Universal Life Insurance Contracts

[mathjak107]

whole life is actually priced so by the time you are 100-105 depending on company , you paid in the face value of the policy via reinvesting decades of interest ,premiums and dividends .

at that point the policy can be said to be endowed and many companies just mail you back a check dead or alive at that point .

it is priced very different than term . term has a tiny tiny percentage chance of paying out statistically since it is rarely held until death . whole life is priced based on 100% certain payout

 

[OldShooter]

I'm beginning to think that @brucethebroker isn't coming back to tell us about the commissions and fees involved with the products he sold.

Too bad. I hope I'm wrong. It would be very interesting, as I have read (on the always reliable 'net) that the first year sales commission can be as much as 100% of the customer's premium payment.

 

[mathjak107]

no , you are right . as i get older my policy will stop supporting itself and extinguish unless i add money .

there are huge jumps in the insurance costs as you pass certain ages .

 

[Independent]

traditional universal life is really not a great product.

it is like i have one i bought decades ago . the policy is running off it's own cash value for 20 years now without me adding anymore money .

BUT --- unlike whole life , the internal cost of insurance goes up and not only does it go up , but at certain ages it jumps big time .

eventually it is designed to self extinguish without dumping more money in to it .
by the time you reach the age where odds are high it will pay out it likely will no longer be able to support itself . so you end up paying forever for it .

if you want permanent insurance -go whole life .

Sorry, but I have to disagree. The internal cost of insurance in a whole life policy goes up every year, just like it does for UL.

You can have an agent run a UL illustration to "endow at 100 on the guaranteed basis" and you'll have a whole life policy that (probably) pays dividends.

In fact, the name "Universal Life" comes from idea that it could mimic any of the policy types that used to fill up those thick ratebooks - Whole Life, Life Paid up at 65, Endowment at 65, 20 year level premium term, etc.

 

[mathjak107]

sorry , now i disagree

a premium for whole life IS ALL COST OF INSURANCE . it never changes .

that is the price for coverage and there is no cost that changes over the policy life except for it being a bit less if dividends are paid .

on the other hand it is very easy to get burned with ul because the costs are not level only the premium is level .

once you let the policy self feed itself , while it looks like the policy costs and interest rate you get may cancel each other out and go on forever the insurance costs internally bump up and one day you likely have to start feeding it again .

i put about 25k in a ul policy decades ago . i never made another premium payment and the interest basically carried the policy .

30 years later the 25k was still there . but now that i am older the internal cost of insurance is rising by a lot . the policy has finally taken a drop below .

it will get bigger and bigger increases until finally as i get in to that range where death is more possible it will likely self extinguish .

i have not seen an internal cost comparison between whole life and ul so i can't say if costs work out the same because i don't know if they really know in advance the size of the actual jumps in the insurance costs .

it may very well be like buying a lifetime membership to a gym where generally you pay less decades later than actual membership later .

 

[Independent]

sorry , now i disagree

a premium for whole life IS ALL COST OF INSURANCE . it never changes .

that is the price for coverage and there is no cost that changes over the policy life except for it being a bit less if dividends are paid .

on the other hand it is very easy to get burned with ul because the costs are not level only the premium is level .

once you let the policy self feed itself , while it looks like the policy costs and interest rate you get may cancel each other out and go on forever the insurance costs internally bump up and one day you likely have to start feeding it again .

i put about 25k in a ul policy decades ago . i never made another premium payment and the interest basically carried the policy .

30 years later the 25k was still there . but now that i am older the internal cost of insurance is rising by a lot . the policy has finally taken a drop below .

it will get bigger and bigger increases until finally as i get in to that range where death is more possible it will likely self extinguish .

i have not seen an internal cost comparison between whole life and ul so i can't say if costs work out the same because i don't know if they really know in advance the size of the actual jumps in the insurance costs .

it may very well be like buying a lifetime membership to a gym where generally you pay less decades later than actual membership later .

I'm not sure where to start.

When you bought your UL, the agent probably gave you a sales illustration that had columns for "guaranteed" death benefits and cash values. If you dig out that illustration, you'll see that both those columns went to zero at some time before age 100.

OTOH, there were also columns using the "current" factors for mortality, interest, and possibly expenses. They were more favorable, and the illustration would have shown the policy lasting longer.

