Why Universal Life Insurance SUCKS!

A tool that's fundamental purpose is to reduce risk. Why on earth would I add additional risk to that type of a vehicle via investments like a Universal Life contract?

So why on earth shouldn't I use Universal Life policy to conduct my infinite banking process? Well, that's a good question. We're going to talk a little bit about that and we're going to talk about some things that we see with the people that we meet day to day and just some observational kind of commentary on it. And so Universal Life is what's considered a permanent insurance product. You know, of course, in North America it has various variations. Lots of companies sell them. For many people, they've been very popular for the last 30 years or so. Seems like the marketplace is, you know, seeing less and less of them being sold. And, you know, the rise of Whole Life has actually been quite good in the last little bit. So we're going to talk a little bit about that and I'll share a couple of just, you know, recent stories. What's most important about this is that as a permanent product, sometimes it has the appearance or people hear the word permanent insurance and there's. There could be an association made where Whole Life and Universal Life are the same thing. And that's just fundamentally not true. They are different structures and of course they, they may vary by insurance company also to some degree. So here's one of the key things I want to talk about, Vern, is who is in control, I guess is what it boils down to. And so with a Universal Life contract, there's common things that we see. And you know, I meet with people like you do almost every day and we have people that come to us with insurance now. I love it when people come to me who already have good insurance, good protection for your family. How do you feel about that?

I love that. I love that. I do. One of the first questions they asked me is, oh, should I replace it? And I said, well, it depends. Like, I'm not in the business of just replacing insurance for the heck of it. So I really love when people especially. I've had a couple lately, Rich, not to get off track, but I've had a few who one of the, let's say two parents, one of them is uninsurable. Hey, very first question I ask is, hey, just curious, like, do you guys have any life insurance in place today? Oh, yeah, she's got 500,000 or a million dollars worth of term. And I go, thank God. Right, right. That's great.

So, yeah, I agree. And you Know, we have those conversations on a regular basis. I mean, the last thing that we want to do is replace good insurance. If it's good. Insurance is good. You know, there's a lot of reason to keep it. And often with a lot of types of insurance, there's. There's an advantage of time. Now, with term insurance, there's a disadvantage with time because the longer that term is in place, the closer you get to the renewal date, the more that spike is going to be. You know, so recently I had a gentleman reach out to me, and both him and his wife, they were actually licensed insurance advisors at one time, not for a very long time, but they were with an organization, and when they went to that organization, they ended up getting some universal life contracts. Now, on those contracts, so they have some for their children, and they have one that has both husband and wife on the same policy. They each have a base layer of universal life coverage, and then they had term riders on it, which is very common to see. And one of the problems is, is that, you know, life has been going on for the last decade, and life has been busy. You know, you got three or four kids, you got soccer practice and hockey, and somebody's working out of town. You know, they're no longer in the insurance business, and they're not following up with the policies. There's no engagement with the advisor. They don't really remember what they have. And so we're trying to pick up the pieces of what's there. Well, at some point in time in the past, they reduced how much they were putting into the policy and of course, forgot that that happened. They just got accustomed to the monthly payment. So the result of that is that the policy doesn't get enough capital coming into it so that it can grow in different investments.

What you're referring to, what you're describing right now, is the universal life policy that this particular couple has. Again, collapsing the conversation, thinking we're talking about the right tool for ibc. You're actually describing right now some of the problems that this family's facing with their current universal life policy.

