ULs, What Are They, How, When, and Why They Were Created

Let's talk about another common insurance, the UL, which stands for “Universal Life Insurance Policy”. What are they?

Universal life insurance is said to be a type of permanent life insurance. With a universal life policy, the insured person is covered for the duration of their life. This is as long as they pay premiums and fulfill any other requirements of their policy to maintain coverage. Like many permanent life policies, universal life insurance combines a savings component (called "cash value") with lifelong protection. When you pass away, the policy's death benefit is paid out to your beneficiaries. Most people don't realize that when a policy is created, it also includes term insurance. That term policy will cause the premium payment to rise as the insured ages. In my opinion, that can become a huge problem.

What are the benefits of a universal life insurance policy?

Universal life insurance offers lifelong coverage and provides flexibility when it comes to paying premiums, and choices for how the policy's cash value is invested. A standard universal life insurance policy's cash value grows according to the performance of the insurer's portfolio and can be used to pay premiums.

You have control over your investment choices. Depending on your policy details, your insurance company may give you choices for where to invest your policy’s cash value portion. No cap on returns. Universal life insurance policies use a money market-type investment that pays a market rate of return. If the market is strong, universal life insurance policies may yield much higher returns than fixed-rate whole life insurance policies. However, as with most investments, returns are not guaranteed.

What are the negatives of a universal life insurance policy?

Disadvantages Of Universal Life Insurance. Some disadvantages associated with universal life insurance include higher premiums. You can choose how much to pay based on your current financial situation. However, the actual cost of insurance will continue to increase as you age, surrender fees, lapse potential, and uncertain returns. The cost of your policy could skyrocket. Potential Negative Returns, while universal life is a form of permanent life insurance, the policy will stay in effect only as long as the cash value is enough to cover the cost of insurance — unless you have a no-lapse guarantee. Please do your research in this area.

There are also detailed stipulations. Some plans offer a "no-lapse" guarantee, which means the policy is always in effect. However, to get this guarantee, a company may require you to make payments on time. This may go so far as to cancel policies if you pay just one day late.

These plans are not for everyone and can be detrimental if not explained in detail before the choice is made.

Why and When Were ULs and IUS Created?

In 1979, the E.F. Hutton life insurance company introduced universal life insurance (UL). It was the first brand-new type of life insurance product in over 100 years. Remember the television commercial, “When E. F. Hutton speaks, everyone listens.” Have you heard him say anything lately? They don’t exist anymore!

Universal life insurance was created because of economic instability which caused premiums to soar when they were supposed to stay level. Frustrated by whole life insurance's clumsiness as a financial instrument and doubting its ability to keep pace with inflation, many traditional customers were opting for term insurance combined with an investment program utilizing some other savings medium.

Life insurance companies were in danger of losing their share of the investment dollar. Also, those policyholders who retained their whole life policies were exercising the policy loan provision more frequently, creating cash-flow problems and forcing the companies to invest in these low-yield policy loans rather than the much higher-yield investments available. The birth of ULs was to save insurance companies' commissions.

The Bottom Line…

Investopedia adds that the fees that come with an IUL policy can be hefty upfront, including a premium expense charge, administrative expense fee, insurance costs, fees, commissions, and surrender charge. IUL policies are expensive to buy and expensive to manage, with returns that Investopedia says can be “lower than policyholders are encouraged to anticipate.”

For more facts on all ULs, I suggest that you read The Real Truth About Mutual Funds, by Herbert Ringold. Then read THE BATTLE FOR THE SOUL OF CAPITALISM by John Bogle, the originator of The Vangard Fund.

These two books are vital to the understanding of what occurs in that industry. Also, read PIRATES OF MANHATTAN by Barry Dyke.

These three books should provide you with sufficient information to make an informed decision about variable life insurance, and why I personally don't sell universal life insurance. Please note that this is my own personal opinion and experience!