Return      Charges are subject to modification
                         up to guaranteed maximum, now
                         generally the 1980 CSO table.
                         Current and guaranteed expense
                         loads sometimes identical.
                         The return on the assets in the
                         fund net of expenses is the policy's
                         investment return. Therefore,
                         while greater investment risk is
                         present on VUL for the
                         policyowner, the risk is entirely
                         with the performance of the fund
                         and not controlled by the insurer's
                         declarations.
COPYRIGHT 2007 ALM Media, LLC
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2007 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:PART I TOOLS
Publication:Tools & Techniques of Life Insurance Planning, 4th ed.
Date:Jan 1, 2007
Words:10207
Previous Article:Chapter 17: Universal life.
Next Article:Chapter 19: Modified endowment contracts.
Topics:

Terms of use | Privacy policy | Copyright © 2020 Farlex, Inc. | Feedback | For webmasters