What is universal life insurance? Is it term or whole?
by Guest » Thu Mar 01, 2012 12:56 am
What is Universal Life (UL) Insurance? Is it considered term or whole?
Total Comments: 20
Posted: Thu Mar 01, 2012 05:20 am Post Subject:
To answer your question, UL is not the same as a traditional whole life insurance policy, but it is a specific form of cash value insurance that combines some elements of both term and whole life policies.
Universal life insurance is a hybrid form of life insurance that bundles an Annual Renewable Term life insurance core with a cash accumulation fund. It resembles Whole Life in the sense that there is a cash value associated with the contract.
I'm sure other posters will chime in with alternate opinions, but this is the way I describe it to juries as an expert witness and it has not been challenged.
Insurance companies and their agents generally refer to any life insurance policy with a cash value component as "permanent" insurance because the contract now runs to age 121 (previously, to age 100), and sometimes refer to term life insurance as "temporary" because the contract has a definite expiration date in the relatively near future, such as 1, 5, 10, 15, 20, or 30 years from the day it is issued.
But the courts are increasingly deciding that Universal Life insurance, because of its Annual Renewable Term core, is NOT "permanent" insurance, and it's costing insurance companies large settlements in bad faith cases because they failed to disclose the inherent likelihood of the policy to fail (lapse) due to insufficient premium payments.
Those of us who long ago stopped using words such as "temporary" and "permanent" in favor of "term" and "cash value" to describe the two principal forms of life insurance, in my opinion, are more accurately describing the policies -- at least as far as the courts seem to interpret them.
Posted: Thu Mar 01, 2012 10:52 am Post Subject:
hi,
Thanks for the information, life insurance covers both life and whole term policy. Both are useful. Cash will be received after the term of the policy.
Posted: Fri Mar 02, 2012 01:47 am Post Subject:
Those of us who long ago stopped using words such as "temporary" and "permanent" in favor of "term" and "cash value" to describe the two principal forms of life insurance, in my opinion, are more accurately describing the policies -- at least as far as the courts seem to interpret them.
First of all, I've always had a problem with the term "cash value". I wish that we would always refer to it as "cash SURRENDER value". I think that this would help people understand the product much better. It helps them understand that the only way that they actually get all of this money is if they actually surrender the policy.
I'm not in favor of your terminology of "term" and "cash value". There are simply too many exceptions to this. This is especially true now that we are see so many temporary policies that are UL policies. We can also have permanent policies that never have a cash surrender value.
Posted: Fri Mar 02, 2012 06:46 am Post Subject:
We can also have permanent policies that never have a cash surrender value.
True. And this argues against calling the policies CASH SURRENDER VALUE insurance.
When I speak of the words "CASH VALUE" it is only used in the sense that there is an accumulation fund (whether there is any "value" in it or not is mostly immaterial, as you suggest). It can also be described as possibly having "NONFORFEITURE VALUES" if one decides to no longer pay premiums.
Aside from Return of Premium Term policies, "TERM" life insurance does not have such an accumulation fund, and the whole concept of nonforfeiture values is meaningless in a term policy.
And the word "TERM" is commonly understood to mean a policy that is not written to the "ultimate mortality age" of the Commissioners Standard Ordinary Mortality Table (the 2001 version of which ends at age 121). So I don't know why you would want to "disfavor" that point.
I suppose we could start calling the two types of contracts "NONFORFEITURE VALUE" and "NO NONFORFEITURE VALUE" but I think that would be terribly confusing.
The world pretty much understands that there is some kind of difference between TERM and WHOLE LIFE -- some folks just can't tell you what that difference is. It's the insurance companies themselves that screwed everything up with UL and VUL.
Posted: Fri Mar 02, 2012 07:38 pm Post Subject:
I'm not trying to argue with you as much as I'm just pointing out that there are problems when we try to over simplify things. This is true with just using the terms "temporary vs permanent" or "term vs. cash value".
Is an accumulation fund that always equals $0 after surrender charges truly an accumulation fund?
Posted: Sat Mar 03, 2012 02:42 am Post Subject:
Is an accumulation fund that always equals $0 after surrender charges truly an accumulation fund?
What else would you call it? Is my checking account still a checking account if I'm overdrawn on a given day or if I simply run out of checks? Does my car no longer have a fuel tank when it's empty. Your assertions are ridiculous.
You bring up these "semantic" discussions and never make a point or offer an alternative. In a courtroom, they would be simply be considered "vexatious". And eventually, a "vexatious litigant" will be prevented from even filing complaints without the prior approval of the court.
Here, it's simply amusing.
