Tier One Blog: Is It Time To Get Excited About Universal Life?
On January 24, 2022, John Hancock announced it was raising the crediting rate on its Protection UL and SUL by a whopping 30 basis points. I did a double-take when I read the announcement – mainly because, over the past twenty years, I was used to seeing Universal Life (“UL”) crediting rates slowly move from over 7% to under 2%. It was like watching the slow death of an otherwise very flexible and useful product losing usefulness 10 basis point drops at a time. As interest rates rise, the crediting rates for universal life will follow, but how long will that take?
Since there are so many life insurance producers who have come into the business in the last decade and never seriously considered selling UL, let’s have a refresher. A UL offers policyholders more flexibility than traditional Whole Life insurance. A policyholder may be able to increase the death benefit if you pass a medical examination or even lower the death benefit to reduce premiums. The savings portion of the policy, called a cash value account, generally earns a money market rate of interest which is established from time-to-time by the carrier and then guaranteed for a year.
After money has accumulated in the cash value account, the policyholder will also have the option of altering premium payments, provided there is enough money in your account to cover the insurance and administrative costs. This can be a useful feature if the policyholder’s financial situation has changed. However, the policyholder would need to keep in mind that if they stop or reduce their premiums and the saving accumulation in the cash value gets used up, the policy might lapse, and their life insurance coverage will end.
UL shifts some of the policy’s performance risk to the policyholder by providing some flexibility on when to pay premiums and in what amount. As with traditional Whole Life, UL is chosen where there is a permanent need, such as estate planning, as well as for some business applications, but also where the flexibility discussed would be useful.
A major application for UL used to be premium financing. From 2002 until 2012, I led international life insurance distributions where over 80% of the sales were from premium financing U.S.-style UL contracts issued from Bermuda. Crediting rates started north of 7% and the contracts had guaranteed minimum crediting rates of 4%. All of those contracts that are still in-force have their present crediting rates at 4% and are likely a big strain to the issuing insurance company.
Therein lies the current problem with UL crediting rates. Just because interest rates are moving up, doesn’t mean we should expect to see UL crediting rates move in tandem. The huge in-force portfolios that have general account investments locked in at very low rates of return create a drag for insurance companies. For the same reason UL crediting rates fall more slowly than interest rates (insurer general account investments made at high rates of return), we see UL crediting rates lag behind the rest of the economy.
Some carriers deal with this by starting a brand-new UL portfolio from which they can more easily offer a higher crediting rate. Sounds like a smart move, right? Well, how about if you’re one of the policyholders in the old portfolio? You have essentially been abandoned to a low crediting rate existence and you’re probably pretty pissed off. As a result, life insurance companies have to be very careful about how they treat existing policyholders when devising how the companies’ general account products, like UL, can take advance of higher rates.
The John Hancock announcement has given me hope that we will soon see some life return to the use of UL in the marketplace. As a relatively stable product, it would be nice to see more UL and less IUL used with premium financed policies. It would also be nice to see the return of the guaranteed death benefit element of UL; though, we can expect such guarantees to be priced more realistically than they were two decades ago.
Since its inception, Life Insurance Strategies Group has solely focused on the individual high net worth life insurance market. We do not sell products. This allows us to offer unbiased, pragmatic advice. Visit us at www.lifeinsurancestrategiesgroup.com.