Universal Life Insurance, Part 3 – The Good, The Bad And The Ugly
This is Part 3 – You can start at the beginning HERE
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Benefits & Failures of Universal Life Insurance
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“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 in your mind a bucket. Universal Life is a “bucket.” You put your premium dollars into your bucket (policy) and your bucket holds your money.
Now the goal of a Universal policy is to fill up your bucket as fast a possible, because the bucket has leaks in it. 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, there is a minimum amount of interest credited and can be higher depending on where the bucket’s funds are invested. This information is contained in the “Illustration” that you sign or signed at the application.
Mortality Charges and the “Bucket”
When the policy is issued, your “bucket” is set up 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 per month. 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.” So some money starts to drip out the bottom. The money that drips out 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, smoker 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 If you were placed in a very good health class, you would have less withdrawn from your “bucket” than someone who had health problems.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 the “mortality charge” will increase each year as you age. Also the “mortality charge” is not fixed. The company can decrease it or increase it, but never higher that 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.” 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 very recently. Any adjustment upwards 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 can be adjusted up or down by the company.
Third, there may other admin costs, commissions and fees for the company’s profit. So your “bucket’s” hole gets a little bigger each month. As I said earlier, the main 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 makes a deposit into your bucket. That money is interest that your “bucket” earned that previous month.
Next month the process starts again and as you age, the goal is to fill up the bucket with cash. You need to keep a wary eye on 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 is for the “bucket” is:
+ your premium goes in
+ company puts interest in
– company takes out insurance cost (mortality charge – get more expensive every month)
– company takes out admin costs and profit
As long as you have at least $1 in the bucket at the end of any given month, you have insurance. 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 premium has gone away and if you wish to continue the contact, you need to restock your “bucket.” Restocking is usually a very expensive proposition. Some of you have already experienced this. This letter comes as a surprise to most and tells you your account is under funded and you need to increase your premium payments. If you don’t pay up in the next 60 days, the policy stops. Of course all of 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 that you’ve been paying all this money all these years and it’s all gone? They say yes and then tell you to have a nice day. You curse the agent for lying to you. Maybe they did, maybe they didn’t. But in fact, you should have read (and understood) what you bought.
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