Universal Life Insurance: Module V-E

UNIVERSAL LIFE INSURANCE: MODULE V-E

Universal Life was created in the early 1980s at a time when high interest rates prevailed. Although the high interest rates didn't last, Universal Life, with its investment byproduct, did. Its continuing success can be attributed to its flexibility and its ability to act as a tax shelter. For example, policyholders can borrow, withdraw, or use a partial surrender to use Universal Life's cash values, usually without incurring taxes. Most other Life policies offer only policy loans.

Universal Life is a Life insurance product with an investment byproduct. It differs from traditional Whole Life policies in that Universal Life generally offers significantly higher interest on short-term investments and can be adapted to a variety of investment and insurance needs. Part of the uniqueness of this product is its flexibility. Premiums paid can be changed each year by the policyholder or the insurance company, depending on the current interest rate.

Because Universal Life policies are generally linked to investments, a lot of attention is paid to interest rates. Although interest rates have dropped, industry experts believe the coverage is still attractive to Life insurance buyers because Universal Life offers tax-deferred interest accumulations and interest-free loans-on top of Life insurance. At death, the benefit can be received free of federal income tax.

A Universal Life policy is fed by two sources: the premium and interest. The client controls how much premium (not including premium expenses) goes in. The interest source has two parts: one, the amount of interest guaranteed by the insurance company; and two, the amount of interest above the guaranteed rate, which depends on the current investment performance of the insurance company's portfolio. But there are also expenses. These include administrative charges and cost of insurance, which are controlled by the company, and withdrawals and loans, which are controlled by the client. As long as some funds remain in the policy, insurance remains in force. However, if the funds are allowed to deplete, the policy terminates without value and taxes are due on the cash value exceeding the premiums paid.

Universal Life loads can be either front-end or back-end. Front-end loads are fees added to the premium. Other features of a front-end load include: lower current interest rates, better cash value in early years, and policy cost per $1,000 generally greater over the same period as the policy cost for a back-end load policy. Back-end loads are not added to the premium, but are charged only if the policyholder decides to surrender the policy before a specified number of years. When you see a Universal Life cash value illustration, you generally see two columns on a back-end load policy-the cash value and the accumulation columns. The cash value will be less for the surrender period (under 15 or 20 years) than the accumulation column. Once the projected surrender charge period is passed, then the two columns will be equal.

Before Universal Life, most insurance companies credited interest to policies based on the average yield of the company's investment portfolio. This was called a 'portfolio rate strategy.' However, when interest rates rose and Universal Life became popular, the method of determining rates changed. Short-term investments were yielding better results than long-term investments. So carriers, instead of declaring credited interest rates based on the average yield of their investments, began crediting interest based on currently available investments for Universal Life policies. This was called the 'investment generation' approach. This difference gave Universal Life a unique advantage over other forms of Life insurance: a much higher effective yield for the policyholder. During low-interest cycles, the portfolio rate strategy may prove slightly more competitive, but interest rates are notorious for their ups and downs. Over time, short-term investing generally proves more profitable.

Another Universal Life feature is the potential to 'vanish' premiums. You can work out a program whereby the client's premiums will vanish, or stop, after a set number of years, based on a projected interest rate. At that point the earnings on the cash reserves will be able to take over the premium payments. The death benefit won't decline when the premium payments stop but, if the interest rates drop, the premium payments must begin again. On the other hand, if interest rates increase over the original projected rate, the death benefit can increase because the accumulated cash value can't come too close to the death benefit. If it does, tax law says the death benefit must be increased or the policy loses its tax favored insurance status.

Universal Life has also added 'life' to the payroll deduction market for two big reasons: Most American workers don't have access to a quality Life insurance program, and the arrival of Universal Life has made it possible to turn employee-level payroll deduction sales into an insurance planning opportunity. A condensed fact-finding interview can establish an employee's needs and how the program can meet those needs. Employers and employees both benefit from such a plan. (See the 'Payroll Deduction' campaign in this 'Sales Campaigns' section for more information.)

Once a client has been sold a Universal Life policy, the odds are high that he or she won't go back to more traditional Life insurance. Why? First, Universal Life carries a visible interest rate. Today's consumer is more sophisticated and understands interest rates, inflation, and investments. Products with a clear interest return are irresistible to clients. Second, Universal Life insurance is easily understood. The concept 'premium payments plus interest equals cash value' makes sense to them. Finally, Universal Life's flexibility is very attractive to clients who prefer not to be locked into a plan with specific ongoing payments that cannot be skipped without penalties.

