Interest Rates and Universal Life Insurance
Universal life insurance policies provide a flexible insurance
solution for those seeking the protection of death benefits. The
insured can flex the policy's premiums and benefits during the
life of the policy while the policy creates a residual cash
value. This allows one to adjust the nature of their life
insurance so that it remains consistent with their actual needs.
Whole life insurance policies offer insured parties a guaranteed
interest rate on the cash value of the policy. Universal life
policies do this as well. For instance, a universal life policy
may guarantee a minimum interest rate on the account of X
percent. That percentage will be paid regardless of what happens
to the insurance companies actual earnings. However, if the
insurance company is able to invest premiums in a way that
allows them to exceed the X percent rate of growth, they credit
the policy of the insured at the higher rate.
This seems like an absolutely winning situation for holders of
universal life policies. After all, they are guaranteed a
minimum rate of return on the policy's cash value and may
actually earn in excess of that rate, allowing them to pay less
in premiums for the same level of life insurance coverage.
This feature of universal life insurance policies has
contributed significantly to their popularity. However, despite
the minimum guaranteed rate of return, interest rate levels can
still impact universal life insurance policies detrimentally,
making it necessary for consumers to consider all possibilities
when evaluating universal products.
Although the insured is guaranteed a minimum rate of increase to
the policy's cash value, this perk is somewhat meaningless if an
insurance company's assumptions regarding interest rate behavior
are proven to be wrong. All universal life policies are written
with assumptions regarding the nature of interest rates in mind.
If the company is unable to invest at a level producing the
anticipated return, premium costs are forced upward to
compensate for the shortfall.
This can result in policyholders being forced into premiums they
may not be able to afford. This phenomenon is occurring today
for those who bought universal life insurance when interest
rates were in double digits. Insurance companies based their
universal life insurance policies on the assumption that higher
interest rates would continue for some time. This has not been
the case, and many insured parties have found themselves paying
higher and higher premiums in order to maintain their life
insurance. For some, these premium increases are unmanageable,
forcing them to cancel their policies completely.
Obviously, the risk of interest rate fluctuations makes
universal life insurance less predictable than whole life
insurance coverage. However, this unpredictability is not
necessarily a reason to avoid universal life. If one is
cognizant of the risk of premium price upswing if earnings fail
to meet predictions and is prepared to pay the increased
premiums in such situations, universal life remains very
effective.
This is especially true in light of the fact that the
alternative would be to simply buy a whole life insurance
policy, which would likely require higher premiums payments
right away and with no opportunity for relief at any point
during the life of the policy.
Universal life advocates argue that the possibility for cheaper
premiums when investment out performs or meets projections makes
it a more sensible alternative than agreeing to higher premium
payments through the entirety of a policy (whole life).
Whole life advocates maintain that the unpredictability of the
markets and of interest rates makes universal life insurance
products too unpredictable.
In the final analysis, universal life insurance products seem
like a winning solution for those who understand and are able to
handle fluctuations in the required premium. If one necessitates
complete predictability and is able to overlook the possibility
of a cheaper premium over the course of the policy, they may
decide that a whole life package makes more sense for them than
universal life insurance.