You don't like the words "term" or "permanent". Unfortunately, the insurance codes of California and almost all other states (I certainly haven't read them all) use those exact terms in reference to insurance products as I have above. As I mentioned previously, these are words and phrases that have acquired common understanding over more than 170 years of operation in America alone.
Individual life insurance predates group life insurance by at least seven decades. The first group life insurance policies in America were written in 1911, and were called, of all things, Group YEARLY TERM LIFE INSURANCE.
Posted: Sat Mar 03, 2012 05:12 am Post Subject:
This is not an argument of semantics. The checking account and fuel tank are poor analogies. The checking account is designed as a place to keep money. The fuel tank is designed to hold fuel.
With many of the UL policies of today, they are not designed to accumulate money and one would be stupid to try to put in extra money since putting in extra money could still result in an accumulation amount of $0.
So, with these policies, I would not call it an accumulation fund.
The problem isn't the words "term" or "permanent", it is how they are used. There is nothing permanent about an insurance product that will necessitate an unaffordable premium later in life. If we are using, the terminology of "term" and "permanent", we can easily call term insurance "term" and whole life "permanent".
However, we can't simply call UL "term" or "permanent". It really depends upon how it is being used.
Ex. George is 25 and wants the least expensive product for the next 30 years.
Sam wants the least expensive product that will guarantee his coverage to age 121.
It is possible that the least expensive product for George is a UL product.
It is probable that the least expensive product for Sam is a UL product.
In George's case, it is much more descriptive to call his policy "term" or "temporary" and in Sam's case to call it permanent.
In both cases, using the term "cash value" is useless since in neither case will the cash surrender value be greater than $0.
Posted: Sat Mar 03, 2012 06:23 am Post Subject:
Your critique of my two analogies fails. The accumulation account of a cash value policy is exactly the same as either the checking account or the gas tank. They are all designed to hold their intended contents -- whether the contents materialize or not, or evaporate in the future. The design of a term life insurance policy, just like the design of homeowners, auto, medical, property & casualty, and virtually all other forms of insurance, has no container for cash accumulation. You pay, you die, they pay. You just have to die during the period of the policy. Whole life is simply a very long term policy with a container for the cash accumulation -- except that all the mortality costs, expenses, and profits are exactly amortized, including a small amount of interest paid to the policyowner, over the precise length of the contract.
There is nothing permanent about an insurance product that will necessitate an unaffordable premium later in life.
Agreed. Nothing in this world of insurance is permanent unless the contract is precisely designed to be so. A single premium or limited pay Whole Life policy will do exactly that. But it comes at a price.
So agents turn around and illustrate a UL policy with magic numbers that seem to do the same thing, only the same 40 year old language that has been the bane of UL since it was created is still on the front cover of the contract: If the cash value is insufficient to pay the cost of insurance and other expenses when due, the policy will lapse without value. No way to write a UL contract without those words.
Enter the discussion of guaranteed UL products that creates the anomaly. The secondary guarantees are the only things that counteract the inherent nature of UL policy design -- which is the cost of its annual renewable term core.
What makes the SGUL products immensely different from an agent's presentations of most other UL products is that most everyone is actually upfront about the need to pay premiums every year without fail. Because the design fails to accumulate cash value as a cash value policy (ideally) should, failure to pay a premium when due causes the policy to lapse. (I realize this is sort of a broad overgeneralization, but it is, for all intents and purposes, accurate. And the illustration mechanism is still used to depict policy performance resulting in a minimum premium).
The real problem that plagues all UL policies today is the secondary guarantees themselves, including their analogs in annuities (GMIB, GMWB), which are now being addressed in some publications that most people, including agents, rarely read, is that the assumptions that the guarantees were built on (just like the early evolution of UL itself) are proving to be overly generous.
Underestimating the real cost of providing the guarantees, life expectancy and mortality experience, along with a completely unforeseen effect of the recent recession -- greatly reduced policy lapses -- are causing some insurance companies to have to tinker with their internal policy expenses to prop up policy reserves. When pressed up against the maximum expense values, the only other place they can turn to for an increase is the COI -- which is supposed to reflect only actual mortality experience. And if people are living longer, that should have the effect of REDUCING the COI, not increasing it.
The current and coming round of class action suits is targeting increases to COI which cannot be attributed to mortality, and which are obviously intended to recover other company expenses, in violation of contract language. Conseco is involved in just such a case right now, and others have already begun the litigation process.
