Prior to booming interest rates from the later '70s and early '80s, your life insurance options were pretty much term insurance and whole life insurance (and these nifty things calls endowment contracts that have since gone the way of the dodo). But, as interest rates started to skyrocket and insurance companies appeared to lag way behind, many began tough criticisms of the industry for offering such tiny returns compared to CD's and other interest-based savings vehicles.
The industry maintained that its payment of dividends accounted for the fact that policy loans did not change the dividend paid (essentially taking money out without taking money out) and required a smaller dividend payment. Still, the spread was pretty great and a lot of people began taking large policy loans and placing the money into other savings vehicles with much better returns in the short run.
Some companies tried to combat the interest rate environment by changing the way in which they paid dividends. The Guardian Life Insurance Company of America was instrumental in changing the payment of dividends by pioneering what is now known as Direct-Recognition to compensate for the interest spread.
They paid a higher dividend rate by addressing what all of the insurance companies were fearing, money leaving the contracts. So, Guardian began a practice of paying higher dividends if the money stayed in the contract, and reduced the dividend on loaned values of the policy.
Others in the industry decided to go in a different direction. Instead of changing up dividend treatment, they decided to create a new product. A product that took the guarantees that Whole Life brought off the table, but allowed for an opportunity to make more money on the cash value in the policy if interest rates continued their rally. This new product was called Universal Life Insurance
