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INSURANCE EXPERT WITNESS - Areas of Expertise

Universal Life Insurance
Universal life represented the first in the new breed of life insurance contracts which were designed to respond to the high interest rate environment of the late 1970s and early 1980s. Armed with the new and relatively inexpensive computing capacity to design and service contracts with more variables than traditional life insurance contracts, the life insurance industry introduced the revolutionary universal life insurance policy.

These contracts allowed the owner to vary premium payments, face amounts, loans, partial surrenders and death benefits all within the confines of a single contract. As the insured entered and exited various stages in his life he could adapt his life insurance contract to his new set of needs and cover all his needs with a single contract. They were touted as the only policy a person would ever have to own. They could cover the “universal” needs of the insured.

These contracts also offered both the traditional guarantee of an interest rate on the cash reserves as well as a current credited rate if it was higher than the guaranteed rate. These contracts were extremely flexible and offered many of the provisions desired by insurance buyers.

However, several new features were first introduced with this product never before seen in the life insurance industry. Primary among these features were two never before seen in the industry. First was the “unbundling” of the costs and calculations of a life insurance contract. The second, and probably the feature with the most far reaching effects was the transferring of the investment risk from the carrier to the insured/owner.

These contracts clearly laid out the various costs and expenses associated with the policy. Insureds were supplied periodic statements showing both expenses and insurance costs deducted from their funds before interest was credited. The carrier always gets paid first. Only after all expenses and insurance costs were deducted did the owner get any interest credit. And even then, he may be credited with only the minimum guaranteed rate rather than the higher current rate, depending on the interest rate environment at the time. Never before had the expenses and actual death costs been revealed to the buyer as they were always included in the premium in any other form of permanent life insurance.

In addition, the buyer was now responsible for managing his contract status based upon what interest was credited to his funds and how much premium he chose to pay, which was also a variable option. The investment risk of keeping the policy in force was shifted from the carrier to the insured. Often during periods of low interest rates policies required more premium than the insured had planned upon paying because the interest credited was less, in some cases significantly less, than anticipated. The shift of the investment risk was complete.

These contracts had “Target” premiums upon issue. These were premiums that the company recommended the owner pay and they represented a premium flow that would generally keep the policy in force until at or beyond life expectancy. However, the contracts also offered the owner the option of paying less than the target premium to a minimum of zero. A certain percentages of owners granted the option of paying no premium will exercise the option, sometimes with very poor timing, and the result can be disastrous for the insured.

As interest rates fluctuated from very inflated rates in the 1980s to the historically low rates of the early 2000s, the result of the contracts is spread across the board. Some have prospered while others have floundered and resulted in lapse.