Yeah, and they're real problems or real problems that they're facing. And these are not unique problems to them. These are problems that I. We see on a regular basis as people come to us. So. So that's one of the reasons why I want to have a conversation about it, because, you know, you know, our listener right now today might have that problem. And so it's okay to take a minute and look at what you have and Assess it with a different set of eyeballs. And so, you know, one of the things that I kind of. My description, my personal description of a universal life policy, I'll kind of steal it from Jason Lowe is basically, it's a Vegas style slot machine with insurance on the side. Okay. Really, it's an insurance contract with the ability to choose various investments that the insurance company offers you. And most people end up in a bag of investment related funds. And then because they don't follow up or look at it on a regular basis, they just get the annual statement and they don't know what the annual statement says. And they may or may not have good contact with their agent. That's not always the case, but that's often the case. Then they just keep going through time to the motions. Well, you know, I've got the coverage and my family's covered and they're busy with life and so they forget the conversation that happened four years ago, five years ago, 10 years ago when they set it up. So now we find this couple. They still, you know, they have, they have kids, a couple of kids are moving up, they're moving into the university stage, but they still have some certainly at home that are responsible for them. We've got a primary breadwinner of the household and the term insurance they have is about to jump up. They've only got, you know, maybe five or so years left on it. And the price increase just on the term insurance is like 5, 600%. And so when that jump happens, they're going to get rid of it. They won't have that coverage. But because they haven't been properly funding or growing or their investments inside of the investment pile of the Vegas style slot machine haven't performed, they don't have an accumulation of value to support the necessary death benefit for their family. So their family is going to be underinsured. It's not a good situation. And so, so, you know, in the previous year they put in, you know, let's say about $3,000 in capital into this thing, but their fund value only grew by 700 bucks. Okay, so we've got a problem. So there's not enough money going in to grow the fund. There's not enough fund growth. Those two things happening in tandem creates a ripple effect because compounding can only happen over time. And they're not getting the advantage of compounding here in this scenario. So it's really not a good situation. Now they do have some cash value. Cash value was built up and the policies are over 10 years old. Now that 10 year mark is important because in a lot of, not maybe all, but certainly in most of the ones that I see in a typical universal life insurance contract, there's something called surrender charges. And those charges are usually extremely high and they fall off kind of by the 10th year. So in year 11, there's generally speaking no surrender charges. So if they had to or they wanted to replace the contract, they're kind of in a bit of a safety zone. Now here's one of the other things that happens with universal life contracts, because they're geared for or primarily designed around an investment concept that you're investing money. And with investments comes a measure of risk. There's ups and there's downs, and we've all experienced those. And so if you've chosen investment piles or pools for your money to be in, if you wanted to access what's called a policy loan, you generally still have the ability to do that. Not every policy. In fact, I recently came across a contract that would not allow you to take a policy loan. So, which is very unique to me. I found that surprising because the same company offers multiple insurance universal life contracts where you can do that. But this one contract that a client came to me with, I found out recently he could not take a policy.

Super weird.

Don't know how that even happened. But in general, you could take a policy loan. However, if the money's invested in the insurance company's own pile of bag of goodies, they'll only let you access about 50%. But if you've got 30 grand available, you can only take a policy loan of 15 grand. It's kind of like a margin situation. They're not going to let you borrow more because of the risk of the funds that they themselves sold you. Now you can transfer that fund, those funds basically sell off your units, move them into effectively like a GIC or a savings account type method. Of course you're not going to get the same theoretical earning potential on that. So you kill your earning potential. But now you can access more borrowing potential. So in order to get more borrowing, you effectively have to turn your universal life contract into the closest mirror image that you can theoretically get inside of the mechanics of the universal life contract to what a whole life contract is. Yes, but without any of the guarantees attached to it.

Yeah. This is fascinating, Rick. You're triggering all kinds of thoughts for me because I've heard somebody say this once, as they said, oh, well, universal life policy is basically like an unpacked whole life policy, right? With with no guarantees, Right. See that's the thing about it. When I think about insurance immediately what comes to my mind is risk management, the mitigation of risk. And there's all kinds of risks out there, whether it be physical risks, investment risks, whatever. There's all kinds of risk. And I think to myself, okay, a tool that's fundamental purpose is to reduce risk. Why on earth would I add additional risk to that type of a vehicle via investments like a universal life contract, right. I can invest money in so many different places. And so when I think about the, that type of a policy, it just makes, I'm not trying to knock anybody or saying it's bad, good, right, Wrong. I'm just saying it makes absolutely no sense to me, that's all. And so I think about investing versus save it, right? The whole process of becoming your own banker. At the beginning of the video we said why not use a universal life policy for ibc, the infinite banking concept. It doesn't mean that universal life policies are necessarily bad, even though I wouldn't touch one with a ten foot pole. What we're talking about here is why not use it for ibc? See, IBC is about how you go about financing things. So you need to use the tool that is predictable and reliable and has guarantees and where the risk is with the insurance company, not you, the policy owner. So that's part of the reason why we're using the whole life policy design correctly for banking. Because it's more of a savings vehicle based on guarantees versus an investment vehicle where the risk resides with the policy. There's nothing wrong with investing, but we know there's a fundamental difference between saving and investing. Saving, you save a dollar, you should get a dollar. Investing, you invest the dollar, you could double it, but you could also lose the whole thing. Rich, if I was crazy enough to buy a universal life policy, I'd actually use a policy loan from my banking system, my dividend paying whole life policies to fund the premium. Because that's how I go about financing all my other investments. So I just wanted to point that out. But there's a couple things that I, I would love to hear your perspective on if we go back in time a little bit, go back to history. In fact, you're the one who really brought this to my intention when insurance, life insurance, the concept of life insurance was really born. It was because like you and I are, let's say it's 200 years ago and I'm the farmer and know you're, you're the Guy who fixes the wagons or. Right. You have a job in the community.