I'll guess that you focused on the "current" columns instead of the "guaranteed" columns when you bought your policy.

Then, the company didn't continue to pay the "current" interest in the original illustration. It paid less and your policy didn't last as long as you expected.

You could have asked for a UL illustration where a single premium guaranteed coverage to age 100. It would have shown a much higher premium than you actually paid. If you had paid that higher premium, your policy would have survived to 100.

If that company had offered a traditional Single Premium Whole Life at the same time that you bought your UL, that SPWL policy would have guaranteed coverage to age 100. The premium on the SPWL would have been very similar to the second UL premium above - the one where the guaranteed columns survived to 100.

The reason your UL is terminating early has nothing to do with different mechanics between UL and a WL policies. It is because you paid a lower premium than you would have paid for a SPWL.

I don't know how people price gym memberships. I do know that the guaranteed mortality charges in a UL will be a Commissioners Standard Ordinary table, either 1958 or 1980, depending on how many decades ago you bought your policy. The mortality rates used to calculate cash surrender values in a WL, issued at the same time as the UL, would have been the same.

 

[mathjak107]

universal tends to follow term insurance costs .

Whole life is priced for a premium that will be level to age 100 and beyond and provide coverage that you cannot outlive. It starts out higher but ends up being less than premiums for term later in life. Whole life for lifetime needs will always cost less than the term costs for lifetime.

 

[Independent]

universal tends to follow term insurance costs .

Whole life is priced for a premium that will be level to age 100 and beyond and provide coverage that you cannot outlive. It starts out higher but ends up being less than premiums for term later in life. Whole life for lifetime needs will always cost less than the term costs for lifetime.

Again, the name "Universal Life" comes from the fact that the unbundled calculations in a UL allow it to mimic any traditional plan. You can make it look like term or permanent, with single premium or level premium, or any other form you invent, just by varying premiums and death benefits.

UL "follows term costs" only if you pay low premiums per thousand. If you pay higher premiums per thousand, it becomes permanent insurance.

One thing UL cannot do is provide whole life guarantees for term premiums. But, of course, traditional whole life policies can't do that either.

 

[OldShooter]

@independent, you seem to be very familiar with this subject. Despite my request, former salesman @brucethebroker is apparently not interested in explaining the financial aspects of these policies, like commissions and costs. How about you? Can you explain these?

 

[ncbill]

Based on personal experience, ignore any projected illustrations and expect to collapse to the guarantee for ANY UL policy.

Since the policy will be sold to you with lower premiums (than whole life) the policy will eventually "blow up" unless significant sums are added, given the increasing cost of insurance as time goes by.

(people would simply not buy UL if the agent quoted a premium that would guarantee coverage to age 100, i.e. a traditional WL policy)

 

[OldShooter]

There are several mentions here about life insurance late in life, like "to age 100." That's a puzzle to me; maybe I need some education.

My understanding is that insurance is primarily needed late in life for situations where an estate is illiquid and estate taxes need to be paid. (Assuming final expenses like burial are covered.) Most of the people here, probably the vast majority, have liquid investment assets so even if they trip estate tax triggers it would seem that they hve no need for insurance. Is there something wrong with this understanding?

Personally, I dropped my term insurance in my 40s. Kids financially out of the nest, good retirement savings, and a wife with a good job. My income was no longer critical, so it didn't seem that I needed insurance any more except as a sort of lottery ticket for my wife. At that time my premiums were increasing, but so was my income. I was much better positioned to pay increasing premiums than I would have been to pay big premiums in my 20s for a "level premium" policy. The term policy I had was renewable regardless of health events, so no issue there. Was this wrong thinking somehow?

 

[CoolRich59]

I can't remember where I heard this, but it went something like: "If you need insurance, buy an insurance policy. If you want to invest, buy an investment. But, don't buy an investment with an insurance policy".

 

[pb4uski]

Hate to tell you mathjak, but I agree with Independent. If you had a UL policy and a whole life policy and paid the same premiums into the UL policy as the whole life policy premiums, they probably come out to be roughly the same after 40 or 50 years. At least at the company where I worked, that is the way they were designed.

 

[CoolRich59]

I'm beginning to think that @brucethebroker isn't coming back ...

I'm starting to wonder about Wingnut1 myself.

