The shifting landscape of economic conditions continually influences the appeal of permanent life insurance products. While newly issued policies can adapt to prevailing market dynamics, in-force policies often face the challenge of underperformance relative to initial sales illustrations. This reality places financial advisors in the difficult position of managing client expectations and navigating potential solutions. However, a well-structured policy can offer built-in flexibility, mitigating the need for reactive course corrections.
Advisors familiar with permanent life insurance products understand the inherent volatility of projected versus actual performance. The historical trend of declining dividend rates in Whole Life (WL), market-dependent returns in Variable Universal Life (VUL), and fluctuating cap and participation rates in Indexed Universal Life (IUL) all illustrate this challenge. These factors do not necessarily render any of these products unsuitable but do underscore the importance of flexibility in adapting to evolving market conditions.
One potential answer? A strategic approach within the VUL space that incorporates elements of downside protection traditionally associated with Indexed Universal Life.
The rise of downside-protected products offering market-based returns has gained traction due to their appeal to loss-averse clients. While Indexed Universal Life has traditionally filled this niche, its reliance on cap and participation rates makes it vulnerable to declining performance in extended low-rate environments. Policyholders dissatisfied with these limitations often face two choices: maintaining their current policy or transitioning to a new product. However, this presents obstacles such as insurability and surrender charges, making a seamless transition an ideal alternative.
Fortunately, many modern VUL policies incorporate indexed subaccounts, blending the core advantages of Indexed Universal Life with Variable Universal Life’s inherent flexibility. Additionally, buffered strategies, widely adopted in the variable annuity space, have now been introduced in VUL products, offering clients a spectrum of downside protection options while maintaining upside potential.
Clients holding a VUL with indexed subaccounts or buffered strategies are positioned favorably. Should cap rates decline to the point where returns become unattractive, policyholders can reallocate funds within their existing policy. Unlike Indexed Universal Life, which is constrained by the renewal terms set by the insurer, VUL allows adjustments to subaccount allocations, offering adaptability without requiring new underwriting or surrendering the policy.
Financial advisors can guide clients through reallocations tailored to their evolving risk tolerances and return objectives. If a client seeks greater upside potential, shifting to a more aggressive market-based subaccount may be appropriate. Conversely, if predictability is the priority, reallocating to a fixed account or a bond-focused subaccount could provide stability. Crucially, this decision is not binary—clients can diversify their policy allocations across multiple subaccounts to optimize their portfolio’s risk-reward balance. The figure below shares additional details on the difference between an IUL and VUL in these circumstances.
Rather than attempting to predict the best-performing life insurance product at any given moment, financial advisors should emphasize flexibility. The product that is most favorable today may not hold that position in a few years due to economic shifts. Variable Universal Life with indexed subaccounts and buffered strategies provides an inherent exit strategy, allowing clients to adapt without policy replacement or additional underwriting hurdles.
LIFE Brokerage designs exit-ready solutions that protect your clients’ flexibility and long-term growth. If you’d like a quick second opinion on a current illustration, reach out today — let’s make sure tomorrow’s options stay open.