No Load Life Insurance

A very flexible type of whole life insurance. This permanent policy allows the owner to invest and build cash value throughout their entire life. It is often referred to as VUL.

The product combines features from variable life and universal life policies in the following ways:

• Features taken from universal life – the ability to control the amount of premiums paid and the face value.
• Features taken from variable life – control over the way in which moneys are invested.

How does it work?

• Just like any whole life policy, there is a cash value amount and a face value amount.
• The investment component works like mutual funds; the owner can choose to invest the cash surrender value into separate sub-accounts (this is the variable part of the policy). The types and number of sub-accounts available for allocation depends on the company and the policy and include a wide variety of management styles and asset classes. Most policies allow investment in bonds, stocks, money market securities, mutual funds and conservative guaranteed fixed interest.
• Investment performance and resulting cash value is not guaranteed.
• The death benefit can be increased (subject to insurability) or decreased. A reduction in the death benefit may result in surrender charges.
• The owner can choose to pay any amount of premium within the minimum and maximum amounts specified by the policy terms.
• The most efficient way to build cash value is to pay the maximum premium for the minimum death benefit. This reduces the cost of insurance and allows higher tax-free growth. However, the maximum cash value and greatest amount of premium you can pay for a certain death benefit in any given period is limited by s7702 of the Internal Revenue Code.
• Premiums can be skipped so long as there is enough cash amount to pay the cost, fees and charges.
• There is no maturity or endowment age.
• The death benefit is not limited to the face value specified in the policy (as is the case with a whole life policy). It can be the face value plus any cash value built up (less costs at the time). Alternatively, you can choose to buy insurance only on the difference between the cash value and the death benefit.
• If the investments perform poorly, the policy may lapse. Up to a certain age, insurers can offer guaranteed death benefits providing minimum premiums are paid each month. If there is sufficient cash value in the policy, then the cost of insurance can be debited (reduced) from the account.
• Due to the investment risk, VULs are in effect securities contracts, regulated under securities law. You must be provided with a prospectus prior to setting up this policy. You should read the prospectus carefully and/or obtain independent advice if you are unsure.

Benefits of Variable Universal Life:

• Investment returns are tax deferred (until surrender) as long as the policy remains in force.
• Ability to use the tax free investment returns to pay for costs, fees and charges.
• To reduce tax payable on estates with a high net worth, wealthy parents can make yearly tax free gifts to their children’s VUL policies.
• The owner can access the cash amount via tax-free loans, unless the policy is a Modified Endowment Contract. Usually, this feature is used for education or retirement planning.
• Potentially higher returns on investment by allowing the owner to manage their own investments of the cash surrender amounts.

Criticism & Risks:

• The risk of investment shifts to the owner.
• The cost of insurance increases with age (due to higher risk of mortality) as the rate is usually based on term pricing. The increased cost may eventually outweigh the returns, requiring an increase in cash outlay or cancellation of the policy.
• The cash surrender values are very volatile.
• Requires proper funding; more than other types of policies to be run effectively.
• Being a complex product, the VUL requires good planning, funding and investing. It can be mismanaged very easily.
• The insurer can increase the cost of insurance and admin fees and charges at any time, subject to the maximum stipulated in the contract.
• If you exceed the maximum premium, the policy will be deemed a Modified Endowment Contract (MEC) and will lose some benefits which stem from life insurance. This means that any withdrawals will be classed as earnings and will be taxed as ordinary income. The investment returns and the death benefit will remain tax free.
• If you exceed the allowed maximum cash value percentage of the death benefit, the contract will no longer qualify as life insurance. All investment returns will be taxed in the income year the maximum percentage is exceeded. However, contracts avoid this by defining the death benefit to be the higher of the amount nominated in the policy or the amount required by the guidelines. The percentage required by the guidelines ranges from 30% for younger persons, reducing to 0% for persons reaching 100 years.
• Many salespersons over estimate returns and underestimate costs when selling the product. Always consult an independent financial advisor prior to buying VUL insurance.