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Universal life: Your Policy May Be Evaporating
Tuesday, 08 May 2018 12:30

Do you own any life insurance that has cash values? Then we need to talk. Here's why:

In the old days, one could buy a life insurance policy, and put it in a drawer. Pay your premiums, and that policy would be okay for years, decades, an entire lifetime. That's not always true today. Modern policies require periodic reviews to make sure they are meeting your needs.

Most modern life insurance issued today is flexible premium, adjustable life insurance, commonly known as Universal Life, or UL.

Universal Life comes in several versions, listed in order of their invention:

  • Current Assumption Universal Life
  • Variable Universal Life
  • Guaranteed Universal Life
  • Indexed Universal Life

The first Universal Life policy was issued by E.F. Hutton Life in 1979, when interest rates were on the rise.

The original version of Universal Life, a product we now call Current Assumption Universal Life, pays a stated interest rate on the policy's cash values, subject to a minimum guarantee. That excess interest rate is declared by the issuing company, and is based on the returns of the issue company's general account. As interest rates have declined, so have returns on insurance company general accounts, and likewise, the declared interest rates on older Universal Life insurance polices.

Variable Universal Life soon followed. It allows cash values to be invested in variable sub-accounts that can produce investment returns similar to mutual funds, with all the market risks that come with investing in securities, including loss of principal. These market risks are compounded by the fact that the cost of insurance is deducted from those variable sub-accounts every single month, even when the markets have had negative returns.

The next product introduced was Guaranteed Universal Life. This product's current versions is like Whole Life, without the cash values. It is essentially level term for life, or level term to age XX (where XX is an age specified in the policy). This policy often has no cash values at all, but if it does have cash values, they will eventually disappear over a lifetime, although the coverage and premiums may be guaranteed all the way to age 121. These products are designed for protection, and not designed for cash value accumulation.

As interest rates have declined over the last three decades, causing Current Assumption Universal Life (as well as Dividend Paying Whole Life) to under-perform their projections, with two Black Swan events in a decade that often caused irreparable harm to Variable Universal Life policies, the latest derivative of the Universal Life chassis was introduced: Indexed Univeral Life

This latest version of Universal Life pays interest above a minimum guarantee, and that interest is linked to an Index, like the Standard & Poors 500. Interest credited is often subject to a cap, but comes with an interest rate floor, so that the policy cash values are not reduced by negative market returns. All of these polices can seem complicated, which is why a prudent person will retain the services of a professional life insurance agent that knows how these products are designed, and can best match a product to solve your particular problem.

The life insurance business is extremely competitive. Old polices can often be replaced with newer policies that have lower premiums, better coverage, and superior returns on cash values. On top of these improvements, modern policies have new living benefits for critical illness (cancer, stroke, heart attack, etc.) and chronic illness (providing benefits where Long Term Care may be required).

If you have an old policy, it's a good idea to have it audited by a veteran professional that knows the history of life insurance, and how to take advantage of tax laws that allow old life insurance to be improved with new policies. That's where I come in.
For a free initial consultation, call me today at (800) 680-5596, or send me an This e-mail address is being protected from spambots. You need JavaScript enabled to view it .