01 Feb Is your money safe in a universal life product?
Just remember, “There are no deals in insurance.”
It is always a “risk vs. cost analysis” for insurance companies, no exceptions. Insurance simply comes down to performing a math problem of statistical probability to leverage and pool the risks of those insured.
Life insurance, as with all insurance, is the actuarial science of statistical probability. Will a claim will be made on the insurance provided? And if so, when?
Indexed and Variable Universal Life policies have become very popular in recent decades and have errantly been sold as products which the owner “can’t lose money.” That is a myth. Perhaps even a downright lie.
Universal life products are touted by those who sell them as “whole life for half the price.” No, it isn’t. That’s simply not possible in the insurance and actuarial sciences industry. Remember, if the coverage is cheaper, then you are NOT getting the same coverage. Permanent Whole Life Insurance is well, …permanent. Meaning, it will be there when you need it later. It is permanent. You can plan your retirement on it.
Universal life is not permanent and can be voided for “breaches” such as a single late payment. Or when you can’t make a premium payment in a cash crunch. These policies often lapse in later retirement years when owners lose everything invested in the policy and see their retirement evaporate. They lapse because premium payments increase year after year in certain market cycles, and sometimes they increase very dramatically. Many times, premiums cannot be paid by retirees on a limited, fixed income and they lose everything invested in the policy. This is the risk. This is the part that most people just don’t understand about universal life products.
Remember: “There are no deals in the insurance industry.” If there is half the price, then there is half the risk for the insurance company – that’s just how the insurance companies do it. Everyone who is in Indexed Universal Life or Variable Universal Life has an element of risk, and that risk can ultimately take the owner’s cash “security” and flush it down the toilet.
And maybe that type of risk is just fine for “big boys” who understand the risk. But most don’t understand it. Their advisors don’t really know what happens in 10 years, 20 years, or whenever – when a universal life product fails – because they (the agent and the actual universal life products for that matter) haven’t been around that long. Or worse, they do know the risks, and don’t tell you because they are making an exorbitant commission off you.
John Resnick, co-author of an American Bar Association book on life insurance, said of hundreds of universal life 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,” he said. See FN 3.
Nicholas Vertullo, an 85-year old former teacher has three universal life policies that were previously earning him almost 10%. But now they earn him much less. Vertullo says, “I was abstractly aware that interest rates could vary,” but now, “the whole thing came (hitting) home in a way that it was no longer an abstraction…These (universal) life policies are quicksand.” Mr. Vertullo said, “I don’t think I understood completely what the hell I was doing.” See FN 3
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- New York state received 1,400 complaints from NY consumers regarding universal life products in the recent past.
- The New York State Department of Financial Services went so far as to issue a warning notice to all holders of universal life products or would be holders of universal life products concerning the hidden risks.
- Universal and Indexed Universal Life Products are a Ticking Time Bomb.