The Complaints Against Universal Life Insurance

“There is a great disturbance in the force.”

First of all, the New York State Department of Financial Services has issued a warning in which they state they will be taking action against all insurers and agents who are misleading clients by using complex contracts which hide the risks associated with the purchase and ownership of all universal life insurance products, including Indexed Universal Life.

These are some of the risks the department mentions which make the sale of universal life insurance products risky:

1. Premium payments may increase over time
2. The premium payments are not pre-determined
3. There is a need to check policy updates frequently as coverage and premiums are flexible and not pre-determined

Due to nearly 1,400 complaints from consumers within the state of New York, the superintendent of the Department of Financial Services is on record warning consumers and potential consumers to understand that the internal costs of these products increase every year and can be cost prohibitive in the later years.  Furthermore, these products provide NO long-term guarantees of premium payments required, cash values accumulated or death benefits.

Due to the lack of premium and death benefit guarantees, the policy will lapse when the cash value goes to zero.

Over the last decade the sale of Indexed Universal Life has quintupled.  But many say these types of policies are being sold using dishonest measures.  According to Birny Birnbaum, director of the nonprofit Center for Economic Justice, “false promises and deceptive marketing” are commonly used and it would be best to “stay away from them.”

Index Universal Life bases its growth on the purchase, or selling, of options of an underlying index.  If an option is exercised “in the money” the payout can be huge, but if the option expires “out of the money” the entire investment in that option is lost.  Of course, the insurance company is the holder of those options and protects their interests by capping the gains the policy owners can make when and an option is exercised “in the money”. This is why indexed universal life is a riskier investment.  

Even the American Council of Life Insurers admits that indexed universal life insurance isn’t for everybody.  Unlike traditional whole life products that are backed up by the insurance company investments in corporate bonds and government backed mortgages, where money is safe and generates reliable annual returns year after year, indexed universal life contracts shift the risk onto the backs of policy holders.

There is absolutely no question that indexed universal life proposed to offer a bigger upside than traditional whole life insurance contracts.  But there is a cost to that upside potential: the risk of losing it all as the cost of the insurance increases over the life-time of the insured.

Another factor with indexed universal life is the fees associated with premiums paid.  According to Steven Roth, president of Wealth Management International (an insurance analyst and litigation consultant) these fees can be upwards of 8% on premiums and cash values of the policy.  When market condition are less than desirable these fees can drain your policy dry of cash values and even cause it to lapse if you can’t fork over more money in premiums to keep the policy afloat.  This occurred with many index universal policy owners during the COVID-19 downturn.  Even though the investment loss was zero, the fees caused losses of several percentage points in the accumulated cash value of many policy holders.

So remember, do not purchase an indexed universal life policy based on anything other than the guaranteed cash values and death benefit.  Anything else is pure speculation. It could cost you loss of your money and your life insurance coverage.  These indexed life insurance contracts can be 50 to 70 some pages long, and you can bet your bottom dollar those pages written by the insurance company’s attorneys weren’t written to protect you and your interests.  Is it any wonder insurance commissioners of different states are now waking up to the fact that this product is not something which should be purchased without considerable care and due diligence?

In my opinion, the average person has no need to purchase universal life insurance at all.  It is like trying to mix oil and water.  Investing and protection don’t blend well together, and that is what universal life insurance products attempt to accomplish.