Since crashing along with the market six years ago, the VUL market has been in a tailspin.

    Although the stock market has recovered from the technology crash of 2000, at least one financial product that thrived in the pre-crash boom times is still waiting for a rebound. Variable universal life insurance took a major hit when the bottom fell out of the bull market six years ago and has been gasping for breath ever since.
    Not only has the VUL market failed to benefit from the market's modest rebound over the past several years, but its sales have continued to diminish.
    Although there have been ups and downs on a quarterly basis, annual sales of VUL products have declined every year since 2000, according to LIMRA International, the insurance industry research and consulting organization. In 2005, sales were down 9% from a year earlier, according to LIMRA spokesman Howard Drescher.
    The VUL market also has constituted a shrinking share of the overall life insurance market. In 2001, VUL sales were 32% of total life insurance sales, according to LIMRA. In 2005, the VUL market share was just 12%.
    The loss of VUL sales has partially been offset by a resurgence in the sale of universal life, whose fixed rate of return and guaranteed death benefit has been appealing to consumers, Drescher says.
    "After the bear market, consumers became strongly attracted to the guarantees that are built into universal life products," he says. Plus, he adds, "advisors are not selling or recommending VUL policies as aggressively as they did before."
    Of course, it's difficult to find too many advisors who are shedding many tears about the erosion of the VUL marketplace. Always a controversial product, VULs and their value in financial planning are often a point of contention.
    Used properly, advisors say, VUL policies and their tax-deferred growth can be a valuable estate-planning tool and a source of supplemental retirement income. In almost all cases, these advisors say, "proper" use of a VUL implies that those who use them are affluent clients who have exhausted cheaper tax-deferred vehicles. "To justify their cost, you have to load them up with cash," says A. Raymond Benton of Lincoln Financial Advisors in Denver.
    At the other end of the spectrum are advisors-particularly fee-only advisors-who view VULs as the embodiment of everything that's wrong with commission-based financial planning. The problem, these advisors say, is that even though VULs may be a tool for affluent clients, they are more often sold to clients of lesser means who don't fully understand the products.
    "I think that the VUL is oversold in the marketplace," says Jeff Broadhurst, owner of Broadhurst Financial Advisors in Lansdale, Pa. "As long as the commissions are as high as they are on those products, brokers are going to continue to sell them and sell them in questionable circumstances."
    Critics such as Broadhurst point to recent history, when the bull market of the late 1990s led to a boom in VUL sales. Those sales, however, were built on overly optimistic rates of returns and led to a rash of underfunded and lapsed policies after the crash of 2000.

    Some companies, however, say they've cleaned up sales practices and are attempting to address concerns about VUL risks. Naveed Irshad, vice president of product management with John Hancock Insurance, says the company's 2005 VUL sales increased 9%, according to measures used by LIMRA.
    While sales are dropping across the industry, "we're seeing a rebound," he says. John Hancock, he says, has been trying to boost the VUL market by adding guarantee features normally associated with UL policies.
    Last summer, Irshad says, John Hancock launched Protection VUL, which provides a no-lapse guarantee as long as minimum premium requirements are met. "Sales of the product have been ramping up every month," he says. "If you can earn 8% on your VUL before expenses, a VUL is usually always more attractive than a UL."
    While the life insurance industry says it has reformed its sales policies, some advisors say they continue to see VULs turn up in the portfolios of less-than-affluent clients, with potentially harmful results.
    Broadhurst relates a meeting he recently had with a couple-a high school principal with a $90,000 annual salary and his wife, who earned $25,000 a year. During the interview, he learned they were considering a proposal from another firm to put $150,000 into a variable universal life policy.
    What they didn't realize, according to Broadhurst, is that it was a 10%-commission product that would result in $15,000 of the total going to a broker.   "They just thought they were getting into a nice tax-deferred product," he says.
    After meeting with Broadhurst, the couple became clients and decided to instead move the money into a rollover IRA account. He adds that they were impressed with the fact that, for less than half of the $15,000 they would have spent in commissions, they would get a year's worth of comprehensive service-including taxes, estate planning and portfolio management-from Broadhurst.
    Sometimes it's too late for advisors to intervene, says Jeffrey Harwood, president of Ventura Advisors in Woodland Hills, Calif.
    "What I've found is they often don't understand what they're buying," he says.
    Two years ago he met with new client, a 43-year-old man with no spouse or children, who had put $23,000 into a VUL after visiting a company that offered to provide him with a financial plan. After Harwood explained the provisions of the policy-the commissions and costs and the surrender penalties-the client became infuriated.
    Against the advice of Harwood, who recommended he sit on the policy for five years until the surrender penalty period has expired, the client cashed out and paid a $4,500 penalty in the process. "He just didn't like the fact that he felt like he was misled," Harwood says. "He wanted to sever his relationship with the company and move on."
    When used properly, however, some advisors say the outcomes are far more productive. For starters, says Michael King, senior partner at Genesis Group in Brentwood, Tenn., clients should have an insurance need before they're steered into a VUL. Once that need has been established, King says he wants to ensure that any money that goes into a VUL represent assets for which clients don't have an immediate need.
    King says one of the situations for which he has found VULs to be most useful is clients who can apply it toward paying for their children's college education. Assets put into the tax-deferred accounts, he says, become non-accessible assets that do not count against parents in financial aid calculations.
    Also, by planning early, parents can use loans to pay for college costs and use the income stream of a VUL to pay for the notes down the road. This is a better alternative to borrowing against a house or 401(k) plan-options he's seen parents take to make up for little college savings. "The VUL helps them pay for college without imploding their retirement plan," he says.
    VULs also can plug holes in retirement planning, he says. One example, he says, would be a husband who has a pension that, in the case of the pension holder's death, provides his wife with ten years of pension payments.
    A VUL, King says, could fill the income gap if the wife should outlive the pension payments. A lump sum can also be leveraged into a larger death benefit. Should the husband outlive the wife, he says, the husband would still have access to the cash value of the policy.
    The key, he says, is that the VUL allocation doesn't take too much of the couple's net worth. King says he's currently working with a couple with combined assets of $750,000 who plan to put $100,000 toward a $250,000 VUL death benefit. "We look at it from a case-by-case basis and ask, does it make sense?" he says.
    Benton, of Lincoln Advisors in Denver, says that the value of a VUL, as opposed to a solution utilizing a mix of mutual funds and term life insurance, for example, is partly dependent on a specific client's tax situation. Assuming people pay 1.6% in taxes annually on mutual fund gains, as some studies have recently suggested, a VUL can be worthwhile if its added costs amount to less than 1.6%.
    "If you put the money in there [a VUL] and continue long term over 30 years, you can see where the tax savings will justify the cost of the contract," he says.
    Rodney Loesch, advisor at Waddell & Reed in Columbia, Mo., says VULs can be a retirement tool when his clients have exhausted all the benefits of their qualified retirement plans. "Only then would I start utilizing the VUL with its potential of piling additional money up," he says.
    Generally speaking, he says, clients who use VULs in their retirement planning consist of doctors and other professionals with a minimum of $500,000 in retirement assets. "Quite often, in such a high tax bracket, any little edge they can get is an incremental value," he says.