Variable Universal Life Ins - Performance Coincides with Market

Life Insurance policies not as straightforward as they seem

The roiling stock market isn’t just affecting investors in equities.

Holders of variable universal life insurance policies, (not term or, fixed universal life policies) otherwise known as VULs, soon could face a nasty shock as well.

That’s because such policies allow holders to allocate their account value among a variety of investment subaccounts, including stocks and bonds. (Unlike fixed universal Life policies). Their performance determines the growth of the value of the account and the death benefit.

So if the stock market continues to slide, millions of policies are going to tank.

VULs were created in the 1980s to compete with mutual funds, he said. Some agents love to sell them because they generate high commissions.

The problem is that the examples agents often give to clients show static rates of return, ignoring the fact that the stock market doesn’t perform that way

In fact, the illustrations of VUL were and still are mathematically impossible to achieve as sold.

VULs do offer tax advantages that appeal to certain wealthy individuals. But after premiums are paid, the insurance company deducts “mortality charges” that increase with age, management fees, premium loads and other charges. These fees and expenses can rise at the company’s discretion, subject to contractual caps.

If the stock market rockets, there’s enough money in the account to cover these charges.

But if it nose-dives, the cash values of the policies do, too — a downward cycle that accelerates as the insurer continues to deduct mortality charges and other expenses.

One investor discovered this the hard way — after paying a total of $127,096 in premiums over a period of 21 years for a MetLife variable life insurance policy with a death benefit of only $100,000.

Worse, they lost the policy when they got caught up in a Catch-22, according to a claim the couple filed against MetLife with the Financial Industry Regulatory Authority.

The Internal Revenue Service said they no longer were allowed to pay the premiums for the policy as of Jan. 1, 2015, because the maximum amount of money that could be applied to the policy had been exceeded. (Due to MEC provision Modified Endowment Contract. Refer to tab regarding MEC)

MetLife said the policy would lapse if they didn’t continue to pay them. “It was crazy, just crazy,” said Ivana.

The couple, had purchased the policy in 1994 based on the recommendation of their insurance agent at the time, an employee/agent of MetLife.

We were preparing for retirement income,” said Ivana, now 73. “We were talked into it. It sounded good at the time.”

The couple claims the agent indicated the planned annual premium was $5,000, mostly allocated to stocks, and the death benefit and cash value would increase over time.

Thomas, a carpenter, was 63 at the time. He trusted the agent.

But over the years, the policy premiums grew to more than $15,000 a year. Meanwhile, after mortality costs, fees and other expenses the accumulated value of the policy had dropped to only $1,893.

Thomas can’t understand why.

“They said they’d invest and the policy would be paid off with the investment money,” Ivana said.

But there was no cash buildup, she continued. “They claimed the stock market went down and our money disappeared. All of it?”

Thomas, now 85 and suffering from cancer, is heartbroken he does not have a life insurance policy to help pay off the $100,000 the couple still owes on their mortgage.

“This was for my wife,” he said, his voice wavering. “Now I have no alternative.”

A spokeswoman for MetLife said that because the matter is in arbitration, the company has no comment at this time.

And unless there’s a rider protecting the death benefit against a downturn in the underlying investments — a so-called no lapse guarantee — there’s no assurance heirs will receive the full death benefit, minus any loans or withdrawals.

Anyone considering a VUL policy should obtain a second opinion from an accountant or, other savvy financial adviser.

And if you’re concerned about the stock market, go back to the agent or, carrier, and say that you’re concerned. Make sure it doesn’t affect your death benefit or policy.

A Financial Group representative said he sells VULs and that some of his clients have seen returns that were better than originally projected.

But, they are in a special pool of high-net-worth individuals who tend to be healthier and live longer than those who are not wealthy — and thus pay lower premiums.

For the average insurance buyer, he said, VULs can be a dangerous investment, especially if the agent who has sold them the policy doesn’t explain the risks adequately.

One Advisors said VULs are appropriate only for sophisticated clients who have an adviser who can keep an eye on the underlying investments, or who can monitor the investments themselves.

That’s because the best investment options for their cash value are almost always mutual funds, which have high internal costs, he said.

Life insurance products are not liquid products, so people need to be careful putting too much money into something like this.