Recently a local advisor asked me what my thoughts are on guaranteed life insurance. I thought I would share with you my response.
Traditionally the consumer market has understood that all life insurance is guaranteed and decades ago it was. Since the seventies , though, most cash value in the life insurance policy is projected based on assumptions regarding mortality costs, overhead expenses and crediting rates at the point the policy is issued; these assumptions vary over time. Since policy dividends and interest rates have consistently declined for the better part of three decades, many policies in the market are under performing or even collapsing because consumers do not realize that they need to increase the funding when policy variables change for the worse.
About a decade ago the market rolled out Guaranteed Universal Life or No Lapse Guarantee UL policies which had a fixed premium and a fixed death benefit. They have clearly been popular in the market as consumers are sick and tired of bad surprises regarding their life insurance. Some insurance professionals see these products as the end all and be all and others feel they are under-priced and unsustainable. Often time the prevailing attitude is strongly affected by indoctrination by the agent’s primary carrier. Also, there are significant ideological differences agent to agent and carrier to carrier in the market.
The Guaranteed Universal Life policies are not cash rich as traditional whole life policies. However, they have more guarantees than most modern whole life policies. This being said, there are potential downsides to guaranteed policies. They are only guaranteed if the rules are followed and as you know not everyone is following the rules. For example, if policy owners are in the habit of paying premiums a little late, the lifetime guarantees may not be in force and the policy owners have no idea. If I were to perform policy audits on ten Guaranteed UL policies put in force over the past decade, it wouldn’t surprise me if half of them were not actually guaranteed for life as originally intended. Also, though Guaranteed UL policy premiums are often “cheaper” than whole life policies, a cost versus value analysis should be performed to make sure it is the best tool for the job.
Agents in favor of the product will often only extol its virtues while agents whose primary companies do not have such a product will often slam it mercilessly. Clearly there is a middle ground and the consumer market deserves to hear both sides of the story from an objective standpoint. (Coincidentally that is precisely my business.) The product has a fit for many people and planning scenarios but it depends on the goals at hand and, as usual, the ability and willingness to manage the policy appropriately over time.