The method of investing Universal Life premiums is unique to the product. Short-term investments are preferred over long-term investments to take advantage of fluctuating interest rates. As we stated earlier, the short-term investing strategy allows investors to benefit when interest rates are high-long-term investments are locked into their current rate. When interest rates drop, long-term investments may seem to be a wiser choice, but short-term investments have the advantage of flexibility.

Perhaps the most exciting aspect of Universal Life for some people is the variety of ways cash can be extracted from the policy. And interest will continue to accumulate on the policy's cash value. The borrowing rate may be fixed or variable, based on current earnings. These options can be tax-free under some circumstances. Or policyholders can lower or suspend their premium payments. The policyholder determines the size of premium, which can be adjusted up or down, according to the client's needs. And if the cash value of the policy is sufficient, premiums can 'vanish'-the cost of insurance is paid for by the cash reserves.

Projected or current interest rates, on which the Universal Life cash value and premium level are based, are not guaranteed. No one can predict how long any given interest rate will last. This means the policyholder assumes more risk with Universal Life than he or she would with Whole Life coverages. The Universal Life death benefit also is not guaranteed. Most Universal Life policies will show that at their guaranteed rate, the proposed premium will not carry the policy through the client's expected lifetime. Policies sold during a high interest period may pose a problem when interest rates drop:

Premiums may no longer support the death benefit. In this case, the policyholder has three alternatives:

With the success of Universal Life came a number of variations. Today agents can sell Single-Premium Universal Life, Variable Universal Life, Group Universal Life, Mortgage Universal Life, Payroll Deduction Universal Life, and Universal Term Life. Depending on the insurance company, you can undoubtedly find a number of other Universal Life variations, as well. The following are brief explanations of some of the more common forms of Universal Life insurance.

Single-Premium Universal Life-This policy combines the one-time, single-premium payment of Single-Premium Whole Life with the flexibility of Universal Life. Its advantages include: paid-up Life insurance, low-risk, competitive interest rates, favorable tax treatment, loan privileges, and policy flexibility. In addition, although the client pays a single, lump-sum premium, over time he or she can change the type of coverage, raise the amount of the death benefit, borrow against or withdraw from the policy's cash value, or use part of the cash value to buy an additional premium.

Variable Universal Life-Variable Universal Life provides all the benefits of Universal Life, with one addition: This product allows the client to choose from a number of investment options, with transfers among options allowed each year. Companies offer from three to eight investment options, including money market, common stock, long-term and government securities, and bonds, allowing the client to match his or her own investment objectives. The slightly higher risk involved in this type of Universal Life can also mean higher-than-average returns.

Mortgage Universal Life-This policy outperforms traditional Term Mortgage insurance policies in that the premium is flexible and the Life plan is adjustable. Cash values can be created that are sufficient to pay off a 30-year mortgage in 15 years from the date of buying the Universal Life policy. In addition, it allows the client to accumulate cash value tax-deferred, giving him or her Life insurance and cash values after the mortgage is paid off.

Group Universal Life-This is a permanent form of Group insurance in two parts: pure Term protection and an accumulation fund into which the employee contributes premiums. Employees can increase or decrease payments, depending on earnings fluctuation. The accumulation fund provides the product's cash value. The cost of pure Term protection and administrative expenses is deducted from the fund and the balance is credited with competitive interest rates. In addition, the fund accumulates on a tax-deferred basis and is tax-free when paid as a death benefit.

Universal Term Life-The client can tailor this policy to his or her specific needs. The client chooses a coverage pattern and premium payment pattern. First the client decides a certain amount is needed for a set number of years. Then the client determines how he or she wants to pay for the coverage: a level premium or a lower premium that escalates each year, or a combination of the two.

Universal Life is a unique coverage that is destined to be around for a long time. While the frenzy of Universal Life sales has died down, it has now become a basic Life insurance product, taking its place next to Term Life and Whole Life in every Life insurance agent's portfolio of products.

Universal Life insurance is interest-sensitive. This means that a company selling Universal Life must be adept at investing and supporting the huge amount of accounting required to track these investments. The following list highlights those areas that should be considered when looking for a Universal Life carrier:

• Financial strength and history: Both are important. How has the company done on past investments? What is its track record on other products? Look for strong investment strategy and expertise. What is the carrier's investment philosophy? Does it take too many risks, or not enough? The company's investment ability is crucial to the success of a Universal Life program. If possible, take a look at the carrier's broker/dealer's track record. Look for a company that has a reputation for offering high-quality products and providing quality service to both agents and policyholders.

