Whole life or universal life: which is better? Is indexed universal life (IUL) a viable option? Is whole life really worth the extra premium cost? Should I cancel or exchange my whole life policy for a newer or different type of policy?
These are questions have been debated amongst insurance agents, financial advisors, so-called financial experts, gurus, and financial bloggers for years. And by now, we believe the answers are actually quite clear-cut. The dangers of disadvantages of universal life can no longer be ignored.
In September of 2018, MSN.com published an article from the Wall Street Journal: “Universal Life Insurance, a 1980’s sensation, has backfired.” It details multiple instances of policy owners who have had premiums double, triple, and worse.
“John Resnick, co-author of an American Bar Association book on life insurance, said of hundreds of older policies he has reviewed over a decade, ‘easily 90% or more actually were in trouble or soon to be in trouble.’ Many people ‘are sitting on a ticking time bomb, and most probably aren’t aware of it.’ ”
Some, like 94-year old North Carolina retiree Bernice Sack, have kept paying, even though her premiums have increased five-fold and she has put more dollars into her policies than heirs will receive. Others have simply surrendered their policies after years of paying into them—including insurance agents who thought they understood what they were buying.
State Financial Agency Warns Consumers about Universal Life
While we hate to hear of more people who have lost money, we are grateful to see a government agency now backing up what we’ve been saying for years. In February of this year, New York state regulators issued a warning about universal life insurance to New York residents that includes a bold-type admonition: “Beware of Increasing Charges.”
The New York Department of Financial Services (NYDFS) issued the alert to New Yorkers after receiving nearly 1,400 complaints over a five-year period for universal life policies—notably more than complaints for any other type of insurance. Superintendent Linda Lacewell issued a statement:
“The Department has seen many cases of consumers who purchased universal life insurance and who made payments for years, thinking their premium payment would not change or that their coverage would remain in effect. But many found that their policies had lapsed (were no longer in effect) with little to no [cash] value due to declines in interest rates, market volatility and other factors, or they were required to pay large additional premium payments to keep their coverage in effect.”
While consumer groups, industry experts and a handful of media outlets including The Wall Street Journal have highlighted the issues with universal life, to our knowledge this is the first government regulatory agency to tackle the topic. One of the issues raised by NYDFS is the “dirty little secret” many universal life (UL) policy owners don’t discover until it’s too late:
“The internal charges of universal life policies can increase every year. Ongoing premium payments, the policy’s existing cash value and ongoing interest credits (or, investment performance in the case of variable universal life insurance) are all used to cover the policy’s internal charges, which increase each year as the insured gets older and can be very high in later years.”
Sadly, we have learned that many agents and advisors don’t even understand this major disadvantage of universal life (UL). And while it’s a bit embarrassing that whole life’s younger, cheaper cousin has proven to be such a disappointment, we continue to educate all who will listen.
The life insurance battle continues
Recently, we have seen an alarming trend of a rise in universal life policies being sold. Many are indexed universal life (IUL) policies, sold as a handy “one product does it all” solution. Yep—supposedly, you can save money, protect your family breadwinners, and “capture the gains of the stock market without the downside.”
Except… these policies have many of the same flaws of the older UL policies we see collapsing as the insured ages.
And sadly, we see some people trading in perfectly healthy whole life policies to purchase them.
If you are considering purchasing or exchanging a permanent life insurance policy, please read this article in full and contact us for further resources mentioned below. Even if we never do business together, we would rather save you the heartache we see so many suffering as they enter into their elder years with policies lacking essential guarantees.
7 questions to ask about any policy you are considering
(You’ll find some additional questions in our previous articles: “Essential Questions to Ask BEFORE You Apply for Life Insurance” and “Questions to Consider AFTER You Apply for Life Insurance.”)
1. Is the death benefit guaranteed for life—regardless how long I live?
More and more people are living to 100 and, unfortunately, some of them are outliving the universal life policies they thought were “permanent.” Beware of death benefits that are only guaranteed with a special additional rider, or guaranteed only “to age 100.”
Older UL policies often only remain in force until the insured’s age of 90, 95, or 100. This is a huge problem! According to a report from the Centers for Disease Control, there were 72,197 Americans aged 100 or older in 2014—up 44 percent from 50,281 centenarians in year 2000.
A 2017 Wall Street Journal article, “Happy 100th Birthday! There Goes Your Life Insurance” brought attention to the dilemma faced by a man about to turn 100: “When Gary Lebbin turns 100 years old in September, hanging over any celebration will be one very costly fact: His life insurer aims to cancel two policies totaling $3.2 million in death benefits.”
An immigrant who came to the US in 1938 to escape Nazi Germany, Lebbin and his wife built a successful business and decided to leave an inheritance for their children and grandchildren. Unfortunately, after paying more than $1.5 million into “second to die” life insurance policies—including $600k required to keep the policies in force when premiums were increased—Lebbin realized he would outlive his policy and his family would receive nothing. According to courthousenews.com, a lawsuit was filed and a court date was set. (We don’t know the outcome.)
