Flexibility Can Be Complicated

“Universal life has backfired for older Americans for several reasons,” says Richard Harris, managing member of Richard L. Harris LLC, in Clifton N.J. “Based on current interest rates, the policies are underfunded.”

What’s more, he notes, universal life policies offer a high degree of flexibility that makes them more complex than anything Charlie Brown (or anybody else) could explain in a 30-second pitch. In short, you can generally set your own payment plan, based partly on your budget and partly on your expectation for interest rates. You can deviate from that plan temporarily if need be. You can borrow against the value of your cash account, though of course it will diminish the account’s earnings.

“I like universal life’s flexibility and transparency,” says Glenn S. Daily, a fee-only insurance consultant in New York. “[But] some people have gotten into trouble by underfunding their policies. They have abused UL’s premium flexibility. And some people in poor health have continued to pay the ‘planned premium’ [and] failed to take advantage of UL’s flexibility to stop paying premiums.”

To manage a universal life policy wisely requires periodic monitoring and expert advice, which critics charge has often been lacking. “No one [is] servicing them and advising the client,” observes Harris. Universal life, he says, has often been pitched with oversimplified, unrealistic projections. Customers haven’t always adequately been informed that “an illustration is a projection that in most cases won’t happen the way it is shown,” says Harris.

In-force Illustrations

Not that insurance providers are necessarily to blame. “Insurers take fulfilling their promises made to policy owners very seriously,” says Lincoln’s Thompson.

Most carriers do send statements to policyholders that show the value of their cash accounts and other crucial data. Some have even sent cautionary notes to customers whose policies were in trouble.

Nevertheless, many retirees who purchased universal life decades ago now find themselves with a dilemma: They can maintain the policy, tweak the policy or dump it and purchase something else. Thompson recommends clients consult their financial advisor or insurance agent to evaluate their choices. “Clients should request an in-force illustration from carriers,” he says, complete with a range of realistic projections. (Following lawsuits in the late 1990s, many state regulators cracked down on the ways carriers represent policy projections.)

Thomas Santolli, managing director at advisory firm Paradigm Financial in Parsippany, N.J., might agree. “UL is still a viable product, as long as the client understands the interest rate risk,” he says.