Is Guaranteed Universal Life Insurance Too Popular to Survive?

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By Gary R. Lee, Esq., CPA, and Craig Wilkey, MBA, CLU, ChFC
Sterling Resources Ltd., Hingham, MA and Tenzing Advisors, LLC, Midlothian, VA

Guaranteed universal life insurance – also known as `secondary guarantee' universal life insurance has grown tremendously since its introduction to the market. Unlike a traditional universal life insurance policy that lapses if the policy cash value is insufficient to cover the monthly mortality and expense charge, a guaranteed universal life policy continues in force so long as the insured has continued to timely pay the premium payments as agreed to with the carrier when the policy was issued. This means policies can be structured with a pre-determined, minimum premium stream with the insured and the carrier both knowing there is a good possibility the cash value will be zero during the coverage period and the insured knowing that, despite that fact, coverage will continue.

One reason for the product's popularity is its estate planning appeal, especially for older insureds. Older insureds tend to be less concerned with cash values than younger insureds who may feel a need to retain the flexibility to access cash value in later years either for retirement needs or to exchange the policy for a different carriers/policy type should circumstances change.  Not only do older insureds have more defined estate goals, they also appreciate that, due to health reasons alone, they may not have the flexibility of moving to a different product/carrier in the future.

Another possible reason for the popularity of guaranteed universal life is favorable pricing – pricing that looked more and more favorable as the economy went through its slide in the last few years and the stability of a guaranteed product became much more attractive than a performance based product that either required additional premium contributions or lapsed.

However, as insurance carriers watched the value of their portfolios decline without a concurrent decline in their ultimate death benefit liabilities or any possibility of an increased premium stream due to the guaranteed nature of the product, they have begun to wonder if the product pricing might, in fact, be `too good to be true.' Over the last year, multiple household name carriers have either repriced their product, limited the amount of coverage they will issue in a given case, or pulled the product off the market entirely – some only to have the product reappear with a new pricing/underwriting approach and once again pull the product off of the shelf.

What does this mean to the potential purchaser of a guaranteed universal life insurance product? There may be no clear cut answer to the question. At a minimum, it means buyers should act now if they and their advisors have determined that a guaranteed universal life policy fits their needs. Will the product disappear from the life insurance shelves forever? Unlikely – it has too many features that work well for high net worth estate planning clients.  But we should expect continued availability/unavailability vacillation, and, when the dust finally settles, a higher premium structure for future purchasers.

For more information, in the Tax Management Portfolios, see Lee and Wilkey, 827 T.M., Life Insurance — A Practical Guide for Evaluating Policies,  and in Tax Practice Series, see ¶6240, Life Insurance.