Just as the robust interest numbers in the 1970s were the motivation behind UL then, the policy design was flawed because company execs figured the high interest rates would be around for a long time. The flaws have not been corrected -- and agents still use ridiculous illustrations to depict policy performance that is not likely to happen in order to hide the true cost of the contract in later years -- only now they have been covered with a layer of makeup that makes them look good in the afternoon. But what you get to see in the morning, without the makeup is often rather scary.
Nothing wrong with your examples of George and Sam, except that they shed no light on your dissatisfaction with any of the words that distinguish a term life policy from a cash value policy, and neither have you.
Posted: Sat Mar 03, 2012 11:33 pm Post Subject:
Your critique of my two analogies fails. The accumulation account of a cash value policy is exactly the same as either the checking account or the gas tank. They are all designed to hold their intended contents -- whether the contents materialize or not, or evaporate in the future.
What happens if you put an extra $100 into your checking account? What happens if you put an extra gallon of gas in your car? You have more money or you have more gas. That is what is supposed to happen.
What happens if you put an extra $100 into a UL policy that has a design based upon a minimum guarantee? The cash surrender value will still equal $0. It's the equivalent of giving away money to the insurance company.
These policies weren't designed to hold cash.
The reality is that just because they are universal life policy, it is painting a false impression to call it a cash value policy.
Run an illustration of a policy based upon a minimum guarantee. Now, do the same thing with double the premium. The results will end up identical. In both cases the cash surrender value will end up at $0.
Posted: Sun Mar 04, 2012 12:02 am Post Subject:
Underestimating the real cost of providing the guarantees, life expectancy and mortality experience, along with a completely unforeseen effect of the recent recession -- greatly reduced policy lapses -- are causing some insurance companies to have to tinker with their internal policy expenses to prop up policy reserves. When pressed up against the maximum expense values, the only other place they can turn to for an increase is the COI -- which is supposed to reflect only actual mortality experience. And if people are living longer, that should have the effect of REDUCING the COI, not increasing it.
The current and coming round of class action suits is targeting increases to COI which cannot be attributed to mortality, and which are obviously intended to recover other company expenses, in violation of contract language.
When we are talking about UL contracts with secondary guarantees that are sold and purchased based upon these guarantees, why would anybody care about the COI?
When "Charlie" a healthy 40 year old male buys a $500,000 UL contract from Genworth (their UL 20 product), his $428/year premium is going to keep the contract in force for the next 20 years regardless of the cost of insurance. If he pays more, (he won't and would be stupid to do so, and I don't think that the insurance company will allow him to do so), the cash surrender value will still be $0.
Posted: Thu Mar 01, 2012 05:20 am Post Subject:
To answer your question, UL is not the same as a traditional whole life insurance policy, but it is a specific form of cash value insurance that combines some elements of both term and whole life policies.
Universal life insurance is a hybrid form of life insurance that bundles an Annual Renewable Term life insurance core with a cash accumulation fund. It resembles Whole Life in the sense that there is a cash value associated with the contract.
I'm sure other posters will chime in with alternate opinions, but this is the way I describe it to juries as an expert witness and it has not been challenged.
Insurance companies and their agents generally refer to any life insurance policy with a cash value component as "permanent" insurance because the contract now runs to age 121 (previously, to age 100), and sometimes refer to term life insurance as "temporary" because the contract has a definite expiration date in the relatively near future, such as 1, 5, 10, 15, 20, or 30 years from the day it is issued.
But the courts are increasingly deciding that Universal Life insurance, because of its Annual Renewable Term core, is NOT "permanent" insurance, and it's costing insurance companies large settlements in bad faith cases because they failed to disclose the inherent likelihood of the policy to fail (lapse) due to insufficient premium payments.
Those of us who long ago stopped using words such as "temporary" and "permanent" in favor of "term" and "cash value" to describe the two principal forms of life insurance, in my opinion, are more accurately describing the policies -- at least as far as the courts seem to interpret them.
Posted: Thu Mar 01, 2012 10:52 am Post Subject:
hi,
Thanks for the information, life insurance covers both life and whole term policy. Both are useful. Cash will be received after the term of the policy.
Posted: Fri Mar 02, 2012 01:47 am Post Subject:
Those of us who long ago stopped using words such as "temporary" and "permanent" in favor of "term" and "cash value" to describe the two principal forms of life insurance, in my opinion, are more accurately describing the policies -- at least as far as the courts seem to interpret them.
First of all, I've always had a problem with the term "cash value". I wish that we would always refer to it as "cash SURRENDER value". I think that this would help people understand the product much better. It helps them understand that the only way that they actually get all of this money is if they actually surrender the policy.
I'm not in favor of your terminology of "term" and "cash value". There are simply too many exceptions to this. This is especially true now that we are see so many temporary policies that are UL policies. We can also have permanent policies that never have a cash surrender value.
