What is Universal Life

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Product driven or Market driven

When an item is being brought to the point of being sold to the buying public, it comes from one of two sources–one, being product driven and two, from being market driven. In other words, the product being sold is developed and then a market is found for it, or a market is identified and the product is created to fill that market. 

For example, today’s kiwifruit originated in China dating back to the 12th century during the Song Dynasty and was referred to as Chinese gooseberry. Early in the 20th century, the chinese gooseberry began to be cultivated in New Zealand where it became very popular with British and American servicemen during WW2. In the 1960’s enterprising farmers saw a potential source of income if they could transport the gooseberry to the United States.  With the gooseberry having a long shelf life, transporting to the United States presented no particular marketing problem. The farmers did, however, find by changing the name to kiwifruit they enhanced the market appeal of the fruit. A product was developed, a market was recognized, and now the item is in the mainstream of fruit economy.

Using the same kiwifruit example, the farmers in California saw this just in reverse of how the New Zealanders proceeded. They saw the  import coming into the fruit market, so they began planting their own kiwifruit plants to fill the need created for this market. 

Universal Life Explained

It is the opinion of this author that universal life insurance policies began as a market driven commodity. At their inception during the early 1960’s, life insurance companies were struggling to meet the returns people were receiving from a rising stock market. In fact, they were dealing with some very aggressive sales people who were convincing individuals who owned permanent life insurance policies to strip the cash values from those policies and invest them in the stock market. 

The individuals who did that saw the withdrawals as policy loans which had an interest charged against them which if not paid back became part of the loan which accumulated amounts that had to be paid back upon the death of the insured. It didn’t make a whole lot of sense to keep those policies in force, and consequently termination of policies became a serious concern. 

In order to meet this market shift, life insurance companies decided to unbundle the cash value provision of permanent insurance from the death benefit cost and offer a permanent life insurance policy in which low cost term premium could be identified, with the rest of the premium being charged to be placed in a mutual fund type account chosen by the insured from accounts offered by the life insurance company.

Market savvy consumer

This unbundling of cost of insurance and initial excess premium appears at first blush to be an ideal way for taking advantage of buying term insurance and investing the difference. However, there is a monster in the room which if not recognized and dealt with will cause havoc later on. It is this: current costs are based on mortality rates which are constantly rising due to chance of dying, and if projected mortality tables are wrong or if guaranteed rates of return are off, more of the premium being used for the investment side will have to be allocated to the death benefit costs in order to keep the policy in force. 

Unless an insured is paying attention, this could become a serious factor later on. This became real to many insured when the 1984 interest rates of 12% dropped to about 3% now. Many life insurance agents eager to meet their mutual fund and stock professionals used the 12% projection allowed by their insurance companies to illustrate how the universal life policy could work, while down-playing the part of the illustration which also showed the guaranteed rate of return which was more like 2%. 

No one ever dreamed we would be where we are today with such a drastic drop. Too many of the universal life policies are still having difficulty in finding the proper balance between premiums required to cover the cost of insurance and premiums needed to have the returns  insureds would be hoping to receive.

Market Implosion

Difficult lessons were learned from this market driven experience. An over exuberant industry striving to maintain its market share of buying public money developed a product which ended up having a temporary market. It misjudged the public’s ability to make good financial decisions when it came to knowing how to invest over the long haul. It took advantage of the get-rich-quick mentality of so many in that market by allowing their sales force to use projections which had never been historically proven viable. 

The whole exercise is a definite example of caveat emptor–buyer beware.  

The industry also exposed its selling force to products they perhaps were not trained well enough in to properly advise their clients. 

Since universal life had provisions for investments represented by mutual funds and by stocks and bonds, life insurance agents were required to be licensed under Series 6, a securities license entitling the holder to register as a company representative and sell mutual funds, variable annuities, and insurance. It must be noted the Series 6 license does not make an agent a stockbroker and he/she cannot sell stocks. 

A Series 63 exam and license was required entitling the holder to solicit orders of any type security in a particular state. 

Many life insurance agents took those exams, not with the intent they would become proficient at investing, but as a way to broaden their sales market. They, too, got over exuberant in marketing this new product. Again, caveat emptor

With the difficulties encountered by the dispersing of premiums to insurance costs and uncertainty of amounts needed for investments, universal life policies lost their luster relatively fast, giving way to the more notable variable universal life policies which have better customer appeal and understanding. 

Variable universal life policies offer guarantees and access to indexing not available to universal life, so this should be the next horizon for a market driven product.

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