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How a Tax Law Tweak Supercharged Sales of One Type of Insurance


Life insurance policies, specifically whole life insurance and variable universal life insurance, continue to skyrocket in popularity. While this upward trajectory in the life insurance market has been underway for some time, there are a few factors contributing to this continued growth. It’s no secret that the COVID-19 pandemic has made people reckon with their mortality, which has undoubtedly contributed to an increase in new policies. But another key contributor to the sales boom is a tweak to Section 7702 of the federal tax code that has made variable life insurance products especially popular. Section 7702 defines what types of life insurance can be taxed as ordinary income. These factors, combined with low interest rates and strong markets continue to contribute to the life insurance boom.

Curious about how life insurance can fit into your long-term financial plan? A financial advisor can help. Try using SmartAsset’s free advisor matching tool to find an advisor in your area.

What Kinds of Policies Are Currently Booming?

The life insurance industry as a whole is seeing some of its fastest growth in decades. The first six months of 2021 saw an 8% increase in policy sales, the highest level of growth since 1983, according to LIMRA. Plus, total life insurance premium increased by 21% in the second quarter of this year. The industry hadn’t seen that type of growth since 1987.

But that’s not to say that specific policies aren’t standing out in popularity. Whole life products have done particularly well, with premiums increasing by 25% in the second quarter and total policies increasing by 5% for the entire year. Whole life insurance made up 36% of the market in the second quarter of this year.

Variable universal life (VUL) insurance is also surging in popularity, in part due to changes in the tax code. Section 7702 of the federal tax code deals with the type of life insurance setups that can be taxed as ordinary income. Recent changes have made it easier for VUL owners to avoid paying normal income taxes. Plus, booming markets and low interest rates have made VUL products even more attractive to life insurance buyers. VUL products made up 11% of the life insurance market in the second quarter of 2021.

What Is Variable Universal Life (VUL)?

variable universal life insurance popularity

Variable universal life (VUL) insurance is an insurance product that builds up a cash value by being invested in separate accounts. The performance of these accounts will typically vary, so it’s easy to see why VUL is popular in a booming equities market: These accounts pool money and perform essentially like mutual funds. If the separate accounts out-perform the market or out-perform the insurance company’s accounts, your life insurance payout can be greater than it otherwise would be. Of course, the inverse may also be true in downturns. VUL shares some similarities with variable annuities.

VUL products are also known for their flexibility when it comes to making premium payments. With whole life insurance the owner of the policy is typically required to make regular, fixed payments or risk lapsing the entire policy. With VUL, however, you can decide to skip certain payments altogether or even contribute maximums allowed by the IRS.

Should You Get Variable Universal Life (VUL) Insurance?

While the answer to this question will certainly depend upon your personal financial situation, it’s easy to see why more and more Americans are opting to take out VUL policies these days. With booming financial markets and the option to make variable premium payments, you could end up with a VUL policy that pays out more than a normal whole life insurance policy. However, make sure you read the fine print. Since VUL products are invested, you also might end up with less in the event of a market downturn, depending on when you die.

Another reason to think about getting a VUL policy is the fact that they typically don’t come with any set endowment age, which is when the value of the policy’s payout, or death benefit, equals the cash value of the insurance account. With whole life insurance, you’re typically limited to receiving what is stipulated in the death benefit. With VUL, you can almost always continue to accrue cash value in your insurance account, leading to larger payouts when a claim is eventually made.

Bottom Line

variable universal life insurance popularity

It’s easy to see why the life insurance market has been heating up lately. With the COVID-19 pandemic still in full swing, people are continuing to think about their long-term financial plans and those of their loved ones. Plus, due to robust equity markets and changes to the 7702 section of the federal tax code, VUL policies are performing particularly well. It’s ultimately up to you to decide which life insurance plans make the most sense for you, but external factors may end up pushing you, like many others, in the direction of a new life insurance plan.

Tips for Financial Planning

  • Planning for the future isn’t always easy, and life insurance is only one part of what you should consider when it comes to thinking ahead. A financial advisor can help you figure out how to plan for what’s next. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • At SmartAsset, we want you to be prepared for what comes next, even if you’re going at it alone. We have a number of free online resources that can help you create a financial plan. For example, check out our free asset allocation calculator today.

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