A few weeks ago, I told you about Jon, a long-time reader of my newsletter. His Edward Jones financial advisor was trying to sell him a Variable Universal Life (VUL) policy, and he asked me for my 2nd opinion. Instead of writing my opinion, however, I posted his question to my newsletter readers, and asked you guys to make an assessment. 

A few of you came back with the answer of YES since the $2mm death benefit is huge, and the annual premium payment of $17k appears to be quite reasonable. On top of that, the buyer gets the flexibility to skip payments as well. I believe this view of the product is exactly what the insurance company wants but it is misguided.

To answer Jon’s question, I first talked to him to determine his family’s actual need for life insurance. He has two teenage kids and he and his wife already both have 20-year term life insurance policies, each with a $2mm death benefit. They clearly have no need for additional life insurance.

Now let’s look at the product itself. A VUL policy is a combination of two components – life insurance and investment. The product is not entirely under the oversight of the SEC, therefore there is a huge regulatory loophole that the insurance company can use to take advantage of the buyers.

Take flexibility for example: it’s a great selling point for VUL buyers, but what they don’t know is that in exchange for the flexibility of payments, the insurance company also gets tremendous discretion when it comes to changing the terms of the contract, like fees and costs and investment options. Trust me, when insurance companies do that, they do it to benefit the company, not to benefit you.

One thing the insurance company can manipulate easily is the COI – the cost of insurance. This is an amount that the insurance company takes out of your cash value to cover the risk of you dying in any given year, causing them to have to pay out the death benefit of $2mm that year. The COI for a VUL policy is oftentimes 2 to 3 times more expensive than a term life insurance policy. For example, for a 50-year-old buying a term life policy, the COI is typically $1,000 per $1mm death benefit. For a VUL policy, it is $2,000 to $3,000 per $1mm at the get-go. By the time the insured is in his 70s, the COI can go up to $30,000 to $50,000 per $1mm death benefit, and when the insured is in his 80s, the COI could be $80,000 to $100,000 per $1mm death benefit. 

With the flexibility they have of manipulating and overcharging for COI, the insurance company maximizes the chance that, by the time you hit old age, your cash value will no longer cover the COI, causing the insurance policy to lapse after you have paid the insurance premium diligently for 30 or 40 years of your life. This actually happened to one of my clients. Read the story here. Ask yourself this question, when the insurance company has the flexibility, would they use that to maximize the chance you get $2mm or to maximize the chance you don’t get $2mm?

The COI is the big one, but it’s hard for laypeople to understand, so let’s also look at the investment expense. The insurance company chooses the Fidelity VIP 500 Index Fund with an expense ratio of 0.35%. The regular Fidelity 500 Index fund has an expense ratio of only 0.015%. In other words, the insurance company intentionally chooses an investment fund 23 times more expensive than necessary. And this is the cheapest fund in their lineup! So they don’t just skin you through high COI, they skin you through investment expenses as well.

I have not even mentioned that Edward Jones and its “financial advisor”, will take a slice of your money, paid as a sales commission by the insurance company as a reward for channeling your money toward such a lucrative (for them) product!

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