Look What Universal Life Begat

When universal life insurance was introduced in the early 1980s, it was an almost-instant smash. Today, it is gradually fading away. Yet universal life is spawning a welter of similar products that could shake up the industry and provide more and better choices for consumers.

A rarity in an industry that's known for its stuffiness, universal life was a true innovation: an insurance product that fluctuated with current interest rates and had flexible premiums. Policyholders could increase, decrease, or skip premium payments, increase the death benefit, or add to the cash-value in the policy. And universal life policies offered higher rates than did traditional whole-life policies.

Universal life, though, proved to be solely a creature of high rates. When interest rates started falling, which reduced investment returns, policyholders soon discovered they often had to increase premium payments to keep up coverage.

Now, universal life is giving way to a new generation of flexible, rate-sensitive products. It is packaging the new offerings "in a universal-life wrapper, so you get premium flexibility and face-value flexibility," says Thomas B. Wheeler, president and chief executive officer of Massachusetts Mutual Life Insurance Co. But while the newer products still offer rate-sensitivity, they often try to lessen the downside risk and assuage consumers' fears about the financial soundness of the insurance industry.

Among the most popular new products is so-called variable life insurance. Rather than have the cash value invested by the life-insurance company, variable-life policies allow policyholders to direct the cash value in their policy into a variety of stock and bond funds. "Assets in the funds are separate from the rest of the insurance company's assets, so it's another level of protection for risk-averse investors," says Steven L. Putterman, assistant vice-president for market strategy at Aetna Life Insurance & Annuity Co. Aetna plans to expand the fund options from those managed by their own investment advisory to those of one or two outside firms.

PEACE OF MIND. Another new offering is a hybrid, the universal variable policy. It allows the policyholder to change premiums and face value. And some old standbys are seeing renewed life. In November, Aetna, one of the major universal-life vendors, added interest-sensitive whole-life policies to its portfolio. Like traditional whole-life policies, premiums remain level for the life of the policy. That makes them more expensive initially than universal-life policies. But the provisions avoid the problem that afflicted universal life during the 1980s: that consumers might have to make more premium payments. Further, any investment earnings in excess of the guaranteed rate can be used to pay premiums. "It's not new, but it's seeing a resurgence because of the drop in interest rates, and also the fact that there's a flight to quality; people are looking for more guarantees in their policies," says Putterman.

With consumers willing to give up a little upside to get more peace of mind, universal life's glory days are unlikely to return. But its progeny should thrive. Insurance companies are finding that consumers are a lot more comfortable with policies with more downside protection and fewer grandiose claims.

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