Understanding the Different Types of Life Insurance Policies – Episode 380

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[00:00] On this episode, we’re taking a community question and this one may feel somewhat general, but we’re actually going to dive into several different details. So you want to hear and pay attention to this episode as we talk about the various permanent types of life insurance policies. I’ve got a pen and paper out, Kim. I’ll take notes for the listeners and we can jump into it. Oh, how fun. You know, it’s going to be like a three minute episode. Stay tight. We’ll cover some other things because there’s only one type of permanent life insurance. So what’s the definition of permanent in your mind? Permanent means that it goes beyond my life to the next generation. And to me, permanent is absolutely positively going to be there no matter what.

[00:54] Permanent is foundational. It’s there to stay. And so for this reason, and this is not just me talking, when you apply the definition of permanent, there is only one life insurance policy that can succumb to the very critical elements of the definition of permanent and its whole life insurance. So why are there other types of life insurance that are called permanent that are truly not permanent? I think that’s the real question. You know, I think that we find this happens often that when you hear politicians debate, if you can confuse your opponent, you’ve essentially won the game. Boy, is that well said. And these other types are so confusing. It was a good five years of me being in the life insurance industry full time.

[01:55] You know what? I think longer than that. I think closer to six, seven or eight years before I understood the difference about the various types of insurance that we’re going to talk about today. And this can be so boring for some people. However, we’ve had good questions from our listeners. And as you said, the community at large about this. So we are going to dive in and explain why all of the other types of life insurance that are often called permanent are not permanent. Before we get into that, why did it take you five plus years to be able to see that and understand it? Because it’s confusing and the entire industry, the life insurance industry calls. So let’s get specific here. Universal life permanent insurance.

[02:42] It is not. It calls index universal life permanent insurance. It is not. It calls variable universal life permanent insurance. It is not. The only good news is that it does not call term insurance permanent insurance. Good, good. Okay. Now that being said, just real quick, term insurance is fine. We’re not going to get into that today. Term insurance is beautiful. Wonderful. You should have lots of it. I still own it and I’m very clear that it is not permanent insurance. So it’s these other policies that are the real issue. So why is it the issue? The biggest issue is the issue that it’s called permanent, which is really misleading. So why is it not permanent? Because there are aspects of the policy that are either not guaranteed.

[03:33] So guaranteed and permanent to me go together and they’re both extremely strong words. So there’s aspects of the policy that are not guaranteed, number one. And number two, there are aspects of the policy that the life insurance company can change. In most cases, a life insurance policy is a unilateral contract. In other words, it gets put out there and only one party can make changes. The owner of that contract, which is the insured in many cases, and if not a separate owner, it’s the person. But on all of the universal life policies, so we could get sidetracked and confused by index and variable and regular universal, that’s really not where the problems are. The problems are that underlying product called universal life and it’s often referred

[04:34] to as a chassis. Think about it like the chassis of a car. And yes, it can have all kinds of fancy bells and whistles on it. And that is another area and element that causes confusion. But the bottom line is that underlying universal life policy has aspects that are not guaranteed and consequently are not permanent long, long term, which you and I said at the beginning permanent means forever, at least until death, right? Because we are talking about life insurance. And while you can absolutely benefit from life insurance during your life, the fact is that death is a guaranteed event unless you’re going to ascend and I think they would probably even pay if you ascend it. So we’ll skip that one.

[05:19] So because death is a guaranteed event, we want to be crystal clear whether our life insurance policy gets to be attached to that guaranteed event with guarantees. And only then can we call it permanent. If we touch on universal or the index or variable, is it that the confusion comes in because it has done well at specific times and then people forget about the permanent piece? Or what is this? What’s the cause? I think the confusion is twofold. One, what you said is very accurate. So universal life came on the scenes when interest rates were really, really high and it did well during that period. There were people that died with universal life in place and there will be people that die early, critical part, with universal life and universal life will pay.

[06:12] That’s not the problem. The problem is the second part, which is because it did so well for a while, people got lulled and confused by the insurance industry into this idea of it being a permanent product. And then the second part too got confused. And so the aspects of universal life that are not guaranteed look really good on paper, especially in the early years. And early could mean 20 or 30 or 40 years. And again, I’m saying universal life could absolutely work in that shorter time frame. Now, why does 20, 30, 40 years not sound short? Well, we’re talking lifetimes here. So it’s all relative. Again, if we want something to pay upon our death, we need to have a guaranteed death benefit. And there are universal life policies that try to do that.

[07:06] They try to have, and it’s usually an extra rider, a guaranteed death benefit. And then they say that it almost acts like whole life insurance. This is information from the life insurance industry. If it almost acts like whole life insurance, why doesn’t it act exactly like whole life insurance, which would then mean that it would be whole life insurance? Yeah. You mentioned that. And I think about our world today and how people are satisfied or maybe even proud in some cases of things that act like what they are. We’ve got fake burgers on the scene, fake chicken and everything else. It’s as though we’re having the wool pulled over us. And we can see right here the time frame of 20 to 30 years of it going well.

