Universal Life Insurance’s Problems — Todd Langford

The universal life idea came up – really in the 80s is when it got very popular. The reason that it came about was actually because we saw bank rates get very high and insurance companies came under competition with the banks and so this idea of universal life came out which was really – rather than being a one piece product, it was really it’s really kind of two pieces. You’ve got a savings account with a term insurance policy, so that term is going get very expensive as time goes on, and whether that be universal life straight universal life, that’s in fixed assets or variable universal life where the the savings portion of it is actually invested in the marketplace and the end results are similar. As that term insurance increases, it takes more and more of the savings account to cover that death benefit, and so unfortunately what we’ve seen is there were estimates made on the universal life back in the 80s when the bank rates were high – of doing huge returns. Well, those rates have dropped since the eighties and the result is – on policies that were minimally funded, since we can vary the amount of premium we put in there people put the minimums in there and hoped that they would carry based on high rates of return. The sad part about what’s happened is those policies are coming apart because there’s not enough cash value at the rates that we’ve seen since the 80s to cover the term insurance cost and keep the policies in place. They’re considered permanent policies – it’s kind of interesting – I don’t really know why because they don’t endow. On a whole life policy on the other hand is a complete product that’s put together that has a time of endowment where the policy actually is completed, and at that point in time it pays out even if the individual is still alive, so that is in my mind a permanent policy because it’s gonna be there all the way through. The fluctuations that occur in the market are going to change at some level. The returns – the amount of cash that grows inside the life insurance policy, but they’re not going to destroy it, and the difference between those two – it comes down to one word and that’s guarantees. Okay, that’s what makes the difference. In the whole life policy we’ve got guarantees. We’ve got guarantees on the premium – it can’t ever go up. We’ve got guarantees on a portion of the cash value. We’ve got guarantees on the death benefit. Those are things that don’t typically exist in the Universal Life Products. The premiums can fluctuate when they become short, the death benefit can fluctuate – all of those things are pieces that are that are not guaranteed and when we’re talking about something like family security – isn’t that supposed to be the guaranteed part of our financial plan? Why would we risk that portion? And If I really want to risk that portion – I can always borrow money against my whole life policy and go put that in the market. Now I would never do that, but it would at least be safer than buying something that’s always exposed to that risk that exists out there.

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