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September 18, 2014 at 03:12 AM
Most people know guaranteed universal life (GUL) for its flexibility and guarantees. These features are built right into the policy and are the reason many of your clients are drawn to it. They may not know that there is a third and equally important design aspect to these products, though — risk.
While a “risky GUL” may seem like a contradiction in terms, it’s really an industry standard. For some carriers, 30 percent or more of GUL policyholders’ premium schedules may be going off track, according to The Life Product Review. These policies run the risk of lapsing or experiencing a reduction in coverage, which could result in the policy’s beneficiaries receiving little to none of the funds originally intended for them.
When you consider that GUL accounted for more total premium in 2013 than any other type of universal life product, according to LIMRA’s “Individual Life Insurance Sales Report” for Q4, then you understand just how much of an issue this can be for you and your clients.
How risk is introduced
Think of life insurance products on a sliding scale — risk on one side, guarantees on the other — where the level of flexibility offered determines a product’s location on the scale. In this scenario, variable universal life, which offers a great deal of flexibility, would be located on the risky end, while whole life, offering very little flexibility, would be on the other.
Though guaranteed, GUL also offers flexibility in the level of death benefit and the amount and timing of premium payments. So, when you run a sales proposal for a client using a GUL product, it looks risk free. And it is – as long as the premium amount illustrated is consistently paid on time and in full. Any deviations from the original proposal will ultimately jeopardize the death benefit guarantee.
Product design is at the root of the issue
GULs earn interest on cash value, but they aren’t meant to be used as a vehicle for accumulation. The reserves backing the policy are there primarily to support the desired guarantee, so it can provide a death benefit for the intended beneficiary. When payments are late or missed there may not be enough funds left to cover the policy’s charges, potentially resulting in a need for a decreased death benefit or lapse in coverage.