I know my way around a wagon, let me tell you.

Right. All of a sudden I get offed and the whole community now goes, oh my gosh, we got a problem. Because Farmer McCarty there, who supplies the village with all the goods for the food, he's gone. His family's in big time trouble. And we're now all in big time trouble because we don't have those goods coming in anymore. Gosh, I wonder if there's a way that we could like all come together with some kind of a program or a plan or a fund, let's call it, so that if that ever happens, we don't have that big problem. We can dip into that fund and replace that person and make sure the family's looked after in a very high level, loose way. That's basically how insurance was born. Right? It's free people coming into free contract to solve a very common problem.

Absolutely. And then they apply some math, engineering to it, actuarial calculations to, to, to make that all go around so you can put a little bit in so that everybody has a higher value of protection. Because the probability that that farmer or that person goes, or it's that the guy that, you know, the milk guy, let's say that has the cows and doing all the milk, like that person could be the one that goes, you don't know which person it's going to be. But we can all spread that risk around amongst us. We can all take on a little piece of the risk so that we don't individually have to take on all, all of the risk. That is really fundamentally how the risk management methodology of insurance really works.

Right. And so moving forward into history. So now we know that it's nearly 200 years in Canada that dividend paying participating whole life insurance contracts have been around. And the companies that we work with have never failed to produce a profit. They've never failed to pay a dividend. But yet the general public has been convinced that this is a stupid place to save money. Let's say we're in like the 30s, 40s, 50s. There was no like mutual funds at the time. They couldn't access stocks because you needed thousands of dollars to get involved.

RSPs didn't exist. People were buying gold and they were storing money in dividend paying, participating whole life contracts. That was like the, for you. And I did a video on YouTube for Canada's oldest tax free savings account. Right. We did a whole video using that concept. So that's where people used to save money. In fact, I have a client who told me that his grandfather was an immigrant to Canada. And he goes, man, he goes, I knew you could do this for the last 40 years. I just didn't know how to figure it out because I know my grandfather came here, he bought a bunch of whole life policies. Now, he said he didn't do the borrowing, like he didn't do the banking part, but that's where he stored his money. And he cashed those policies in and eventually used them to buy the farmland that that family still has today. Right. So it's fascinating. So then what happens? We start getting later into whatever, 60s, 70s, and then they start going, oh my gosh, mutual funds and RSPS and less pensions and guess what, Canada, you get more control. You get to fund your retirement and invest money and do all the stuff that the wealthy get to do.

No one else is going to look after. We're going to make you looked after you, but we're going to sell it to you as well. It's a good idea. And then we're going to put a bag of crap together and let you pick and choose from the bag of crap. And we hope that you get there. Good luck. We'll see on the other side.

Right. And don't the headlines go crazy? Right. And 10% here and 12% there and oh, we're all going to get rich. It's going to be awesome. Then what happens? I think you and Jason, I heard you guys talking about this. Like, you know the stock market's like the Ferrari, right? Yeah. You can go fast, you could go real fast, but guess what?

And you can blow the engine and have a very expensive repair.

Yeah. When you. Exactly.

Right.

That's the risk, if you will. And so the whole life policy is like your Toyota Sienna. It's like your Ford F150. It's like man, point A to point B all day long, every day. I know exactly what I'm getting. It's consistent, it's reliable. Guess what? Boring, not exciting. Creating wealth shouldn't be your form of excitement.

