We’ve long argued that many of the scare tactics used to dissuade people from universal life insurance products are very heavy-handed. The “evidence” exists mostly as anecdotes concerning “I know someone who knows someone who” once owned one of those products and bad things happened.
For the most part, bad things involve a requirement to contribute additional premium later in life because, as the story always goes, the product failed to deliver. This is a fundamental misunderstanding of universal life insurance and shows the lack of proficiency these so-called experts have regarding the product.
Universal life insurance, by its design, affords the greatest amount of design flexibility of all the available life insurance products. But with this design comes the responsibility of the owner–and almost equally the agent–to use the product for its correct intended purpose.
It is not a cheap alternative to whole life insurance. $1,000,000 of universal life insurance should not be considerably cheaper than $1,000,000 of whole life insurance when seeking comparable features. This idea, that universal life insurance somehow magically allowed people to buy death benefit at serious discount to other life insurance options, is at the core of every universal life insurance horror story floating around the internet.
We’ve pointed this out a few times in the past.
But today, I want to highlight the frailty of the common argument against universal life insurance through real evidence. An actual policy. An actual policy put in force 10 years ago and not implemented by the owner as originally designed. But also a policy that made use of most of the features that would ensure its survivability nonetheless.
A Real Historical Indexed Universal Life Insurance Policy
We have indexed universal life policies in force. And when you’ve been doing this as long as we have, it’s not impossible that we might have a few clients who didn’t execute their policies entirely to plan. For what it’s worth, the same can be said for whole life insurance. Looking at the two products, the percentage of policyholders who strayed from the original policy plan is identical. It’s not a product problem, it’s a function of life.
We happen to have one that’s got a number of years on the clock now, and has been underfunded by a considerable amount. Is the policy doomed? No.
In fact, it’s doing just fine.
Originally, the policy projected having just under $250,000 of cash value at this point. It actually has a little under $120,000. But here’s the kicker. If the policyholder were to have paid the originally planned premium through this current year, they’d have more than $250,000 in cash value. So adjusting for the significant reduction in actual vs. planned premium, we can see rate of return is far ahead of expectations.
But this policy does have considerably more death benefit than it needs given the actual premium paid, surely this must set the stage for a dire problem. Not really. If the policyholder wanted, they could go back and back up for the forgone payments. They’d be able to make a sizeable contribution to the policy. A six figure contribution. They’d ceased paying premiums as planned around year 3 and haven’t made a single premium payment to the policy in the last three years. But that doesn’t mean they missed the boat on funding their policy.