2025 Regulatory Outlook: What’s Changing for Variable Universal Life Insurance?

Introduction

The Variable Universal Life (VUL) insurance market has been evolving rapidly, influenced by both consumer demand and regulatory changes. In a LIMRA industry report, it was noted that VUL insurance saw a significant 27% year-over-year (YOY) growth, outpacing other life insurance products like Indexed Universal Life (IUL), Fixed Universal Life, and Term Life. Meanwhile, Whole Life insurance fell by 4%. These figures highlight a dynamic market but also point to a range of regulatory updates and compliance requirements that are reshaping how VUL products are developed, marketed, and sold.

New Compliance Requirements and Best Interest Standards

In today’s regulatory climate, life insurers face a growing imperative to align their sales practices and product strategies with evolving best interest and fiduciary standards. Federal and state authorities alike are raising the bar on compliance, transparency, and consumer protection. For insurance carriers, especially those offering complex products like Variable Universal Life insurance, this trend represents both a challenge and an opportunity to build stronger, trust-based relationships with clients.

A Regulatory Shift Toward Best Interest Standards

At the heart of this transformation are new and updated rules that elevate the obligations of financial professionals. The National Association of Insurance Commissioners (NAIC) introduced its revised Suitability in Annuity Transactions Model Regulation (#275), which has been adopted by nearly every state. This model requires insurance professionals to act in the best interest of the consumer, placing the client’s needs ahead of their own financial incentives.

Similarly, the U.S. Securities and Exchange Commission (SEC) implemented Regulation Best Interest (Reg BI) in 2020. This rule imposes enhanced standards on broker-dealers, requiring them to disclose conflicts of interest and to ensure that compensation structures do not skew recommendations in favor of the advisor. Reg BI applies to all securities transactions, including those involving VUL insurance, which blends life insurance with investment components.

New York has taken these standards even further through Regulation 187, which applies best interest obligations to life insurance as well as annuity sales. Agents must demonstrate that they have made recommendations based on the client’s financial situation, needs, and objectives, without being influenced by commissions or incentives.

The heightened scrutiny surrounding sales practices has led to increased enforcement actions. A notable example includes FINRA’s $500,000 fine against a broker-dealer for paying commissions on VUL sales to an unregistered entity. This underscores the importance for insurers to ensure their sales teams are properly licensed and that systems are in place to detect and prevent rule violations.

Fiduciary Rule Uncertainty and its Implications

In 2024, the Department of Labor (DOL) proposed an updated fiduciary rule that would treat one-time advice, such as recommending a retirement fund rollover into an annuity or life insurance policy, as fiduciary investment advice. Although this rule has been temporarily stayed by a federal court, its mere proposal has created industry-wide uncertainty.

If enacted, this rule would require agents to adhere to fiduciary standards when advising on retirement assets, further blurring the line between advisory and transactional roles. In anticipation, many insurers are beginning to revise their sales processes, considering the introduction of fee-based VUL products that remove commissions and better align with fiduciary frameworks.

Adapting Sales Practices to Meet Higher Standards

These regulatory developments are prompting sweeping changes in how life insurers train, supervise, and compensate their agents. Compliance now demands more than just avoiding violations. It requires proactive steps to ensure client-centric practices.

Many carriers are implementing robust training programs that focus on ethical sales behavior, suitability assessments, and proper documentation. Suitability checklists have become standard practice, with agents required to collect and evaluate comprehensive information about each client’s financial goals, risk tolerance, and investment time horizon.

Additionally, insurers are scrutinizing compensation models. Sales incentives that could create conflicts of interest, such as bonuses for hitting volume targets or contests tied to specific products, are being eliminated or redesigned. Companies are increasingly rewarding advisors for compliance adherence and client satisfaction rather than just closed deals.

The Rise of Fee-Based VUL Products

One of the most significant innovations in response to these compliance pressures is the emergence of fee-based VUL contracts. These products are designed for distribution through Registered Investment Advisors (RIAs) and other fiduciary channels. Instead of receiving commissions, advisors charge a fee to the client, typically based on assets under management. By removing traditional commissions and surrender charges, fee-based VULs align better with fiduciary frameworks, reducing conflicts of interest and meeting the DOL’s and SEC’s expectations.

However, the challenge for insurers is that without commissions driving sales, these policies require new distribution strategies, such as partnerships with registered investment advisors, educating clients on how VUL can complement their investment portfolios, and offering competitive pricing to justify the advisor’s fee. This shift represents a significant strategic change driven by regulatory demands for lower-conflict sales models.

Regulatory Impact on VUL Product Design

Beyond sales processes, compliance requirements are influencing how VUL products are designed and administered. The SEC’s updated disclosure rules now allow for summary prospectuses that provide a concise, easy-to-read overview of VUL features, fees, and risks. While this change improves consumer understanding, it also adds pressure on insurance carriers to ensure all documentation is accurate, comprehensive, and regularly updated. Carriers offering VUL must closely follow SEC guidance on marketing communications to avoid misleading claims, ensuring compliance with Rule 156 and FINRA Rule 2210, which regulate fund performance projections and risk disclosures.

In parallel, NAIC workgroups are reviewing life insurance illustration regulations, which could lead to tighter controls on hypothetical performance scenarios. For VUL, this may mean standardized maximum return caps, mandatory inclusion of zero-growth scenarios, and clearer disclosure of investment risks.

