Universal Life Insurance: Never Again


I started my career in insurance in 1987.  It was the golden years for Universal Life insurance.  The Modified Endowment Contract (MEC) rules had not been adopted as of then.  Interest rates were high and the cost of insurance was low.

I was taught to use Universal Life insurance as an alternative to a bank’s C.D. but with the ability to shelter money from the Internal Revenue Service.  Ah, those were the days!

Unfortunately, what I was taught was only good for illustration purposes.  The facts were a bit different.  Universal Life insurance is primarily a Life insurance policy.

Universal Life insurance illustrated wonderfully for those people who were retiring at 65.  Unfortunately, 5 years later huge chunks of their life savings were going to pay for Life insurance premiums.

PAST EXPERIENCE 

Once the law-suits started flying I had to spend a considerable amount of time explaining to people that the plan that was sold to them as an investment vehicle had eaten up a large chunk of their life’s savings.  The agents who sold the plans as investments had taken their commission and were long gone.  They left it up to the rest of us to clean up their mess.  It was not a happy time.

I survived that experience but I learned several lessons.  Perhaps the most important lesson that I learned is that you should never try to use Life insurance as a long-term investment plan.

Life insurance has a place in your portfolio but it should never be confused with a savings or investment plan.  If your financial goal is to create wealth for your loved ones when you die, there is no better vehicle than Life insurance.

If, however, your financial goal is to save money for your child’s education or your retirement, there are other vehicles that will help you without you having to pay for Life insurance benefits.

CURRENT CONCERNS

Last week I received notice from no less than 3 large life insurance companies that they were suspending sales of Universal Life insurance until interest rates rebound.  I was curious, “What has changed?” that would cause 3 insurance companies to stop selling Universal Life insurance after they have tried to change my mind about that type of Life insurance for years.

My studies showed me that last month the National Association of Insurance Commissioners adopted a new rule that retroactively affects many Universal Life insurance plans that went into effect as far back as July 1, 2005.

Rule A.G. 38 changes the way insurance companies must deposit money into a reserve account for certain Universal Life insurance plans.  From the memos that I have gotten, several insurance companies have decided that with interest rates less than 1% they cannot meet the new guidelines on any future business.

They cannot do anything about plans that already exist.  The NAIC changed the rules on them during the middle of the game.  Their decision is to “cut their losses” and stop selling Universal Life insurance until interest rates go back up.

SOLUTION

After what I went through in the 1990s with Universal Life, I have not been a big fan of that type of insurance.  I understand that their have been consumer protections added to the policies in the last 20 years to protect people from the abuses of the 1980s.  I just do not trust any interest based Life insurance product.

During my first year in insurance I was taught, “Insure permanent needs with permanent insurance and temporary needs with temporary insurance.”  I still believe that approach works.

Rather than “Flexible” or “Adjustable” Universal Life insurance, I prefer a combination approach to Life insurance planning.  Permanent insurance needs like funeral expenses and probate fees should be insured with Whole Life insurance.  Bigger temporary needs, like replacing income or setting up a college trust, should be funded with Term Life insurance.

When the final cost is compared, the combination plan is often very similar to the cost of Universal Life insurance.  It just does not carry the same level of governmental risk.

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