Hopefully we have all been educated on the upsides and downsides of GUL policies. I say that knowing it is far from the truth but that doesn’t make the level of education regarding Guaranteed Universal Life policies much different than almost any other types of policies.
My experience in the market over the years regarding these contracts is they are positioned either as the panacea to all ills or they are the scourge of industry. As usual, the perspective often has a whole lot to do with the goals and prejudices of who is making the statements. Also, the extremists on each side generally tell only half the story. There is so much more to share.
My position? GUL has the ability to be well utilized in some situations and the pricing and guarantees are exactly what many consumers have been searching for. In other situations it is grossly oversold and is simply not an appropriate product. I have recommended its effective utilization many times and steered many people away from it as well.
One aspect of GUL which hopefully has been gleaned from all of the noise in the market is that it needs to be managed like all life insurance. With GUL, “managed” means something a bit different than managing a non-guaranteed product with variables but, none-the-less, close attention must be paid to paying premiums on time and periodic projections should be ordered to ensure the contract is on track.
Every once in a while I get a question asking if the policy will outperform projections if the variables within the policy perform better than expected. My general response is that there should be no expectation that a GUL policy will outperform the initial projections.
That being said, I will share three examples I have seen lately of that not being the case. In one situation, a GUL policy was a portion of a large and diversified portfolio. All of the contracts were projected or guaranteed to last for life with the exception of one where the 1035 exchange came in a little lower than expected and the guarantees lasted “only” until age 103. The decision maker said that was good enough and decided not to lower the death benefit or add more premium. Now, a number of years into the contract, a new in-force projection shows the policy guaranteed through age 105.
In another situation I was called by a trustee regarding a GUL policy. He stated that there were some temporary cash flow issues until a piece of real estate was sold and he wanted to know the effect on the policy if the premium was a few weeks or months late. This is exactly what I would hope and expect of responsible trustee and I ordered ledgers a number of ways. What we ultimately discovered is that this year’s entire premium could be skipped and the lifetime guarantees would not be affected whatsoever.
The third situation was an older policy owner who doesn’t think he wants to maintain the trust owned policy he purchased for estate tax liquidity when he no longer has an estate tax liability under the new tax law. The policy has zero cash surrender value so I broached the subject of a potential life settlement as an attempt to garner some terminal value from the contract. I believe this is the responsible and professional thing to do in such a situation.
The premium was due in a few weeks and the client was reasonably concerned about jeopardizing the policy while we examined the settlement market. However, he didn’t want to pay a premium now if it was unnecessary and he ultimately decided to let the policy go. I ordered multiple projections to show him and the trustee the effect of various funding scenarios, including:
- Pushing this year’s premium off and double paying next year’s premium. This had no effect whatsoever on the projected guarantees, giving us the breathing room we needed to evaluate alternatives without unnecessary pressure.
- I showed him that he could skip this year’s $20,000 premium all together and then start paying $22,000 annually starting next year.
- He could skip two years and then pay $25,000 a year
- He could skip four years and then start paying $33,000.
- Maybe he wanted to skip one year and then start paying the $20,000 next year and beyond and start paying $29,000 a year if he wakes up at age 97 and finds that he is still alive and kicking.
The point is that in the end there are numerous options and these options may be particularly attractive for a given individual. Maybe you are in your mid-eighties and not exactly sure how much time you’ll have before “assuming room temperature.” If you are 50 it is only about the timing of premiums and the time value of money. When you are 85, you may think that you are getting away with something if the Grim Reaper could be around any given corner and the higher premiums may never materialize.
Why bother with this? While I am not going to suggest this will work with GUL products across the board, because I am sure it will not, there at least exists the possibility with some that since a policy has been in force for a number of years performing better than guarantees, the original guaranteed premium is not necessarily required every single year at the level originally stated. This isn’t really any different than doing better in your retirement portfolio than planned which gives one the flexibility to scale back on deposits if so desired.
Again, if not required, can you assume that everyone who has a policy which doesn’t absolutely require the premium to be paid wants to pay it? Or, that a level premium structure is always the best? I have seen some policy owners with some liquidity or temporary cash flow issues goes through very difficult and costly gyrations to ensure the full premium is paid on time when it just might not need to be.
This is just one more example of the importance of managing life insurance. It is also an example of not believing everything you hear.