Insurance: Beware Of Universal Life

Has a life insurance agent suggested that you buysame death benefit. But let's look at some real
'permanent' insurance such as Whole Life,numbers. The annual premium for a 45-year old
Universal Life or Variable Universal Life? Theman in excellent health for $1,000,000 in coverage
reasons they give seem so compelling, but areis $1400 per year for 20-year term. That man
they in your best interest? Here's an explanationwould pay roughly $8,000 a year for permanent
of the basics, plus what the insurance agent isn'tinsurance. That's right--about $6600 more every
telling you!year.
There are two broad categories of lifeThat reserve in the permanent insurance can
insurance--term and permanent. The basic ideabecome a substantial over time, so they give you
behind life insurance is that if you die prematurely,the ability to borrow the money held in reserve.
there will be a pot of money there to take careThis has spawned the use of permanent
of your loved ones. That pot of money isinsurance for needs other than the death benefit,
referred to as the 'death benefit'.such as a way to build a retirement nest egg. The
The cost of life insurance is based on your age,'ploy of the day' is that you should take all the
your gender and your health. The insuranceequity out of your home and put it into a
company bases the premium on the risk that youuniversal life insurance policy because it will allow
will die. The older you are or the poorer youryou to build your wealth more quickly. (I expose
health, the more expensive the insurance will be.the fallacy of that argument in a future article.)
The 'raw' cost of insurance goes up every yearWhat your insurance agent isn't going to tell you is
because the risk of death increases every year.that the commission on permanent insurance can
Term and permanent insurance approach thebe around 70% of the first year premium and
payment plan differently. With level term, thesethen maybe 5% a year on additional premiums.
increases in cost are spread out over 10, 20 orCommissions on first year term premiums can be
30 years and the premium is kept the same. Ifas high as 100%. In our example above, the
you renew your policy at the end of the term,agent will make about $5600 on permanent
your insurance costs will increase.versus only $1400 on the term. This higher
With permanent insurance, your premium stayscommission is a tremendous incentive for agents
the same as long as you own the insurance, up toto sell permanent insurance instead of term.
age 100. That way, you shouldn't be in a situationThe result is a huge conflict of interest between
where it becomes too expensive as you age.the needs of the client and the desires of the
Initially you pay more than the raw cost ofagent. I would like to think that every agent will
insurance and that money is kept in reserve.always do what's in the client's best interest, but
Once the raw cost of insurance is greater thanwe know that's not the case. And most agents
your premium, the difference is taken from theare convinced that term is a waste of money
reserve.and that permanent life insurance is the better
The difference between Whole Life, Universal Lifechoice. I don't.
and Variable Universal Life has to do with theI believe that permanent life insurance should only
return you earn on that money while it's kept inbe used in special situations, such as to cover
reserve. Whole and universal essentially payestate taxes due at death. I do not think it should
interest while variable universal allows you tobe used when you want to provide for your
'invest' that reserve in mutual-fund-like accounts.family in the event of a premature death. I don't
On the surface, it may seem that there shouldn'tthink it should be used as a way to 'build wealth'
be a lot of difference between the premium onor as a type of retirement plan. In my next
20-year term and a universal policy with thearticle, I'll explain why.