What Insurance Agents Need to Know Before Selling IUL and VUL

Editor’s note: This post was originally published on 10/25/16 and has been updated for accuracy and comprehension.

Life is really simple, but we insist on making it complicated.  – Confucius

The same could be said about comparing Index Universal life (IUL) to Variable Universal Life (VUL).

Even as I approached the task of writing an IUL vs. VUL blog, I realized how easy it would be to overcomplicate the article. Much can be written on each product type, and comparison opinions are like iPhones - everyone has one!

Considering the vast amounts of data I could gather to adequately compare the two, I could even confuse most insurance producers and I didn't want it to be an analytical comparison.

The best way to simplify and start the comparison between IUL and VUL is this:

The first series of questions to ask include:

• What's the goal?
• Who is the client?
• What is does their profile look like and is it suitable to sell them either product? (Both products have their strengths and weaknesses.)

Because both IUL and VUL are primarily used to build cash, make sure the client's goals match the product's intent. And goals can and will change over time so what may be good for a prospect or client today may not be in the future.

Term insurance aside, permanent policies will perform differently than what the original illustration looks like, given the number of moving parts. It may be tempting to sell off the original illustration, but let's be honest – those are only projections, and are highly unlikely to occur "as-is." And if a client is late to paying a premium or skips one or more altogether, actual results may vary from the original illustration considerably.

Here are a few thoughts about comparing IUL to VUL and tips for knowing which product to sell to your client.

1. You must have the underlying life insurance license to sell either product.

If you think that's obvious, you haven’t experienced the questions we get about selling IUL or VUL!

Also, in order to sell variable universal life, an insurance producer must have a securities license (series 6 or 7) in addition to a life license, and be registered with a broker-dealer.

This is because the underlying subaccounts found within a variable life policy are securities  – mutual funds.

Additional regulatory oversight and continuing education compliance is also a stricter requirement for selling VUL, and it’s getting worse.

So much so that many life insurance producers who historically had the proper license to sell VUL have decided not to renew it due to the onerous levels of compliance required.

Assuming they dropped their securities license, they can no longer sell VUL. This may account for more IUL policies being sold today than VUL policies.

2. You currently only need to have a life license, but must also satisfy general continuing education requirements as well (with some exceptions by age) to sell an index product.

There has been controversy over the last several years as to whether or not an index product should be regulated because, inevitably, the insurance producer is discussing a credited interest rate that is actually tied to the insurance carrier’s underlying performance in an option in the equities market – but that’s another blog.

As it stands of this writing, index universal life policies are not regulated by FINRA (Financial Industry Regulatory Authority), therefore, producers currently do not need to be securities licensed to sell it.

Getting the license is not the difficult part  – merely the minimum table stakes – to sell either one.

3. Many properly licensed insurance producers still tend to shy away from both products because they appear to be more technical in nature than the average permanent life insurance product.

To a degree that is true, but with proper guidance and a little bit of study, both products can make a lot of sense and are actually quite simple once you familiarize yourself with the terms and components that make up each IUL product.

The best first step is for the producer to understand the primary objective of each product and who might be suitable to purchase this type of policy.

Understanding the suitability of IUL and VUL is critical to not only making the sale but to ensure that the client will keep the policy over a long period of time.

4. Experience shows that most clients do not know exactly what they’ve bought when it comes to life insurance, especially IUL and VUL.

Ask them to explain how those policies work – even the day after purchasing one – and most clients would be challenged.

That doesn't make it wrong to sell them an IUL or VUL product, rather, it points out the complexities found in life insurance policies in general.

Selling tip:

Don't speak using industry jargon or use acronyms. Assume your prospect won't buy from you unless they can understand and restate everything you tell them back to you!

This lack of understanding also highlights the importance for insurance producers to be informed and educated when it comes to selling and knowing exactly how to present the products so the prospect understands.

This is where role playing has a multitude of benefits.

Most agents cringe at the thought that they may have to "present" a life insurance concept to a group of their peers or another agent for practice purposes, but there's not better way to learn how to present in these conditions.

You'll get the best feedback you you can imagine.

5. The key point here is for insurance producers to be well-versed and really understand how these products work.

Even after explaining it to a client, due diligence suggests that a producer have periodic policy reviews (such as annually or bi-annually) once a VUL or IUL policy is purchased.

It takes time for most clients to understand what they purchased when it comes to life insurance, and that may be more important than the actual purchase itself.

This is a great time to reconnect with a client, re-establish the need behind the initial purpose (and confirm it still exists), and review the policy policy performance.

It can also be a good opportunity to see if the client's needs have changed (possibly requiring more insurance), as well as a opportune time to ask for favorable introductions to other potential clients.

It doesn't take much investigation to find that – historically – the cash value in few life insurance policies ever purchased pan out precisely the way they were sold or what the policyholder may have expected. The reason is that illustrations are only a point-in-time and based on the then-current assumptions.

6. Depending on the objective, many of these sales emphasize (or should emphasize) cash accumulation.

Then, the life insurance policy will end up providing additional living benefits in case the client outlives the need for the life insurance or just wants to borrow from the cash value.

An insufficient premium could mean that there one day won't be enough cash value in the policy to support the Monthly Deductions (Cost of Insurance charges and expense charges). Should this happen, the policy would lapse.

Also, insurance producers should be careful not to be lured simply by carrier IUL product claims that a "minimum floor" (such as a zero or 1% credited interest rate) will protect cash value against negative returns in an index such as the S&P.

Although true, annually increasing monthly deductions will be sure to eat up any cash value, therefore bringing special attention to whether the premium schedule is sufficient for the long term.

With IUL and VUL design, a common approach is a minimal death benefit and maximum premium in order to achieve those objectives.

Final thoughts

This brings me to the question, why sell one or the other when both are products designed to accumulate cash?

That might all depend on how bullish a prospect (or agent) is on the stock market, and which product best matches the prospect's suitability and risk profile.

Of course there's also the issue of licensing – is the agent licensed to sell a VUL product?

Ultimately, the amount of cash value realized in one of these policies will be a function of several factors, such as the amount of premium paid, the performance of the carrier’s underlying investments that support the product, and the annually increasing cost of the insurance charges that are deducted from the policy cash value.

Again, let me reiterate that perhaps one of the most common reasons that IUL or VUL products don’t work “as designed” is because there wasn’t enough premium paid into the policies in the first place and/or the performance didn’t measure out as expected.

In many cases, it’s both!

Ah, the manifold benefits of doing an annual policy review!

Stated differently, many policies are underfunded.

Some recent IUL and VUL products offer no-lapse guarantees to ensure that the policy won't lapse in case of poor cash-value accumulation.

That's actually a great improvement over older VUL and IUL product designs, giving the policy owner assurances that the policy will remain in force for some guaranteed known duration.

At the end of the day, insurance producers who attempt to sell IUL or VUL should have a close relationship with a General Agency to guide them through the process of understanding how each one works.

A brokerage manager should provide an in depth look into VUL and IUL products, differentiating how they work and what a consumer would want to know in order to make a sound buying decision.

IUL and VUL are not products that you simply spreadsheet and provide to the client to choose the one that works best for them.

As Confucius also said, “The mechanic that would perfect his work must first sharpen his tools.”

What has your experience been with selling IUL and VUL insurances?