Right.

It should be boring. It should be systematic. It should be automatic. And so with that said, just humans being humans, the whole life policy became less attractive because, hey, you can grow your money way more over here. Well, that's not what it was designed for. It was designed for consistency and being reliable. Right.

And it led to the creation of new products, namely the universal life product. Hey, let's take this idea that whole life is permanent People like the permanent part. Let's create something that we tell them is permanent and we'll put it in the same category. But instead of having the insurance company who's got 200 years of experience of managing the money and a whole big team that are effectively institutional investors that get access to the best quality of deals and things and they recognize actuarial design and planning in 100 year lifespans and they get paid a lot of money to do all that. Let's not have them do all the work, let's just give the people the ability to go and do that on their own. And we'll say, hey, here's the insurance part, here's how much money you could put in there and you can willy nilly invest in a bag of crap that we've got. Which by the way, the bag of crap we're going to let you tap into is not the same stuff that our PAR account is doing. Those guys are in the institutional level. We're just going to give you the retail version of it that we're going to package as a new product so we can also sell those products at our insurance company and we're going to let you. Good luck, hope you get there.

See, that's why I wanted to go back in time. Because basically, basically there might be some other reasons, but pretty much the reason why universal life policies were ever invented in the first place is so that the insurance companies could compete with all these headlines out there about these massive returns you can get in the stock market and mutual funds and RSPs and all these great benefits. You don't need whole life because you got all this stuff. So they created this product out of a need to stay relevant, right?

And interesting enough, it really took hold. It was born in the time frame of escalating inflation, much like at the time of this recording today. The other thing is, is that it doesn't have the lifespan. It hasn't gone through the lifespan of cycles of people owning it, receiving death benefits, you know, utilizing it as the way it was intended. And so for a lot of those products that were sold, they were sold under certain assumptions and those assumptions change. And so every couple of years they rebrand the product or they put a new fancy label on it, they retweak the contract features and they relaunch a new version of that product. And so every single time what ends up happening in these is a lot of times it's not just the financial investment component that is being placed on the individual who's taking on that Risk. Often there's actuarial pieces that are also being placed on the individual. And sometimes there's even contract changes that can happen. I saw another statement recently from a client with a universal life contract where the assumptions of basically death claims, mortality assumptions, were modified because they can modify those in a UL contract and they can't in a whole life. So the assumptions at the time of sale, if there's a change in their assumptions on the actuarial mortality side, in some contracts, maybe it's not all, but certainly in some they could say, hey, actually we get to change effectively the internal cost of insurance that we've been charging you for 20 years because we got it wrong, it's actually going to go up. So, like there's additional changes that could happen on the back end. The result of that behavior is that the policy owner is the one who's taking on all of the risk and the insurance company is absolving themselves of the risk because they're saying, hey, you wanted to go do it. We gave you the tools, we gave you the car, we gave you the parts to the car, and we said, here's an instruction manual, go put it together for yourself. Okay? So that's effectively what's transpired. So going back to my client story, there's nothing fundamentally wrong with universal life contract. What makes it wrong or what could make it wrong is how it's sold, how it's utilized, and your client's objective. So if the goal, these have been sold out of the auspices, that it's going to help create a retirement income for people. But it's based on assumptions of an interest rate of earnings of an account. It's also based on the assumptions of funding the account. So if the policy owner doesn't fund it well, because we've got high inflation, economic uncertainty, we had a global pandemic. They were pulling levers in their financial life and trying to figure out ways that they could reduce some of their funding in various accounts, which is a normal market thing to do, right? But then we don't remember to go turn it back on again. So if people don't fund it well, they can't get and they also don't get the returns that they were promised or expected. You have two features, two levers of the equation not working to your benefit. You need both of them to happen. You can't just have the good returns and bad funding. You can't just have good funding and mediocre returns. You actually need both of those things working in tandem to create the actual objective that you want. And if either one of them fails, I'm sorry, you're done.

So you have some insurance tied to it. But realistically using that tool, it sounds like to me, correct me if I'm wrong, it's literally not a lot different than, let's say, funding high level, like, like again, a stock portfolio, a mutual fund or whatever, that I have to fund it well and it has to produce good returns, otherwise I wind up with nothing. UL policy, very similar.

