Universal Life Insurance, Part 2 – The Good, The Bad And The Ugly

This is Part 2 – You can start at the beginning HERE. 

About Universal Life Insurance Policies

 

The History of Universal Life Insurance

Over 40 years ago, I sat in a former employer’s class anxiously waiting for the product to revolutionize the life insurance industry. It was called Universal Life. The product was designed to pay current interest rates on cash values (then 15%). Combined with a low mortality charge and low administration costs, everyone who bought the product would be millionaires. It was sold as the solution to every financial problem. As I mentioned above, many major financial magazines glowed about it (I think they may have burned all the unsold issues).

Back in the 1980s, I’m not sure the insurance companies wanted to introduce this product, but the outcry by the consumer groups was getting too loud for them to ignore.

In the late 1970s, things were changing. Consumer groups, led by Ralph Nader, started picking on the insurance industry, telling them their products were terrible. The companies were selling outdated, over-priced Whole Life contracts that mainly paid low interest and charged high mortality charges. The public demanded higher interest crediting of their cash values. As a side note, Term life insurance was almost non-existent at the time, and what Term was available was grossly overpriced and had very short rate guarantee periods.

The industry had a dilemma. Their cash cow product, Whole Life, was under attack. Interest and inflation rates were sailing along at almost 15%. Now, one thing the industry didn’t want to do was to offer a product that offered great interest rates on the cash value growth and still give the guarantees that Whole Life provided. There was too much risk for them to absorb.

They made a compromise with the critics and the public. They said, “We will give you the higher interest rates you want; however, we want you, the consumer, to share some of the risk.” So they devised a modified variation of their old, long-standing product and created Universal Life. It unbundled some of the inherent guarantees of Whole Life. Universal Life left the consumer wide open to new risks and the possibility of having their insurance canceled.

What is Whole Life Insurance?

To understand Universal Life, you need to understand Whole Life. The best way to explain Whole Life is this: You pay a set guaranteed premium for life – the company gives you coverage on your life (for life) for the amount you choose. The policy pays you paltry cash value interest and holds your cash value, invests your cash value, makes lots of money, and pays you almost no interest in return. So, you get to make the company a zero-interest loan and you get some insurance – in other words, you get screwed – got it? If you don’t think that’s true, why do insurance companies own half the world?

 

So, from a historical perspective, you can see why, in the 1970s, people were upset with the insurance industry.

 

Questions? Comments? Suggestions? 1-800-542-5530 – admin@americaquote.com

 

What viewers tell us...  

 

From California...

 

I am very impressed by the content of your website. I have learned more about term-life insurance in the last few days through you than I have in the last eight years through my soon-to-be-ex-broker!! I commend you for the excellent viewpoints that you present and the thoroughness with which it is presented. I will definitely recommend your site to others who are also looking for information on term life insurance.