* Traditional, non-guaranteed universal life insurance (often described in the insurance industry as "Current Assumption UL") has been subjected to rather brutal criticism over the last few years, most recently in a September 2018 Wall Street Journal article (1) that blamed the product for financial hardship being experienced late in life by many policy owners who purchased these policies back in the 1980s and 1990s.
But how much of this condemnation is truly warranted, and how much of it reflects a fundamental misunderstanding of how these products are designed to work when properly tended to?
WHAT IS CURRENT ASSUMPTION UNIVERSAL LIFE?
Current Assumption UL is a flexible premium permanent life insurance product that contains both an insurance component and an investment component. Like other permanent life insurance products: Premiums are deposited in the policy's cash account, which is reduced by policy charges and increased by a crediting methodology set forth under the terms of the policy. What differentiates a Current Assumption UL policy from other types of non-guaranteed permanent life insurance is that the growth of the policy's cash value is based on a flat crediting rate that is established by the insurance carrier and adjusted from time to time--rather than based on a flat dividend rate that is established by the insurance carrier and adjusted from time to time (a product referred to as "whole life"), based on the performance of an equity index that is collared by a cap and a floor (a product referred to as "indexed universal life"), or based on the actual investment returns of specific equity investments (a product referred to as "variable universal life").
As illustrated below, projections of Current Assumption UL policy performance are based on the forecasting of two variables: (i) annual policy charges; and (ii) the insurance company's crediting rate. While many life insurance policies provide that the insurance carrier may increase policy charges under specified circumstances (generally defined broadly by reference to the company's expectations regarding future mortality, expense and persistency experience), this discretion is very rarely exercised and annual policy charges rarely deviate from schedule set forth at the time a policy issued (2). In contrast: The crediting rate, which is tied to the interest rate that the insurance carrier is able to earn on its portfolio of fixed income investments (i.e., bonds), changes...