The battle for prominence between arch-rivals Coke and Pepsi has been fought for more than 100 years. After tens of thousands of taste tests, only one thing is clear: people are split fairly evenly in their opinions about which cola is best. It's not uncommon to hear, “Cola is cola – it doesn't make any difference.” Some people have the same opinion about life insurance. Is the type of policy you use simply a matter of taste? Can we say, “Life insurance is life insurance – it doesn't really make a difference.”?

One of our favorite pastimes is to analyze things. We usually don't analyze simply for the sake of analysis. After all, we're not scientists in a lab doing pure research for the sake of knowledge. Instead, we're practitioners in real life client situations. Our analysis is done to compare possible strategies to determine which one potentially provides the best outcome for a client. While it doesn't necessarily prove a new scientific “truth,” it does allow us to make reasonable comparisons in order to calibrate “best” outcomes.

That's why when recently faced with our first opportunity to compare variable universal life insurance (VUL) to our normal “default” policy type - guaranteed universal life (GUL) - our curiosity (and skepticism) got the best of us. As a result, we performed an extensive analysis before making our final recommendation to the advisors involved. The theory behind VUL is that the cash value inside the policy is invested in what are essentially mutual funds. This investment strategy is designed to take advantage of the potentially greater returns offered by the equity markets, which theoretically causes the client to end up with either lower premium costs or greater death benefit. With GUL, on the other hand, the insurance company is charged with investing the policy's cash but, as long as premiums are paid on schedule, the death benefit is “guaranteed” for the life of the policy.

Theoretically, then, VUL should be less expensive than GUL. That is, the same premium should buy more insurance since there is a potential upside in the policy's investment return. That, however, is not the case. The VUL policy we analyzed with a $10 million death benefit was based on a gross return of 8% for the lifetime of the policy. Yet, real rates of return (that is the growth of the cash value inside the policy), only hit 1% after ten years and 4.8 % at the client's age 90. The VUL face amount of $10 million is projected to grow to $26.9 million at the life expectancy of the insured (if everything works perfectly). Conversely, a GUL policy illustration on the same prospective client was able to provide an initial face value of $26.9 million for about 80% of the premium charged for the VUL. There is little doubt which produces the better result for the client.

Our experience in planning for affluent clients has taught us that life insurance is a vital and effective planning tool. In most cases it is needed for liquidity or to balance estate distribution among heirs. Upon analysis, using a Variable Universal Life policy seems unnecessary and economically unsound. For pure death benefit, simpler is better.

Randy Fox, InKnowVision, LLC

www.inknowvison.com

Randy@inknowvision.com

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