One of the biggest selling points for Universal Life insurance policies today are their secondary guarantees. Have you ever heard of them? What’s been happening with Universal life insurance policies is that they are very reliant on interest rates. How are interest rates today? Lower than anyone ever thought they would be, even the life insurance companies, but especially the agents selling you the policy. Well, truthfully, I don’t think the agents really cared, but that’s a whole other can of worms.
If we look back at the history and structure of a Universal Life insurance policy you can begin to understand how much they rely on the return the cash value of the policy receives. If you think of your Universal Life insurance policy as a bucket you need water in that bucket in order to keep your policy.
The life insurance companies got smarter again. They realized that consumers where having problems with their Universal Life insurance policies as interest rates fell. They can’t have people upset with them because that means people will buy less life insurance. So how did they fix this? The created secondary guarantees for Universal life insurance policies.
Universal Life insurance policies were born out of the ‘buy term and invest the difference’ concept. Life insurance companies knew they needed to compete with that concept so they created a life insurance policy that allowed you to ‘buy term and invest the difference’ within the policy. This internal structure also created a lot of flexibility for the life insurance policy as well. That’s how they where sold throughout the 80s and 90s, as flexible life insurance.
This flexibility meant that you life could happen and you could still keep your life insurance policy. If you miss a premium payment, they just take the money out of the cash value. If you want to increase or decrease your life insurance coverage you no longer had to get a whole new policy, they just adjusted your current policy. If you didn’t want to pay for your life insurance for the rest of your life, you could now pay more in the early years so that you didn’t have to pay later on and your life insurance would still be there for you.
These were just some of the great benefits that the flexibility of Universal Life insurance provided for the policyholders. However, with extra flexibility comes more places that mistakes can be made. This is where your life insurance person becomes that much more important. Most of the life insurance agents didn’t understand how Universal Life insurance policies worked. In fact, most still don’t. Insurance agents were selling the policies the way people wanted them regardless if it was best for the person. They gave people what they wanted.
What happened was Universal Life insurance policies were too lean. What I mean is that they became too dependent on the returns the cash value got. If the returns dropped (as they did) the policies need more money. No one likes being told they had to payment, so it was time for the life insurance companies to step up. The stepped up with secondary guarantees.
Most Universal Life insurance policies sold today are sold with a secondary guarantee. What the secondary guarantee says is something along the lines of, if you continue to pay at least $X amount of premium, this life insurance policy is guarantee by the good faith and claims paying ability of ABC Insurance Co. regardless of the cash value in the policy. The key is the ‘regardless of the cash value’ in the life insurance policy. This meant that if your Universal Life insurance policy ran out of cash value, you could still keep the policy in force and your premium stayed the same.
Great. Now you don’t have a life insurance policy that is as reliant on the cash value within it. Now you can save policyholders and insurance agents from themselves.
What people don’t understand is that these secondary guarantees are basically minimum premiums. If you fall below that minimum premium (i.e. miss a premium payment), this secondary guarantee will most likely go away. Most life insurance policies won’t let you re-instate a lost secondary guarantee or if they do it will be a higher premium than it originally was. You’ve now lost that flexibility that was the huge selling (or buying) point of Universal Life insurance.
Today’s Universal Life insurance policies are glorified permanent term insurance. People pay the secondary guaranteed premium which usually means the policy will have little or no cash value build up. The secondary guaranteed premiums are the minimum to keep the policy in force so they are not set to help you build cash values in any way. They become term insurance, policies that will cover you for a set period of time (in this case permanently) with little to no walk away value. Just make sure you don’t miss a premium, because as with term insurance, you just might lose your permanent policy.
If you read this policy and are wondering what kind of Universal Life insurance policy you have, I completely understand. Pick up the phone and ask your financial planner and/or life insurance guy. What did they say? If their answer doesn’t sound quite right or you still have questions, contact me. Or better yet, just get an insurance assessment.
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Excellent assessment & analysis. I have a term policy in place. Would you ever consider whole life or universal life insurance?
.-= Jason @ MyMoneyMinute´s last blog ..Wine On A Budget: Oak Creek =-.
Jason:
I would definitely consider whole life or universal life depending on your situation. The biggest problem with term insurance is the opportunity cost. That money has one use and one use only and the only way you’ll get anything back is if you die. But not everyone is in a financial position to do more than term. So it’s the best place to start.
I’m just not sure I understand the benefit of using it as an investment, rather than just as insurance. Is there just more of a security to a life insurance policy involved? Perhaps a stable, fixed percentage of return?
I’d imagine you could make more investing in the open market, or in real estate, rather than in an insurance product. Also, more flexibility in how/where you invest your money, although I’m sure there’s flexible life insurance products that would allow for various investing tactics.
Don’t mean to open a huge can of worms, but I am curious when a whole life policy would and wouldn’t be better than term life. Both are obviously purchased for different reasons.
.-= Jason @ MyMoneyMinute´s last blog ..Unemployment Benefits – Denied! =-.
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