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A fight rumbles within the life insurance industry about product selection and this often results in some agents pledging their allegiance to a specific type of life insurance. While both parties find value in the use of cash value life insurance, they disagree quite aggressively about which type of cash value life insurance is appropriate. For some, whole life insurance is the only product you should ever consider. For others, universal life insurance–and more specifically indexed universal life insurance–is the bee's knees.
The truth is, they are both wrong.
Wrong in the sense that they often suggest that it's either all whole life or all indexed universal life. But interestingly, it's the whole life-only crowd that appears to be the most vocal in its opposition to the other team. This isn't the first time we've addressed this on The Insurance Pro Blog. But in the wake of the Ohio National news, it seemed appropriate to note that some of the key arguments made in favor of whole life will likely fail to come true for ONL policyholders.
Whole Life Is Superior Because It's Guaranteed
Every time we mention our agnostic position on this subject, we receive a flurry of emails reminding us that whole life provides numerous guarantees that universal life insurance products simply do not offer. This, in a very limited context, is correct. But my long-standing argument is that it completely ignores why people are buying these types of life insurance in the first place.
A large number of cash value life insurance buyers are making these purchases for the cash value. They learn about its many uses and decide that what it offers will fit well into their portfolio. A portfolio that ultimately seeks to build personal wealth.
In my humble opinion, the guaranteed accumulation rate of cash value life insurance (regardless of type) is terrible relative to investment options with similar risk profiles. In other words, the guarantee is fine, but it's not a motivating purchase consideration. If you truly believed the circumstances that would drive whole life insurance (or universal life insurance) to perform at its guarantees were likely to unfold, you'd seek out alternative options.
It's also worth noting that shear unlikelihood of these policies performing at their guarantees in our lifetime. Knowing that people are willing to commit their hard-earned money to life insurance instead of bonds, certain stocks, real estate, or whatever else have you places–in my opinion–a big responsibility on me the agent to prudently pick out a solution that reasonably balances rate of return with risk.
This seems to be an argument whole life-only agents are willing to make when they suggest that a potential client buys only from Company A because they are superior at returning value to their policyholders over company B. But something causes them to stop short of fully embracing this notion when it comes time to admit that, for some people, universal life insurance will be a better match.
Universal Life Insurance is Designed to Extract Money From Policyholder; Whole Life is Not
Whole life insurance often comes from mutual insurance companies where ownership in the company sits in the hands of those who buy insurance from the company. Universal life insurance products often come from non-mutual companies who financial obligations are to people/entities that are not necessarily policyholders. While this isn't true 100% of the time, it's true the majority of the time and so some agents run with this story to suggest that the mutual form of insurance companies is the only way to ensure a company will work hard to deliver value to policyholders.
There is no empirical evidence to support this allusion. In fact, every attempt I've made in the past 10 years to substantiate it failed. In fact, I've also failed to prove that mutual companies have safer financial profiles.
To be clear and brutally honest, insurance companies engaged in whole life and universal life sales have, at times, done things I'd describe as extracting values from policyholders. There are examples of good and bad on both sides of the aisle and those who champion whole life insurance cannot ignore the fact that these arguments works against them just as much as they work for them.
In fact, we have worked on several dozen cases where a whole life policyholder wound up in a less than ideal situation with a whole life insurance policy, and universal life insurance ended up being the best option to correct the ship.
We also have several universal life insurance policies on the books that performed very well and none of those clients have any reason to worry or be upset. The same is true for the whole life policies we put in force.
The Market Success of Universal Life Insurance Likely Led to this Situation
Universal life insurance, or more specifically the companies that primarily market and sell universal life insurance, were more successful at distributing their products through mass marketing efforts. Companies heavily engaged in whole life insurance depend on more direct relationships with agents that tend to make scale much more challenging.
This led to a much broader exposure to universal life insurance that I specular resulted in shrewd marketers deciding they'd take a different path and vehemently advocate for whole life insurance within the sea of universal life options. It's no the first time someone employed such a strategy. It's identical to the genesis of buy term and invest the difference.
But ultimately, this isn't a war between the nobility of one product and the evil of another. It's a never-ending marketing battle fought by people who simply want to make a sale and will resort to whatever message they believe will in close said sale.
