Cash Value Life Insurance
The Universal Truth about Cash Value Life Insurance
There has been an age old debate over Term Life Insurance vs. Whole Life Insurance. Having been in the Life Insurance Industry for nearly 20 years, I am asked to explain the difference between the two very often, and am going to reveal some information about Universal Life policies that is not usually disclosed to applicants during the sales process.
I’ll start with “Term Life Insurance” as it’s a pretty easy thing to explain. Term Life Insurance policies are the cheapest form of life insurance and provide a death benefit of your choosing for a fixed price. The name “Term” comes from the fact that these type of policies are guaranteed for a certain amount of years or “term”. The most common policies are 10, 20 and 30 year level Term. With Term policies, the consumer chooses the amount of insurance or death benefit they would like paid to their beneficiaries in the event of their death, AND the length of the policy guarantee or Term. Obviously, the more insurance you want, the more it will cost you. Additionally, the longer the term you want will also cost you more since you are locking in a guaranteed level premium for the duration of the policy, no matter what happens to your health. For example, a very healthy 35 year old male can purchase a 20 year level term in the amount of $500,000 for just $22 per month. As long as the premium is paid continuously, the premium and death benefit are guaranteed for the entire 20 years.
When we discuss “whole life insurance,” it should be understood this is a broad term used to apply to different types of policies in the industry. Traditional Whole Life Insurance is guaranteed but usually cost prohibitive to provide as much coverage as the average family needs in the modern day. Universal Life Insurance evolved as a way of providing affordable ‘permanent’ coverage. Universal Life policies have a cash value account inside the policy that provides an investment aspect. Traditional Universal Life is based on a fixed rate account, and the newer Variable Universal actually provides the options of investing in stock and equity accounts with greater income earning potential. However, listen very closely to what I’m going to say now, because you will not hear this from the agent sitting in your living room trying to sell it to you: Most Universal Life Policies are NOT guaranteed, can actually LOSE money and/or end up with the policies LAPSING even if you pay all of the scheduled premiums. The simple reason for this (again, something NEVER explained by the agents..) is that unlike Term Policies where the “cost of insurance” is the same price for the duration of the policy and why the premium and death benefit are guaranteed, the “cost of insurance” in a Universal Policy increases every single year!
You may be wondering how the premium can possibly remain level if the company is contractually charging you more and more each and every year for the insurance? Simple: the premiums to pay this increasing cost of insurance are deducted from the ‘investment’ account so that the interest that the company claims you are earning, you aren’t really ‘earning’ at all as some or all of your earnings go right back to the company to pay the premium instead of accumulating in your cash account. All of this is buried into illustrations and policy language that is so confusing and complicated that after 20 years in the industry I don’t even understand most of it, and have always wondered how they expect the average consumer to. And, it is the reason that even after 10 or 20 years, the ‘cash value’ of your policy can be less than or perhaps barely more than the total you have paid in premiums, despite being told you had were earning a “guaranteed interest” rate.
When these Universal policies are sold to consumers, the illustrations appears very favorable and show a level premium and impressive cash accumulation over the years. However, please note these are all “projected” and based on assumptions that the company keep all of their costs and charges at a certain level. As a consumer, one should always ask to see the “guaranteed” portion of the illustration, or WORST case scenario with regard the policy performance–this will be buried somewhere in the bottom pages of your illustration. The “guaranteed” illustration usually shows the policy losing all of it’s cash value and lapsing within a certain number of years. Perhaps the policy won’t perform at the worst case scenario, but that is all the company is contractually guaranteeing, so I guess it becomes of matter of putting your trust into an insurance company going above and beyond their obligation.
One of the founders of our company had a long and illustrious career with a major well known Insurance company, selling these Universal and Variable Universal policies for many years. He believed in what the company said about them and bought them for himself. After a 20 year period of seeing how they ACTUALLY performed vs. what the company PROJECTED they would do, he left the company to found a Term Life Insurance brokerage as he realized how fraudulent these policies were. And the class action lawyers had a field day with all of the big companies, filing suits vs. all of them one by one for deceitful sales practices and false promises.
I’m sure there will be much rebuttal to this blog by the Permanent Life proponents, but if you are a consumer, consider this: As an agent, I’d make a lot more money selling the costly Universal policies which also provide a steady stream of renewals (that we aren’t paid with Term Life Insurance policies), so why would I choose to advocate a product that is going to earn me less money? It’s because I cashed in all my Universal policies years ago (after losing money!) to buy Term insurance to protect my family as it’s the most fiscally responsible decision anyone could make. I simply wouldn’t be able to sleep at night if I were selling a product that I’d not buy myself. But, you’d be surprised how many agents do! And, many of them who make a living selling those policies, actually are clients of ours, as they know enough to buy term to protect their own family!
Having said all that, there is one type of Universal policy we do advocate for the right situation and it is the GUARANTEED Universal Life….more to come in another posting, but these types of policies are common for smaller face amounts (since it’s tough to afford much more) and feature level premiums to age 100 or 121. You can compare rates of those and other policies from all companies at www.termhouse.com.