General UL Questions

AboutThatLife

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I notice UL seems to be the hot new product, particularly, IUL. I am also aware that many people who bought UL policies in the 80's when interest rates were high are now having their policies expire due to them only paying the guaranteed premiums.

With that being said, why would anyone want a UL policy, especially because it becomes more expensive each year with its ART/YRT component. How are today's super low interest rates UL policies?

Edit: How are today's super low interest rates AFFECTING UL policies?
 
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First, WL and IUL have different DISCLOSURE requirements.

Whole life has:
- Fixed premiums
- Fixed interest rate
- Fixed death benefit

The only variation for whole life is the dividend scale.

Because everything about whole life is FIXED and costs of insurance are bundled into the premium... there is no additional cost of insurance disclosure. However, if you stop paying on a whole life policy, the APL (automatic premium loan) pays the ENTIRE premium is due, not just a cost of insurance cost... assuming there is enough cash values to keep the policy afloat.

I compare WL to a CD at a bank. There are costs, but they aren't disclosed. Why? Because everything is guaranteed with fixed interest rates.

With UL, it is an UNBUNDLED product.

UL has:
- Flexible premium
- Flexible interest
- Flexible death benefit

Because of the inherent flexibility, the costs of insurance need to be disclosed so they can be managed by the policyholder AND the agent. I would compare UL costs of insurance similar to a money market fund with a mutual fund company. The prospectus discloses that there are costs because the returns vary AND it is possible to "break the buck". (Money market funds are generally $1 per share.)

If you stop making payments on a UL policy, all that is required is enough cash SURRENDER value to continue to pay costs of insurance costs.

I believe (I haven't done a comparison) that if one stops paying on a WL vs a UL for a period of time... that the UL has a better chance of staying afloat due to the lower costs of insurance than the WL. But don't quote me on that.


Why would someone want a 'basic' UL policy? I would suggest someone who has a varying income and needs the flexibility in the product - such as salespeople, business owners, and those in seasonal occupations like construction.

Just some thoughts for you.

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Other than the traditional UL, there is also

IUL - the opportunity to earn market-type gains without losses by using stock market options in the general account. The risk with this product, is that you can have the potential of a few years in a row without a gain.

Non-Lapse GUL - essentially term to age 100 (or other age depending on product).
 
UL dates back to the 70s... it is new compared to WL... but it is not new. IUL is the "hot new product", but that is mostly because it is misunderstood by many. IUL is just a UL that is not based on interest rates. Nothing special, and it wouldnt look as good if interest rates were at their normal levels.

Id also recommend that you look at an expense report for a few ULs and IULs. Calling it ART is a very poor comparison... and is an ill-informed comparison often used to disparage UL. Yes the COI increases with age... but it starts out far less than what an ART would be. The COI of a UL is in no way comparable to ART premiums when it comes to the actual dollar amounts.
UL also has admin charges that decrease or even go away after a certain period of time.
UL COI also varies depending on the testing method and DB option chosen.

UL is a more complicated product. And should only be sold by agents who fully understand its ins and outs. If you dont know what GPT does and what CVAT does, or what Opt1 and Opt 2 are, then the only UL you should sell is a GUL.
 
"UL is a more complicated product. And should only be sold by agents who fully understand its ins and outs"

If I can add to this statement...

It should also be owned by an insured that is going to review and manage that policy over time. It is not one to be stuck in the drawer and forgotten about.
 
UL dates back to the 70s... it is new compared to WL... but it is not new. IUL is the "hot new product", but that is mostly because it is misunderstood by many. IUL is just a UL that is not based on interest rates. Nothing special, and it wouldnt look as good if interest rates were at their normal levels.

Id also recommend that you look at an expense report for a few ULs and IULs. Calling it ART is a very poor comparison... and is an ill-informed comparison often used to disparage UL. Yes the COI increases with age... but it starts out far less than what an ART would be. The COI of a UL is in no way comparable to ART premiums when it comes to the actual dollar amounts.
UL also has admin charges that decrease or even go away after a certain period of time.
UL COI also varies depending on the testing method and DB option chosen.

UL is a more complicated product. And should only be sold by agents who fully understand its ins and outs. If you dont know what GPT does and what CVAT does, or what Opt1 and Opt 2 are, then the only UL you should sell is a GUL.

My understanding of universal life insurance comes mainly from the licensing test. After passing the test I found out quickly that this was not enough info, but what I have is the following:

Basic Concept
Universal life is a two component product, the insurance component, and the cash value component. The insurance component(according to the textbook) is an Annually Renewable Term. It renews every year, as such the Cost of Insurance increases. The ART is a component of COI, but COI also includes all administrative costs, it is more "pure" than the bundled premiums in a whole life policy since it is determined yearly.

The cash value component in a Guaranteed Universal Life goes into an insurance account and functions normally, while the cash value component in a Variable Universal life goes into a separate account outside of the insurance companies general accounts.

Flexible Premium not so Flexible
The premium in a UL stays level because of the cash value built up during the early years of the policy. If only the guaranteed premium is paid, eventually the policy will reach its "no lapse" date(if it has that guarantee) and the premiums will become too expensive and the policy will probably lapse. The target premium is the true premium needed to ensure the cash value continues to grow through the life of the policy and the policy will remain in force.

Options
Option A is the level benefit option. The benefit remains level and as the cash value increases the risk to the insurer decreases, eventually the policy is endowed.

Option B has increasing death benefit. As time goes on to keep the cash value from surpassing the death benefit a corridor is established and the insurer maintains the minimum level of risk required by the IRS.

What I Dont Understand

I dont fully understand the no lapse date. If you were advertising this to someone, they would assume the "no lapse" guarantee means the policy cannot lapse, it may not lapse immediately, but it will lapse eventually if only the minimum payment is made.