2. Does the policy endow?
This is a related, equally important question. If a policy endows, that means that even if you reach the age defined as the policy maturity date, the benefit or face value will be still be paid—to you. (That’s a much better birthday present than losing your life insurance!)
Universal life policies do not endow. With a UL policy, as the insured ages, the cash value tends to become depleted by the rising cost of insurance inside of the policy. (We are not sure why UL policies can even be called “permanent” when they keep proving they are not.)
In contrast, whole life policies endow. And by that date, the cash value equals the death benefit—guaranteed.
Today’s permanent life insurance policies are written to last until age 121. And while 121 may seem an impossible age for a 50 or 60-year-old to surpass, healthcare advancements may change our expectations dramatically. Never buy a “permanent” life insurance policy that does not endow.
3. Do policy loans or changes in premium payments jeopardize the guaranteed death benefit?
Be sure to read the fine print, because changes such as these can actually nullify a guaranteed death benefit with some types of universal life policies! This is even true of many “guaranteed universal life” policies. A single late payment can jeopardize your death benefit.
With a whole life policy, the death benefit is always guaranteed as long as the policy remains in force. (As we explain in “7 Things to Know about Life Insurance Loans,” care must be taken to repay loans.)
4. Are the premiums guaranteed not to change?
“Flexible premiums” was a catch-phrase that sold a lot of universal life in the 1980’s and 1990’s. Unfortunately, it became painfully obvious that these types of policies gave the company the flexibility to change premiums—not just the policyholders.
Just as the NYDFS warned, universal life and indexed universal life (IUL) policies have changeable costs—especially, mortality costs that rise as the insured ages. Eventually, these costs can eat away at cash value, require higher premiums, or cause a policy to implode.
We prefer guaranteed premiums with the option for flexible payments. In other words, you want the type of policy in which your premiums can never rise. Then if you need to pause or reduce payments for awhile, you can. If a cash crunch strikes, employ one or more of the strategies discussed in this article on ProsperityPeaks.com.
5. Are policy guarantees based upon a guaranteed rate or a guaranteed dollar amount?
Too often, universal life is sold as a magical product that turns modest premiums into a fortune. Yet even if the cash value DOES earn the promised return, there often just aren’t enough dollars earning those returns to matter. In other words, when compared with whole life, especially as a policy ages, we often see a higher percentage of a UL insurance premium going to policy costs, and a lesser amount to cash value. “Flexible premiums” exacerbates this issue, as many people will pay less if they can.
Would you rather have fewer dollars earning a potentially higher rate of return, or more dollars growing for you steadily—guaranteed!? Over a 30 year time period, you’re much better off having $1000 growing at 4% than $100 growing at 8%. By guaranteeing a minimum dollar amount, companies that provide whole life insurance are guaranteeing a minimum net return. This is an important distinction.
6. Are cash value returns tied to the stock market or non-correlated?
Permanent life insurance should be the safe, steady, guaranteed part of your personal economy that provides a stable foundation for all else. But many indexed or IUL policies CAN lose cash value, in spite of sales rhetoric to the contrary. A policy with a 0% or even a 2% minimum earnings rate with 2.5% costs can and often do lose money. And fair warning: cash value can be further eroded to cover the rising cost of the insurance within the policy.
People usually assume certain types of risk or tolerate some volatility in their investments. In contrast, your savings and protection strategy should be risk free—especially during a bear market!
7. Does the type of insurance you’re exploring have a history of stability or lawsuits?
This question leads us back to where we started. The citizens of New York are not the only people impacted by the problems with universal life. Just Google “universal life insurance lawsuits” and you’ll find reams of information on unhappy policyholders suing their insurance companies! Many were misled as to how the policies would perform. Few were warned of how costs could rise or the possibility that larger and larger premiums could be demanded to keep the policies in force.
In 2016, the Wall Street Journal exposed this problem in “Life Insurance Customers Push Back Over Surprise Cost Increases”:
“Over the past year, several major insurers have notified tens of thousands of people of higher costs to keep their policies in force, with increases ranging from mid single-digit percentages to more than 200%, according to financial advisers….
“At issue are ‘universal life’ policies… Millions of Americans own them.”
Other recent articles covering issues with universal life and related lawsuits include NYT’s “Why Some Life Insurance Premiums Are Skyrocketing,” from August 2016. It details how companies such as Axa hiked premiums for policyholders while increasing profits for shareholders—a move that angered many. Forbes.com covered the topic in their April, 2017 article, “A Problem with Life Insurance that’s Universal,” and the WSJ’s most recent article on UL is from September, 2018: “Universal Life Insurance, a 1980’s Sensation, Has Backfired.
Does Indexed Universal Life (IUL) have the same disadvantages?
