Variable Life Insurance
VUL
-Death Benefit Minimum Guarantee -Death Benefit Flexible -Premiums Flexible -Policyowner Selects CV Investment Funds -Cash Value Fluctuates with Market Value of Policy Investment Account -Considered a Security
UL
-Death Benefit Minimum Guarantee -FlexibleDeath Benefit -Premiums Flexible -Guaranteed Minimum Interest Rate
What is Variable Life?
-Permanent life insurance with investment flexibility -Level premium -Policyholder has separate investment account for cash value (CV). -Fund allocation based on diversity and degree of risk -No guaranteed minimum CV or loan value -Death benefit usually a multiple of CV subject to guaranteed minimum
Assume the death benefit is 250% of the current cash value, subject to minimum of $50,000 -If Cash value is $22,000 at age 40, death benefit is what?
55,000
Variable Universal Life
Combination of Universal Life and Variable Life
VL
Death Benefit Minimum Guarantee -Policyowner Selects CV Investment Funds -Cash Value Fluctuates with Market Value of Policy Investment Account -Considered a Security
A unique feature of VUL as compared to VL is: a. Level premium b. Flexible premium c. Investment flexibility d. Guaranteed minimum death benefit
Flexible premium
Universal Life features in variable universal life
Flexible premiums Option A (level)or Option B (increasing) death benefit Current assumptions with transparency (Interest, mortality, expense)
Advantages of VL/ VUL
Policy owner controls how cash values are invested -Allocate investments among mutual fund accounts Tax free transfers between funds are permitted Earnings on cash value are tax deferred Policy death benefit will increase with CV subject to guaranteed minimum VUL provides flexibility and transparency -Flexible premium -Death benefit options A and B -Current assumptions with transparency(Interest, mortality, expense)
When is VL or VUL Indicated?
Policyholder wants control over investing the cash value account Policyholder has a basic understanding of investments Policyholder is willing to bear the risk of the investment account, since cash values not guaranteed
Disadvantages of VL/ VUL
Policyowner bears investment risk Death benefit may be less than anticipated -Subject to minimum death benefit -Realized gains from CV withdrawals taxed as ordinary income; not capital gains (15% max.) -Higher expense loads than WL and UL
Variable life features in variable universal life
Separate investment account for CV No guaranteed minimum CV or loan value
Alternatives to Variable Life
Universal life insurance Current assumption whole life insurance Variable annuity plus term insurance -Withdrawal from annuity prior to 59 ½ usually taxable plus 10% penalty
Variable Life Includes: a. Guaranteed CV account b. Guaranteed loan account c. Guaranteed minimum death benefit d. CV based on investments in insurance company's general investment account
c. Guaranteed minimum death benefit
How to Compare VL and VUL Policies
investment management fees Sales and expense loads Surrender charges: 24% declining for 12 years Projected investment returns Current and maximum mortality rates Shortcut is to compare current cash values for first five years
Which of the following is a normal VL death benefit?
multiple of CV
