When I first entered the life insurance business almost three decades ago, selling variable universal life policies as a “private pension plan” was the “in” thing. I had started my career with a captive company that was one of the originators of the product, so it certainly was a priority of theirs to promote sales aggressively.
Needless to say, insurance agents became misinformed and under-educated, and subsequently misdirected prospective clients in the purchase of the product. People kept looking at VUL as an investment because hey, it did, after all, house a mutual fund in a separate account, through which cash could be accumulated. A prospectus had to be delivered with an illustration, and clients had to be taught about asset allocation and ongoing money management.
It looked and sounded like an investment, yet it actually was life insurance! It had a death benefit, which with some companies was guaranteed. It also provided the tax advantages of potentially tax-deferred cash accumulation, and tax-free distribution, if these distributions were properly handled.
The entire mix was extremely complicated and seemed too good to be true. I suppose that too many agents presented it as a dream that really did come true, and many consumers ended up with buyer’s remorse. It didn’t take too long before lawsuits flooded the gate and we were banned from using the phrase “private pension plan” ever again when selling life insurance. Just one of the many sorry episodes of “market misconduct” which you now read about when taking Continuing Ed classes to keep your license 🙂
Nonetheless, a lot of valuable lessons were to be learned. One take away for me was a perspective on the tax advantages of VUL, and of life insurance in general. What’s a fair way of emphasizing this benefit?
This is how I presented it.
For me, the value of the tax benefits of life insurance could be appreciated when compared to products that did not provide those benefits. Let’s suppose that my client was considering spending $10,000 per year on a cash accumulation vehicle. Should it be life insurance, or mutual funds, or individual stock investments, or anything else outside of an insurance policy? I suggested that we run an illustration showing a continuous payment of the $10,000 up until their retirement age; thereafter, a level income stream to a chosen mortality age would be calculated. This income stream would be net after all policy costs and charges, It would assume that all proper guidelines would be followed to avoid triggering a taxable event. And, a reasonably conservative interest rate would be assumed.
Then I suggested they go to their investment advisor and ask for an illustration using the same $10,000 with the same scenario. Pay that money on an annual basis continually until retirement age, and then calculate an after-tax income stream, net of all charges. Of course, the same interest rate that was used in the life insurance illustration would be used here. The winner would be the product that put the most retirement income into the client’s pocket.
Through this comparison, using both life insurance and non-insurance options, it could become clear whether or not the tax advantages of insurance could really make a difference. That to me was a fair way to evaluate the tax benefits of the product.
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