The saying goes that what goes around comes around. In universal life insurance, that is certainly truebut the product that is coming back is much better than before.
For instance, it has a new aggressive price structure. More importantly, it has guaranteed death benefits that really cast the product in an entirely different light than in its earlier days.
To grasp the depths of the change and its meaning for todays market, lets first review its rich history.
Up until the late 1970s, the life insurance industry sold whole life and term. Guarantees were important to customers back then, and guarantees were what insurers sold.
But when short-term interest rates shot up at the end of the decade, pricing became problematic. Thats because insurers generally invested in high quality long-term bonds and mortgages. This made it so their dividend rates couldnt match the new skyrocketing short-term money yields of 12% to 18%.
Policyholders, seeing those soaring rates, took out low fixed rate loans from their WL policies and invested the money in those double-digit short-term instruments. That produced near turmoil in the life insurance sector.
Thats when UL came to the fore. In 1978, a company called E.F. Hutton Life began marketing Completelife, which is widely believed to be the first UL contract in the industry. It was an ordinary life contract that “unbundled” the key features, showing all expense charges and monthly deductions, and offering “credited” interest rates that mirrored the current interest rate environment.
Soon, virtually every major insurer had its own version of UL, and UL policies became strong sellers through most of the early and mid-1980s.
But when interest rates fell dramatically at the end of the decade, UL sales hit the skids. Thats because UL guarantees were lower than those of WL, and in a lower interest rate environment, the product didnt illustrate well. In addition, many owners of in force ULs soon got the unpleasant news that their contracts could no longer perform as originally illustratedbecause of the lower credited interest ratesso they would have to deposit more premium or lapse their coverage. UL seemed doomed.
Fast forward a few years. In the 1990s, self-directed retirement accounts (401ks, IRAs, etc.) came into favor; the stock market was a happening place; and another version of ULvariable universal life, with its multiple investment optionssoon emerged as a strong contender. After all, what could be better and more contemporary than tax-deferred, self-directed investments wrapped in life insurance?