The cash value from the universal life policy starts decreasing and due to the automatic loan provision, the policyholder begins to lose cash value at the rate of the increasing COI not covered by the guaranteed premium + the interest on the loan.

Variable UL's are an even bigger mess and I dont want to get into them yet.
 
Think of a non-lapse date... like a term policy. Term is level for the length of the term it is guaranteed - such as 10 years, 20 years, or even 30 years. However, it WILL lapse if you don't send in your payment.

Guaranteed UL (non-lapse GUL) is essentially a "permanent term" where the premiums are guaranteed level to a given age - such as age 95. The lower the age it is guaranteed to, the lower the premium. However, if you skip a premium, the policy will lapse. These contracts are designed to have minimal cash values... if any at all.


VULs (just to get into them quickly) are invested in mutual fund sub-accounts. Mutual funds have their own portfolio expenses... and when comparing insurance sub-accounts to their retail mutual fund counterparts... typically the expenses are higher in the insurance contracts. Plus, you still have a similar expense ratio as just about any other UL.

The problem with VULs is that you don't transfer the market risks inherent with mutual funds. When the market tanks (just as it has done in the past), you will have reduced cash values in the contract along with guaranteed increasing costs of insurance being charged against the remaining values. This ends up leading to "reverse dollar cost averaging" as shares are liquidated at a reduced value to fund the costs of insurance. (The best thing to do when the market goes down is to keep paying your premiums so they will be locked into a lower share value (buy low) and when it rebounds, you may have a decent upside (sell high).)

If the contract also happens to not be getting any new premium payments... and the policyholder has a serious situation on their hands. Plus, you are typically limited to what you can choose to invest in - either model portfolios or a smaller collection of mutual funds.

I think VUL can be a great additional "executive savings" type product on top of 401(k) and IRA contributions... but I wouldn't use it as a primary means of insurance.

To sell VUL would require being with a broker/dealer with a Series 6 or 7 license. In my opinion, you can do much of the same things with a VUL in an IUL without the market risk and without the additional compliance oversight required with a Series 6 or 7.


Every product has its place. The key is figuring out where that place is and who it's best for.
 
Re: General UL Questions-

My understanding of universal life insurance comes mainly from the licensing test. After passing the test I found out quickly that this was not enough info, but what I have is the following:

Basic Concept
Universal life is a two component product, the insurance component, and the cash value component. The insurance component(according to the textbook) is an Annually Renewable Term. It renews every year, as such the Cost of Insurance increases. The ART is a component of COI, but COI also includes all administrative costs, it is more "pure" than the bundled premiums in a whole life policy since it is determined yearly.

The cash value component in a Guaranteed Universal Life goes into an insurance account and functions normally, while the cash value component in a Variable Universal life goes into a separate account outside of the insurance companies general accounts.

Flexible Premium not so Flexible
The premium in a UL stays level because of the cash value built up during the early years of the policy. If only the guaranteed premium is paid, eventually the policy will reach its "no lapse" date(if it has that guarantee) and the premiums will become too expensive and the policy will probably lapse. The target premium is the true premium needed to ensure the cash value continues to grow through the life of the policy and the policy will remain in force.

Options
Option A is the level benefit option. The benefit remains level and as the cash value increases the risk to the insurer decreases, eventually the policy is endowed.

Option B has increasing death benefit. As time goes on to keep the cash value from surpassing the death benefit a corridor is established and the insurer maintains the minimum level of risk required by the IRS.

What I Dont Understand

I dont fully understand the no lapse date. If you were advertising this to someone, they would assume the "no lapse" guarantee means the policy cannot lapse, it may not lapse immediately, but it will lapse eventually if only the minimum payment is made.

The cash value from the universal life policy starts decreasing and due to the automatic loan provision, the policyholder begins to lose cash value at the rate of the increasing COI not covered by the guaranteed premium + the interest on the loan.

Variable UL's are an even bigger mess and I dont want to get into them yet.

Under option A the death benefit remains level and when the insured passes the beneficiary gets the death benefit, correct? Lets say this occurs in the 15th year and the cash value is $25,000. Does the beneficiary get the cash value as well as the death benefit or does the insurance company get the cash value and the beneficiary only gets the death benefit?
 
Please become familiar with the term "net amount at risk".

The insurance company NEVER "keeps the cash value".

Death Benefit = net amount at risk + cash values - any outstanding loans.


Death Benefit Option A = level death benefit = decreasing net amount at risk as cash values grow.

Death Benefit Option B = increasing death benefit = net amount at risk stays constant on top of cash values.
 
Got it. The net amount at risk is the difference between the db paid by the company and the cash value. Example- John took out a policy fifteen years ago The face amount was $250,000 and was sold as an option A level death benefit. The product performed nicely and in the fifteenth year John dies. His last statement showed he had $25,000 in cash value and his death benefit remained at $250,000. Does the insurance company send the beneficiary a check for $250,000 or $275,000?
Thanks in advance for taking the time to answer this question!
 
Got it. The net amount at risk is the difference between the db paid by the company and the cash value. Example- John took out a policy fifteen years ago The face amount was $250,000 and was sold as an option A level death benefit. The product performed nicely and in the fifteenth year John dies. His last statement showed he had $25,000 in cash value and his death benefit remained at $250,000. Does the insurance company send the beneficiary a check for $250,000 or $275,000?
Thanks in advance for taking the time to answer this question!

In that example, Option A is a level death benefit, John's beneficiaries receive $250,000. Death Benefit ($250,000) = net amount at risk + cash values ($25,000) - any outstanding loans.
 
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