Throughout these emails, when referring to permanent insurance, I have almost always meant whole life. However, since the late 1970’s, several other types of life insurance policies have been introduced which could be categorized as permanent; universal life (UL), variable life (VL), and indexed universal life (IUL). I emphasize could because if they are not monitored and funded properly, they could just wind up being expensive term insurance.
One of the criticisms of whole life is that it takes an actuary to figure out how much of the premium is going towards the actual cost of insurance and how much is going towards “savings” (although if you have been reading these missives, you know that the so called “savings” component is actually a reserve to pay future claims). Universal life solves this “problem” by unbundling all of the components of the premium, albeit at a cost (to the policyholder, not the insurance company).
The common analogy used to describe UL is that premium goes into a bucket, with the expenses (premium loads and cost of insurance and riders) being taken out of the bucket, and what’s left in the bucket will be credited with the current interest rate of the policy. As long as there is enough money in the bucket (the policy) to pay the policy expenses, the policy will remain in force.
There are two types of UL on the market today, current assumption universal life (CAUL) and guaranteed universal life (GUL). CAUL was the first UL policy introduced in 1979. With the high interest rates in effect at that time, it required a premium that was significantly smaller than whole life to keep the policy in force for the insured’s lifetime.
The problem was that the smaller premium was dependent on the high interest rates, and when rates came down, the required premium increased. By the late 1990s and the early 2000s, insured’s found that the “permanent” policies that they bought in the early to mid-1980s required significantly larger premiums to stay in force.
This led to the introduction of guaranteed universal life, which the insurance company guarantees will remain in force as long as a stipulated premium (the guaranteed premium) is paid on a timely basis. Most GUL policies have very little if any cash value in later years. Additionally, in the current low interest rate environment, a much larger premium is required than when interest rates are high.
These policies were touted as very consumer-centric when they were introduced, and they certainly have value when used in the right situation, and monitored properly. However, they are not “one size fits all”, as the financial media is wont to portray them. The fact that they have flexible premiums doesn’t automatically make them superior to whole life. Like any other financial vehicle, they must be analyzed in relation to your goals and objectives to determine if they are an appropriate fit.