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UL PRODUCTS BASICS
PLC.9319.07.13
This
presentation
contains
general
educational
information about Universal Life products and is not
intended to promote any products or services offered by
Protective Life Insurance Company.
In General…
2
There are two major categories of
insurance products, Term and
Permanent.
Universal Life insurance and Whole
Life insurance are both types of
permanent insurance.
Because Universal Life insurance is
a variation of Whole life insurance, it
helps to begin with an understanding
of Whole Life insurance.
Let’s review key facets of Whole Life…
3
Traditional whole life plans have
fixed, pre-set premiums and values.
Often premiums are level. But, if
premiums do change, the timing and
amounts of the changes are
“scheduled” and spelled-out in the
contract.
Cash values usually increase,
gradually and predictably, over time.
More about traditional whole life…
4
Similar to a “budget plan” for your electric
bills—the premiums charged for a level
premium whole life plan are an “average”
of the insurance and administrative costs
over the “lifetime” of the policy.
With a level premium whole life plan—
premiums paid in early years are more
than what is needed to provide the
coverage at younger ages when death is
less likely.
In later years, premiums are less than
what is needed to provide the coverage
at older ages when death is more likely.
Finally, with traditional whole life…
5
Premiums are predetermined, as are the policy values.
Since all facets of the plan are “fixed” at issue, policy
values are based on a modest rate of interest.
If the company is able to invest premiums at a higher
interest rate when financial markets are rising, policy
values on these plans do not benefit.
There are (usually) no opportunities for the whole life
policyholder to change premium amounts or influence the
cash values or coverage amounts after buying the policy.
As long as the original, fixed premiums are paid when
due, the coverage can remain in effect.
Even if the company gains a higher return than originally
predicted on premiums invested, the policyholder does
not (typically) benefit.
How UL works…
Premiums Interest
Premium
Expense
Charge
Policy
Value
Surrender
Charge
(if applicable)
Cost of Insurance
Administrative
Expenses
6
In contrast, UL plans have
contract provisions providing
flexibility and they are interest
sensitive.
Planned and unplanned premium
payments are possible. The
combined premium and interest
credits fund the policy value.
How the policy values grow can
be influenced by choices the
policyholder makes about the
premium amounts he/she pays
and by the return the company
gets on premium investments.
How UL works…
7
Generally, companies pay higher
interest on UL plans when premium
investment returns are higher and lower
interest rates when those returns are
lower. That is what is meant by “interest
sensitive”.
Some newer UL plans have a “lapse
protection feature” which, in some ways,
makes a UL plan operate more like a
fixed premium, whole life plan.
Without such a feature in effect, UL
plans stay in force based on having
enough policy value each month to pay
insurance and administrative expenses.
How UL works…
8
Because premiums are flexible with UL plans, a policyholder can choose
to pay more premiums in, than are necessary for just the death benefit
coverage.
This enables him/her to take advantage of higher interest rate credits -available when financial market investment rates are on the rise.
That is what truly makes UL plans special — the fact that policy values are
interest sensitive. The interest sensitive facet of UL plans can also make
them more affordable than traditional whole life plans with comparable
death benefits.
The flexibility and interest-sensitive components of UL plans make it
important to monitor how the plan is performing using the Annual Report
sent around the policy’s anniversary date.
In particular this is true when interest rates are consistently lower than
originally projected and/or when premiums paid are less than originally
projected.
How UL planned premiums & current
interest rates work together…
9
At issue, UL policies should be “in balance” with the right combination
of premiums and interest (projected using an illustration) to maintain
coverage and build sufficient policy value over time.
In large part for many UL plans, it is the policy value which supports
the administrative and insurance costs needed each month to keep
the policy in force and “on pace” to accomplish the original objectives.
Planned Premiums were
chosen at issue, based on the
amount and duration of
coverage, plus any
accumulation of cash value
desired in future years.
Current Interest Rates were
set by the Company at issue
and helped determine the
amount of Planned Premiums
needed to meet the objectives
and plan requirements.
How UL planned premiums & current
interest rates work together…
For some UL plans, if current interest rates go up and
remain higher than projected at issue, it may be possible
to lower or skip premiums and still maintain coverage
and meet other policy objectives.
10
How UL planned premiums & current
interest rates work together…
11
For some plans, if current interest rates go down and
remain lower than projected at issue, it may be necessary
to increase or supplement planned premiums to maintain
coverage and still meet the original policy objectives.
Some UL plans may be less affected
by changes in interest rates…
12
Some UL plans have a “safety net” in the form of a lapse protection
feature.
For those plans, as long as the protection is in effect -- fluctuations in
interest rates alone do not endanger the coverage.
Timeliness of required premiums is critical, however.
And, whenever the lapse protection is not in effect, policy value becomes
just as important a factor as with other UL plans.
Current
Interest
Rates
Planned Premiums
Lapse Protection
Loans and Partial Surrenders affect
policy stability and values…
13
When policy value is the basis for a UL plan staying in force,
without overfunding or interest rates consistently higher than
originally projected -- loans or partial surrenders destabilize
the policy.
Policy
Value
Policy
Value
Loans and Partial Surrenders affect
policy stability and values…
14
For policies without lapse protection in effect, loans and partial
surrenders directly reduce the useable Policy Value available to pay
on-going monthly expenses. If there is unpaid loan interest in any
year, values deplete faster as the loan is increased to pay it.
Whenever policy values show a pattern of declining over multiple
months/years—it means more is coming out for expenses than is offset by premium and interest credits. A policy in this state may, quickly
or eventually, lapse unless one of the following occurs:
(1) the policyholder makes sufficiently large unplanned premium deposit(s)
(2) the policyholder sufficiently increases planned premiums
(3) the policyholder reduces/repays an outstanding loan
(4) the company raises interest rates substantially.
UL basic concepts recap…
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Traditional whole life plans have “fixed” components – and are not interest sensitive.
UL plans are flexible and interest sensitive -- newer versions may include a lapse
protection feature.
Interest sensitivity helps when interest rates are on the rise, allowing lower or skipped
premiums, faster cash value growth and fewer ill effects from loans/partial withdrawals.
Declining interest rates can make UL plans more vulnerable to lapsing, sometimes
necessitating an increase in premiums.
Loans, unpaid loan interest and partial withdrawals make UL plans more vulnerable to
lapsing – sometimes necessitating an increase in premiums.
A combination of lower interest rates and loans/partial withdrawals definitely increases
the possible need for increased premiums to avoid a lapse of coverage.
UL plans’ flexible and interest sensitive nature make them an affordable and appealing
whole life coverage option – for both consumers and insurance companies.
Monitoring the status of a UL plan is particularly important whenever there are periods of
declining interest rates and when premium deposits decrease or values are withdrawn.