• Service to clients: Because Universal Life policies are interest-sensitive and flexible, they need a substantial level of service. Are contracts issued promptly? Are changes in ownership and beneficiaries executed quickly?
• Proposal illustration capacity: Look for a company that can back you up with illustrations, marketing tools, and service. If you are interested in selling to financially sophisticated clients, you should look for a carrier that offers limited partnerships, mutual funds, a range of securities products, and other Life and securities products. The administrative support service should also be good.
• Life products: Does the carrier offer many different types of Life insurance products? Look for companies that provide Universal Life as one of several individual Life insurance options available to clients. Universal Life shouldn't be offered as the only solution to Life insurance needs.
• Policy specifications: What are the policy specifications offered by the company? Look at: loads and fees, current and guaranteed costs of insurance, current and guaranteed interest rates, surrender charges, minimum policy size and premium, non-smoker/smoker or blended rates, availability of spouse and child coverage, current interest rate history, loan and withdrawal provisions, cash value buildup, and guaranteed and simplified issue underwriting.

As one Life insurance agent said, 'Anyone who has a job is a Universal Life prospect.' To help you narrow your focus, this list highlights those prospects and clients who are prime Universal Life candidates. Remember, this is only a partial list. Almost anyone is a potential Universal Life buyer, depending on his or her needs.

1. Any client on your books who currently owns Term Life insurance: These should be your first Universal Life prospects. Their outdated policies are easily converted to Universal Life.
2. Businesses: Universal Life offers a number of benefits to business owners by serving as the vehicle for accumulating funds for salary continuation plans, deferred-compensation plans, executive bonus plans, and retirement income split-dollar plans. The business owner is provided with a growing emergency cash reserve, retirement income, and income to the family when death occurs. Universal Life insurance can also be used in Key-Person Life coverage, corporate stock redemption plans, and buy-sell agreements.
3. Young couples, singles, and single parents: They're starting to establish themselves and need Life insurance. They'd also like a chance to make some investments. Universal Life combines the two, in addition to offering favorable tax treatment.
4. Doctors, attorneys, accountants, and other professionals: Professionals tend to be more investment-minded than other groups. They also need Life insurance.
5. Anyone who owns an IRA, annuities, money market account, or CD: The Tax Reform Act of 1986 provided Life agents with a whole new field of prospects. People who previously swore by IRAs, for example, saw that, while tax-deferred buildup continued, their tax deductions slipped away. The internal buildup and low- or no-interest borrowing privileges that a Life insurance policy offers became some of the few vehicles left untouched by tax reform.
6. Two-policy P/C clients: You've already built a relationship with these people. Now you can go after their Life and Health business.

Universal Life insurance is a fairly complex product. Agents need to be able to clearly explain all the advantages and drawbacks to prospects. For example, the area of interest rates is fairly complicated and based on a number of factors, yet it is the most important feature of a Universal Life policy. Prospects need to understand what happens to a Universal Life policy when interest rates go down, as well as when rates rise. Illustrations should be run for prospects showing best, worst, and average interest rate projections. Despite the seeming difficulties in making a Universal Life sale, the process is not hard. The following pages list sales strategies to help you sell to your prospects. Keep in mind the product should fit the client's needs, not the other way around.

1. Term Conversions/Present Clients: Converting current Life insurance clients is probably the best way to begin selling Universal Life. Send a preapproach letter and have your CSRs call clients to set up an appointment to review their Life insurance, following the language found under 'Action Step 3: Setting the Appointment' in your 'Sales and Marketing' section. During the presentation (Action Step 5), draw a diagram illustrating the client's current Term Life insurance premium rate, and then those rates in five-, ten-, and 20-year increments. Then compare the client's current plan to a proposed Universal Life plan, with projected values for five, ten, and 20 years. Insert death benefits, total cash values, and monthly net cost (premium less cash value) after each year. These illustrations will vividly show the client how expensive Term Life becomes as the years go by, while Universal Life provides him or her with a lower net cost and a flexible death benefit.
2. Term Conversions/Prospects: The above sales procedure works equally well with Term policyholders who currently aren't with your agency. Set up a cold-calling program. Have CSRs or telemarketers follow the language found in 'Action Step 3: Setting the Appointment' in 'Sales and Marketing.' The language can be modified to fit the market. If you anticipate a dominant-needs sale (where you combine Action Steps 4 and 5 into one-see your 'Sales and Marketing' section for more information), have callers ask prospects qualifying questions. Depending on the extent to which you have qualified the prospect, you can sell Universal Life in a dominant-needs presentation. Or, you can gather all the facts and make a two-call sale. Either way, during the presentation, be sure to show cash value accumulations compared with the prospect's present Term policy. Remember, there will be no cash accumulation and the Term premium will increase in increments as the years pass. Explain that Universal Life isn't more insurance, it's simply an upgrade of the current Life policy.
3. Personal Lines Customers: These people are ideal Universal Life prospects because they are already familiar with your agency and are accustomed to being contacted by you. Begin your campaign with a preapproach letter (Action Step 2) informing clients that in addition to Property/Casualty coverage, you can also provide for their Life and Health insurance needs. Use Letter UL 1 in this campaign. Ask clients to contact you, but follow up on all letters.

