A Good Universal Life Insurance Plan

Since it was first introduced in the early 1980’s, Universal Life Insurance plans have become a popular choice for consumers looking for a low cost alternative to owning a permanent life insurance policy. Since its inception, Universal Life Insurance has undergone several iterations in order to comply with the ever changing tax laws and increasing consumer demand for greater transparency and disclosure.

Today, in a highly competitive market place, choosing a good Universal Life Insurance plan may, seem like a daunting task, however, knowing how a Universal Life plan works will ease that burden and ensure that your selection will provide lifelong security.

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History

A brief history of Universal Life Insurance will help in your understanding of its inner workings and the most important criteria for choosing a good plan. Universal Life Insurance was introduced by life insurance companies as a direct response to consumer dissatisfaction with the poor performance of the low yielding and non-transparent permanent life insurance plans being offered at the time.

It was a time of historically high inflation and interest rates, increasing incomes, and a much more savvy and demanding consumer. Whole life insurance plans, the only permanent life insurance plan available at the time, was quickly losing favor due to its inflexibility and its low fixed yields.  Even though insurance companies assumed all of the risk, guaranteeing fixed premium payments, savings growth and life protection, they were losing a significant part of their revenue and assets through term insurance conversions and policy lapses.

The response was the creation of an alternative plan that would provide access to higher yields, more flexibility and more transparency. Universal Life insurance was created by unbundling the components of a traditional whole life plan and reassembling them in a way that gave the consumer more choices in the way the protection and savings elements worked for them.

This enabled consumers to receive a higher return on their savings while providing more flexibility in how they manage the life protection component.  In return, insurance companies transferred the risk of premium payments, savings growth and life protection to the consumer.  As interest rates decreased over the next couple of decades, these risks became more apparent to consumers who planned their future premium payments based on earlier, higher yielding projections.

Risks

Additionally, consumers soon became aware of the risks associated with the performance of the underlying investment portfolio of the life insurance company. The interest generated inside their savings element is tied to the performance of the company’s portfolio of investments.

It hasn’t happened often, but where a company’s portfolio underperformed or was exposed to junk bond shenanigans, the Universal Life insurance policyholders were at risk to losing the portion of their savings that weren’t  guaranteed by their state’s guaranty association (most states guaranteed up to $300,000 of life benefits and $100,000 of cash values).

The good news for consumers is that, over the years, the life insurance industry has overcome the concerns that stem from undertaking these increased risks by improving the disclosure rules and standardizing the structure and components of all Universal Life plans. 

Summary

So, what makes a good Universal Life plan?  The best plan is the one that will be around to pay your living benefits and your death benefits at the time they are needed.   Using the strength, stability and the investment history of a life insurance company as your primary criteria, there are many good plans to be found.  Start with the highest ratings (A+ from A.M. Best), and then look for companies that have a large and diverse asset base.

With the list narrowed, it’s easier to examine the investment histories to find those with the most consistent and stable returns over 10 and 20 years. The final determination of whether it’s a good Universal Life plan is the ease with which you can understand the policy guidelines and disclosures. 

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