There is an investment component in the variable universal life insurance (VUL) plan. There are three dangers. First, administrative fees are guaranteed to be heavy, which take away a lucrative portion of your nest egg. Second, the insurance portion of the fund has an increasing rate, so each year the insurance fee is going to increase until it becomes unaffordable. Third, there is a market risk, if the market tanks and you need the money, then you will lose a lot of money.
If you invest in the market, there is still a market risk, but just that. With the variable universal life insurance plan, you have two more dangers. Insurance makes it sound safe, but it is really not safe. The insurance contract is often too thick and too complicated for average client to read, but if you summarize the whole thing it all comes down to the three dangers. The basics are still the same-the funds will not be big enough for you to get rich, and you will be charged heavily by the insurance company.
The fee is not quite fair for the customers. Usually the investment options within the VUL are imitations of products in the market and are available to everyone. You can buy similar products in the market from professional investment firms, and pay much less. With the insurance company, they will charge you and then hand over your money to the same investment firms and earn a referral fee from the firms, so you are being charged twice!
Since your VUL plan has an increasing insurance cost, over the years the cost will exceed the premium you pay each month, and the unpaid cost will be paid by the fund in the investment component of the plan. Most clients don't realize this; if the fund runs out, the policy lapses. It happens quite often in reality. Is this the agents' fault? Do they not know what they are selling? Or do they do it deliberately knowing that they are going to earn a lucrative commission from such plans?
Maybe the agents who sold you such plans are your good friends, but if they knew what would happen to your policy, but still sold you the product, then they are really not friends at all. Some agents are sincere, but they are trained to believe in the products. The industry has been able to propagate the insurance market with the so called advantages of their expensive products, and I am amazed how people can believe in these arguments so strongly even though the glitches can be spotted if checked carefully.
What Should You Do To Get Out?
If you happen to own a VUL policy then what should you do? Check if the insurance rate increases each year. If so, you know you are not going to be able to afford the plan 10 to 20 years down the road, so go online and check term life insurance quotes to see how much a term life insurance plan would cost for your age group. Don't mention this to your agent until you pass the medical test to qualify for the new term policy. Get the new policy in place, and then surrender your VUL policy to recoup the cost.
There will be an expensive penalty for you to do that, but there is always a penalty. They want to lock you up for life. They want you to think that if you cancel the policy you will get nothing, but there is no point in staying since it is going to get worse, not better if you wait. The administrative fee is heavy, even though they don't really manage your assets, but outsource it to the real asset management or investment experts in the market. You should get out while you still have some money in the fund, otherwise when the insurance cost eats your nest egg, it might be too late.
Lastly, call your agent and tell him or her how disappointed you are, and confront him or her as much as you want. Most clients never see their agents again, but that's okay, because who needs an enemy when you have a friend like that?