How Do Brokers and Insurance Agents Mislead You Into Buying VL and VUL Insurance Policies?

Brokers and agents who sell variable insurance products are supposed to comply both with state securities or insurance regulations and with regulations issued by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Before recommending variable insurance, the broker or insurance agent is required to obtain information enabling him or her to evaluate the customer’s personal and financial situation and needs, tolerance for risk, and financial ability to pay for the proposed insurance policy. Unless such a suitability analysis shows that variable insurance is in the customer’s best interest, the broker or agent is forbidden to recommend a VL or VUL.

Unfortunately, many brokers and agents neither follow the rules nor tell the whole truth when selling variable life insurance policies.

Not only do these sellers often ignore the suitability requirement, but many of them also actively mislead their customers. They convince their customers, usually with the aid of printed illustrations regarding potential future returns, that the cash value in the Variable Life or Variable Universal Life will rise dramatically over time. In fact, purchasers often are told that the ever-increasing cash value eventually will make the policy self-sustaining, meaning the customer will be able to stop paying premiums. Unfortunately, agents fail to carefully and clearly explain to their customers that unless (a) the policy is adequately funded (or better yet, overfunded) from the start and (b) the cash value increases as predicted by the illustration, the policyholder eventually will be forced to pay additional premiums to prevent the policy from lapsing.

Another common tactic employed by brokers and insurance agents is to recommend that the customer “finance” the premiums for a new variable insurance policy by taking loans against or making withdrawals from the cash value of existing whole life policies. But brokers and agents who recommend that a customer exchange existing whole life insurance policies for new VL or VUL policies are supposed to be able to justify the suitability of that recommended exchange.  Often that doesn’t happen. Withdrawals from existing policies may be subject to federal income tax, and borrowing or withdrawing money may reduce the death benefit or entirely eliminate it. Moreover, if the customer can’t keep the original policy in force, he or she will lose the insurance protection, and any loans taken might give rise to tax consequences. Finally, an exchange of existing whole life policies for new variable policies may present unnecessary expense and risk for the customer while creating a huge unwarranted payday for the broker.

For more information about variable universal life insurance fraud, visit our companion website at