Universal Life Insurance, Part 5 – The Good, The Bad And The Ugly
This is Part 5 – You can start at the beginning HERE
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About Your Universal Life Insurance Quote
About Variable Life Insurance
The concept is the same as above. Variable Life is a “bucket.” everything works the same with a major exception. In a Variable contract, you have more control and substantially more risk. You get to invest your “bucket’s” money in mutual funds that you pick and the returns (profit or losses) are dictated by your investment decisions. With the standard Universal Life example above, the company is doing the driving (investing and paying you interest). With Variable life, you do the driving (and hope you don’t crash). VARIABLE LIFE IS FOR A SAVVY INVESTOR WHO IS WILLING TO TAKE SUBSTANTIAL RISK. I think the variable life purchaser is more in tune with the product’s inherent flaws and are willing to gamble more for better results. The big problem with the bucket in a Variable policy is that the values bounce all over the place. One year there could be great returns, the next losses. So additional deposits in a bad year may be dictated.
Another concern I have with variable contracts are the admin fees, management and ancillary charges. They can get quite steep and can put a sizable dent in the bucket, as they are another drip. Of course the buyer of this product is usually one who feels they can beat the market consistently and offset the higher charges not found in Universal Life.
Indexed Universal Life Insurance
The Newest Darling of the Insurance Industry!
Indexed Universal Life insurance provides a death benefit plus the opportunity to accumulate greater policy value (your bucket) that can generate tax-free supplemental income. Many policyholders pick the crediting strategy that links growth in policy values to the performance of the S&P 500 Index. A fixed account crediting strategy is usually also available.
I have already gone over my time explaining how these contracts work, but the key ingredient with Indexed Universal Life is the illustration given to you at application. On the far right in most illustrations is the projected values (or hoped for values). The guaranteed values are on the left. If those “projected” crediting percentages are high on the right, that should be a warning sign as the illustration is saying, “you will get this interest rate each and every year on an average.” Those high projections make your bucket bigger.
There was a famous quote by the great Spanish philosopher George Santayana (1863-1952), who said in The Life of Reason: “Those who cannot remember the past are condemned to repeat it.” I believe the life insurance industry is about to repeat history. After 2010, the buzz in the insurance business turned to Indexed Universal Life. It has the same ingredients as standard Universal Life with one important twist. Your bucket’s investment return tracks the stock market and as I said above, mainly the S&P 500 stock index. Whatever the index returns in a given time period, you get some of the profit added to your bucket (less company expenses as outlined above). Most companies say that if the index returns a loss in any given crediting time period, you will not lose money for that period. Sounds good so far. In good return periods, your bucket gets a percentage of the index’s gain.
The companies are “projecting” their returns on the bucket based on historical returns of the S&P 500 (over the last 25 years) with the guarantee that in any given crediting period, the contract will never lose money. So the “floor return” is zero. What’s the ceiling return?
This is where it gets a little tricky. The companies put a “cap” on how much you can make in a crediting period. It may be 10% or 12% – each contract is different. So if the index goes up 20% in a crediting period, you are capped at whatever your contract dictates (less expenses). The company gets the rest. You make money, they make money, what’s the problem?
If you hit low or zero interest returns early in the policy’s life, you have to make up the lost interest (remember they are projecting X% average return each year) either with big investment returns or you putting more cash into the policy. If your returns are ok, but less than, projected, you still face the same problem. Remember, the salesperson will show you the best-possible outcome and that this is an illustration, not a guarantee. Compare it to the weather reporter that says, “it may rain, but there are no guarantee on that.” The guarantees are on the left side of the illustration, be sure to look for them and understand the downside.
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