In a 1980s TV commercial, Charlie Brown extols the benefits of universal life insurance. It “means the cash value of your insurance earns interest at competitive market rates,” he tells Linus. “Within limits, you can skip payments or vary the amount of coverage.”

So persuasive was this type of simple sales pitch for a relatively new product that by 1985 universal life, or UL, accounted for some 38% of all individual life premiums, as measured by the LIMRA. Between 2 million and 3 million UL policies were sold annually in that decade.

But now, 30 years later, many of these policyholders may be feeling a kind of buyer’s remorse. “UL as sold has backfired for many,” says Larry Rybka, president and CEO of Valmark Financial Group in Akron, Ohio. “With interest rates as low as they are, UL is not the best insurance option for most people today.”

That’s because universal life invests part of policyholders’ premiums in tax-deferred savings accounts, called “cash value” accounts, that are linked to interest rates. In the 1980s, when interest rates were high—even into double digits—those savings accounts could accrue a decent gain. The cash value could be leveraged to lower premiums or even, in some cases, allow policyholders to skip premiums every now and then.

Over the past three decades, though, interest rates have plunged. That’s affected all insurance carriers, but it’s been especially painful for universal life policyholders.

Interest Rates

“In the 1980s, universal life emerged as a result of consumer demand for an affordable, more customizable permanent insurance alternative to whole life,” explains Stafford Thompson Jr., senior vice president of life product management at Lincoln National Corp., a leading provider of policies. “For those [clients] where universal life is a fit, these types of policies offer value, including a guaranteed lifetime death benefit for heirs, flexible premium payment options and an opportunity to accumulate savings in a tax-deferred manner.”

In essence, universal life is a variation on low-cost term coverage: You buy a policy that covers only a specific period of time. You renew it annually. Whatever gains the cash account accrues help offset the cost of successive annual renewals.

Following the crash of 2008, the Fed slashed rates to near zero. Fortunately for policyholders, many universal life plans don’t allow their cash accounts to fall below a certain threshold, typically 4%. But to make up the difference, carriers were forced to raise premiums—on top of the fact that premiums rise as policyholders age anyway.

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