Posted: Fri Mar 02, 2012 06:46 am Post Subject:
We can also have permanent policies that never have a cash surrender value.
True. And this argues against calling the policies CASH SURRENDER VALUE insurance.
When I speak of the words "CASH VALUE" it is only used in the sense that there is an accumulation fund (whether there is any "value" in it or not is mostly immaterial, as you suggest). It can also be described as possibly having "NONFORFEITURE VALUES" if one decides to no longer pay premiums.
Aside from Return of Premium Term policies, "TERM" life insurance does not have such an accumulation fund, and the whole concept of nonforfeiture values is meaningless in a term policy.
And the word "TERM" is commonly understood to mean a policy that is not written to the "ultimate mortality age" of the Commissioners Standard Ordinary Mortality Table (the 2001 version of which ends at age 121). So I don't know why you would want to "disfavor" that point.
I suppose we could start calling the two types of contracts "NONFORFEITURE VALUE" and "NO NONFORFEITURE VALUE" but I think that would be terribly confusing.
The world pretty much understands that there is some kind of difference between TERM and WHOLE LIFE -- some folks just can't tell you what that difference is. It's the insurance companies themselves that screwed everything up with UL and VUL.
Posted: Fri Mar 02, 2012 07:38 pm Post Subject:
I'm not trying to argue with you as much as I'm just pointing out that there are problems when we try to over simplify things. This is true with just using the terms "temporary vs permanent" or "term vs. cash value".
Is an accumulation fund that always equals $0 after surrender charges truly an accumulation fund?
Posted: Sat Mar 03, 2012 02:42 am Post Subject:
Is an accumulation fund that always equals $0 after surrender charges truly an accumulation fund?
What else would you call it? Is my checking account still a checking account if I'm overdrawn on a given day or if I simply run out of checks? Does my car no longer have a fuel tank when it's empty. Your assertions are ridiculous.
You bring up these "semantic" discussions and never make a point or offer an alternative. In a courtroom, they would be simply be considered "vexatious". And eventually, a "vexatious litigant" will be prevented from even filing complaints without the prior approval of the court.
Here, it's simply amusing.
You don't like the words "term" or "permanent". Unfortunately, the insurance codes of California and almost all other states (I certainly haven't read them all) use those exact terms in reference to insurance products as I have above. As I mentioned previously, these are words and phrases that have acquired common understanding over more than 170 years of operation in America alone.
Individual life insurance predates group life insurance by at least seven decades. The first group life insurance policies in America were written in 1911, and were called, of all things, Group YEARLY TERM LIFE INSURANCE.
Posted: Sat Mar 03, 2012 05:12 am Post Subject:
This is not an argument of semantics. The checking account and fuel tank are poor analogies. The checking account is designed as a place to keep money. The fuel tank is designed to hold fuel.
With many of the UL policies of today, they are not designed to accumulate money and one would be stupid to try to put in extra money since putting in extra money could still result in an accumulation amount of $0.
So, with these policies, I would not call it an accumulation fund.
The problem isn't the words "term" or "permanent", it is how they are used. There is nothing permanent about an insurance product that will necessitate an unaffordable premium later in life. If we are using, the terminology of "term" and "permanent", we can easily call term insurance "term" and whole life "permanent".
However, we can't simply call UL "term" or "permanent". It really depends upon how it is being used.
Ex. George is 25 and wants the least expensive product for the next 30 years.
Sam wants the least expensive product that will guarantee his coverage to age 121.
It is possible that the least expensive product for George is a UL product.
It is probable that the least expensive product for Sam is a UL product.
In George's case, it is much more descriptive to call his policy "term" or "temporary" and in Sam's case to call it permanent.
In both cases, using the term "cash value" is useless since in neither case will the cash surrender value be greater than $0.
Posted: Sat Mar 03, 2012 06:23 am Post Subject:
Your critique of my two analogies fails. The accumulation account of a cash value policy is exactly the same as either the checking account or the gas tank. They are all designed to hold their intended contents -- whether the contents materialize or not, or evaporate in the future. The design of a term life insurance policy, just like the design of homeowners, auto, medical, property & casualty, and virtually all other forms of insurance, has no container for cash accumulation. You pay, you die, they pay. You just have to die during the period of the policy. Whole life is simply a very long term policy with a container for the cash accumulation -- except that all the mortality costs, expenses, and profits are exactly amortized, including a small amount of interest paid to the policyowner, over the precise length of the contract.
There is nothing permanent about an insurance product that will necessitate an unaffordable premium later in life.
