Fee-based advisors examine the merits of low-load variable universal life.

For fee-based financial advisors, the idea of suggesting a variable universal life insurance policy to a client is probably about as appealing as an Internet stock.

Chances are, if there's a client with a need for life insurance and some extra money to invest, the advisor will recommend term insurance and a conventional investment vehicle instead of a variable life product laden with hidden fees and commissions and surrender charges. But that hasn't stopped a few companies from at least trying to spruce up the image of variable universal life in the eyes of the fee-centric financial planner through low-load products.

Ameritas, for example, added variable universal life to its line of low- and no-load products in 1996. TIAA-CREF, meanwhile, introduced a line of low-load variable universal life products in March.

"There is an increasing demand for it," says Patty Reiners, an official at Ameritas. "There is a movement towards fee for advice, and low-load products work very well with that."

If there is indeed a movement towards low-load insurance, however, it's hard to detect because the overall variable life insurance market has been slumping in the face of a weak equities market. The slump followed a period of explosive growth that coincided with a euphoric bull market.

From 1998 to 2000, when equity values skyrocketed, variable life's share of the life insurance market rose from 28% to 36%, overtaking universal and whole life as the largest share of life insurance premiums. Since then, however, variable life has skidded to a 24% market share in 2002, compared with 28% for universal and 26% for whole life. Variable, in fact, is just slightly outpacing term insurance sales, which comprise 22% of the market.

Another reason the climate for variable life sales has been dismal is that many of the policies written during the 1990s included steep surrender charges. That has put many policyholders in the no-win position of either having to stick with a potentially underfunded policy or paying a high penalty to cancel the contract. It's a trap not too many advisors want their clients to fall into. "They don't have much latitude to exit a bad policy," says Joseph Maczuga, president of the Fee Planners Network, an industry-sponsored group that acts as a resource for advisors on matters related to fee-based life insurance.

That is why Maczuga and some insurance companies see this as an appropriate time to tout low-load variable universal life insurance, which typically carries no surrender charges and lower first-year premiums. Unlike commissioned policies, low-load variable universal life typically includes a full disclosure of fees and costs and provides the policyholder with cash value in the first year.

The flexibility afforded by the lack of surrender charges and the full disclosure of fees are keys when it comes to utilizing variable universal life in a fee-only practice, Maczuga says. Products with heavy commissions, he notes, simply don't mesh with an advisory practice that fully discloses fees to clients. Advisors are also going to steer clear of surrender charges that could lock their clients into a policy for ten years or more, he notes.

"A lot of advisors are saying we want the full disclosure and control year to year because we know they're playing games with these policies," Maczuga says. "The advisors are looking at fiduciary responsibility, full control and full liquidity. They want to make sure they're not stuck if they need to change."

Fee-only advisors also want the ability to retain their relationship with the client through the process of seeking, writing and closing a policy, says Brian Peterson, a senior consultant at TIAA-CREF. They're reluctant to have a client deal with a commissioned sales representative alone and then come back with a policy that was put together without their involvement, he adds.

Peterson says TIAA-CREF's low-load insurance services are structured as a "back-office support agency" for advisors and their clients. The company provides the advisor and client with policy comparisons and analysis, as well as all application and underwriting work, often through a conference call that includes both the advisor and client, Peterson says.

"Were acting on their behalf, and they know exactly where their client is," he says. "It's still their client, and that's what they really latch onto."

Indeed, the clash between the commission-based culture of the life insurance industry and that of the fee-only advisor is one of the primary reasons so few companies offer low-load products, says Nancy Kenneally, a senior consultant with Tillinghast-Towers Perrin, an actuarial and management consulting firm in New York City.

"One of the issues is that companies have not been able to penetrate the nontraditional insurance agents," she says. "It takes a fairly large investment from an insurance company's perspective for training and for simplifying the business process."

There's also the fact that variable universal life was designed as an alternative to fixed premium whole life insurance-essentially a product for people with a need for life insurance, with the added benefit of cash value in the form of flexible subaccounts. From a fee-based advisor's perspective, however, the added investment "perk" of variable universal life has been of dubious value, even considering the fact that the products provide tax-deferred capital growth.

Maczuga of the Fee Planners Network, however, says some advisors are finding the tax-deferred growth to be a boon when it comes to rebalancing a portfolio. Some advisors, he says, are using variable universal life policies to hold some of the more volatile components of their clients' portfolios to facilitate frequent rebalancing. And unlike a qualified savings plan, he says, "there are no strings attached to withdrawing the capital."

John Morvay, an advisor with Questar Capital Corp. in Canfield, Ohio, started using low-load variable universal life products from Ameritas about seven months ago. Introduced to the products through the Fee Planners Network, Morvay says he's "batting 100%" when it comes to clients following his advice to use them.

In one example, Morvay says he had a 32-year-old male client who wanted to open up a Roth IRA with a $3,000 initial investment. The client, as it turned out, was planning to buy term life insurance. "I combined it into a variable universal life policy," Morvay says. He ended up writing up a policy with a $150,000 death benefit and using the client's $3,000 as a premium for the low-load contract. The client ended up with a first-year cash value of $2,715, he says. "So the insurance was costing them about $300," he says.

The most difficult part of dealing with low-load life, Morvay says, is the fact that most clients are not used to having to pay a fee for buying life insurance. "That's the hardest part and the scariest part," he says. Although his fees can vary depending on the complexity of a client's case, Morvay says he typically charges $2,000 for the work involved in developing and finalizing a variable universal life policy for a client. Annual reviews of the contract cost $150 an hour, he adds. "I bring a value to them, and that's what I'm selling," he says.

Bragg Comer, an advisor with Laurus Financial Advisors in Dallas, says clients are usually comfortable with paying a fee for insurance preparation after they get an explanation of the differences between load and low-load life insurance. "They can see where the money goes, so to speak," says Comer.

Comer says his firm views variable universal life as an ideal investment for clients who have hit the maximum contribution limits on their retirement plans, but have extra money they want to put away for retirement. Comer says he also prefers that his clients overfund their variable policies.

"A variable universal life policy is dealing with the volatility of the market, and you just need to have more dollars to deal with that," he says. "If the market is down, you want to make sure you're not in a situation where you don't have enough money in your VUL to pay the insurance costs."

But while he's certain variable universal life policies are useful in financial planning, he's not as sure that more insurance companies are eager to introduce fee-based product lines. "You're almost talking about a cultural change for most insurance agents," Comer says. "So much of their compensation is built around first-year commissions, which is so much different from how the investment industry works."