Universal Life Insurance, a 1980s Sensation, Has Backfired

[question everything]

A popular insurance product of the 1980s and 1990s has come back to bite many older Americans. Universal life was a sensation when it premiered, and for some years it worked as advertised. It included both insurance and a savings account that earns income to help pay future costs and keep the premium the same.

That was when interest rates were in the high single digits or above. Today, rates are completing a decade at historically low levels, crimping the savings accounts. Meanwhile, the aging of the earliest customers into their 70s, 80s and even 90s has driven the yearly cost of insuring their lives much higher.

The result is a flood of unexpectedly steep life-insurance bills that is fraying a vital safety net. Some find they owe thousands of dollars a year to keep modest policies in effect. “I’m very scared that everything will go down the drain,” said Bernice Sack, a 94-year-old former hospital billing clerk in North Carolina. A $56 monthly premium Mrs. Sack paid when she bought the policy 35 years ago has climbed to $285, despite her efforts to keep the cost down by reducing her death benefit. Living with a daughter and getting by on Social Security, she skimps on medications to pay the insurance bill, sometimes runs late on her share of household costs and considers ice cream a splurge.

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Universal life is among the reasons Americans are approaching retirement in the worst shape in decades. The insurance policy type emerged in an era nearly four decades ago when the Federal Reserve was fighting inflation with high interest rates. Some financial advisers suggested people forgo traditional “whole life” insurance and buy less-expensive policies that covered just a limited term, investing what they saved in the mutual funds and money-market funds then proliferating. Insurance companies embraced this mantra of “buy term and invest the difference” by inventing a new product.

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Compounding the problem, universal life offers flexibility that is alluring but dangerous. Within reason, customers plan their own monthly or annual premium payment. They can set it low, counting on high interest income in their savings account to keep the policy financially sound. Customers also can choose to pay less than their planned premium sometimes if money is tight. Or they can skip a payment altogether. And they can borrow against their savings account. Any such move, of course, will spell skimpier earnings in the account. It is widely accepted that not all customers—or even all insurance agents—fully understood years ago how borrowing or skipping payments could undermine a universal-life policy.

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https://www.wsj.com/articles/universal-life-insurance-a-1980s-sensation-has-backfired-1537368656 (paid subscription)

[Farmer-Rick]

1. Except when I was in the Navy, I have Never had life insurance and never will

I merely keep a bank account that I put enough into cover funeral expenses. I've had this account for 16 years. Why do I need more than that, or more specifically, why would my family need more than that?

I think life insurance is a scam.

[question everything]

2. We had this product for a year, I think, cost a lot and we could afford it

but then we were laid off and decided to cancel it. Was surprised to get some cash back.

Then a former co-worker offered us a term life insurance. Like the promoters of the story, above, suggested to pay for term and invest the rest. In contrast, he did not offer investments. We were just glad to have the extra money.

We kept term policy for about 20 years, mostly to pay for the mortgage on the house.

Then, 10 years ago, it was time to renew the policy, we were in a new place, older, and the new agent offered to get a long-term policy instead of a life one. And this is what we have had.