FOR IMMEDIATE RELEASE
February 24, 2003
Jack Gillis, 202-737-0766
James H. Hunt, 603-224-2805

CFA's Rate of Return Service Helps Consumers Analyze Individual Policies

Washington, D.C. -- A new report prepared by the Consumer Federation of America's life insurance expert -- actuary James H. Hunt, former Vermont insurance commissioner -- addresses the question, is variable universal life insurance (VUL) worth it? The report's answer is that VUL is extremely difficult to understand and comparison shop but can provide good value if intelligently purchased, held, and managed.

"Variable universal life insurance policies are so complex that they are difficult for most consumers to purchase intelligently," said Hunt. "Those seeking tax-sheltered investments should look first to 401-Ks or even to Roth IRAs," he added.

Variable universal life combines features of term insurance and a mutual fund. It represents the most popular type of cash value life insurance sold in recent years. In 2000, for example, variable life captured 57 percent of the market for new cash value policies, as measured by premiums paid. And, well over 90 percent of these variable life premiums represented VULs worth $9 billion. While the decline in stock prices lowered VUL sales more recently, when these prices rebound so should VUL sales.

"Many consumers who, several years ago, replaced whole life policies by transferring policy values to VULs have lost billions of dollars," said Hunt. "On the other hand, those who are now replacing VULs with universal life policies could also lose billions of dollars if stock prices increase in the future," he added.

To help consumers evaluate new or existing VUL and other cash value insurance policies, the nonprofit Consumer Federation offers a Rate of Return Service provided by Hunt. In the past 15 years, Hunt has analyzed more than 5,000 policies. The cost of this analysis per policy ranges from $55 to $75. Consumers can learn more about the service by calling 1-202-387-0087 or by consulting www.evaluatelifeinsurance.org or www.consumerfed.org.

High Charges May More than Offset Tax Benefits

As well as insurance protection, the main attraction of VULs is as a tax shelter -- under current law, VUL investment earnings do not represent taxable income, and if the policy is held to death, no income taxes are ever assessed. The main cost of VUL, which can more than offset tax benefits, is an array of charges, which include:

• federal and state premium taxes that vary among states but average around 3 percent of premiums;
• M&E (mortality and expense) charges assessed against cash values that range, among policies studied, from 60 to 90 basis points (with 100 basis points equaling 1 percentage point);
• investment management assets charges that vary, among policies studied, from 20 to 162 basis points; and
• surrender charges that typically exceed the first year's premium and last from 10 to 15 years.

For consumers who bought VULs in recent years, the report recommends:

• hold the policies at least through the surrender charge period;
• "dollar cost average" through market weakness;
• be informed about the level of asset charges on "name accounts" and consider changing to an index fund; and
• never surrender a VUL with a loss without looking into a transfer of the loss in the policy -- the excess of premiums over the surrender value -- to a variable annuity.

When and How VULs Should Be Purchased

The report recommends that consumers considering a VUL purchase first compare an attractive VUL to a combination of term insurance and a low-cost mutual fund. In general, purchasing the VUL can make sense if one plans on taking substantial "tax-free" withdrawals or loans as retirement income and maintains the policy until death. (And in general, VULs are more attractive than a combination of term insurance and a variable annuity because the latter is expensive and its earnings will be taxable to someone, someday.)

Those wishing to purchase a VUL should look first to an insurer that deals directly with the public and charges no or low commissions. Low-load insursers include Ameritas (800-552-3553), USAA Life (800-531-8000), and TIAA-CREF (800-223-1200). The report notes that Ameritas is particularly attractive because it makes available the low-cost Vanguard separate accounts while allowing buyers to change their minds about investment purchases at minimum cost. TIAA-CREF VULs have very low asset charges.

When shopping for VULS, the report specifically recommends that consumers:

• Decide on the amount of the premium you would like to pay and how frequently;

• Decide on the amount of insurance you would like to have and whether Option A or Option B. In seeking to maximize the tax-advantaged investment aspects of a policy, ask for the lowest Option B insurance amount that is not a Modified Endowment contract (MEC) and ask that Option A be illustrated beginning in policy year 8.

• Eliminate any riders, which usually offer poor value, such as spouse riders. A term life rider on the insured person can be effective in lowering commission costs, but some term riders cost nearly double what careful shopping can achieve.

• Request an illustration at some hypothetical gross earnings rate, such as 8 percent. Specify that you would like the illustration to assume that 100 percent of your investment allocations be in the lowest cost, index account even if later you intend a different selection.

• Compare the columns of cash surrender values among competing illustrations. In general, the higher the surrender values the better the policy.

• Read the full CFA report, which provides many examples of what different insurers charge for VULs as well as much analysis and advice (see www.consumerfed.org). For personal assistance, contact the CFA Rate of Return Service (see above).

The report is free to reporters and available to others who send $15 (check or money order) to: CFA VUL Report, 1424 16th St., NW, Washington, D.C. 20036.

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The Consumer Federation of America is a nonprofit association of 300 proconsumer groups that has advanced the consumer interest through advocacy and education since 1968.