For others, variable products present a sort of cart-and-horse conundrum. “My problem with variables in general is that the chassis is sold first and investments are secondary,” says Pete Lang, president of Lang Capital in Hilton Head, S.C. “You buy a variable policy and they go, ‘Here is what you can invest in.’ What can happen over time is that those investments are no longer suitable for the investor.”

What Lang prefers is to start by choosing an appropriate investment and then create a variable insurance trust around it. The trust essentially owns the insurance contract. But the single entity can encapsulate a series of funds with multiple investment advisors. “The investment will grow tax-deferred with low fees and commissions,” he says. “It’s the best of both worlds.”

A Forced Investment
Nevertheless, fans of variable life insist they are a good way to induce clients to (a) secure life insurance and (b) save and invest. “Life insurance is a forced investment in the sense that you’re going to get reminders, you’re going to have a broker who calls you to make sure you keep up your payments,” says Santolli.

When he runs the numbers, comparing the performance of a variable policy and a stand-alone investment in a similar mutual fund, Santolli finds, “Nine times out of 10 you’ll end up with significantly more money at the end with the life insurance contract than you would on the outside.”

Indexed Universal Life
Still others prefer a kind of compromise option: indexed universal life. While this product also pays death benefits and gives policyholders some exposure to market rallies, the money isn’t invested directly in stocks or bonds. Instead, insurance companies hold the funds and pay interest to policyholders at a rate that correlates to a market index such as the S&P 500. (Some index policies also allow participants to set aside a portion of their money to generate interest that isn’t connected to stock market performance.)

The interest payments generally have a cap and a bottom, so policyholders won’t get the full benefit of market upturns, as they would with a variable plan, but they also get some protection against downside risk. The average maximum return recently has been about 12% a year, but carriers reserve the right to lower that cap to protect themselves. They could take a loss, but will also profit if returns exceed the 12% cap. They typically invest in high-quality bonds and usually exclude reinvested dividends when evaluating gains. But clearly, some of the risk falls on the insurance company, not just on the policyholders.

Last year, sales of indexed universal life rose 13%, making this the second-best-selling life insurance product after variable life. It’s a relatively young product, though, so its long-term impact isn’t entirely clear. “We are still at the beginning of the learning curve on how to evaluate them,” cautions Daily.

One concern is that some indexed universal life policyholders are being encouraged to borrow against their coverage. “The variable loan feature of IUL has also allowed unscrupulous agents to convince people that you can get rich by borrowing money at a lower rate of interest than the assumed credited interest rate in the policy,” he says. “It’s an old game, and this is just the latest variation.”

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