The Wall Street Journal recently posted an article titled, “Universal Life Insurance, a 1980s Sensation, Has Backfired”. Now I have become keenly aware over the years that very few people really take my blog to heart unless the run into a post that is an answer to their particular problem. So as I have ranted over the years about universal life insurance imploding and the new indexed universal life going down the same road, I’ve accepted that it is just me blowing off steam. But when the Wall Street Journal blows off steam they have an audience that treats their information as, well, better than mine.
Leslie Scism who wrote the article for WSJ begins by quoting an elderly person about their experience with the universal life insurance purchased in the 1980’s. “A long decline in interest rates caused premiums to soar when they were supposed to stay level, trapping retirees and forcing many to drop coverage.” “These life policies were quicksand,” says one 85-year-old customer.” The quicksand was never explained to customers who bought these policies. The universal life insurance policies were sold as the financial answer to everything. You would have plenty of life insurance, and after some years, enough cash value to retire and live on forever. That was why millions of people bought universal life insurance.
What they weren’t told was that the life insurance and the cash value, yes the entire contract, was dependent on interest rates. If the interest rate stayed high your dreams came true and if they dropped, well, “these policies were quicksand”. It didn’t happen immediately but the insidious march toward the end of your life insurance and retirement started when interest rates dropped in 2002 and have stayed low since. The low interest rates chewed away at the cash value as it was diverted to pay your increasing life insurance premiums. When the cash value ran low or out millions received letters from their life insurance companies letting them know that in order to keep their life insurance in force higher premiums were needed. Often this came as a sticker shocking increase of, say, an increase from $1000 a year to, say, $6000 a year. And remember this was just to keep the life insurance in force. Your cash value was gone and your life insurance was soon to follow.
This phenom is known in the industry as selling on assumptions. Every policy has a guarantee and from the 80’s universal life to today’s indexed universal life, most agents sell based on the pie in the sky numbers that, well, get people to sign on the dotted line. The same illustration that life insurance agents showed those customers with the huge life changing $numbers, the assumptions, also showed another set of numbers call “guarantees”. It is this column of guaranteed values that shows what happens when things don’t go as planned and these values were rarely shown to interested clients because the guaranteed values would call into question the validity of the assumed values, kind of a wet towel effect.
Bottom line. I couldn’t have said it better, but “John Resnick, co-author of an American Bar Association book on life insurance, said of hundreds of older policies he has reviewed over a decade, “easily 90% or more actually were in trouble or soon to be in trouble.” Many people “are sitting on a ticking time bomb, and most probably aren’t aware of it,” he said.” I’ve been screaming this message to the best of my ability for 10 or more years. It should be noted that the WSJ has never written an article supporting the myth behind universal life and indexed universal life. If you have a universal life insurance policy, it is more than prudent advice to have it reviewed by an agent, not the one that sold it to you, but someone that will tell you the truth about the policy’s future. If you have questions or would like me to review your universal life policy, or have purchased or are considering purchasing an indexed UL, call or email me directly. My name is Ed Hinerman. Let’s talk.