Universal life insurance is a complex product -- it always has been from the time it was first created in the 1970s as a way for insurance companies to attract money away from bank deposits in a time of extreme inflation in America until now.  It is actually more complex today, with many variations and a plethora of no-lapse and other guarantees or riders that attempt to overcome the inherent and common design flaws in UL products that can, and do, lead to their collapse long before the insured dies.  When this happens, the policyowner is forced to pay considerably higher premiums or terminate the coverage and lose every penny paid in premiums, sometimes amounting to tens or hundreds of thousands of dollars.

Most folks can ill afford such costly mistakes.  Would you play a game if you did not know the rules?  And if you played a game without knowing the rules, wouldn't you expect to possibly make some mistakes that could cause you to lose the game?  Think of life insurance along those same lines.  Your policy contains all the rules -- it's a contract between you and the insurance company.  Agents frequently fail to understand some or most (or even all) of the most important "rules", and may describe the policy as doing something it does not, or is not designed to do the way the agent explains it.  And one of the most important rules is that the insurance company or its policy is not obligated to do what the agent says unless it also says so in the contract.

In my role as a licensed Life & Disability Insurance Analyst, I take a very close look at the language of the contract, the performance of the contract as revealed in the annual policyowner statements, and do the math needed to show how the policy is performing.  The insurance companies do not make this obvious to their clients, and the vast majority of agents do not have the skills or abilities to perform such an analysis.  Indeed, there are less than 30 licensed Life & Disability Insurance Analysts in the State of California.

In the vast majority of cases, analysis reveals that the premium being paid is wholly insufficient to maintain the policy to its maturity -- despite the fact that it's the same premium the agent said the policy would cost and the client has paid every month since they purchased the policy.  Many of  my clients say things to me such as, "So how can this be wrong?  It must be a mistake, right?"  Wrong.  It's a failure to know and understand the "rules" of UL policies.

Older life insurance policies mature or "endow" at the insured's age 100.  All policies issued in California since January 1, 2009 mature at age 120 or 121., although some policies will not require any premium payments after age 100.  A type of cash value policy called "Whole Life Insurance" (sometimes referred to as "Ordinary" insurance) is designed with a level premium from the day it is issued to the day it endows, and if all the premiums are paid on time, and if the insured has not died by the endowment age, the policy cash value will equal the face amount of insurance, and the contract terminates by paying the face amount to the policyowner.  The fundamental rule in a whole life policy is rather simple:  "You pay, you die, we pay."  Policies like this have been sold in America since the 1840s.

The Rules of Universal Life are very different than those of Whole Life

But UL policies, including IUL, SGUL, and VUL, are designed with an annually increasing "Cost of Insurance" ("COI",:or rate factor), based on the age of the insured.  This is equivalent to a type of term life insurance known as Annually Renewable Term, or "ART".  The rate for life insurance is based on $1,000 "units".  You multiply the number of units by the rate factor to determine what the premium is.  On top of the premium in a UL contract may be a sales charge, and various monthly expense charges, and the cost of any riders added to the contract.

Premiums for UL policies, after any deductions for sales charges (or "loads") have been taken, are deposited into the "Cash Accumulation": of the policy.  And from that cash accumulation is taken all the other monthly expenses of the policy -- administration fees, the cost of riders, and the monthly Cost of Insurance based on something called the Net Amount at Risk ("NAR").  A formula in the contract -- another one of the rules -- describes how the COI is calculated.

But nothing in the contract tells you what the COI factor is -- you are only told what the most it could be at any age.  In most policies, the COI could easily increase by 100,000% or more from the first day of the policy to the day the policy endows.  Agents sometimes sell parents of a newborn child a UL policy on the life of the child . . . "There are so many diseases these days, you don't know what could happen to your child.  By purchasing life insurance now, you guarantee that your child will be protected even if they develop a disease five or ten or twenty years from now" are the words sometime spoken by the agent . . . and the COI might only be $0.01 per $1,000 of insurance per month.  A $100,000 policy like that might only cost $10 - $12 dollars per month.  But at age 120, the last year of the policy, the COI could be as much as $83.33 per $1,000 of insurance per month, and that is an 833,200% increase compared to the first day's $0.01 per $1,000.

No agent will describe the cost of insurance in those terms to a prospective client.  But if you knew that, how likely would you be to buy that life insurance policy for your child? Or for yourself?  At age 25, your COI might only be $0.06 per $1,000.  At age 120, the $83.33 maximum monthly cost is a mere 138,783% increase, a relative bargain compared to the child's policy. 

The mitigating factor in the application of this "rule" is the cash accumulation.  Each dollar of cash accumulation reduces the Net Amount at Risk -- the difference between the full death benefit amount and the accumulated cash value that will be paid as part of the death benefit (reducing the amount of insurance company money that needs to be paid out)