Universal Life Insurance, Part 1 – The Good, The Bad And The Ugly

Understanding Universal

Life Insurance 

The Good, The Bad, and The Ugly- Part 1

I will conclude this painfully tedious and lengthy six-part article right up front: Don’t buy a Universal Life policy (aka Flexible Premium Adjustable Life, Variable Life, Indexed or Equity Universal Life) if you don’t understand the inner workings of the policy. It can cost you a fortune and leave you with no coverage and a possible big tax bill. Know ahead of time what can go wrong and proceed with caution. You must keep up with this contract every year, including contact with your agent regarding its progress. You can’t stick it in the drawer and forget about it. Your agent (who may disappear on you) is the key to the advice you need. Don’t depend on the insurance company for any assistance. Find an agent with experience and several years in the business, and make them your new best friend.

Specifically, I am concerned about how Indexed Universal Life contracts are promoted today, as the “be-all and end-all” financial product with a pile of money awaiting you at retirement. I was around in the 1980s when Universal Life was first introduced as “An Almost Perfect Policy” by major financial magazines. In the 1990s and 2000s, the number of class action lawsuits against insurance companies was staggering for the original Universal Life product alone.

A limited percentage of financially savvy people should consider buying a Universal Life policy. We recommend Universal Life in estate planning, business succession, and other tax-planning situations. I’m OK with those wanting lifetime coverage with little expectation of cash value buildup. In those situations, we recommend paying the “guaranteed” premium vs. the “illustrated” premium (I’ll explain that later). In other words, they will have guaranteed coverage regardless of what happens.

The above describes a very negative approach to Universal Life; however, the product is fine as long as those considering (and already owning one) understand its ins and outs. I am troubled as to how it is sold. So the bottom line is, proceed with caution…

UNIVERSAL LIFE INSURANCE IS VERY CONFUSING

Now that you know the conclusion, let’s return to the beginning…

When I want to see the time, I look at a clock. I don’t care about the clock's inner workings or how it produces the time; I just want the time. Unfortunately, this page is about the inner workings of Universal Life. It’s long and boring. There’s just no other way around it. I believe Universal Life is the most confusing product ever introduced by the insurance industry. If you are considering spending hundreds or thousands of dollars each year on this product, I suggest you read and re-read this page so that you know how this clock works. If you already have one of these contracts, this page will explain whether your policy does what it was set up to accomplish. It will also guide you in asking your insurance company the right questions and getting the accurate documents to assess the policy’s progress.

UNIVERSAL LIFE INSURANCE STARTED WITH HIGH RATES

What went wrong with Universal Life is that the product was introduced into a very high-interest-rate climate and was sold so that interest rates would stay high forever. I was kidded at that meeting 40-some years ago by some of my fellow agents when I asked, “What happens if interest rates go down?” The mindset in the late 1970s was that interest rates would never go down. My wife and I bought our first house in 1980 and were thrilled that we got a 12% mortgage. How times have changed.

 

CONFUSION AND COMPLAINTS ABOUT UNIVERSAL LIFE INSURANCE

Looking back over those 40 years, what have the companies learned? As I mentioned above, we first see that Universal Life probably produced more class-action suits than any other product the industry has ever invented. It created so much confusion for the public that insurance departments nationwide were overwhelmed with complaints. People had their life insurance cancelled when they thought they had lifetime coverage. In short, it was a disaster. The companies paid a gazillion dollars to settle class-action lawsuits from people who said the companies and agents misled them. I believe our industry is headed for a repeat performance with Indexed Universal Life.

 

UNIVERSAL LIFE INSURANCE WENT DOWNHILL

The main problem, as I see it, with Universal Life is that no one understands how the product works. It is nearly impossible to explain the policy’s mechanics. I think explaining the evolution of black holes in the universe is easier. To put this to the test, about 40 years ago, I met with a client who was a high-powered attorney in Washington, DC. He negotiated contracts for major hotel chains and was among the brightest people I've ever met. So we sat down and I explained Universal Life. After I was done (about 15 minutes), he said he understood the concept. I turned the tables and asked him to explain it back to me. He couldn’t. So we went through it again and repeated the process. He tried again and failed. We gave it one more shot without success. I knew then either the product was doomed or I stunk as a salesman, probably both.

 

I will explain the product and why a very limited group should consider purchasing this type of policy or one of its ugly stepsisters, Variable Life, Variable Universal Life, and Indexed Universal Life. At no additional charge, I will also advise those who already own this type of contract on what they should do now.