To remain compliant, carriers are refining how they present policy illustrations, adopting conservative assumptions, and emphasizing the variability of investment outcomes. These changes reduce the risk of misrepresentation and help consumers make more informed decisions.

Ongoing Oversight and Risk Management

Regulators are also turning their attention to how insurers manage the long-term administration of VUL policies. As market volatility directly affects the performance of separate account investments, companies must have robust monitoring systems in place.

Policyholders now receive annual reports detailing account values, fees, and potential policy lapses. In some states, carriers are required to notify clients if the policy’s current funding levels put it at risk of lapsing. These communications must be written in plain language to meet consumer understanding standards.

The focus on reinsurance security for life liabilities also affects VUL. Insurers cannot transfer investment risk off their books without regulatory approval and proof of sufficient capital. This has led to more cautious product guarantees, with fewer insurers offering generous secondary guarantees on VUL, as these attract capital charges and regulatory attention. Overall, insurers must carefully balance offering attractive VUL benefits with the need to maintain strong reserves, clear disclosures, and rigorous compliance monitoring throughout the product’s life.

The Role of the Interstate Compact

The Interstate Insurance Product Regulation Compact (Compact) is playing a growing role in standardizing VUL product requirements. In 2024, insurers, through The American Council of Life Insurers (ACLI), lobbied for the Compact to create new standards for group private placement VUL policies, which are typically used by high-net-worth individuals and institutional clients.

Previously, this niche product, often used by high-net-worth individuals and trusts, required state-by-state filings. A nationwide standard would streamline approvals, improving speed-to-market. While insurers stand to benefit from greater efficiency, they must also ensure compliance with the Compact’s requirements, such as standardized contract language or disclosure rules for privately placed VUL. This shift underscores the growing regulatory coordination even for specialized VUL products.

Strategic Shifts in Product Development

The compliance landscape is also influencing broader product strategy. Following the 2021 change to IRS Code 7702, which lowered interest-rate assumptions for defining life insurance, VUL policies became more attractive as tax-advantaged investment vehicles. This boosted their market share, prompting insurers to introduce accumulation-focused VUL products designed for retirement planning and estate transfer.

However, these products are marketed with caution. To comply with illustration regulations, insurers are using conservative return projections and highlighting the need for sustained premium payments. Some carriers have shifted focus away from Indexed Universal Life (IUL) products, which face tighter illustration rules under Actuarial Guideline 49-B, and toward VUL offerings, which offer more flexible investment opportunities but require clearer disclosures.

Challenges for Smaller Carriers

While large insurers may have the resources to navigate these compliance demands, smaller carriers often face a steeper climb. Enhanced training, documentation, supervision, and IT infrastructure all come at a cost. Extended product development cycles and increased legal review requirements can slow innovation and strain operational budgets.

To remain competitive, smaller companies may need to consider partnerships, outsource compliance functions, or adopt third-party platforms that facilitate documentation and supervision. Alternatively, they may choose to focus on niche markets or simplified products that carry fewer regulatory hurdles.

Technology as a Compliance Enabler

Technology is proving to be a valuable ally in meeting new compliance standards. From automated data validation and audit trails to AI-driven recommendations and e-signature tracking, modern tech solutions help streamline regulatory adherence. By embedding compliance into workflows, insurers can reduce risk, improve accuracy, and enhance advisor and customer confidence. The right technology empowers carriers and distributors to keep pace with evolving standards like Best Interest and avoid costly errors or delays in suitability reviews.

Supporting Regulatory Compliance with Emtech QMT

As the insurance industry faces increasing regulatory pressures, including evolving best interest standards and more stringent compliance requirements, the role of quality assurance (QA) automation becomes pivotal. Emtech QMT is designed to help insurance carriers streamline their compliance processes and navigate complex regulatory landscapes more efficiently.

With regulations such as the NAIC’s updated Suitability in Annuity Transactions Model Regulation and the SEC’s Regulation Best Interest (Reg BI), carriers must ensure that every policy recommendation is aligned with the client’s best interest, properly documented, and transparent. Emtech QMT QA automation software can greatly assist in meeting these stringent standards by automating data validation processes.

As insurance carriers navigate an increasingly complex regulatory environment, the implementation of automated QA solutions like Emtech QMT provides a critical advantage. Not only does it ensure compliance with regulatory frameworks, but it also supports operational efficiency, allowing insurers to focus on developing competitive products while staying ahead of the curve on regulatory changes.

Final Thoughts

As fiduciary and best interest standards become the norm, the life insurance industry is undergoing a cultural transformation. What was once a compliance exercise is now a strategic imperative. Insurers that embrace these changes are not only mitigating legal and reputational risks, but they are also positioning themselves as trusted partners in consumers’ long-term financial planning.

Transparency, fairness, and ethical conduct are no longer optional, they are fundamental expectations. Whether through fee-based models, improved disclosures, or redesigned product features, the future of VUL sales lies in delivering value and clarity to policyholders.

In this evolving environment, the winners will be those companies that invest in training, innovation, and technology, not just to stay compliant, but to build lasting relationships based on trust and accountability. For insurance carriers, best interest standards aren’t obstacles, they’re guiding principles for long-term growth in a consumer-first marketplace.

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