   Because this is a dominant needs, one-interview sales strategy, the first call, either by a Personal Lines producer or a CSR, can act as a qualifying interview. If you don't already have the information, the qualifying interview should include: How much Life insurance do you have? What types? Are you married? Do you have children? What are their ages? Are any children college-age? Do you own or rent? If you own, what is your mortgage amount? Are you covered by a pension plan? And so on.

   We recommend that if you anticipate a two-call sales strategy, a total needs fact-find be done. We have provided a fact-finding form for you in the 'Sales and Marketing' section of this Agent's Guide. In the two-call sale, the producer makes the presentation/close (Action Step 5) on the second interview.

4. Two-policy Accounts: These clients have two or more policies with your agency, either Personal and/or Commercial Lines, and so are more locked into the agency. They're also initially targeted with a letter (Action Step 2), then a call is made setting up an appointment (Action Step 3). While the Life producer is working with these prospects, the CSRs are converting one-policy Personal Lines accounts into two-policy accounts, who then become Life prospects.
5. Commercial Lines Customers: These make great Universal Life prospects, as well, but their needs may be very different. Universal Life insurance provides a variety of benefits for businesses: long-term protection for reasonable investment deposits, tax-free accumulation of cash value, significant wealth-building opportunity, emergency funds available at low cost, a retirement planning option with self-completing waiver of premium, annual full disclosure for information and accountability, the opportunity to postpone or stop investment deposits, and a competitive rate of return.

   Advance Markets-A cash-rich corporation or pension plan can use Universal Life to transfer capital to an employee on a tax-favored basis. The company can buy a Single-Premium Key-Person Universal Life policy with a substantial face amount to minimize cash surrender value in the first year. After the first year, the company can transfer policy ownership to the employee. The employee can then reduce the face amount through the flexbility of Universal Life. IRS Section 83 provides that on the transfer of a Life policy, the value is determined by the cash surrender value. That value was minimized because of the large first-year face amount. The employee receives the paid-up Life insurance, plus an accumulation account that quickly recovers because of the reduced death benefit beginning in the second year-all for a small tax paid on the first-year-end surrender value.
   
   Deferred Compensation-Again thanks to the 1986 Tax Reform Act, corporations now have a greater incentive to use insurance plans as executive perks. Businesses can develop deferred-compensation programs to help keep executives happy. The company gets a corporate tax deduction and the employee gets the benefit. Split-dollar insurance is another way for businesses to give a key employee a large death benefit at a low cost to the employer, while keeping the cash value.
   
   Withdrawal Option Benefits-Universal Life's withdrawal option serves as a good refuge for money because it's accessible, earns interest on a tax-free buildup basis, and can be removed interest-free. This makes it ideal for funding such emergencies as a large deductible on a medical plan or a large liability judgment, or for funding opportunities.
   
   Buy-sell Agreement-Universal Life also works well as a buy-sell agreement because it builds a cash reserve that can't be used in the event of an owner voluntarily withdrawing from the firm.

   Login or Register (for FREE) to gain access to thousands of other great articles.

   Need more reasons to join? Need insurance for you, your business or your family?

   • Get quality appointments - Save yourself a whole lot of time & money when you use our directory of carriers, wholesalers and service providers.
   • Negotiate lucrative contracts with carriers and wholesalers. Net result. More revenue for your agency!
   • Clients & Prospects will research you, your co-workers and your agency here.
   • The most comprehensive online insurance industry reference library for -
     • Personal Lines Professionals
     • Commercial Lines Professionals
     • Life/Health & Benefits Professionals
   • Online newsletters and content that you can use for your clients and social media efforts.
   • Ability to attach leads and clients to your specific market searches, with e-mail alerts for all the market, articles, blogs and people searches you make.
   • And much more!