Understanding Universal Life Insurance
The Good, The Bad, and The Ugly- Part 1
I’m going to give the conclusion of this painfully boring and very lengthy article: 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. This is a contract you have to keep up with each and every year to include contact with your agent as to 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 will need down the road. 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 how Indexed Universal Life contracts are promoted today (2019), as the “be all and end all” financial product with a pile of money awaiting you at retirement. I was around in the 1980’s when Universal Life was first introduced as “An Almost Perfect Policy” by major financial magazines. In the 1990’s and 2000’s, the number of class action lawsuits against insurance companies was staggering, just for the original Universal Life product alone.
There is limited percentage of financially savvy people that 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 that just want 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, regardless of whatever happens, they will have guaranteed coverage.
The above describes a very negative approach to Universal Life, however, the product is fine as long as those considering (and already own one) it understand the ins and outs as to how it works. 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 go back to the beginning…
When I want to know the time, I don’t care about the inner workings of the clock 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 tedious. There’s just no other way around it. In my opinion, 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 is doing what it was set up to accomplish, or not. It will also guide you to ask your insurance company the right questions and get 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 in a fashion 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 the question, “What happens if interest rates go down?” The mind set in the late 1970’s 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 change.
Confusion and Complaints About Universal Life Insurance
Looking back over those 40 years, what have the companies learned? As I mentioned above, the first thing we see is Universal Life produced more class-action suits that any other product the industry ever invented. It created so much confusion for the public that insurance departments throughout the country 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 to people who said they were misled by the companies and agents. 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 one of the brightest people I 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’m going to attempt to explain the product and tell you why there is a very limited group that should consider purchasing this type of policy or one of its ugly stepsisters, Variable Life, Variable Universal Life and Indexed Universal Life. I will also, at no additional charge, advise those that already own this type of contract as to what they should do now.
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