Criticisms of Variable Universal Life
Some general Criticisms
- Potentially higher costs - VUL policies may be more expensive than other types of permanent insurance, such as Whole Life and traditional Universal Life. Volatility of cash surrender values, especially at late duration, can cause a "reverse dollar cost averaging" effect that results in higher costs of insurance charges. Proper funding of a contract may reduce this risk, but it cannot be completely eliminated.
- Some older VUL policies have limited sub-account choices. This issue has been greatly corrected with the current generation of policies having 50 or more sub-accounts that cover all the major asset classes, with more than one sub-account manager.
- Policy administrative expenses and costs of insurance may increase at the company's whim, subject to a contractual maximum.
- VUL is relatively complex compared to traditional Whole Life or Term Life.
Some criticism is not about the product, but rather the sales tactics used by some insurance agents.
- Projecting the maximum illustrated assumed interest rates (generally, 12%), using current (or assumed) administrative expenses and current costs of insurance, without showing the prospective client several other assumed rates of return, creating a Blue Sky problem.
Some regulators deserve criticism:
- Securities regulators (the U.S. Financial Industry Regulatory Authority (FINRA)) refuse to allow insurance companies to illustrate VUL policies using a stochastic projection (commonly called a 'Monte Carlo Simulation' or MCS), forcing agents to use archaic, antiquated, and deceptive deterministic projections ('straight line' or constant interest assumptions) that are far removed from reality. Illustration software with MCS capability has been available since the mid-1990s, but FINRA has forced the life insurance industry into a corner that virtually guarantees litigation.
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