Is term universal life really term life insurance?
By Michael Gray
As prices for term life insurance continue to come down, some life insurance companies, in my professional opinion, have taken a short cut to compete. They are offering term life insurance policies within a universal life framework that allows them to offer cheaper rates to consumers but with potential negative consequences to the client.
The term life insurance marketplace is extremely competitive and in order to remain players in the market, several companies are shifting to a different approach with their contracts and product offerings. On the face of it, the change seems very positive, since rates are somewhat cheaper. However, the new term-universal life, or term UL, policies are just not true term policies and do not have some of the advantages of traditional term life insurance.
Some of the more prominent companies taking this strategy are Genworth Financial, Transamerica, United of Omaha, Protective Life and Lincoln Financial. The main reason why these companies have decided to change the structure of their term life contracts is financial. In other words, money.
Recent history of guaranteed life insurance policies
Several years ago (2000), the National Association of Insurance Commissioners established certain reserve requirements for all insurance companies offering long term guaranteed life insurance contracts. These “real cash on hand requirements” were subsequently adopted by the individual states, which dramatically impacted all products with level premium guarantees.
The goal was to improve the solvency of the insurance industry and to limit the aggressiveness of overzealous insurance companies and their pricing strategies. The effect was an immediate price increase for most policies with guarantees of 15 years or greater.
The new term universal life approach
Each of the life insurance companies noted above has adopted a new approach to their term life insurance policy design that utilizes a universal life contract which allows for a term-like premium that can be guaranteed for 10, 15, 20 or, in one case, 30 years. By using this approach, they can work around some of the reserve requirements and, therefore, free up more cash for investment. In simple terms, by offering term UL, these companies can make more money for their stockholders. But at what cost to the client?
It is our view that these well known insurance companies have made a conscious decision to put profits ahead of their policyholders because there are negatives that will affect the contracts. Below are two of our biggest concerns about term UL policies.
Term UL contracts have no true conversion option
With term UL, at the end of the level term period, the policy becomes an annual renewable term policy. This is not uncommon for any term policy aside from the fact that term UL contracts cannot be converted or exchanged for a permanent policy without proof of health. They do offer the ability to increase premiums to maintain coverage but when compared to convertible term insurance, the rates are sky high. With term universal life, reductions in death benefits can trigger a surrender charge
With most traditional term policies, companies allow the policyholder to reduce the death benefit at least once during the life of the policy. This is permissible without any out of pocket charges. With term UL, if you want to reduce your death benefit in the future, it will likely cost you.
A defense of term UL policies
We do write term UL on occasion, so we don’t want to dismiss the concept or the product. There are cases where the underwriting from the above noted companies is so favorable that we have very little choice. Another reason someone might buy term UL is if they are simply trying to get the lowest priced policy and have no desire for the options that traditional term life offers. Just be careful that they understand the downsides and are comfortable with the limitations.
As markets change, so do the marketing efforts of life insurance companies, and many are now offering a hybrid or combination term/universal life policy as true term life insurance. The reason is to remain competitive price wise but to also increase profitability. It is our professional view that these hybrid contracts are inferior to traditional term policies and that consumers should definitely not buy these policies simply on the basis of the lowest cost. In fact, if they can get a traditional term life contract for roughly the same price, they should go that route.