It's kind of like buying, buying term insurance and investing the difference in the stock market, but smashed together on one product a little bit like that.

Now, now here's one of the other.

Key things that happens. And now this is not occlusively across the board. This is where the United States and Canada are a little bit different. In the United States, every universal life contract from my understanding, is a, what's referred to as an annual renewable, increasing term cost or a yearly renewal. So what that means is you get the policy at a certain age, whatever the issue, ages, and as you go along the timeline of age each year, there's an incrementally increasing cost because you're one year older and you're one year older and you'RE one year older. So the cost to provide that amount of insurance benefit actually goes up a little bit each year. Now, it's such a small blip in the early years that the theory is that you can load more capital in and you can outpace the big increases later on, but the result would be happens is basically an exponential curve. It's a hockey stick. So the cost of insurance, as you get older and older, as you get into your late 50s, you get into your 60s, it's going to spike, like straight up. And as that cost goes up, well, it has to be funded. But you're at a point in time in life in theory, where you don't want to be putting money into things because that's what the world's been training you to do. So.

And also to your point, it has.

To use, yes, you may not be paying attention. It has to use the capital that you've built up in the fund, draw down from that to pay the premium cost. And in a lot of situations, what can be created, not exclusively, but what can often be created, is what I refer to as an implosion. An implosion where something implodes. And most of the ones that we see, they're set up in that way. They're set up where they're designed to implode. And, you know, had they been funded well, had they got good returns, maybe it would have been okay. But I have yet to meet a single person that has had either of those things happen. Nothing has been funded well. Nobody's got the returns that they were promised. And the result is they have now an increasing cost of insurance. And they're headed for a trajectory that when they need the insurance the most at death, it's not going to be there. They're going to get a premium notice that says, hey, you owe us, you know, you owe us 100 grand to pay this premium or whatever, 50 grand to get it done. And you're like, dude, I'm like, you.

Called it in my closure. I call it a cash call.

It's a cash call. That's right. And there's actually lawsuits in the United States around this that have happened. I don't know of any in Canada, but there's certainly many of them that are out there. So it's a warning signal. It's a warning call for being mindful of what you have. Why most definitely you don't want to use universal life for the purpose of infinite banking, because you shouldn't. And Nelson Nash says in his book that you shouldn't and why he wouldn't recommend it. And he goes on about that for a couple paragraphs and. And then just being mindful, see what you actually have, get clear on what it is, have it assessed by someone who can explain it to you in a way that makes sense to you, not just in a way that sells the product.

Well, speaking of which, I know that you mentioned in the us, I didn't realize that all of them were YRT or art. But just to be clear, Canada, there are level cost universal life policies in Canada, but there also are YRT and art. So you should be able to open up your contract and see right in there. If you look at the premium type, I don't know the exact language, because every life insurance company is a little bit different. But you want to find out if you have an annual increasing cost of insurance. Because to your point, Rich, I've ran into that so many times. I said, oh, this? Oh yeah, I got a universal life policy. And it's like 150 bucks a month or something like that. And a certain amount pays for the insurance and a certain amount is going into some side fund to build up, you know, this cash. And my advisor told me that, you know, if I get to age 65, you know, there's going to be $17 billion in there and I could just spend like crazy and it's going to be all good. And I go, oh, okay, interesting. But then they do a little digging because I give them a little homework and they find out, oh, I didn't realize this, man, guess what? My cost of Insurance now is 200 bucks a month, but I've only been paying 150 for the last 10 years or 20 years or whatever. So they didn't know that the funds that they did build up, if they built some up in those first, to your point earlier, those first five, 10, 15, 20 years, whatever, they didn't realize that slowly the cost of insurance has been chipping away at their quote, retirement fund and to offset the cost of insurance. So at least now we caught it and we can stop the bleeding and figure out something to do with it. But to Richard's point earlier, some people don't catch that until it's way too late. And now all of a sudden the cost of insurance is thousands and thousands and thousands of dollars per year that they didn't expect. And all of a sudden they find out that their retirement fund, if you will, has been dwindled down to nothing because things weren't structured correctly and they weren't paying attention and they had no idea what they bought in the first place.

