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Universal Life Insurance

Universal life offers you a guaranteed interest rate similar to that of a whole life policy, but if the carrier earns more interest, it will credit you with the higher rate. Thus, if the carrier earns 9%, you will get 9%, but if the carrier earns 2% or even loses money, you are still guaranteed to get 4% (most policy minimum).

What’s the point of all this? Well, by assuming that they’ll earn a higher return than the 4% guarantee — say, 7.5% — the carrier can assume its future cash value will be much higher, too. Since the carrier would be amassing more money in the accumulation account, it would need to collect less from you. Therefore, the carrier charges you much less than projected and this makes the policy much more competitive in the marketplace. U.L. in the News

One Problem with Universal Life

Universal life has proved to be a very popular product. However, you need to be aware of one significant potential problem: The interest rate assumption used by the carrier might be wrong and, if so, the policy will not perform as planned. If the carrier fails to earn that return, you will find that your premiums will increase. That is why we recommend more conservative projections. The results are better, It creates higher cash value and it reduces the risk of a lapse.

The danger of lapse is exactly what happened to thousands of people who bought universal life policies in the late 1970s and early 1980s. Back then, interest rates were 15%. Thus, carriers assumed they would earn 15% for the next 40 years. Of course, rates since then have been much lower, and carriers are no longer earning anywhere near those high levels. At those times, we were purposely  illustrating much lower rates in anticipation of the interest rate downturn.

Also, as a result of the downturn, insurance companies have cut their rates like everyone else. Thus, the assumptions they once used have become invalid — meaning that since the carriers are not earning 15%, their policies are not accumulating as much cash as projected. That means policyholders who decided to follow the advice of "high hope" agents must make up the difference — in the form of higher premiums. Thus, many policyholders are being told that their premiums are increasing — even though they bought "permanent" insurance to avoid that problem. And they have little choice, for if they don’t pay the higher premiums, they’ll lose their coverage. 

This can be a big problem, but you can avoid it. How? Simply by knowing what you’re buying and asking questions. If you understand universal life and recognize the possibility that future premiums might increase if you don't prepare in advance, there’s no problem. After all, your alternative is to buy whole life and pay those higher premiums today. So, many people conclude that it’s better to choose universal life (and acknowledge the possibility that premiums might rise) instead of paying those higher costs now as whole life would demand. Others argue that whole life is better because you enjoy the confidence of knowing that your premiums never will increase.

So which is best? It depends.

If you want to be certain that your premium will never rise, choose whole life.

If you want to pay less now and plan well, choose universal life, and base your premium on lower assumptions. Need help?                    Term VS Permanent Insurance. Which is best?