The History of Variable Universal Life Insurance
The story of variable universal life insurance is really the story of the stock market climb of the late 20th century. Although there were certainly both ups and downs during that time period, the overall trend of stock values was growth, and as a result, life insurance companies wished to capitalize on that success.
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Early Dominance of Whole Life Insurance
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Because the death benefits of whole life insurance are tax-free, and because of the financial stability that whole life insurance offers, it remained the primary form of life insurance into the 1970s. Starting in the '70s, however, interest rates began to rise rapidly, and as a result whole life insurance, which is sensitive to interest rate fluctuation, seemed to offer smaller returns than stock market investment.
Development of Universal Life Insurance
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As a result of these interest rate changes, universal life insurance became a viable alternative to whole life insurance. Universal life insurance allowed customers to set their own premiums and then invest their insurance money in the stock market rather than banks. Since stocks have the ability to generate money very quickly, customers' money didn't have to work as hard to generate large returns, especially in a high-interest environment.
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Variable Universal Life
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The initial success of universal life led to the creation of variable universal life (VUL), which invests customers' money in a wide variety of stocks, just as a mutual fund would. In fact, it is very difficult to tell the difference between a VUL policy and a mutual fund, and this led to the some criticism among consumer advocates, specifically that VUL policies stray too far from the original objective of insurance, which is security.
Recent Market Developments
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Late in the first decade of the 21st century, economies around the world began to falter, including that of the United States, and stock values tumbled. Because the value of VUL policies is tied to stock values, the risk inherent in VUL turned out disastrously for some who relied on a VUL policy for death benefits.
Looking Ahead
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There is currently what some researchers call a life insurance gap in many American families, which means that a great deal of Americans have less life insurance coverage than they would actually need to maintain their standard of living in the event that the primary earner died. Given this gap, and the volatily of the current stock market, it is unlikely that enrollment in VUL plans will rise any time soon.
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References
- Photo Credit life"s a gamble image by Pix by Marti from Fotolia.com
