The Wall Street Journal published an article[i] today that confirms what many of us have known for some time. Universal Life (UL) insurance, along with sister products Variable Universal Life (VUL) and Indexed Universal Life (IUL), does not live up to the sales hype. The article reveals several sad cases where customers have paid more in premiums than their heirs will receive when they pass on, due to the way the policies are designed. While there is little to be done for the poor souls highlighted by the Journal, this piece may be a blessing to clients who have recently purchased any variation of a UL policy.
To be clear, this post assumes clients wish to create a guaranteed savings account that will provide a significant benefit to their heirs at the end of their life. There may be people who don’t care about the size of the death benefit or the predictability of premiums. It’s also possible there are clients who want to believe the UL policy they purchased is different. This post is not for them.
From the Journal article (emphasis added) –
Universal life is among the reasons Americans are approaching retirement in the worst shape in decades[ii]. The insurance policy type emerged in an era nearly four decades ago when the Federal Reserve was fighting inflation with high interest rates. Some financial advisers suggested people forgo traditional “whole life” insurance and buy less-expensive policies that covered just a limited term, investing what they saved in the mutual funds and money-market funds then proliferating. Insurance companies embraced this mantra of “buy term and invest the difference” by inventing a new product.
After practicing the advice of ‘buy term and invest the difference’, many Americans are approaching retirement with little to show for it. We don’t like using scare tactics to sell products, but do yourself a favor and re-read the snippet from the Journal. Before you start (or continue) down the UL path, consider that this method has proven to be unreliable at best. These contracts rely on assumptions that interest rates will remain at or above a certain level, and/or the stock market returns a certain amount annually.
Sadly, market performance and interest rates not only impact the performance of an individual policy, it can impact all UL policies sold by that company. From the Journal again (emphasis added) –
With future profits expected to be hurt by low rates, at least a half-dozen insurers have invoked policy provisions that they say allow them to raise the rates used to calculate the annual cost of customers’ term insurance, according to ITM TwentyFirst, which provides policy-management services.
This means some customers see costs rising not simply because they are a year older, or because their savings account didn’t grow as planned, but because their insurer has changed its price formula. As a result, even some customers who kept their policies well funded are being hit with unexpectedly higher costs.
We like to say “it’s the process, not the product” when talking about the Perpetual Wealth Code(TM) and the benefits you can create. In the case of UL products, it appears the product can actually derail the process even if you follow it properly. Thankfully, there is a better way.
The objective when purchasing a permanent life insurance policy is to create a legacy that you can pass to your loved ones when you pass away. A more immediate benefit is the ability to access your saved capital now and into retirement. The gold standard for building both the legacy and accessible capital is a properly designed Participating Whole Life Insurance (PWLI) policy. Premiums remain level, both the death benefit and cash values are guaranteed, and the insurance company cannot change the cost/benefit if the market declines.
Feel free to contact me with any questions on PWLI or how to incorporate the Perpetual Wealth Code(TM) into your life.
[i] – https://www.wsj.com/articles/universal-life-insurance-a-1980s-sensation-has-backfired-1537368656?mod=hp_lead_pos5
[ii] – https://www.wsj.com/articles/a-generation-of-americans-is-entering-old-age-the-least-prepared-in-decades-1529676033?mod=article_inline