Variable Life Insurance

Variable universal life insurance pays out a smaller guaranteed amount on death but aims to build a more significant investment return. At this point, we need to offer a general warning. Two groups of people become targets for the sale of financial products. One group is the surviving older spouses who have just seen their loved ones pass away and now have a large cash sum. The second group is the twenty somethings who have an annual salary of above $100k and have already accepted the idea of life insurance by buying a whole life policy. Marketers will aim to sell to both groups, peeling away cash as a lump sum or as an increase in the amount paid. The younger group are offered what look like good investment options wrapped up in a universal package. The idea is that you have a minimum monthly payment which you can increase if you want. This money is then invested in s number of different ways. If you want to leave the management of the money to the company, you will pay a slightly higher percentage fee. The fee is lower if you assume more responsibility for the management of the investment.

The problem with this form of investment is that it's not often clear exactly how returns are calculated. If you buy a stock through one of the registered exchanges, you pay an initial commission and thereafter the stock value and dividend declarations are outside your control. You know this when you buy the stock and, because the risk of losses is higher, you hope for higher returns. Historically, stock exchanges have proved a good investment as long as you think long term. If you panic and withdraw your investment when values drop, e.g. in 2008, you miss out when the values recover. Indeed, there’s an argument for pulling your money out when values are falling and then buying at the bottom of the market. If you have the power of foresight, this makes the maximum amount of money.

When you look at the language used to sell variable universal life insurance, there appears to be control and certainty of returns. You will see columns of figures in charts marked “Guaranteed”. No one would buy a financial product if they did not feel confident it would provide a good return. But the reality is that the way projections are made is not transparent. Worse, the broker's commission is significantly higher on variable universal life insurance policies. So although there are some good products of this type, you should not rush into buying a policy from a broker. Take advice from an independent adviser so you understand what you're proposing to buy and how to reduce the risk your investment returns end up no better than investing in a mutual fund or buying stocks in your own name. Note that in the index-linked policies, you get all the gains from investments in equities up to a cap, usually set around 14%.