All About Variable Universal Life Insurance

What are the Risks of Variable Universal Life Insurance Policies?

The risks that we discussed below are common risks for most of the variable life insurance policies. You need to refer to the product prospectus for details about a specific variable life insurance product.

1. Investment Risks

If you invest your policy's cash value in one or more of the investment divisions, you are subject to the risk that investment performance will be unfavorable and that you cash value will decrease. In addition, the insurance company will deduct Policy fees and charges from your Policy's cash value, which can significantly reduce your Policy's cash value. During times of poor investment performance, this deduction will have an even greater impact on your Policy's cash value. It is possible to lose your full investment and your Policy could lapse without value, unless you pay additional premium. If you allocate cash value to the Fixed Account, you still assume the risk that the rate may decrease, although  it will never be lower than a guaranteed minimum annual effective rate.

2. Surrender and Withdrawal Risks

The policies are designed to provide lifetime insurance protection. They are not offered primarily as an investment, and should not be used as a short-term savings vehicles. If you surrender the policy within certain number of years, you will be subject to a Surrender Charges as well income tax on any gain that is distributed or deemed to be distributed from the Policy. You will also be subject to a Surrender Charge if you make a partial withdrawal from the Policy within the certain number of years if the partial withdrawal reduces the face amount (or the face amount increase). Sometimes for some policies a whole year's coverage expense charges could be deducted if you surrender the policies too soon. Different products from different companies will have different time frame for all the surrender charges. You need to read the prospectus of each individual product to find the detail.

Warning:
You should purchase the policy only if you have the financial ability to keep it in force for a subtantial period of time. You should not purchase the Policy if you intend to surrender all or part of the policy's cash value in the near future. Even if you do not ask to surrender your policy, surrender charges may play a role in determining whether your policy will lapse (terminate without value), because surrender charges determine the cash surrender value, which is a measure we use to determine whether your Policy will enter the grace period (and possibly lapse).

3. Risk of lapse

Your policy may lapse if you have paid an insufficient amount of premiums or if the  investment experience of the investment division is poor. If your cash surrender value is not enough to pay the monthly deduction, your policy may enter a grace period, usually about two months. If your policy does lapse, your insurnce coverage will terminate, although you will be given an opportunity to reinstate it. Lapse of a policy on which there is an outstanding loan may have adverse tax consequenses.

4. Tax Risks
If your policy is not treated as a life insurance contract under Federal tax law, increases in the policy's cash value will be taxed currently. Even if your policy is treated as a life insurance contract for Federal tax purposes, it may become a  modified endowment contract due to the payment of excess premiums or unnecessary premiums, due to ta material change or due to a reduction in your death benefit. If your policy becomes a cmodified endowment contract, surrenders, partial withdrawals and loans will be treated as a distribution of the nearnings in the policy and will be taxable as ordinary income to the extent thereof. In addition, if the policy owner is under age 50 and a half at the time of the surrender, partial withdrawal or loan, the amount that is included inincome will generally be subject to a 10% penalty tax.

If the policy is not a modified endowment contract, distributions generally will be treated first as a return of basis or investment in the contract and then as taxable income. Moreover, loans will generally not be treated as distributions, although the tax consequences of loans outstanding after the tenth Policy year are uncertain.

Finally, neither distributions nor loans from a Policy that is not a modified endowment contract are subject to the 10% penalty tax.

5. Loan Risks.

A Policy loan, whether or not repaid, will affect the cash value of your Policy over time because the insurance companies subtract the amount of the loan from the Investment Divisions and/or Fixed Account as collateral, and hold it in their Loan Account. This loan collateral does not participate in the investment experience of the Investment Divisions or receive any higher current interest rate credited to the Fixed Account. The insurance companies also reduces the amount they pay on the insured’s death by the amount of any outstanding loan and accrued loan interest. Your Policy may lapse if your outstanding loan and accrued loan interest reduce the cash surrender value to zero. If you surrender your Policy or your Policy lapses while there is an outstanding loan, there will generally be Federal income tax payable on the amount by which loans and partial withdrawals exceed the premiums paid. Since loans and partial withdrawals reduce your Policy’s cash value, any remaining cash value may be insufficient to pay the income
tax due.

6. Limitations on Cash Value in the Fixed Account.

Transfers to and from the Fixed Account are usually have a minimum.  Partial withdrawals from the Fixed Account also require a minimum in some products. The total amount of transfers and withdrawals from the Fixed Account in a Policy year may generally not exceed certain percentage of the Policy’s cash surrender value in the Fixed Account at the beginning of the year, or the maximum transfer amount for the preceding Policy year. The insurance companies may also limit the number of transfers and partial withdrawals and may impose a processing charge for transfers and partial withdrawals.

7. Tax Law Changes.

Tax laws, regulations, and interpretations have often been changed in the past and such changes continue to be proposed. To the extent that you purchase a Policy based on expected tax benefits, relative to other financial or investment products or strategies, there is no certainty that such advantages will always continue to exist.