[08:00] Pretty easy to get lazy at that point and think things are okay. We identified that universal life doesn’t typically, even with the riders, you have to read your fine print without a doubt. Make sure you get all 12 or 13 pages of the illustration. If it’s indexed universal life, it’s 50 some pages. Make sure you get them all. And I believe that you will see that while it may have a guaranteed rider, it’s not permanent. And there’s a big difference there, whereas it shouldn’t be. Guaranteed should mean permanent. And then in addition to that, Spencer, the premium is not guaranteed. And I have had this happen and it saddens me so much. You’ve got a 70, 80-year-old person that’s been paying universal life

[08:46] insurance premiums for about 20, 30, 40 years that we talked about. And now all of a sudden, they’re getting a letter from their insurance company that says, in order to keep this policy in force, instead of paying, whatever, 10 grand a year, now you have to pay 30 grand a year. Because the premium is not guaranteed, it can change. And the insurance company can change it. And the insurance company, because they’re now, too, dealing with low interest rates, which low interest rates gives us all kinds of positives, but it comes with it some negatives. And one of those negatives is life insurance premiums are going up, up, up if they can. Whereas with whole life insurance, they are guaranteed to never change.

[09:32] And so here you have this 80-year-old person that thinks they have permanent life insurance, and now they got a letter that says, in order to keep it, they have to pay more. That’s wrong. Absolutely. And it’s absolutely wrong that you have to, one, go through the complexity of setting up whatever this would be. And then the additional writers, why not just get the correct thing the first time? Absolutely. And I will readily admit that there are rare occasions when universal life is the only option. If you have insurability issues or what have you, it’s clearly better than nothing. Just understand what it is. And so we have this lack of guaranteed death benefit. We have a lack of guaranteed premium.

[10:12] And then there’s one additional thing that is, in our community’s world, the worst of the worst. Because so much of our community is very focused on the cash value of life insurance. And whole life insurance has a guaranteed cash value as well as a guaranteed increase in that cash value. Universal life only has a guaranteed interest rate. And because there is often very little cash value and because those costs can increase, your guaranteed interest rate may be on literally zero dollars, in which case it means nothing. And so you have this area that’s so confusing. There are so many agents speaking incorrectly about universal life and especially about index universal life that it is very, very scary to me.

[11:04] And so we’ve got so much misinformation out there. And the best thing I can do, and I know this is tough, is to have you read your illustrations. Read the very boring pages that come with. And if you don’t have an illustration on an existing policy, you can always call the insurance company and get something called an in-force illustration, I-N-F-O-R-C-E. And that will be easier than reading your actual policy. And you will see the line items that make it very, very clear that the typical universal life policy is not going to sustain itself. It’s going to implode, meaning it falls apart from the inside. And you can literally even see the year at which it is projected to do that, assuming only the guarantees,

[11:56] which, like I said, are just a guaranteed interest rate. So that’s a really important part, is you typically want to look on the left-hand side of the illustrations. Not the right-hand side, where all the wonderful projections are, because in this world of permanent that we’re talking about, the only thing that you can look at are the guaranteed columns. Yeah, absolutely. This is great. Now, you wrote the book Busting the Life Insurance Lies. Do you think that’d be a complement to this as well? I do. I would not want a first-timer in that book. It is a deep, deep dive. However, we tried to make it a little bit interesting to read because we combined it with a story, a story of a multi-generation family

[12:42] that is going through the use and the learning of life insurance. And there are a lot of calculators in there. There’s a lot of good information. It is a deep dive. If, by chance, you’re new to the subject, please start with Live Your Life Insurance. It’s a better introductory book. But if you’re even slightly experienced, you will love Busting the Life Insurance Lies for the deeper dive that it takes into the concept of permanent life insurance. And here’s a question. I know you’ve got an incredible support team. For any of our listeners that do pull their in-force or they just look at their own illustrations, maybe they have questions. Can they reach out and ask specifics so that they can get guidance?

[13:27] They can. Hello at partnersforprosperity.com. Well, actually, barring my time being completely overwhelmed, probably get an email back from me because the team can look at these illustrations, but sometimes it takes a trained eye to pull out the literally one or two sentences, although there’s usually four or five to pick from, that cause the alarm or should be causing the alarm. And then let’s just briefly, as we’re wrapping up here, cover what do you do if you already own Universal Life? Because hopefully if you don’t, we’ve talked you out of it. I’ll be very frank, go buy term insurance until you can get it figured out. Yet if you already own it, keep it, it’s fine. Canceling it is not going to help you.

[14:13] Unfortunately, you do probably wanna redirect your new premium dollars like the subsequent ones that you pay in future years somewhere else and just get clear that that Universal Life is probably never going to outlive you and you are better not putting additional money against it, but before you do that, get some other term insurance in place, or if you can, ideally, of course, you wanna add whole life insurance to your picture and then that Universal Life can be limited essentially and it will exist for many, many, many years for a lot of people. And then like I said, at some point implode. In most of these cases, the Universal Life policies don’t have that much cash value especially for a younger clientele

[15:00] who’s healthy and able to get another policy, it’s really the right thing to switch gears. Of course, if you are uninsurable or can’t get another policy, which you should figure out before you make any stopping of your current premium payments, you then may have to stay the course and keep paying them, but that is definitely an individual consultation where you wanna reach out to us or somebody to help you get clear on the risks that you have with your current Universal Life policy if you already own one. So good. So not only did you provide some education here, but you’ve actually provided a solution. This is wonderful. Listeners, if you have any questions on this, the specifics for your case,

[15:46] if you have one of these policies or you’re just looking to strategize for the future, send an email to hello at partnersforprosperity.com. We’ll also put a link to the books that we talked about inside of the show notes. Thank you for listening to the Prosperity podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.