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Beware: Universal Life Insurance
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What happened to my policy?
Now that you know the basics of life insurance from my articles "Life Insurance, Part 1", "Life Insurance Part Two", and "Life Insurance Part Three", it's time to take a look back at Universal Life (UV).
UV was designed by the insurance companies to make it easier for clients to "get into" life insurance. UV promised the best of both worlds: lower initial premiums (that were similar to the economical Term Life costs) in a "permanent" life policy similar to Whole Life.
Without getting too technical, the UV plan was to use interest generated by the current premium payments to help pay for the future, more expensive insurance. This is the same "interest" that would be added to the "cash value" of the Whole Life policy if the client had paid the higher premiums associated with a Whole Life Product. UV policies do not build a "cash value" but "spend" the interest earned on the actual insurance cost. Sound confusing?
It is a very good, sound design that could help clients get the insurance coverage they need at the time they need it, but that "good" aspect of UV gets lost in the agent's sales pitches.
The problem is that ALL UV policy "illustrations" use "assumed" rates of interest to calculate their interest earnings and guarantee the future CLAIMS paying ability of the policy. In other words when your neighbor sold you that UV policy and told you it was a "permanent" policy that would last your lifetime he was telling you that it would last your lifetime if the financial markets yielded a 8% rate of return every year. Your policy NEEDS to get that type of return to generate enough interest to pay the future premiums to keep the policy in force at the current premium cost.
Let's have a show of hands from everyone earning a 8% return every year from ANY investment or savings product. If you're new to the financial world you might not get the sarcasm so I'll be blunt: 8% every year will NOT happen. The best savings account around (actually a checking account) is the "Go Green" at Coastal Federal Credit Union and it's paying 3%. Normal bank savings accounts are paying LESS than 2%. The stock market CAN yield a 8% return one year, but then it can take it away the next.
So where is ANYONE making 8% per year, guaranteed?
Nowhere.
And what happens when UV earnings are NOT enough to pay the costs of the annual insurance? If earnings are not enough to pay costs the client will have to make "catch-up" payments. The UV client will need to pump MORE cash into his or her UV to keep it active. And if the client does not pay attention to this problem in the early years of the contract there will be a LARGE "catch-up" payment due at an older age to keep the policy in force.
One of the nice things about Whole Life is the predictable, budget-friendly stream of payments that never change. Ever. At age 65 the payments are the same as at age 25. But with UV the 65 year-old who is planning on Life Insurance to help kids or grandkids will be faced with this decision: add large sums of money to keep the policy in force or let it lapse and see all the previous years premiums go down the drain.
I have not met one, single UV client who understood this potential problem. All of the clients I've talked to felt they had "permanent" insurance that would last their lifetime as long as they made their current premium payments.
Do not blame the UV policy or the insurance companies for this problem. As I said earlier it is a good, sound design to help people get into insurance but the sales person who sells a UV policy has to be doubly clear about the plan's design, and explain each and every scenario. And even when that communication happens clients have faulty memories and do not remember that lower interest rates due to market conditions will threaten the life of the UV policy. What's worse is that each and every year the client gets a statement that warns them of impending problems with the policy.
So if you have a Universal Life Policy, whether it's a VARIABLE Universal Life or FIXED Universal Life, get with your agent and find out the condition of your policy, and do it as soon as possible.
Then think back to when you bought the policy and signed all those papers the agent put in front of you. One of those forms was a "Statement of Understanding" where you put your signature on a "statement" declaring that you "understood" the design and performance issues surrounding your policy.
Get with your guy or girl and go over it all again. Then ask him or her to review your policy with you every year. Both you AND your agent will be glad you did.
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