To be used correctly, the experts say, variable universal life insurance should be heavily funded and given ten years or more to deliver tax-deferred growth. That being the case, a bear market-such as the one that exists now-would seem to be a perfect time to take advantage of a low cost basis and enter into a variable universal life contract.

Then why is it that VUL sales plummeted in 2008-as they usually do during a bear market-and soared during the bull market of the late 1990s? Because, observers say, people who hold VUL contracts are like most other investors. They act out of fear and greed.
"This is a point in time where people should be looking for opportunities," says A. Raymond Benton of Lincoln Financial Advisors in Denver.

"But people don't or aren't able to emotionally do that."

Variable universal life insurance is a controversial product. Some advisors despise it. Others find them useful in some circumstances. But as the current bull market shows, very little seems to change in the VUL marketplace. Indeed, some advisors find the products useful tools, particularly in estate planning for clients who are wealthy enough to overload them with cash. At the same time, many contend they continue to be oversold and misunderstood.

Lapsed contracts continue to blemish the market, and advisors say they continue to see people walk through their doors who remain stuck in expensive, thinly funded contracts whose terms they did not fully understand. "My personal take is they really are only appropriate for very wealthy people who can afford to sock away a lot of money in these things," says Jeremy Portnoff of Portnoff Financial LLC in Westfield, N.J.

New annualized premiums for variable universal life dropped 17% in 2008, according to figures compiled by LIMRA International. Nearly 90% of VUL writers suffered declines, most in the double digits, according to LIMRA.

The drop came during a year in which the overall life insurance market was down. Whole life insurance, with a 2% increase in annualized premiums, was the only product category to show industrywide growth, LIMRA says.

Except for a few years with slight gains, VUL sales have mostly been down since peaking during the technology boom of the late 1990s. "VUL has always been highly sensitive to market conditions," LIMRA spokesman Howard Drescher says. "Since the market downturn in '01 and '02, we never saw anything like a strong recovery."

That may be partly due to the surge in lapsed policies the industry saw after the tech bubble collapsed and sent equity values into a tailspin. In many cases, the lapses were the result of policies that were sold with minimal premiums and, as it turned out, overly optimistic return projections.

It was that experience that led insurance companies to introduce risk management features, such as no-lapse riders for VUL contracts, which, for a fee, allowed policyholders to protect the contract's death benefit.

"The no-lapse guarantee features you would normally see in universal life products, and even some of the features you would see in variable annuities, have made their way into some of the VUL products," says Steve Roche, vice president of product management for The Hartford.

One of the company's most successful VUL riders, introduced two years ago, allows policyholders to access their death benefit if they become terminally ill, he adds.

While some VUL writers reported an uptick in lapsed policies last year, The Hartford-the second-largest seller of VUL policies-has not seen such an increase, Roche says. He feels this may be partly due to the company's efforts to work with distribution partners on how the product is sold.

"We are a very big player in what's called LIRP-life insurance for retirement planning," he says. "It involves putting a lot of premium into the policy for the death benefit you have."

Some in the advisory profession feel that most VUL sales are inappropriate and that clients would be better served with a mix of conventional investments and term or whole life insurance. James Hunt, a former Vermont insurance commissioner who has conducted studies on VULs for the Consumer Federation of America, says his research showed that most people were better off with term life insurance and mutual fund investments than with a variable universal life policy. "The aggregate of charges really adds up to an expensive product," Hunt says of VULs.

The one possible exception, he says, is TIAA-CREF's Intelligent Life VUL, which he says carries relatively low fees, a good mix of investment choices and a premium load of around 2%, as opposed to the 5% that's typical in the industry. The product has a relatively high mortality and expense (M&E) charge, but it scales down as the invested assets increase.

Hunt is unimpressed by the new riders that have been introduced over the past several years, saying they are often just "tricked up" policies. For example, one company he found dropped the M&E charge from its VUL product, but quietly increased the surrender charge.

Companies also typically raise the surrender charge on policies with no-lapse riders, he says. "You increase your early charges through the surrender charges so you have lower long-run charges," Hunt says.

Glenn Daily, a fee-only insurance consultant in New York, says whole life and guaranteed universal life clearly beat out variable universal life when it comes to cash value policies. "My impression is that most of the people who are buying these should not be buying them," he says.
He spoke to one woman recently who is paying $140 per month into a VUL that has a cash value of only $200. She originally put $8,000 into the policy, and pulled out $4,000 as a policy loan. Fees and market losses ate up the rest of the value.

One of Daily's pet peeves with VUL policies is that they are confusing at the point of sale. For example, he says, the policies are often unclear about the difference between gross and net rate of return. "Depending on the company, net rate of return could mean the rate of return after deducting insurance and sub-account charges, or deducting the insurance charges and not the sub-account charges," he says. "The bottom line is, I can't always tell what I'm looking at."

Daily also objects to VUL illustrations that are modeled off a constant rate of return. "You have to have some idea of the plausible range of results given the variability in the rates of return," he says. "The variability month by month, year by year, leads to an enormous range of premiums to keep the policy in force."

Some advisors argue that, when used correctly, variable universal life can be a valuable tool. Benton of Lincoln Advisors says a VUL offers flexibility in estate planning. In one example, Benton says he used a VUL as part of the funding in a generation-skipping trust for an older client. The VUL was funded with $500,000 from the sale of a heavily concentrated stock position. "Because it's a life insurance contract, it doesn't produce any taxable income."

Another client is using a VUL to replace a fixed contract in an irrevocable life insurance trust-a tactic that will lead to a larger death benefit. "Every now and then [VULs] get attacked in the financial press, but I think over the long-term the industry will make them better," Benton says.