The Universal Life Insurance Myth

The Myth of the Rising Cost of Universal Life Insurance

For years, those who favor whole life insurance have told us that universal life insurance has an evil side.

The product with an optimal expense structure that affords the policyholder ample opportunity to adjust premiums as personal finances require also possesses the nasty cost of “shifting the risk back onto the policyholder,” thus (a favorite line of mine) “taking the sure out of insurance.”

This “awareness” campaign has enjoyed a certain degree of success. The number one concern about universal life insurance that we hear from those looking to buy a policy is the rising cost of insurance as they age.

Somehow, the companies that manufacture whole life insurance magically stop your probability of dying from increasing as you age.

Perhaps there is a fountain of youth in every home office. Maybe they dip the policy pages in it prior to sending it to you, and that’s why it takes them so long to arrive!

The Theory…

Just so we’re all clear, let’s start by laying out the “theory” about how universal life insurance works vis-à-vis the crippling expenses later on in a policy’s life.

I was a career agent at one of the big and well-known mutual life insurers where universal life insurance was a dirty word, so I know this story pretty well (sadly, I used to tell it).

Universal life insurance is nothing more than yearly increasing term insurance with a savings account.

So, long as you have enough money in the policy to pay for the rising cost of insurance (as well as a few other administrative fees), the policy will remain in force.

But…

Just like the seemingly out-of-control rising premium on level term insurance that has come out of its level period, universal life insurance has an exploding expense component that has ruined many a life insurance buyer’s policy as they aged.

Whole life insurance doesn’t suffer from this problem since the premiums are fixed from the beginning, and no rapidly rising cost of insurance can come along and bury your policy.

Oftentimes, a term insurance ledger/illustration (having nothing to do with universal life insurance and therefore priced on very different assumptions) is used to illustrate (more like overemphasize) the point.

…and the truth

The actual expense for universal life insurance comes from the net amount at risk.

This is the difference between the death benefit and the cash value. When properly designed for cash accumulation, the plan is to continuously minimize the net amount at risk to ensure minimal insurance expense under the regulations that stipulate the qualification features of life insurance.

Since this amount (the net amount at risk) is ever-decreasing in later years, the actual expense does not rise nearly as substantially as would be the case under a constant death benefit amount.

This example will help separate fact from fiction.

Example

Using an indexed universal life insurance policy sold to a 35-year-old male with a standard risk class funding at $35,000 per year to age 65 and using the policy to generate income from age 66 to age 100 (projected generated income assuming our regular 6% per year index credited interest rate is ~$172,000 per year), we see that the average cost of the insurance contract relative to the total cash value in the policy from age 66 to 100 is 0.23%.

That’s very slightly below one quarter of one percent.

For those who are interested, here’s the per year breakdown of the contract from ages 66-100:

Age COI Policy Fee Insurance Contract Costs Total Cash Value Contract Costs/Total Cash Value
66 $4,584 $60 $4,644 $2,745,361 0.17%
67 $5,051 $60 $5,111 $2,912,502 0.18%
68 $5,636 $60 $5,696 $3,088,999 0.18%
69 $6,188 $60 $6,248 $3,275,446 0.19%
70 $6,865 $60 $6,925 $3,472,305 0.20%
71 $7,586 $60 $7,646 $3,680,152 0.21%
72 $7,646 $60 $7,706 $3,900,328 0.20%
73 $7,623 $60 $7,683 $4,133,654 0.19%
74 $7,244 $60 $7,304 $4,381,288 0.17%
75 $6,536 $60 $6,596 $4,644,428 0.14%
76 $5,550 $60 $5,610 $4,924,292 0.11%
77 $6,583 $60 $6,643 $5,219,800 0.13%
78 $7,753 $60 $7,813 $5,531,745 0.14%
79 $9,119 $60 $9,179 $5,860,905 0.16%
80 $10,853 $60 $10,913 $6,207,928 0.18%
81 $12,388 $60 $12,448 $6,574,086 0.19%
82 $14,628 $60 $14,688 $6,959,795 0.21%
83 $17,169 $60 $17,229 $7,365,906 0.23%
84 $20,113 $60 $20,173 $7,793,218 0.26%
85 $23,518 $60 $23,578 $8,242,519 0.29%
86 $27,738 $60 $27,798 $8,714,272 0.32%
87 $33,165 $60 $33,225 $9,208,561 0.36%
88 $39,631 $60 $39,691 $9,725,643 0.41%
89 $46,807 $60 $46,867 $10,266,130 0.46%
90 $56,019 $60 $56,079 $10,829,293 0.52%
91 $66,659 $60 $66,719 $11,414,982 0.58%
92 $62,577 $60 $62,637 $12,039,732 0.52%
93 $54,599 $60 $54,659 $12,709,921 0.43%
94 $41,828 $60 $41,888 $13,433,249 0.31%
95 $23,084 $60 $23,144 $14,219,116 0.16%
96 $26,203 $60 $26,263 $15,048,724 0.17%
97 $559 $60 $619 $15,954,431 0.00%
98 $638 $60 $698 $16,914,289 0.00%
99 $724 $60 $784 $17,931,546 0.00%
100 $825 $60 $885 $19,009,642 0.00%

For what it’s worth, this specific contract has a 1% floor on the indexing account; at no point does the expense of the contract ever exceed 1% of the cash value in the policy (at it’s peak, it barely breaks one half of a percent).

Furthermore, if the indexing account does better than the assumed 6%, the ratio of expense to cash value goes down (i.e., it gets more favorable to the policyholder).

As we can see in the above example, the suggestion that universal life insurance expenses explode later in the insured’s life is a story based on an itty-bitty piece of truth (the cost per thousand of death benefit does rise) blown largely out of proportion in an attempt to scare people away from a perfectly good product.

Universal life insurance is not a ticking time bomb, but I suppose that story makes for a more interesting headline.

If you’d like to see how a universal life insurance policy might work for you, book a consultation with us.

About the Author Brandon Roberts

Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. Brandon was born in Northern New England, and he currently calls VT home. He attended Syracuse University and graduated with a triple major in Economics, Public Administration, and Political Science.

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