We have long argued that many of the scare tactics used to alienate people from universal life insurance products are very coercive. “Proof” basically exists as an anecdote about “I know someone who knows someone, once owned one of these products, and bad things happened.
In most cases, the bad side always involves demanding to offer an extra premium later because, as the story goes, the product was not delivered. This is a fundamental misconception about universal life insurance, and it shows the lack of competence of these so-called experts in their products.
Universal life insurance provides the greatest design flexibility of all life insurance products by design. However, this design is the responsibility of the agent, who is almost as much the owner who needs to use the product for its intended purpose.
It is not an affordable alternative to life insurance. In performing a similar function, a $1 million universal life insurance policy should not be significantly less expensive than a $1 million full life insurance policy. The idea that universal life insurance somehow magically allows people to buy death insurance cheaper than other life insurance options is at the heart of all the horror stories about universal life insurance circulating on the Internet.
We have pointed this out several times in the past.
But today I want to highlight the weakness of the general claims about universal life insurance with factual evidence. The actual policy. The actual policy was put in place 10 years ago, but not in the way it was originally designed by the owner. However, it is also a policy that uses most of the viability features.
Physicals of the Universal Life Insurance Policy
We’ve indexed the current universal life insurance policy. And if you’ve been doing it as long as we have, there may be some clients who haven’t fully planned their policies. If it’s worth it, you can say the same thing about life insurance. If you look at both products, you’ll see that the percentage of insurance subscribers who deviate from the insurance plan is the same. It’s not a product issue, it’s a function of life.
Coincidentally, we found that a few years later, a significant amount of money was not enough. Is this policy broken? No.
In fact, it’s going well.
The original assumption was that the cash value of the policy at this point would be just under $250,000. In fact, it’s just under $120,000. But here’s the catch. If you had paid the premiums that you originally planned for before this year, their cash value would have been more than $250,000. So, adjusted for the significant decrease in scheduled premiums compared to the actual premiums, you can see that the returns are much higher than expected.
However, this policy provides far more death benefits than necessary, given the actual premiums paid, and surely this should be a springboard for serious problems. In fact, this is not the case. If the insured wants to, they can go back and refuse to pay. They would be able to make a significant contribution to the policy. A six-figure contribution. They stopped paying premiums as planned in the third year, and they haven’t paid premiums once in the last three years. But that doesn’t mean they couldn’t fund their policy.
Universal life insurance is flexible and provides exceptional flexibility in the payment of premiums. So, if the insured wants to, they can go back and pay the premiums. Universal life insurance is the only life insurance product that provides this flexibility in the timing of payouts.
Obviously, this will greatly increase the cost of the policy and completely eliminate the slight concern that the policy might have problems in a few years.
But let me tell you about the problems that will arise in the future, let’s look at some really interesting cost figures for this policy.
Destructive and rising fees for Universal Life Insurance
Ten years into the contract, the annual cost of the current policy is about $3,700. As you know, this has not been a particularly good year for indexed universal life insurance proceeds. The market is down a lot and the interest paid on these products is close to zero. In this case, the insurance will pay a deposit of 2 percent annually, so the insured will earn at least 2 percent regardless of the market. By the way, this year’s earnings are just over $4,100. Yes, even in a year when the market is stagnant, they will earn a net worth of $400. We are talking about a bad market year that results in a loss in insurance premiums.
Keep in mind that his policy is still in a phase where costs are increasing somewhat. A 2% guarantee could easily offset the cost as cash value charges are expected to continue to decline in the future.
However, this policy reminds us that it is a far cry from the maximum funding scenario we have talked about in the past when we indicated that policy costs are unlikely to really become an issue. This is the usual practice of indexed universal life insurance, and it’s still a good one.
There are other options for such life insurance
Policyholders can make other decisions about this policy now or in the future to reduce costs. If they really feel they will never participate in the program again, they can reduce their death benefit. This would significantly reduce costs and certainly maximize the cash value of the premiums paid at this time.
I estimate that we could cut policy costs at least in half from current levels. Maybe a little longer.
So the difference between the guaranteed interest and the current policy costs generated by the 2% guarantee is even more in the policyholder’s favor. In addition, the policy is now in the process of applying another guaranteed bonus. In the future, you will receive a bonus interest payment, as if you were saying “Thank you” to a longtime insurer.
Exaggerate the problems.
I’m not saying that there isn’t a one-size-fits-all life insurance with problems. What I am saying is that any attempt to use these problems as a reason to reject today’s universal life insurance being implemented as intended is shortsighted at best and deliberately misleading at worst.