Dealing with market volatility is a normal part of investing but not limited to just investment products. It affects insurance too. We’ll look at three insurance products and hear from two experts in the field describe volatility and its affects on life insurance.
Starting with Variable Universal Life (VUL) insurance, the intention or goal of VUL is an important one because it is designed to stay in place as long as you live and your premiums are paid. It is a smart way to generate potential tax-free income as well as an awesome diversification option.
However, market volatility at the wrong time can adversely impact the protection aspects of the contract if there’s a permanent need for life insurance.
Protection guarantees can be built in to a VUL contract at an additional cost, but ill-timed premiums over the course of the plan could impact those insurance guarantees. As the client ages, costs of insurance increase, and a market drop in later years could severely impact life insurance protections.
Most people understand market projections in traditional investments. Of course, we all must remember losses and shortfalls are components too. When those same projections and coverages fall short in a VUL, coverages will fall short. When they do, we shouldn’t be
Some Things Are Practical and Efficient
Variable Universal Life is linked to stocks and bonds, a feature that perhaps has made VUL become the most popular insurance plan in the past decade. Mike Yavorsky, at the Brokers Source, explains how volatility affects VUL this way:
“In the 1974 film, “The Man With The Golden Gun,” Agent 007 faces off against Francisco Scaramanga, played by the great Sir Christopher Lee. At one point, Scaramanga’s AMC Matador has wings attached to it and can fly like an airplane. A flying car is pretty cool, but it’s really not a practical car when the wings are attached, and it’s not an efficient flying vehicle at all.
“Variable Universal Life is like that. It is a great vehicle for potential tax-free income and cash value growth (the airplane). However, fixed life insurance (the car) works separately for the foundational guarantees it provides if there is a permanent life insurance need, keeping the airplane and the car separated.
“That’s not to say that VUL could never serve both purposes. With proper annual policy review and good timing, it could work splendidly. Having a separate fixed life insurance plan should take away the concern that the policy won’t be there when needed for legacy or estate needs.”
A Non-Correlated Asset
Ian George, at MassMutual, describes how volatility affects Whole Life Insurance this way:
“If you own Whole Life insurance, market volatility is one of the reasons you should be grateful that your advisor recommended it. Whole Life insurance policies through a mutual company are a non-correlated asset because a dividend paid is a dividend earned. This means that the cash value will go up every year. What we don’t know is by how much.
“For most mutual companies, the dividend for the upcoming year is declared in November. A mutual company’s dividend rate takes into account the company’s overall performance on top of the underlying guarantees. If a retired client is taking income from an investment portfolio, this could be a time where they take their income from the cash value of the Whole Life policy, to avoid liquidating equities at a lower value than they would like.
“Whole Life insurance does not compete with equity investing. It compliments it. For those who do not yet have Whole Life as a part of their plan, times like these are a good reminder as to why they should consider it for the future. As Whole Life policies take some time to grow into an effective hedge, it is best to get it started sooner rather than later.”
Indexed Universal Life
Ian shares his concerns with Indexed Universal Life (IUL) policies this way:
“With IUL, the contract’s ‘interest rate’ is adjudicated on one day of the year in most cases. This means if the given index is not positive over the time period it receives no interest credit. If it receives no interest credit, not only does the cash value not grow but also the expenses for the policy are still deducted.
“Volatility in the market can also cause the companies that offer these products to reduce the cap, meaning they limit the upside for the coming contract year. This is different than Variable Universal Life, where the contract’s values are actually invested.
“Clients who understand the risk involved in investing usually own these.”
At Hefren-Tillotson, we believe simpler is better. If you would like more information regarding any of these policies, or if you own any of these policies and are unsure of how they work, contact me at Hefren-Tillotson today. I would be happy to help.