Rest assured, variable life is regulated as a security; they fall under the oversight of the Financial Industry Regulatory Authority (Finra). But those protections only go so far. “If I were an insurance regulator, I would require the use of stochastic illustrations in sales presentations,” says Glenn Daily, principal at New York-based Sutter’s Mill Valuation Services, a fee-only life-insurance advisor, referring to a type of probability analysis that takes into account a broader range of variables for a more realistic outcome than the current “deterministic illustrations,” he says.

It’s also incumbent upon brokers and advisors to make sure clients know that variable life insurance products, like all investments, have downside risk. “Advisors should ensure clients thoroughly understand the product and manage client expectations,” says Montgomerie. “These products have surrender charges, too, which can be substantial if [policyholders] decide to surrender their policy early.”

The Case Against
Besides the risk inherent in these products during a bear market, some advisors also object to their cost. “When you compare the expense ratio of the funds you can invest in through a variable universal life policy with the equivalent mutual funds you can invest in outright, you usually find at least 80 to 100 basis points more expenditure within the variable product than in the outside world,” says Dan Yu, managing principal at New York-based EisnerAmper Wealth Advisors.

Yu argues that careful retirement and estate planning can produce many of the same results without the price tag. “I’d design a portfolio that gives you protection from unforeseen events using low-cost 20- or 30-year level term insurance,” he says. “I’d then put the savings into an investment vehicle using low-cost mutual funds and ETFs.”

He would discourage selling shares, to avoid taxes. “Even if I do sell something, if I have done this correctly, it’s going to be a long-term capital gain tax with qualified dividends,” he says. “In other words, I can give you all the things a variable universal life product can, at a lower cost. It’ll just take me two or three different vehicles.”