Universal life masquerading as whole life

by David Lewis

Today’s email is going to be a bit more technical.

A couple of people have asked me why I don’t recommend universal life insurance.

It’s all the rage these days… especially indexed universal life insurance.

And, when I mean rage… I mean it’s Lady Gaga popular.

The sales pitch for it goes a little something like this:

“Earn the upside of the stock market without any of the downside risks.”

What more could you want?

It’s supposed to be an alternative way to plan for your retirement.

Here’s the skinny:

The way all universal life policies work is… they are a combination of term insurance and a cash account.

This sounds kinda similar to whole life (which works to the advantage of companies selling universal life).

And, in principle, they are very similar… not the same, but similar… but the mechanics of how it all works is very very different.

And it’s those differences that create some of the problems.

I won’t go into the history of universal life today except to say that it was a product that was created in a sort of panic by the insurance industry… in response to criticisms about whole life made by Ralph Nader in the 1970s and by Congressional testimony of A.L. Williams company (whose expressed mission was to destroy whole life insurance as a product and instead sell mutual funds and term life insurance as an alternative solution).

Anyway, one of the reasons I don’t recommend it is because of its complexity.

The way the product is designed, it “unbundles” the cost of insurance from the policy’s savings component.

This is supposed to increase transparency, which it does, but it also increases complexity.

I consider myself pretty good at explaining things… and even I struggled to relay just the ESSENTIALS of these policies to clients.

Now, I don’t know the last time you voluntarily sat down with an insurance salesman for 3 hours… but let me tell you something… we see you start to doze off after 20 minutes which is why we keep talking…

Subliminal messaging.


The mechanics of universal life resemble a Rube Goldberg machine… with the difference being each moving part in the policy actually does something that matters.

And oh boy are there moving parts.

Let me give you just one teeny tiny example:

One insurer who sells this type of policy makes it very clear that there are charges assessed on each policy premium you pay (which are usually paid every month).

However, the charges vary according to the amount of premium you pay… and may be more or less in specific years.

The result is… in year 2 of one of their policies, it is 25% less expensive to pay the first 2 years worth of premiums in the first year. Not only does this have a significant impact on the long-term cash value buildup of the policy, it affects the death benefit, too.

Then… later on… at around year 10… there is a 40% savings for simply skipping year 10’s premium and paying just a little more in year 11.

These “discounts” are a function of how fees are charged internally and so it’s not like they come right out and say… “you’ll save 40% by skipping this year’s premium.” You have to do a few calculations to figure out the difference in the cash value growth based on how you pay your premiums.


It’d be nice if every insurer price their policies the same… but they don’t. Meaning, this tactic has to be recalculated for each and every company. There is no standard internal pricing mechanism when it comes to this kind of thing.

And that is just one of about 3 to 5 different moving parts inside of a BASIC universal life policy. Indexed universal life has MANY more moving parts.

And each one can impact the other in unpredictable ways.


… one reason I think these things have gotten to be such a mess is because the insurance industry abandoned the integration of insurance and savings… which radically simplified a multitude of complexities inherent in financial planning… and opted for an analytical approach…

… an UNintegrated approach… breaking apart that which was essentially simple…. and by doing so, radically INCREASED complexity with the alleged benefit of transparency.

… but at the same time… because of all the complexity… they had to “sell” the idea as “a product that performs basically like whole life insurance.”


Now why do I mention all this?

Simple, my friend.

It’s because I abandoned that complexity years ago and now use either term life insurance, whole life insurance, or a combination of both to protect your business, family, and savings from catastrophic loss.

Most of my plans are brain-dead simple.

So simple, some people TRY to make them more complicated than they really are.

But… my wily ways are NOT for people who worship complexity.

There’s nothing inherently wrong with complicated things… but when it comes to finance, I prefer simplicity.

And so do my clients.

And if you want to be one of them, here’s where you sign up:



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About David

David Lewis is a licensed life insurance agent, and has worked in the life insurance industry since 2004. During that time, he has worked with some of the oldest and most respected mutual life insurance companies in the U.S. To learn more about him and his business, go here.