By Matt Zagula
Agents are often coming to me to talk about their cases—something I like to help them with. But I always stop short when an agent says they have a universal life case for me to look over.
As financial advisors and agents, it’s our job to put our clients into the best possible product for their situation. And, quite frankly, that is almost never a universal life product.
I will happily go on the record and say there is almost never a time when it is a good idea to put a client into a life insurance product that allows the insurance company to ultimately shift the risk back onto the insured—which is exactly what a universal life policy does.
For example, look at what is happening with universal life policyholders with policies purchased 20 or more years ago. Because interest rates failed to keep up with their estimations, they’re facing giant premium increases that many of them cannot afford. What these people were once told would be a nest egg they could access for added cash as they aged has turned into a rotten egg they have to overpay for, even though it’s not delivering on the value it was purported to have.
Don’t take my word for it—read what my good friend and attorney, Rick Law, has to say about this type of insurance in his published article, “Universal ‘Lies’ Insurance”:
“Crash and burn” is what’s happening with frightening frequency to many of our senior clients’ life insurance policies which they purchased in their thirties and forties. Senior citizens typically are uninsurable after they lose an existing policy.
The life insurance product in question is “universal life insurance.” It has an almost infinite number of brand and subcategory names, like “flexible premium life”; “guaranteed universal life”; and the most misleading of all—“variable universal life.”
Conceptually, universal life and permanent whole life are the same type of insurance. With universal life, the burden of obtaining the projected death benefit falls onto the insured (the buyer), who has to manage the cost/benefit relationship of the policy. Despite that hidden flaw, life insurance illustration software and unrealistic long term performance assumptions can make them look as if they are providing the same level of permanent life insurance.
While universal life and permanent life insurance are conceptually the same, contractually they are profoundly different.
Permanent whole life insurance promises the following benefits: (1) A true guaranteed death benefit through ages 100–121, if premiums are paid; (2) The burden of fulfilling the guarantee is on the life insurance company.
Universal life insurance is structured as follows: (1) An illustrated death benefit based on long term assumptions with a low probability of fulfillment; (2) Flexible premium payments which are marketed as being in the policy owner’s interest; (3) Failure to warn the policy owners that they have the duty to determine the dollar amount of the ongoing premiums necessary to obtain the promised death benefit.
Matt Zagula is a leading tax arbitrage expert, and author of SMART Retirement: Discover the Strategic Movement Around Retirement Taxation® with ForbesBooks. Learn more at smartretiree.com.