A flight to safety

Stock market volatility has caused some advisers to shy away from the sexiest life insurance policies — variable universal life and variable life — and to steer clients to a tamer cousin, universal life.

Advisers point to the inherent equity risk in variable policies, where cash value is invested in subaccounts similar to mutual funds. Many felt burned by the 2008 market downturn, when policies failed to live up to product illustrations made in better times, using more optimistic market assumptions. Poor stock market performance ate up cash value in variable policies and forced clients to add more premium dollars.

“We used variable universal life over the last 10 years, but mutual funds haven’t made any money,” said Bill Fretwell, a producer with Edward Jones. “When the market isn’t doing well, people gravitate toward safer products.”

Sure enough, sales of variable universal life as measured by annualized premiums plunged by 49% during 2009, compared with the prior year. Sales rose slightly during the first half of 2010, climbing by 6%, according to data from LIMRA.

In comparison, annualized sales for universal life fell by a more modest 20% during 2009. Sales rose by 13% during the first half of 2010.

A quarter of the 484 advisers polled by InvestmentNews for its annual insurance products survey indicated that they are recommending universal life. About half said term life insurance is among their most recommended products.

These days, some advisers say they’re switching clients out of battered variable universal life policies into guaranteed universal life products. These products have secondary guarantees that keep the policy in force for a period even if the cash value is depleted.

Michael C. Kusick, an adviser at Investmark Financial Services Inc. and one of the top insurance producers at Commonwealth Financial Network, said he recommends that clients pay the amount of premium necessary to guarantee the death benefit.

Financial advisers also have been recommending universal life for a variety of purposes, including pension maximization strategies for older clients.

Retirees with pensions can choose either to receive maximum payments for the remainder of their lifetime or take smaller payments with a survivor option for their spouse. Under the first choice, if the retiree dies while receiving the maximum pension payment, the spouse collects nothing.

Guaranteed universal life insurance can act as a backstop for a surviving spouse when the spouse collecting a pension passes away.

“If the retiree dies first, then the insurance comes into the picture tax-free, and it can be invested to provide income to the survivor,” explained Richard L. Bergen, an adviser with RLB Wealth Planning Inc.

Not everyone is abandoning variable policies, since some advisers believe the products remain suitable for certain clients. For example, David Szafranski, a branch manager at Edgewater Investment Group and a top insurance producer at Raymond James Financial Services Inc., continues to use variable policies for professional athletes.

When working with professional football and baseball players, Mr. Szafranski recommends that they purchase a variable universal life policy when they are in their 20s and can contribute 10% of the gross value of their contracts toward the policies. Once the client retires from his athletic career, in his mid- to late 30s, the policy is filled with cash because it’s been overfunded.

It’s long-term money that’s intended to supplement the retirement benefits that players eventually receive from their leagues, plus any investments that are growing on the side, Mr. Szafranski explained.

Clients must be warned that the policy is only a supplementary product, he said. “There’s a limit to what they can take from insurance; we’d rather take a small and consistent supplement of their budget from the policy,” he said.

ESTATE PLANNING

Advisers also are employing universal life in estate planning, particularly to fund a trust and leave an inheritance. If a client is receiving distributions from a large 401(k) plan, a small portion of the distribution can go to cover the premiums toward a universal life product that will eventually benefit the heirs.

“We’re careful to make sure that the client can make the premiums without affecting their retirement income,” said Mr. Kusick. “We gift the insurance or use it to create trusts, and that’s worked really well.”

The policies also have worked with special-needs trusts, which Mr. Kusick has built for a number of clients who want to fund care for their special-needs children after they die.

“What you don’t want is for the special-needs child to be placed in a state-supported program and then have the estate pay directly to that child after the parent dies,” he warned. “Then they’re ineligible for benefits because of the financial windfall.”

When building the trust, a family member such as a sibling with an interest in looking after the child can become the trustee and can dispense the money toward other expenses not covered by Medicaid.

Universal life policies have been used in buy-sell agreements and irrevocable life insurance trusts by Jeffrey T. Dobyns, president of Southwestern Investment Services Inc. and a top insurance producer at Raymond James.

Buy-sell agreements involve the owners of a small business purchasing coverage on their own lives and making the company the owner and beneficiary of the policies. Once one of the business owners dies, the remaining partners can pay the business owner’s surviving family, basically buying out the stake of the deceased partner.

Mr. Dobyns decided to switch some of the variable universal life policies to universal life policies after noticing that poor market performance was depleting the cash value of the policies. He found that out after performing recent in-force illustrations.

“I think everyone should paint an in-force illustration, using current expenses and interest rate assumptions. We’re trying to do this with all clients,” Mr. Dobyns said.

In the buy-sell context, the level of growth in the universal life policy, which receives a guaranteed rate of interest, isn’t terribly generous. But that’s OK since business owners are more concerned about the amount of death benefit coverage they get, he said.

Irrevocable life insurance trusts also have been a good place to use guaranteed universal life. In this case, the trust owns a life insurance policy and is also the beneficiary. Upon the demise of the insured person, the death benefit is left outside of that person’s estate and avoids income and estate taxes.

“What nobody wants to see is a new policy that will become unaffordable and lapse in five or 10 years,” Mr. Dobyns said. Though the tactic works best with clients who have at least $5 million, he says he’s waiting for greater certainty on estate taxes before setting up any trusts.

For clients who are working and are of more modest means, there’s still the option of purchasing plain-vanilla term life insurance to cover the most basic of needs.

Mr. Fretwell raises the idea with clients in the fall, as benefits enrollment season rolls in. Though some employers offer workers basic life insurance coverage, a stand-alone term policy is portable and can’t become a casualty if the employer starts to cut costs.

“You’re self-insuring and you have your own policy,” he said. “If the company cuts your benefits or if you lose your job, the coverage is continual. It’s basic financial planning we recommend to all of our clients.”

E-mail Darla Mercado at [email protected].