 

[mathjak107]

Hate to tell you mathjak, but I agree with Independent. If you had a UL policy and a whole life policy and paid the same premiums into the UL policy as the whole life policy premiums, they probably come out to be roughly the same after 40 or 50 years. At least at the company where I worked, that is the way they were designed.

not according to those who have done the calculations . they say the outcome with ul by age 100 costs a lot more just like term would since it is priced like term and whole life would cost less . .

term always cost more if you hold it until older ages

 

[pb4uski]

Are you referring to just mortality cost of insurance charges or to total premiums? If you are referring to mortality charges of course they increase with age... that would be true of term, or UL COI charges or mortality costs imbedded in whole life pricing... if so then your point is a perceptive glimpse of the obvious.

So all else being equal if you pay $x/month in whole life premiums or UL premiums or even BTID in bonds, then it should be sufficient to provide life insurance coverage for life.

 

[mathjak107]

whole life is 100% premium for the cost of insurance until death .

if you figure the total costs usually by age 100-105 you would have paid in via premiums ,reinvested interest and dividends the value of the policy less fees and expenses .

if you tried to keep term until the same age term it will cost you a lot more less fees and expenses .

generally ul is priced like term so the older you get the more you will pay for that insurance until you are paying more than you would have had you bought whole life instead . ul can be more costly trying to hold it in to your 90's

 

[Independent]

@independent, you seem to be very familiar with this subject. Despite my request, former salesman @brucethebroker is apparently not interested in explaining the financial aspects of these policies, like commissions and costs. How about you? Can you explain these?

I think your post #36 is the most important response. I agree that most people do not need life insurance late in life. Most of us are better off buying term when we have others relying on our wages, then dropping it as our financial position changes. That's what I did, just like you.

So, discussions of "UL can be funded at a level that makes it a permanent policy" are irrelevant to most people, and this post is just a theoretical question.

In a UL policy, you pay a premium, the company probably deducts some "percent of premium" expense, at least 2% (because state premium taxes are about 2%). The rest goes into a fund. Each month, the company credits interest to your fund, deducts some expense charge, and deducts the cost of insurance.

That last factor is (insurance charge per thousand) x (excess of your death benefit over your current fund).

Note that the charge per thousand goes up as you age. If you're putting enough money into the policy, the "excess of death benefit over your fund" is decreasing. So, it's possible for the dollar amount of the monthly mortality charges to be level or even decrease, even though the rate per thousand goes up.

That same mechanism happens in traditional life policies (except the calculations are annual instead of monthly). In UL they are visible, in traditional they are hidden.

Now, for expense loads. Some are labeled - the percent of premium and the monthly expense charge. But, others are hidden.

The interest credited is not equal to the interest the company earns on its bond portfolio. The difference covers expected credit losses, some contribution to "profit" or "cost of capital" (depending on your politics), and some operating expenses.

The mortality charge is not exactly equal to the expected mortality rate. Again, the company charges more to cover expenses and profit goals. (Due to some regulatory issues, I think the room to charge expenses on the mortality charge has decreased, but I haven't kept up on that.)

In practice, the first year cost of putting the policy in force - Marketing, Sales, Underwriting, and FY Admin - exceed the actual first year premium. So the company goes in the hole in the first year. It recovers that FY loss, and pays the annual admin costs, through all all the loads mentioned above.

Back in the day, the company I worked for illustrated a significant step in factors after the first 10 years. In the 11th year, the interest load decreased (so interest paid increased), the mortality load decreased (so there was a downward jog in mortality charges, and the explicit monthly expense factor decreased. This all occurred because the company planned to recover that first year loss over the first 10 policy years.

All that was similar to what that company did for traditional policies. The differences were that the calculation was annual instead of monthly, and all this stuff was completely hidden from the buyer. It was just a premium, a guaranteed death benefit and surrender value, and a non-guaranteed dividend. The dividends got bigger as the policy aged, partially because early year dividends were squeezed by the need to recover first year losses.

That's for a simple interest crediting UL. If you really care about an equity indexed UL, where the credited interest is tied to a stock index, I can same some stuff, but it will be another long post.

 

[Independent]

not according to those who have done the calculations . they say the outcome with ul by age 100 costs a lot more just like term would since it is priced like term and whole life would cost less . .

Could you provide a link to those who have done the calculations?

 

[mathjak107]

let me see what i can find