The Way To Universal Life

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The last few years have not been happy ones for the life insurance industry. For decades, its main offering was the tradiional whole-life" policy, which combined insurance with a sort of built-in savings account. The longer you lived (and the more you paid in premiums), the more money accumulated in your policy.

The trouble lay in interest rates, which in the 1970s began to hit double-digits. Whole-life policies were paying old-style rates of 5% or 6%, and the insurance companies, hamstrung by low-yielding investments, weren't easily able to offer more. "Life insurance companies were just getting murdered," says Joseph Siegel, a financial planner and partner in Welger-Siegel Financial Group in New York. "They couldn't sell their products anymore."

Like any good business that is faced with products that aren't selling, the insurance industry came up with some new ones.

One, term insurance, had actually been around for a while, although until recently it was little used. Term incorporates no savings plan at all; instead, you pay a relatively low premium in return for a benefit if you die. That is fine as long as you have the discipline to do your saving and investing elsewhere -- and as long as you won't need insurance coverage as you get older. A 65-year-old looking for term insurance will find that it doesn't come cheap.

Another, universal life, was brand new. Introduced a few years ago by a handful of insurance companies, it soon turned out to be one of the industry's hottest-selling offerings. By the end of 1983, says Helen T. Noniewicz of the Life Insurance Marketing and Research Association in Farmington, Conn., universal life should account for somewhere between 20% and 25% of the industry's business. That is up from a mere 2% market share in 1981.

Like traditional whole-life policies, universal life combines insurance coverage with a savings plan. The value of the policy grows as you get older and put more money into it, and the interest compounds tax-free until it is withdrawn. Universal life policies however, pay competitive interest rates. For example, Integon Life Insurance Co. in Winston-Salem, N.C., ties its rates to five-year U.S Treasury bills.

As with all insurance, the cost of coverage varies with your age and health. Unlike the old policies, though, each universal life policy is structured individually. You decide how much of your premium goes into savings and how much into life-insurance protection.

If you want $200,000 worth of life insurance coverage, for example, you might need to pay $1,300 a year, or $6.50 per thousand dollars of coverage. Anything over that amount would be channeled to the policy's savings plan, where it earns interest.

Most universal life policies also offer flexible premiums. There is an annual minimum, of course (based on your age, health, and amount of coverage), but after that you can pay what you like when you like. You can even make a lump-sum payment big enough to finance your policy indefinitely. "If you put $5,000 in a policy up front," explains Samuel Turner, president of Life Insurance Co. of Virginia, in Richmond, "then you may not need to pay anything again."

All this allows you to raise or lower your payments depending on your finances, and to channel the money where it will do the most good. As John F. Penry, president of Integon's agency division, explains, "During the early years of a family's growth, you can provide high [death benefit] coverage by having most of your money go into that portion of the plan. As time goes by and your obligations -- the mortgage, your children's education -- diminish, more dollars can go into the savings portion."

The chief drawbacks of universal life, says Joseph Siegel, are that the death-benefit is tied to interest rates and that the initial loading charges are high. Penry confirms that these first-year administrative and processing costs can gobble up as much as 50% of the premiums, but after that, he says, the figure drops to between 3% and 5%. Your agent should be able to help you decide whether these costs are worth paying.