IPB 088: Do Increased Expense Charges Really Cause Problems for Universal Life Insurance?

It seems there's no end to the bad news in our industry as it relates to increased COI/expense charges for universal life insurance policies that were sold by SOME companies. Lawsuits are popping up and embarrassing company practices are being revealed.

First, let's get a few things on the table…

Yes, within every universal life contract, the company has the right to increase charges within certain limits. There are contractually guaranteed caps set forth in the policy.


Are the problems that are being created for these policyholders a result of the increased charges or are the problems caused by chronically underfunded policies?

And before I get tons of hate mail–I'm not absolving bad behavior from insurance companies.

In a recent court filing against Transamerica (relating to increased charges in UL contracts), there are allegations of subverting agents to talk directly with policyholders (not something insurance companies ever want to do normally), withholding in-force illustrations (and/or representing a truly terrible outlook for the policies in an effort to coerce policyholders to surrender their contracts), and setting up separate phone lines to “deal” with these policyholders.

All bad, no excuses (if it's true).

However, as we've discussed over and over…universal life insurance (especially older policies that were sold with current interest rates that were much higher than anything the policies are actually earning today) is a product that needs to be managed. It's not a set it and forget it sort of product.

In the many examples of collapsing universal life insurance policies we've seen, all could have been saved by slight increases in premiums paid over the years. Of course the problem is that many people have no competent resource to manage their policy and they don't know there's a problem until there's a big problem that's compounded over an extended period of time.

The industry needs to figure out a way to do better. Life insurance companies need to do better. When they (life insurance companies) removed themselves from the distribution, they seem to have thought they removed themselves from the management/service side of the equation.

That attitude is proving to be shortsighted and foolish.

4 thoughts on “IPB 088: Do Increased Expense Charges Really Cause Problems for Universal Life Insurance?”

  1. I have an old VUL policy I bought from the largest mutual life insurance company in the United States. In my case the policy was sold 20 years ago and other than the annual statement and a periodic questionnaire about my income, I never heard from the company again.

    I was young and financially ignorant when I made the purchase and would have appreciated the insurance company, or its agent, contacting me every few years suggesting an insurance policy check-up. Perhaps some suggestions on what to do or not do with the policy as a means of keeping not only informed and interested, but investing more $$ in their financial products. Even car dealerships devise gimmicks and promotions to keep the customer coming back for service and engaged by establishing an ongoing relationship with the dealership. The dealership ends up selling more services, products and replacement cars. Duh!

    Or on the other hand maybe the insurance companies want the policies to eventually fail so they do not have to pay a death benefit? What’s your thoughts?

    • Hi Terry,

      If this is VUL, you should be hearing from the company more often than once per year. Securities products would require quarterly statements.

      As far as keeping the customer coming back for more, continuously paying premiums accomplishes of what they would need in that regard.

      If the agent remained in the industry or is still at it, it could be a time resources issue. For example, if you continued to pay premiums and never caused any sort of stir, the assumption could be that everything is going as planned. You haven’t been the squeaky wheel so-to-speak so you don’t get the grease. I know this might sound bad, but I think a lot of us forget what the other party is dealing with at any one time. I can speak from a lot of experience that there is a huge range in terms of neediness among insurance clients, and some can capitalize a lot of agent and insurance company time leaving very little left over for everyone else.

  2. This is one reason whole life insurance is a little better in this aspect. It’s close to impossible to be underfunding your policy for years as some folks do with a UL policy.

    • Hi Jamie,

      While not necessarily untrue, the bigger point we were focussing on here was that these expense assumptions can and do vary among whole life focused insurers through changes made to the dividend that require zero disclosure.

      We’ve maintained for many years that universal life insurance can be insulated from these policies if the funding level of premiums is “adequate,” which we would define as at or near the maximum allowable premium per MEC and 7702 testing.

      It’s also somewhat noteworthy that blended whole life insurance is more susceptible to the woes commonly associated with universal life insurance because dividend fluctuations can negatively affect the planned replacement of term insurance, which could lead to a greater drag on cash value growth due to higher than anticipated term insurance expenses.


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