Monday, May 01, 2006

The Policy that Fell to Earth (Part Two)

In Part 1, we learned about the history of Universal Life, and the mechanics of how it works.

Properly funded and used, UL can be a great insurance planning tool. And it’s not my intention here to “bash” it. Indeed, I own both Universal and Variable Universal Life policies, so I’m a believer.

To a point.

The challenge, and the reason I’ve become less enamored of UL, is that, despite the best intentions of agents, clients, and carriers, UL carries within it the seeds of its own destruction (pause for dramatic effect). That is, in the later years of these plans, that spigot gets turned wide open, and the cash value drains very quickly, leaving the client with no insurance (and potentially a sizeable tax bill).

The problem is that, ideally, agents would recommend – and clients would agree – that the client should put in as much money as possible in the early and middle years, to compensate for that wide-open spigot in the later years.

But one of the appeals of UL is that it can be funded at a lower (sometimes much lower) level than a comparable Whole Life plan, and the temptation is to save money. Nothing wrong with that, but it can be difficult playing ‘catch up’ in those later years.

And there’s the rub: policies bought and sold in the 1980’s are now 25 years old, and starting to show signs of wear and tear. Folks who didn’t put in the maximum dollars are finding that their plans don’t have enough cash to keep going, even if they increase their premiums. Sometimes, we have to lower the face amount AND raise the premium.

And it’s not likely that things will get much better soon.

So what’s the lesson? Well, first of all, look at your annual statements, and see how well they track with what was illustrated. They won’t match exactly, but it’ll give you a sense of what’s happening with the plan. Second, call your agent, and ask what options are available. Agents can run (or have run) “in-force” illustrations, and play “what if” with the plan.

Finally, don’t conclude that UL is a poor choice: it has its uses, and it can be a great tool. Like any financial or insurance product, though, it requires supervision, and fortitude.
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