Industry News

Spotlight on: Whole Life

Shortly after I entered the insurance business in 1989, I signed on with Northwestern Mutual Life. At one of the first meetings I attended, a multi-media program was presented that showed the words UNIVERSAL LIFE in huge letters on the screen, and then had those letters crumble slowly into a heap of rubble. A roar went up from the crowd and applause lasted for several seconds. Many NML agents jumped to their feet, hands clapping high over their heads.

I sat with my arms folded in mild amusement. I was a “newbie”, but I wasn’t ignorant. In my mind, Universal Life was a viable option and it’s transparency provided an easy explanation of how life insurance worked.

Over the years, Universal Life (UL) has not crumbled into a heap as an insurance product, as the NML marketing department depicted, but individuals have seen their contracts get into “trouble” as interest rates credited to their UL cash value have plummeted.  A premium originally calculated on an 8-11% credited interest rate assumption became insufficient to pay for the rising costs of insurance and the policyowner was faced with either putting more money into the contract or watching the cash values slowly erode and the policy lapse with no value.

During those golden sales years of Universal Life, Whole Life (AKA “ordinary life”) experienced a long decline in market share. High interest rates during certain periods of time exceeded the dividend crediting rates on whole life cash values and policyowners began moving money out of their policies and into other, better paying accounts, an action known as disintermediation. To stop the bleeding, some carriers began a practice called “direct recognition”, meaning that the carriers “directly recognized” those that did so by reducing the dividend credited to the money that had been loaned out of the whole life contract.  This practice is still in effect with some carriers, but it is now an anachronism because, boy, have times changed!  Credited dividend rates, while lower than before, are still holding strong in the 5%-6% range.

Whole life is on the rebound.  Sales of this “ordinary” life insurance have doubled and then doubled again over the last three years.  Granted, that’s still not a dominant market share since the market share from which the doubling started was quite low.  But, it does indicate that the benefits, features, and riders of a whole life policy now look pretty good to many consumers. A market crash in 2008, followed by a “great” recession, and now a slow – and perhaps even imaginary – market recovery, are driving more agents and advisors to reconsider this type of life insurance.

Some economic inovators have suggested that by overfunding a whole life contract, one can use the contract as one’s own personal insured “bank account” with easy and tax-favored access to the cash values.  (Go to and type in “be your own bank” in the search field to find books written about this concept).

However, the primary motivation for taking another look at whole life is that it features two components in tandem that are not found in any other life insurance contract:  a guaranteed death benefit AND guaranteed cash value.  They are not tied to any intest rate, dividend, or rider.  They are contractually guaranteed.  In the current economic environment we find ourselves in, that can be an attractive “bottom line” to sell to security-starved investors and consumers.  There are costs associated with those guarantees.  Whole life is not cheap.  But, it can be a great foundation for a person’s insurance portfolio when supplemented with less expensive temporary (term) insurance as part of life-long financial plan.

Maybe Northwestern Mutual’s marketing department was exagerating the situation a bit back in 1989 because Universal Life is still around and still a very appropriate contract to consider for many situations.  It also should be noted that the dividends credited at the end of each whole life policy year are not guaranteed.  But, the contractually guaranteed death benefit and cash value provide an attractive option for many.  We’ll have more to say about whole life in future postings.  In the meantime, call me to discuss further.

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