We were having some fun recently for April Fool’s Day. While I was wearing a set of funny looking glasses (big, plastic nose, fuzzy eyebrows, and a mustache), it had me thinking about what is real and what is not real.
We are big believers in term life insurance for a certain term of time, and whole life insurance that is for the whole of your life all the way up to age 121. There are some really cool things that you can do when that asset is a part of your overall estate planning. It can make certain that everything you wanted to happen in regards to your life and your family’s life actually happens exactly the way that you wanted.
There are some life insurance products out there that may be a little misleading. That’s why I like the phrase: “Whole life insurance is permanent insurance, but permanent insurance may not necessarily be whole life insurance.” Whole life insurance is for the whole of your life. Let’s talk about some of these other options. I’ve been in this industry for 35 years. So, I’ve seen the different varieties of universal life: variable universal life, index equity, or index universal life as it is referred to now. I’ve also seen them not to play out the way that you would think. Oftentimes, they will promote lower premiums and guarantees, but do they really work out that way, or is it just a mask? Are they masking potential problems?
This is what you really need to know about the different types of universal life policies that are out: the internal costs are not guaranteed. Usually, we like to sit down with people and get into the actual policy language because policies are contracts. What does the contract say? Almost all the time, we will see that the internal costs are not guaranteed. They can be adjusted from time to time depending upon the profitability of the company that year.
For example, the mortality charges/mortality costs can change. In fact, the maximum mortality costs are usually listed inside these policies, and we have seen companies adjust these with time depending on the profitability and the risks that the insurance company is taking on.
Drops in the market can be a double-pain. If you have your money invested in the market for one of these policies and the market drops and then you have to take money out to pay for the actual insurance policy, it becomes doubly painful. Not only is the value of your account lower, but now they’re taking money out of your account when the account is lower.
Late premiums can also kill the guarantees. It will often say that this variable universal life/universal life policy/index policy is guaranteed, but if you take a loan against that policy, that guarantee is often voided. OR, if you are just a few days late in your premium payment, same thing, the guarantees are often voided.
The dividends of an index for an index universal life policy are not factored into the profit of your policy. If it is an index universal life policy that means that the index number, not the rate of return on the dividends, are what a person would be receiving if they own those securities. So, you’re only getting part of what the actual return would be if you were actually in the markets.
There’s also something called a participation ratio. Let’s say if the market has a 20% rate of return, you might have a participation ratio that says you only get 80% of that 20%. That ratio can change from contract to contract and from year to year at the discretion of the insurance company, per the contract.
They also have caps on the rates of return. This is typically where you can have a 20% rate of return, but they can cap the maximum rate of return to you receive at 10%. Who gets that difference? It’s not going to be you!
Additionally, the guaranteed minimum rate of return isn’t always calculated annually. This goes back to when I talked about how sequential rates of return actually work in a blog a few weeks back. Sequential rates of return are not necessarily the same rate of return that you would get reported on your policy.
So, based on the contract or contract language, virtually everything in a universal life type of product can be changed by the insurance company, at their discretion. Therefore, the risks might not be something to joke about, they might all be on you. This is why we like whole life insurance because there is just the one lever instead of all those levers described above that can be moved and adjusted by the insurance company. A whole life insurance contract has one lever: dividends based on the profitability of the company. If the company is more profitable, they have the potential to pay more in dividends. If the company is less profitable, the worst-case scenario is that they won’t pay a dividend that year, but they are still obligated to pay the contractual guarantees inside that policy.
You may have heard about some of these wackadoodle universal life policies that are out there. You think you have a permanent policy, but it might not be a whole life policy. If you would like us to run the numbers on your universal life policy contract, we can help you understand what guarantees you really have. We do this free of charge because we want the guarantees in your life insurance policy to play out the way that you need them to. Today is the day to call us and schedule your Financialoscopy®.