Agreed. Nothing in this world of insurance is permanent unless the contract is precisely designed to be so. A single premium or limited pay Whole Life policy will do exactly that. But it comes at a price.
So agents turn around and illustrate a UL policy with magic numbers that seem to do the same thing, only the same 40 year old language that has been the bane of UL since it was created is still on the front cover of the contract: If the cash value is insufficient to pay the cost of insurance and other expenses when due, the policy will lapse without value. No way to write a UL contract without those words.
Enter the discussion of guaranteed UL products that creates the anomaly. The secondary guarantees are the only things that counteract the inherent nature of UL policy design -- which is the cost of its annual renewable term core.
What makes the SGUL products immensely different from an agent's presentations of most other UL products is that most everyone is actually upfront about the need to pay premiums every year without fail. Because the design fails to accumulate cash value as a cash value policy (ideally) should, failure to pay a premium when due causes the policy to lapse. (I realize this is sort of a broad overgeneralization, but it is, for all intents and purposes, accurate. And the illustration mechanism is still used to depict policy performance resulting in a minimum premium).
The real problem that plagues all UL policies today is the secondary guarantees themselves, including their analogs in annuities (GMIB, GMWB), which are now being addressed in some publications that most people, including agents, rarely read, is that the assumptions that the guarantees were built on (just like the early evolution of UL itself) are proving to be overly generous.
Underestimating the real cost of providing the guarantees, life expectancy and mortality experience, along with a completely unforeseen effect of the recent recession -- greatly reduced policy lapses -- are causing some insurance companies to have to tinker with their internal policy expenses to prop up policy reserves. When pressed up against the maximum expense values, the only other place they can turn to for an increase is the COI -- which is supposed to reflect only actual mortality experience. And if people are living longer, that should have the effect of REDUCING the COI, not increasing it.
The current and coming round of class action suits is targeting increases to COI which cannot be attributed to mortality, and which are obviously intended to recover other company expenses, in violation of contract language. Conseco is involved in just such a case right now, and others have already begun the litigation process.
Just as the robust interest numbers in the 1970s were the motivation behind UL then, the policy design was flawed because company execs figured the high interest rates would be around for a long time. The flaws have not been corrected -- and agents still use ridiculous illustrations to depict policy performance that is not likely to happen in order to hide the true cost of the contract in later years -- only now they have been covered with a layer of makeup that makes them look good in the afternoon. But what you get to see in the morning, without the makeup is often rather scary.
Nothing wrong with your examples of George and Sam, except that they shed no light on your dissatisfaction with any of the words that distinguish a term life policy from a cash value policy, and neither have you.
Posted: Sat Mar 03, 2012 11:33 pm Post Subject:
Your critique of my two analogies fails. The accumulation account of a cash value policy is exactly the same as either the checking account or the gas tank. They are all designed to hold their intended contents -- whether the contents materialize or not, or evaporate in the future.
What happens if you put an extra $100 into your checking account? What happens if you put an extra gallon of gas in your car? You have more money or you have more gas. That is what is supposed to happen.
What happens if you put an extra $100 into a UL policy that has a design based upon a minimum guarantee? The cash surrender value will still equal $0. It's the equivalent of giving away money to the insurance company.
These policies weren't designed to hold cash.
The reality is that just because they are universal life policy, it is painting a false impression to call it a cash value policy.
Run an illustration of a policy based upon a minimum guarantee. Now, do the same thing with double the premium. The results will end up identical. In both cases the cash surrender value will end up at $0.
Posted: Sun Mar 04, 2012 12:02 am Post Subject:
Underestimating the real cost of providing the guarantees, life expectancy and mortality experience, along with a completely unforeseen effect of the recent recession -- greatly reduced policy lapses -- are causing some insurance companies to have to tinker with their internal policy expenses to prop up policy reserves. When pressed up against the maximum expense values, the only other place they can turn to for an increase is the COI -- which is supposed to reflect only actual mortality experience. And if people are living longer, that should have the effect of REDUCING the COI, not increasing it.
The current and coming round of class action suits is targeting increases to COI which cannot be attributed to mortality, and which are obviously intended to recover other company expenses, in violation of contract language.
When we are talking about UL contracts with secondary guarantees that are sold and purchased based upon these guarantees, why would anybody care about the COI?
When "Charlie" a healthy 40 year old male buys a $500,000 UL contract from Genworth (their UL 20 product), his $428/year premium is going to keep the contract in force for the next 20 years regardless of the cost of insurance. If he pays more, (he won't and would be stupid to do so, and I don't think that the insurance company will allow him to do so), the cash surrender value will still be $0.
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