Was this right for me? Understanding Variable Universal Life Insurance (VUL) Policies 

What Are VULs?  

Variable Universal Life (VUL) insurance policies are securities that combine life insurance, a savings account, and an investment portfolio. VULs have two main components: a savings account and a death benefit for beneficiaries. The savings account is divided into sub-accounts for investing, which may include a guaranteed premium account (GPA) and a fixed account that accrues interest without risk. Part of the premiums that are paid are invested and last for the insured’s lifetime. 

The Reality of VULs

While VULs might seem attractive, they usually come with high fees and inflexible terms and are entirely unsuitable for many investors. They can generate interest but also have the potential to lose money. Many investors are drawn to VULs for the sales pitch of the tax-free death benefit, but this advantage can disappear if the policy lapses. Here are some factors that you should consider when determining whether a VUL policy was right for you: 

• Understanding the Product: VULs are complex financial products. Make sure your broker fully explained how they work, including the investment risks and fee structures. 
• Fees and Costs 
  • High Fees: VULs come with various fees, including management fees, administrative fees, and mortality and expense risk charges. These can significantly reduce your returns. If your Broker failed to provide an in-depth explanation of the costs for the policy this can be a red flag. 
  • Surrender Charges: Be aware of surrender charges if you decide to cancel the policy early. 
• Investment Returns: The investment component of a VUL is subject to market fluctuations. Don’t assume guaranteed high returns; be prepared for potential losses. If your Broker has guaranteed or promised a certain return rate this can be a red flag. 
• Tax Implications: While VULs can offer tax-deferred growth and tax-free death benefits, these advantages can disappear if the policy lapses. Understand the tax implications of withdrawals and loans. 
• Premium Payments: Ensure you were told about and are able to pay sufficient premiums to keep the policy in force. Underfunding can lead to policy lapses and loss of coverage. If your Broker fails to explain that premium payments are necessary, this could be a red flag. 
• Financial Advisor Incentives: Be aware that financial advisors may earn high commissions on VULs, which could influence their recommendations. Ensure the policy is genuinely in your best interest. 

FINRA’s Warnings  

FINRA warns that VULs carry significant risks, including the potential to lose value or lapse. These policies are complex and come with more fees than ordinary life insurance. According to FINRA Rule 2111, Brokers and financial advisors must ensure VULs are suitable for the investor’s age, experience, risk tolerance, and financial goals. Determining whether a VUL insurance policy was suitable for you involves considering several factors. Here are some key points your broker needs to have reviewed with you: 

• Understand Your Financial Goals 
  • Long-term Protection: Were you looking for lifelong coverage? 
  • Investment: Were you interested in combining life insurance with an investment component? 
  • Savings: Did you want an insurance policy that includes a savings account? 
• Assess Your Risk Tolerance 
  • Investment Risk: VULs invest in sub-accounts that can fluctuate in value. Are you comfortable with the potential for loss? 
  • Fee Structure: VULs come with higher fees compared to other life insurance policies. If you are not seeing the return rate that was promised by your Broker, it may be due to the fees/costs associated with the insurance policy. Did your Broker provide suitable alternatives to the VUL policy, such as purchasing a term life policy and investing in a diversified portfolio of stocks and bonds. If your Broker did not present suitable alternatives, this is a red flag. 
• Evaluate Your Financial Situation 
  • Premium Payments: Can you afford the potentially higher and variable premiums over the long term? 
  • Liquidity Needs: Do you need access to your funds, and did your Broker explain the potential penalties for withdrawals? If your Broker failed to explain the penalties or process associated with accessing funds from the policy this is a red flag. 
• Consider Tax Implications 
  • Tax Benefits: VULs offer tax-deferred growth and tax-free death benefits. Are these benefits important to you? If your Broker told you that you would receive tax-free growth in the policy, this is not accurate and is a red flag. 
  • Policy Lapse: If the policy lapses, outstanding loans may become taxable. Are you prepared for this risk? If your Broker did not explain the consequences of having a policy loan if the policy lapses this is a red flag. 
• Compare with Other Insurance Options 
  • Term Life Insurance provides coverage for a specific period and is generally less expensive. Further, if you are seeking Growth in your investments, the costs associated with the VUL are often too high and this makes the VUL unsuitable for your investment objectives. 

Since VULs are securities, a securities fraud attorney can help you recover losses through FINRA arbitration. If you experienced any of the red flags that were discussed above when you were sold a VUL policy, if your VUL policy is not functioning as it was explained to you by your Broker, if you are losing money in your VUL policy and you cannot explain why, or if you believe your broker sold you a VUL that did not suit your needs, contact The Securities Lawyers at Halling & Cayo S.C. for a free case evaluation. 

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