And you don't want to go 20 years not knowing something when all you needed to do because it's your money is to pick up the phone, get, take an action, have a review with someone, actually look at what you have, ask some questions, because it's not, it's not the person who sold it to you as insurance, it's your insurance. So to not go and have a review or a conversation about that on a semi regular basis, it could be potentially decimating not only to your family, but also to your retirement account and your mental health. And time is important. Time is so important. So take the necessary time so that 20 years doesn't go by and then you get saddled with a real problem. It's so common that people pick up the phone and do 911 calls when it comes to their insurance because they got a premium notice that says, you owe us more money. I have another couple of folks, young family Again, two kids, you know, the oldest boy is only 10. The husband is a smoker, he's in his mid-40s. They had term insurance, it was only 10 year term while their term is due. And guess what? They got the premium notice and the premium notice triggered. They weren't my client, but it triggered a 911 call to me and they were going from $100 a month on a joint term policy to $600 a month. But they have a mortgage, Some of their costs have gone up. They haven't assessed it in 10 years. They didn't even look at it for 10 years. Now we're trying to solve a problem and we have a limited amount of time to solve the problem. Well, the good news is literally today I got a notification that both husband and wife have now been approved for new term policies at a better rate because the rates have come down and we have conversions in place from the old contract on, some of the old stuff being turned into some infinite banking style design, whole life policies that's in process. The result is, yeah, they're still going to be paying more premium, but they're going to be paying the premium that they want and they actually are going to know what they have and their family is going to be better protected.

Hey, you mentioned how important time is in that whole equation. So before I forget, I want to make sure that you take the time to go to watchibc.com to learn more about the process of becoming your own banker, the infinite banking concept, because we're just pointing out not how the process works so much, but some of the problems that people face and why you want to make sure you use the right tool and whatnot. But the key thing is to spend some time getting educated.

So go to watchibc.com yeah, perfect, Vern. And you know, I'll close off a couple of our things just to recap on the universal life thing a little bit. So first off, as fundamentally it's insurance and it's not good, bad or otherwise, it just is. And it has a set of characteristics. If you don't know what those characteristics are, then that's a problem. And if you own one and you don't know what the characteristics are, that's a problem. And there's the characteristics that are general in nature and then there's the characteristics that are ultra specific about the contract that you have when it was sold, what you're allowed to invest it in, what you're allowed to put it in for savings accounts and whatever, what your borrowing capacity is, how that operates, the cost of insurance, all of those are individual components at each contract level with each insurance company and every couple of years they modify. So the product that they're selling today is probably not the product that you purchased a couple of years ago. So you need to get really clear about the one that was sold that you specifically have. It's very critical to understand that. And the other piece is this. So if you want to be able to borrow off a permanent contract, well, you need to know the rules about doing that. In a whole life insurance contract. It's dead simple, dead easy. And with the insurance company they usually make it very easy and is very functional. In a universal life contract, my experience has been that is simply not the case. Happy to know if it's been easy for someone else, but for me and the clients that I've served, it just has not been the case. Be aware of surrender charges, be aware of the cost of insurance. Is it a level cost of insurance, which is fine, or is it annual, renewable, doesn't mean that that's bad. It means that you need to understand it much deeper and you need to have in force illustrations that actually show you is this even a sustainable contract. Now, we do meet people every once in a while that have level cost coverages and usually they're set up as basically just a very basic plain vanilla insurance contract. So it's good insurance, it's okay, it's going to pay a death benefit, it'll be there when you need it, that's what you're looking for. But as far as it doing anything else for you, probably not going to have a whole lot of other advantage. So universal life on its own isn't bad. It certainly isn't good for infinite banking. Would never recommend it. Don't think anyone should be doing that. I think that's completely ludicrous and stupid. That's my opinion. We just would encourage everyone to dust off your contracts, have a look at what you have and get really clear on it and speak to someone. Book a meeting with one of our coaches, speak to someone that you know that can actually intelligently explain to you what you have and ask a lot of questions. You deserve the right to actually know what it is that you have when it comes to your insurance. And no one's going to take a better care of that than you will. So you need to take the time to get educated, watch some more great, great content. By the way, speaking of great content, Boom. There's a video that just appeared right down below that's great content. Click on it. Go dig in right now.