Back to the 1980s…

The interest rate the company is paying you on your “bucket” is the critical part. Let me digress for a minute back to the 1980s and into  1990, where problems for Universal Life started. It was the interest rate. When people bought this product, companies projected outrageously high interest payments to customers’ “buckets.” Notice I didn’t say “guaranteeing,” but “projecting.” Above, I listed what funds the “bucket.” There are two components. They are the premium payments and the company’s end-of-month interest deposit. When the very high projected interest rate was used, the computer illustration (used at sale) said the customer could put in less money, and the company interest crediting would fund the difference. When interest rates started to fall, the company wasn’t making the necessary interest payments, and the customer was paying too low a premium, and policies began to lapse. Why did they lapse? No one was paying attention!! As I said above, money must be in the bucket, either by premiums or interest, to cover the drip. And as long as there was sufficient money to cover the ever-increasing drip, the policy stayed in force. In many cases, the drip exceeded the premium deposits and credited interest. The customer was oblivious to the compounding problem (which is why the annual report is essential).

There was plenty of blame to spread around. The first target was the agent. They were blamed for presenting an interest rate too high on the initial sale. They were also blamed for not following the policy’s progress and alerting the client when things started going downhill. Many of the policies were in self-destruct mode right from the start.

The companies were blamed because safeguards were not in place to protect the customer. Many of their software programs had no limitations on the illustrated interest rate. An agent could use just about any interest rate they wanted. Today, an agent can’t illustrate anything higher than the company’s current interest rate. The companies were also blamed for not giving early warnings to agents or customers before it was too late. They were also blamed for not having customers sign disclosures about the ramifications of the contract, and they knew the interest rates were variable and not fixed. Most of what the customer knew was only what they were verbally told. Today, the customer has to sign the exact proposal stating they understand what they are doing and the risks involved.

The insurance commissions were barraged with complaints. Lawyers, smelling blood, swarmed like locusts in the Old Testament. The customers who brought the class action suits didn’t make out that well. Some companies reinstated some policies, but overall, it was a mess. The companies paid huge fines and settlements. Those insured in Florida had a field day with some of the companies.

I suppose that with any new revolutionary product, there are growing pains. The insurance industry had a time of it. From this experience, the industry has produced better products today, offering better guarantees and disclosures. Despite the improvements, I don’t recommend the product except in specific situations.

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

What viewers say - From Pennsylvania...I might add that your analysis of my Universal Life policy has made so much sense and has helped clarify the issue so well that I think you should write a book on the subject. I think that lots of people would want to understand better the whole subject and would benefit greatly from such information being available.