For the last few years, one type of life insurance has handily outsold all the rest: variable universal life insurance. Last year alone, while overall life insurance sales remained flat, sales of variable universal life jumped 24%, as measured by the Life Insurance Management Research Association (Limra), the Windsor, Conn.-based industry data group.

Variable universal life, of course, allows policyholders to deposit a portion of their premiums in mutual-fund-like accounts. So their current popularity is undoubtedly related to the powerful bull market. The S&P 500 advanced nearly 30% last year.

But what happens when the market turns—and how can advisors prepare for the inevitable flood of questions and complaints? Perhaps more important, are there smarter, less volatile ways to accomplish what variable universal life claims to?

The Case For VUL
Variable universal life is designed for those who have “a need for life insurance death-benefit protection and a desire to accumulate cash inside the policy for their use while living,” says Ray Caucci, senior vice president of product management, underwriting and advanced sales at the Penn Mutual Life Insurance Co., in Horsham, Pa. Variable life provides all this in “a single vehicle,” he says. “As long as the client has the proper risk tolerance, and funds the product properly, it can weather most market volatility.”

Indeed, if the account appreciates in value, the gains can help defray the steep annual policy costs. Not only are earnings tax-deferred but withdrawals can be made “without taxation through a return basis and via policy loans,” says Russell E. Montgomerie, a CFP licensee at Ameritas Investment Corp. in Boca Raton, Fla., noting that withdrawals will reduce both the cash value and death benefit. “Ultimately, at the policyholder’s passing, the proceeds pass [to the heirs] income-tax free,” he says.

Like standard universal life, variable life policies offer creditor protection. It can also help extend a client’s tax-deferred savings beyond the maximums allowed in retirement accounts, although many advisors would deem a variable annuity a better vehicle for this purpose. Those who “have maxed out their qualified plans, have a stable financial future and want to save more, are potentially viable candidates,” says Montgomerie.

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