Why I almost never recommend universal life insurance

Occasionally, someone will send me a quote they got from another agent for universal life insurance. Sometimes it’s guaranteed UL. Sometimes it’s indexed UL. Don’t see too many current assumption ULs anymore. I did when I first got into the biz, but not these days. 

Anywho, I rarely recommend them to my clients for a couple reasons:

  1. “Thin funding”. A lot of universal life insurance sold in the 1980s and ‘90s assumed very high interest rates, so clients paid very little in premiums and hoped high returns would bail them out of a low savings rate/premium. Didn’t work, just like it didn’t work for pensions or investors doing a similar strategy in their 401(k). I spent an insane number of hours my first year in the business trying to fix old universal life policies clients had purchased 20 years before I got into the business. Most of them were unsaveable, though I did save a few “at great cost” as the saying goes.
  2. ULs are inherently riskier than both term insurance and whole life when used for death benefit protection. No 2 ways around this. Even “guaranteed UL” (GUL) which is advertised as “guaranteed” carries significant administrative risk as well as shadow account (and other) risks most policyholders aren’t aware of and most agents don’t know or are in denial about. People who own GUL policies from some of the major players are finding out all about that this year with carrier buybacks and degraded policy servicing. Degraded policy servicing is when the insurance company sells off their block of business to another company that doesn't really care about customer service, “forgets” return your phone calls, delays paperwork processing, or in really egregious cases, “forgets” to apply your premium properly and you end up with rising premiums or a lapsed policy. Ooops. It happens. GUL and other UL products also rely heavily on lapse-supported pricing, meaning the insurer assumes lots of people will lapse their policies in order for the insurer to make a profit. If that doesn’t happen, the insurer has to eat it or... figure out “clever” ways for policyholders to lapse their policies and get that business off the books.
  3. No adjustment for inflation with level death benefit universal life. GUL, and indexed life and current assumption UL with a level death benefit option has an “erosion factor”. If the death benefit never increases, inflation eats away at it. Plain and simple. Since life insurance companies set a maximum insurable limit for every policyholder, it’s not as simple as coming back to buy more insurance later. Eventually, you just get tapped out and have to live with a death benefit that is constantly losing value. This has never happened to dividend paying whole life insurance and probably never will. 
  4. Overfunded ULs can still collapse or underperform whole life insurance. There is a trend now with newer universal life policies (i.e. Indexed Universal Life) to overfund the policy to the maximum allowable under current IRS rules for life insurance. By doing this, agents hope to avoid some of the problems that plagued older policies. Specifically, they hope that policy charges will remain relatively low and that interest earnings will cover those charges and net the policyholder some sweet gains on cash value. But, IUL is usually very expensive and contains expense charges which consume a large portion of the policy premiums for many years. It's certainly possible for interest earnings to exceed policy charges, however the opposite is also true and I don't think many agents give that side of things much serious thought. They just assume overfunding an IUL will solve (or minimize) the potential for problems. That's not always true and, in many of the newer types of IUL (particularly those with bonuses and index credit multipliers), even overfunding cannot protect the policyholder from losing money. Even if the policy is overfunded, it can still underperform a whole life policy (or match its performance, despite taking more risk), lose money due to policy charges, or... in a worst-case scenario, lapse due to higher-than-expected policy charges and less-than-anticipated policy credits. For example, right now, life insurers can afford to offer policyholders a 5.8% cap rate on IUL. Many of them offer much higher caps than that, and are relying on mean reversion pricing or are subsidizing higher caps in other ways. Those higher caps are unsustainable and will have to come down. When, and how, those rates come down remains to be seen, but if an insurer has to "overcompensate" for holding their cap rates artificially high for too long, then you can bet it won't turn out well for policyholders.

Bottom line: when you go with whole life insurance for death benefit and estate planning purposes, you often pay more, but get more. That’s what people don’t like. They don’t like paying the higher premium and so they go with the lower premium universal life policies. Can’t say I blame them. It’s less money out of pocket. 

But, when you go with universal life for death benefit protection, you pay less, but you also get less. 

It’s not necessarily “wrong” to use universal life, per se. It’s just not my bag, baby. 

I’m all about paying more to get more, and it’s something I recommend my clients do so they don’t end up with less later on. I’m in the bid’niz of protecting my clients’ assets and that includes protecting them from inflation. 

David Lewis

This post brought to you by //The Rogue Agent//. David has been a life insurance agent, and worked with some of the oldest and most respected mutual life insurance companies in the U.S., since 2004. Learn more about him and his business, here.