The Truth About Universal Life Insurance

Following up on our post from last week about whole life insurance we figured we’d give equal time to another product that is probably more mis-represented than any other life insurance product available, universal life insurance.

First, It’s not Whole Life Insurance

universal life insurance truthThis one comes about more by laziness and ignorance than anything else. Those who work in media, even financial media, don’t really possess mastery knowledge of the items they discuss. To be clear, both whole life insurance and universal life insurance are forms of permanent life insurance (aka cash value life insurance), but they are very much NOT the same thing.

Universal life insurance brings considerable more flexibility to the table with certain policy types that tend to have higher anticipated returns. For this, there is a trade off on the guarantees that whole life insurance makes available. That doesn’t mean the universal life insurance has no guarantees, simply that it’s guarantees are at lower levels than that of whole life insurance.

Second, Speaking of Guarantees, Universal Life Insurance isn’t likely to Blow up and take your Money

There are two types of people who enjoy perpetuating this one. On the one hand, we have agents who exclusively sell whole life insurance and on the other we have journalists who know the old mantra “if it bleeds it leads.”

At issue the is the fact that many universal life policies were sold in the late 80’s with extremely over idealized interest rate assumptions, and were sold as a means to knock premiums down for a given death benefit. We’ve noted before that universal life insurance is not a cheap alternative to whole life insurance, and this is where it all went bust.

You see, if interest rates had stayed where they were, everything would have been fine, but unfortunately that didn’t happen. But what happened wasn’t a function of a bad product, it was a function of improper application of a product. There are plenty of universal life policies that were issued with more realistic interest rate assumptions that are doing just fine.

Third Insurers are not going to Willy-nilly Raise your Insurance Rates

This one comes from the deep dark corners of ignorance. Well, actually it probably originated from the shrewd marketing department of a mutual whose interest in seeing universal life insurance sweat over consumer confidence, but it’s perpetual motion exists due to insurance mechanics ignorance or intentional deceit (after today if you choose to still promote this lie, we’ll know which side of the fence you fall on).

The myth goes something like this:

Because insurers have the ability to raise the cost of insurance on universal life insurance contracts, you could lose your coverage and all your money because the insurer decided to gouge you in order to increase their profits.

universal life insurance changes

The truth is increasing the mortality charges on a universal life insurance contract (which an insurer can do) requires that the insurer actually experience a higher claims rate than was assumed when they issued the policy. And this sudden increase in claims never happens.

I should be clear on pointing out that such an event would require a sustained increase in claims experience. An insurer that had a year where more people died than anticipated would not warrant an increase, which by the way requires regulatory approval.

Instead the more common event that has taken place over the last several years is a mortality refund. This takes place as an interest boost that refunds the client for excess insurance costs once an insurer realizes that it’s claims experience was much less than anticipated.

In fact, I know of no one who has increased their mortality rates on universal life products. I’m not saying it has never happened, I’m just not aware of anyone who has done it, and would also point out that I’m aware of no one who has made any increases anywhere near the maximums. To do such a thing, would pretty much take a company out of the cash value life insurance business forever.

Forth, Administrative Charges aren’t going to Change either

We talked about this one about a year ago on the Financial Procast when John Greaney suggested that admin charges could be increased to help pay for the next Home Office reno project to keep those solid gold fixtures looking spic and span. No.

As someone who has been to a few insurance company home offices, I can assure you they are anything by palaces. Sure they may have a nicely decorated reception area, and a few nice conference/board rooms (and the President and/or CEO’s office isn’t terrible) but it’s far from lavish. In fact, one of the worst bathrooms I’ve ever been in was down the hall from a training/conference room at a large and relatively well known insurer (and the conference room was nothing to get excited about).

Simply put, insurers don’t tend to waste a lot of money on administrative nonsense. In fact, when it comes to CEO’s no life insurer tops the top 100 list of CEO annual compensation according to Forbes for 2012. You’d have to go down the list all the way to number 153 to find the first major life insurer, and that’s Prudential Financial’s John Strangfeld. And since we’re talking Prudential Financial (the entire conglomeration) that’s a bit of a stretch.

If we wasn’t to find a company more focused on just insurance, we find Unum position 233, but even that’s a stretch as Unum isn’t much of a life insurer. In fact we can’t find we have to fall all the way to spot 318 before we find the CEO of a bona-fide insurance company (and one engaged in the universal life business in fact the largest issuer of the product in the US) Lincoln National—a company that site 83 spots higher on the fortune 500 list than on it’s CEO’s compensation list

And fifth, Death is Death, Universal Life Insurance is no more Expensive

This one really isn’t a myth, more of a point that builds off point #3. For some reason, some people like to pretend that there is something special about whole life insurance contracts—that some magical potion was used to make the people insured by the policies less expensive. Not true.

Whether an insurer is issuing a life insurance contract on an individual with whole life insurance or universal life insurance, the probability of that person’s dying is unaffected by the type of policy issued; therefore the cost of providing an amount of death benefit is no different product to product.

I bring this up to point out that, just like mutual insurers who major in the issuance of whole life insurance and love to gloat about their well managed risk and the benefit that brings to the table as dividends paid to policy holders, companies who have spent their time focusing on universal life insurance also have managed their risks extremely well and not found themselves underpricing their products.

Know this, if something were to happen that would cause a dramatic change to the cost structure of a universal life insurance contract, there is a good chance that event would affect whole life insurance as well.


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