Jul 15 2025 20:25
Universal Life Insurance, Part 3 – The Good, The Bad And The Ugly
David Frucella
This is Part 3 – You can start at the beginning HERE.
Universal Life Insurance's Bucket
“The Bucket”
What I’m about to describe is the “chassis” of a Universal Life policy, whether a standard Universal Life contract, Variable Life or Indexed Universal Life.
I want you to picture a bucket in your mind. Universal Life is a “bucket.” You put your premium dollars into your bucket (policy), which holds your money.
Now, the goal of a Universal policy is to fill up your bucket as fast as possible, because the bucket has leaks. The insurance company is holding your bucket and, in a standard Universal Life policy, controls where your “bucket’s money” is invested. With Variable and Indexed policies, you can direct your bucket’s investments. The company pays you interest, and that money goes into the bucket. With many contracts, a minimum amount of interest is credited, and it can be higher depending on where the bucket’s funds are invested. This information is in the “Illustration” you signed at the application.
Mortality Charges and the “Bucket”
Your “bucket” is set up when the policy is issued, and you’ve put your first premium in it. This is a critical point. As long as you have money in your “bucket,” your policy will stay in force. Here is how it works. You pay your premium; let’s say it’s $50 monthly. At the beginning of the month, you make the payment, and the company immediately says, “We need some money, and they drill a hole in the bottom of your “bucket” for admin fees. So some money starts to drip out of the bottom. The money that drips out of the bottom is for several things. First, to insure you for that month (the term insurance cost), the company withdraws what they call the “mortality charge.” This is the cost to insure you for the next 30 days. The amount is dictated by your age, sex, smoking status, and the health underwriting class you received when you bought the policy. If you were placed in a very good health class, you would have less withdrawn from your “bucket” than someone who had health problems. What is very important to remember is that the “mortality charge” will increase each year as you age. Also, the “mortality charge” is not fixed. The company can decrease or increase it, but never higher than the maximum it can charge as stated in the policy. This gives the company a lot of leeway, and some companies have stuck it to policyholders by raising the “mortality charge” significantly. Your agent may tell you their company has and would never do that. If you don’t believe that, some major companies did exactly that. Any upward adjustment in “mortality charges” makes the leak at the bottom of your “bucket” even bigger. That is not good. Combined with variable interest rates, it can be a recipe for disaster.
Second, the company withdraws administrative charges. Some charge about $5 per month, some more, some less. It’s usually fixed, but the company can adjust it up or down.
Third, other admin costs, commissions, and fees for the company’s profit may exist. So your “bucket’s” hole gets a little bigger each month. As I said earlier, the primary consideration here is, “as long as you have money in your bucket, the policy will stay in force.”
Here’s the good part – at the end of the month, the company deposits interest into your bucket, which is interest that your “bucket” earned the previous month.
Next month, the process starts again, and as you age, the goal is to fill up the bucket with cash. You must oversee the drip, as it will get bigger. The goal is to fill the bucket with sufficient monies to offset the ever-increasing drip and have the policy in force when the person dies.
The Bucket Formula
The formula for the “bucket” is:
+ Your premium goes in
+ The company puts interest in
– The company takes out insurance cost (mortality charge – gets more expensive every month)
– The company takes out admin costs and profit
You have insurance as long as you have at least $1 in the bucket at the end of any given month. If your “bucket” ever goes to $0, the company will send you a “60-day lapse” letter telling you all the money you have paid in premiums has gone away, and if you wish to continue the contract, you need to restock your “bucket.” Restocking is usually a costly proposition. Some of you have already experienced this. This letter surprises most and tells you your account is underfunded, and you need to increase your premium payments. The policy stops if you don’t pay up in the next 60 days. Of course, this is a complete surprise, so you call the company. They tell you your “bucket” is nearly empty and an immediate infusion of cash is needed. You tell them you’ve been paying all this money all these years, and it’s all gone? They say yes and then ask you to have a nice day. You curse the agent for lying to you. Maybe they did, perhaps they didn’t. But you should have read (and understood) what you bought.
Questions? Comments? Suggestions? 1-800-542-5530 – admin@americaquote.com