In the beginning there was only annually renewable Term life. The buying public began to complain that they couldn’t keep the coverage until they died, since the premiums increased every year as the risk of death increased. This form of life insurance became unaffordable before the inured died and the public outcry was: “This is a rip off! give us something that will last for our ‘whole life'”. And that very product was invented to meet the consumer demand. This was about 150 years ago and the two types of insurance (Whole life and term) coexisted until the 1970’s and early 1980’s when the innovation explosion occurred.
Since that time, there have been scores if not hundreds of variations on the “whole life” product. So there is still Term and Whole Life, but a better way to look at it is term and “permanent” since the cash value of these products have the function of keeping the policy in force until death, regardless of the actual life span of the insured. Many products today offer contractual guarantees that, if certain funding requirements are met, the policy will stay in force until death even if the actual age of the insured exceeds age 120! That’s as permanent as it gets! Term insurance cannot achieve this since its cost is based solely on the age and life expectancy of the insured.
So the permanent policy can carry out this feat of remaining in force until death, regardless of age, but as a condition of this function, the policy has an asset value, often referred to as a cash value. This asset value has in several different designs and this is where the insurance buyer has some financial risk and can easily get confused as to just what she has, what she is doing, how it is performing, and if it is being managed well. Since permanent life is an asset it must be managed by a professional. The home office call centers can help with forms and bank draft information and beneficiary changes, but cannot and will not provide advice on managing the asset value of the product and gives only limited information on the values.
So there is still Whole Life (WL) but the new kid is the are Universal Life (UL) policy design. It has three subsets: Traditional Universal (UL), Variable Universal Life (VUL) and Fixed Indexed Universal Life (IUL). And even though WL is the easiest to “set and forget” it still should be reviewed regularly since the cash value expectations are usually dependant on non guaranteed dividends that depend on the insurance company’s profitability and are subject to change. there have been a few dividen paying WL companies that have reduced dividend payments which has impaired the function of the policy.
The three types of UL shift some of the “investment risk” to the owner and this is where the greatest risk to the owner/insured lies. The salesmen don’t belabor this aspect. Many don’t even mention it at all and present the illustrations based on the then current interest rate and cost assumptions projected into the future, as though the future value of some 20 or 40 years is assured and certain. The past few years of extremely low interest rates is a great example. Who saw the first ten years of the new millennium playing out the way it has with interest rates near 0% for the last three years?
The moral of the story is this: Permanent Life insurance products are still good products, if properly managed and reviewed. It is an asset unlike any other, with tremendous benefits for the owner, the insured, and the heirs. But can’t be simply bought and left in the safety deposit box, especially the UL and VUL types. If you agent isn’t doing this for you at least every other year basis, call us. We can help.