Indexed policies are newer, which means the pool of insured people tend to be younger. But if you think that IUL is immune from the problems of universal life, read what ClassAction.org has to say about the pervasive legal issues with IUL policies. The organization points out how IUL policy illustrations tend to project future policy growth based on current policy costs—a tragic misrepresentation—as well as “representing a higher growth rate of the stock index than what most financial experts would believe to be reasonable…. We have policyholders, financial regulators and other insurance companies that have complained about the practice—and now the attorneys we work with are looking into whether class actions can be filed.”
The truth of the matter is that IUL policies have the same weakness as older UL policies by virtue of the product’s universal life “chassis.” Mortality costs within the policies rise sharply as the insured ages. As Leslie Scism explains in the Wall Street Journal, “With universal life, the customer buys a one-year term-insurance policy and renews it annually.” And as it renews, the price starts to increase significantly about the time the insured turns 80. And with UL and IUL policies—unlike whole life policies—the company can use your cash value to cover the increasing cost of insurance.
Then there’s the cash value. Unlike traditional universal life policies, growth in an indexed UL policy varies according to stock market conditions using a formula defined by the policy. Formulas are generally based on S & P index prices (price, not value, as dividends are not factored in) subtract fees, policy costs, and the limits of participation rates and caps. These formulas limit losses but don’t necessary guarantee gains after policy costs. They frankly offer more protection for the insurance company, which does not have to guarantee a minimum net growth.
And that’s perhaps the biggest disadvantage with IUL policies: they don’t solve the big flaw with all universal life policies. The policyowner—not the life insurance company—bears the risk of a poor economy, low interest rates or longevity. And in the wrong circumstances, those risks can render these so-called “permanent” life insurance policies useless.
Why we recommend Whole Life
Whole life is not always the right choice for everyone. But when permanent life insurance does make sense, our recommendation is whole life—personalized with special riders that will help you grow cash value faster and take advantage of valuable living benefits. Whole life has clear advantages over any type of universal life:
Impeccable Track Record: Whole life companies have a long and solid track record of success. Many mutual life insurance carriers have paid policy owners dividends for over 150 years throughout EVERY kind of economy. Even while the companies issuing UL blame their failure on recent historic low interest rates, whole life insurance has remained viable and profitable throughout every depression/recession, every war, every stock market crash, every circumstance.
Policyholders First: Whole life companies are mutual life insurance companies owned by policyholders. While typical “stock” life insurance companies have to weigh the interests of shareholders vs. policyholders, dividend-paying whole life—by law—pays its profits to the policyholders in the form of dividends.
Reliable and Guaranteed: Life should be an adventure—your life insurance should be boring and predictable! Your gains should be steady. Your benefits should be rock solid. There should be no surprises.
You won’t read about whole life lawsuits in the Wall Street Journal. That’s because of the tried-and-true business model of whole life and the guarantees of whole life insurance. Whole life has a guaranteed death benefit (or endowment), guaranteed level premiums, guaranteed mortality rate and guaranteed cash value growth.
That’s just the tip of the iceberg… to really understand the power of whole life, my first book, Live Your Life Insurance is the best place to start!
And if you want to understand universal life further, I’ve got a complimentary resource I’m happy to send you…
Get the white paper on Whole Life vs. Universal Life
Last year, myself, my husband (Todd Langford of Truth Concepts financial software) and a handful of other concerned advisors helped create a white paper for the Prosperity Economics Movement. While intended for other agents and advisors, we are happy to send it to anyone who wants to educate themselves further on the dangers and disadvantages of universal life insurance.
To receive a copy, email Kim@Partners4Prosperity.com with “WL vs. UL white paper” in the subject line. (Feel free to include any specifics about your own situation in the email.) We will also send you a one-page checklist of life insurance questions that are ESSENTIAL to ask—especially if you are considering exchanging a policy or purchasing any universal life policy!
The Value of a Life Insurance Expert
The misinformation about whole life, universal life and IUL out in the marketplace is astounding. Even in mainstream financial media, we see dangerous misrepresentations. In one such article last month, it was insinuated you would need to change your life insurance policy if you wanted to change beneficiaries or withdraw cash value. (Not true!) Even in the informative articles cited above, we found some factual inaccuracies that only a life insurance geek would catch.
And while we believe whole life is a vastly superior product, we also see the advantages of whole life misrepresented in ways that obscure the truth by some agents and advisors.
As an Investopedia Top 100 advisor, my team and I work hard to educate our clients on life insurance as well as investments. We are here to guide you so that you can:
- Understand the benefits, limitations and proper place of life insurance in your personal economy.
- Increase your financial certainty and confidence.
- Know the differences between whole life, universal life and term insurance.
- Purchase life insurance that will benefit—not drain—your wealth.
- Get the most of your life insurance policy.
- Be informed about alternative investments outside of the stock market.
Contact us today to schedule a no-cost, no-obligation consultation. There’s no sales pitch. We’ll answer your questions and if we can help you… we will! It’s that simple.