Life Lines…

Universal Life Insurance – Then and Now
by Steve Hamilton, JD, CLU, ChFC

Even if you aren’t selling some form of universal life insurance, your competitors are. It’s hard to imagine a time when universal life insurance did not exist. Thirty years ago it was a revolutionary new product that, some would argue, saved a number of life insurance companies. Others would argue that it has been responsible for a number of abuses in the industry. There can be no argument that the product has forever changed the life insurance industry and the life insurance market.

The Birth of UL

Universal life (UL) insurance was designed to deal with the social and economic changes taking place in the 1970s. Customers who were concerned about inflation, the low rates of return in whole life policies, and the perceived inflexibility of whole life were buying term and investing their other money elsewhere. The chart below shows the financial information that helped launch UL as a viable life insurance product. It compares that with more current financial information affecting UL policies today.

Then and Now Average Annual Percentage Rates (Except for the month of July 2009)

Year	1 Yr. Treasure Yield	Federal Funds Rates	Prime Interest Rates	20 Year Treasurey Yield	30 Years Mortgage Rates	Inflation Rates	Top Marginal Tax Rates
1979	10.67	11.19	12.67	9.33	11.20(1.6 Pts)	11.3	70
1981	14.78	16.38	18.87	13.72	16.63 (2.1 Pts)	10.3	70
2003	1.24	1.13	4.12	4.96	5.83 (0.6 Pts)	2.3	35
2009	.48	.016	3.25	4.38	5.22 (0.7 Pts)	-2.1	35

1. The source for the 1 Year Constant Maturity Treasury Yield, Federal Funds Rates, Prime Interest Rates and 20 Year Constant Maturity Treasury Yield is the Federal Reserve Bank of Dallas – Rates and Yields are not seasonally adjusted and are percentages
2. 30 Year Mortgage Rates are from: http://www.freddiemac.com/pmms/pmms30.htm.
3. Inflation rates are from: www.Usinflationcalculator.com/inflation/historical-inflation-rates. Rates of inflation are calculated using the Current Consumer Price Index published monthly by the Bureau of Labor Statistics (BLS).
4. Tax rates are from www.IRS.gov and www.taxfoundation.org/publications/show/151.html

At the same time, policy owners were exercising their policy loan provisions and taking the cash from their policies. This gave insurance companies an outflow of cash, resulting in the liquidation of long-term investments, sometimes at a loss. Insurance companies were losing their share of the investment dollar, according to “McGill’s Life Insurance” from The American College.
The new product was envisioned to combine a flexible premium annuity with a monthly renewable term insurance rider. It would provide consumers with an investment program capable of dealing with inflation and high income tax rates in addition to providing the needed life insurance. So in 1979, Life Insurance Company of California (later E.F. Hutton Life offered the first UL policy that provided the following:
• Flexible premiums
• Cash value withdrawals that weren’t treated as loans
• Level or increasing death benefits

UL was also an unbundled product that separated the investment and protection elements in the policy. It was the first time that consumers could pull back the curtain and see all the parts that determined the costs and performance of a life insurance policy. By 1983, almost all major insurance companies offered a UL product. Since it offered a significantly higher interest rate than traditional whole life, it had a large increase in market share through 1985. Much of that growth was fueled by the replacement of existing policies with low dividends and the displacement of non-par whole life sales.

By the second half of the 1980s, as interest rates declined and traditional products began to add flexibility, the sales of UL started to level off.

Today’s UL

From the beginning, universal life, with its tax-deferral, has been sold as a place to accumulate money. The policy’s cash-surrender values can be accessed for emergencies, retirement, or any other need on a tax favored basis through withdrawals of basis and loans (if the policy is not a modified endowment contract (MEC) and remains in force).

Because of investment losses or low interest rates, many UL policy owners are not seeing their anticipated cash values materialize. Not only are their cash values less than expected, but they may also be risking the loss of their life insurance.

The chart on the following page demonstrates how decreasing rates of return can affect an accumulation goal. To reach the accumulation goal of $100,000 the payments for the remaining 19 years will have to be more than four times the initial payment by the 11th year. But another factor also has to be considered for life insurance.

Annual Payment Needed to Accumulate $100,000 at the End of Thirty Years

Year	Annual Interest Rates	Beginning Year Annual Payment	End of Year Balance
1	10	$553	$608
2	10	$553	$1,277
3	10	$553	$2,013
4	9	$709	$2,967
5	9	$709	$4,007
6	8	$919	$5.320
7	7	$1,173	$6,948
8	6	$1,475	$8,928
9	6	$1,475	$11,027
10	5	$1,847	$13,518
11	4	$2,273	$16,422

The cost of insurance also affects the cash value accumulation in a UL policy. The next chart titled “Table of the 2001 One Year Term Premiums” illustrates the increasing cost of life insurance protection. The cost of insurance increases more than three times from age 60 to 70.

A Portion of the Table 2001 One-Year Term Premiums
for $1,000 of Life Insurance Protection – One Life

Age	Premium	Age	Premium
60	6.51	66	13.51
61	7.11	67	15.20
62	7.96	68	16.92
63	9.08	69	18.70
64	10.41	70	20.62
65	11.90	71	22.72

(These premiums are for illustration purposes and are not representative of any specific UL policy. A UL policy will have its own specific insurance costs or mortality charges that should be reviewed.)

This lethal combination of declining rates and increasing insurance costs can spell disaster for UL policy owners. The situation can be exacerbated even more if the policy owner has taken withdrawals or loans from the policy or has not paid the planned premiums. That is why your clients need you to evaluate their current policies, including a review of an in force illustration.
But it is not enough to help a client understand their situation. You have to offer viable alternatives based on your client’s current situation and goals. When it’s not workable for your client to make changes to the current policy or pay additional premiums, you need to consider the possibility of doing a replacement, providing they are insurable. If the client wants to continue with a UL type policy, what are the options?

It may be tough to keep track of all the universal life options since the current regulatory and economic environment has caused insurance companies to change, remove, and re-price their UL products.

Ultimately, these changes are good because insurance companies are doing what is necessary to remain viable. Many of the product changes ad-dress current policy owner concerns. Some of the riders and policies you should be aware of include the following:
• Guaranteed UL policies that provide a guaranteed death benefit.
• No-lapse death benefit guarantee riders that allow all or part of the coverage to stay in force to a specified age, even if the account value goes to zero.
• Single premium UL policies that guarantee a return of premium and a lifetime death benefit.
• Long-term care riders that provide a long-term care benefit.
• Over-loan lapse protection that provides lapse protection for heavily loaned policies.
• Surrender charge adjustment riders that waive or adjust surrender charges.
When you include second-to-die UL policies to this list, you have a number of UL options for your prospective and existing clients who are insurable.

In Conclusion

After 30 years of economic, regulatory, tax, and social changes, universal life insurance is still adapting to meet your clients’ needs. If you have not done so already, now is the time to sit down and review your clients’ life insurance policies and needs. During these uncertain times, they need your expertise now more than ever.
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Steve Hamilton, JD, CLU, ChFC, is a senior advanced sales consultant for Nationwide Financial Services in Columbus, OH. He can be reached at hamils25@nationwide.com.