Guaranteed Universal Life (GTD UL) policies have been a mainstay in the TOLI world, providing lifetime “guaranteed” coverage for a very cost efficient premium. As our earlier Blog (Happy New Year……The Cost of (Some) Life Insurance Just Went Up) pointed out, GTD UL’s do not provide significant cash value, but in the TOLI world where low cost death benefit is important, they fit the bill.
The key to managing the GTD UL policy is to pay the policy premium in full and on time each and every year the policy is in effect EXACTLY as shown in the life insurance illustration. Unfortunately that happens in a perfect world, not the TOLI world we live in. In fact, one of our favorite online subscription publications (The Life Product Review) recently pointed out an audit just completed by a major name life insurance carrier that has sold GTD UL policies for 3-4 years. They found that 31% of the policies they’d sold are already off track. That is right…31% in less than 4 years. The reasons? 8% because of insufficient premium, 29% because of skipped premium, but the majority - 53% - because of early payments. Let me repeat…53 percent are off track because premium was paid early. GTD UL policies have “shadow accounts” that you never see. They lurk beneath the surface of the policy illustration. As pointed out in this article, this particular carrier has different crediting rates in their shadow accounts depending on funding levels so paying early actually resulted in a lower credited rate.
It was thought that GTD UL policies were fairly straightforward. Turns out that is not the case. Shadow accounts, contingent charges, premiums loads, all differ between carriers and their differences can have a dramatic effect on the outcome of a policy if premium is late, insufficient or even early.
So, what do you do if you are managing one of these policies? First of all, make sure that when a grantor brings one of these policies into the trust, they clearly understand the gifting requirements for it….premium paid in full, on time, etc. I’d recommend putting it in writing and making it a part of the trust file. Secondly, make sure your trust administrators understand GTD UL policies. Universal Life policies used to be flexible premium products, they are no longer. Lastly, if you really want to manage these policies, you have to be able to “look under the hood”. Not an easy proposition and a reason you need to have an insurance specialist on your staff.
We will be discussing this issue in greater detail on one of our scheduled webinars this year as we believe it is an evolving problem that needs to be addressed.