Universal life insurance products may be divided into two primary categories: current assumption UL (CAUL) and secondary guarantee UL (SGUL). The first UL products, developed in the 1980s, were current assumption products. As the name implies, the performance of a current assumption product largely depends upon the current interest rate, mortality and/or expense factors associated with its block of business.
As prime interest rates declined from a high of 21% in 1980 to a low of 4% in 2003, the interest rates credited frequently caused CA products to not perform as well as the original sales illustrations had projected. As credited interest rates fell, many CA policyholders had to choose among unpopular options: making greater premium payments, reducing face amounts or lapsing or surrendering the policy.
Consequently, a market for secondary guarantee products developed. The early SGULs were designed to not lapse in the early policy years from lack of cash surrender value. By the 1990s, lifetime death benefit guarantees began to appear. SGUL has become quite popular especially in the older-age and asset-transfer markets. However, for executive compensation plans like executive bonus and non-qualified deferred compensation funded with life insurance, CAUL may be more suitable.
Reasons to compare
Although SGUL has been more popular in recent years, CAUL has significant advantages over SGUL in many cases.
First, when compared to CAUL, SGULs may generate only modest cash surrender values that may vanish by age 85 to 95.
Second, SGUL must often charge higher loads or explicit charges to fund the guarantees in the product. Consequently, SGUL may require higher premium payments or generate lower cash surrender value when compared to a CAUL product, especially at younger ages.
Third, SGUL tends to be less flexible than CAUL. For many SGUL products, missing a premium or series of premiums shortens the guarantee (i.e., the death benefit may not be guaranteed for the life of the insured), but the charges for the guarantee will continue. Even if the SGUL has a "catch-up" provision, the cost of exercising this provision may be prohibitive. Most CAUL products have no secondary guarantee premiums and will only stay in force as long as cash surrender values are sufficient to cover the monthly charges and costs of insurance.
Fourth, policy loans or withdrawals may significantly shorten the guarantees in an SGUL. CAUL products generally have better terms for "preferred loans" or "zero net interest" loans that may permit the policyholder access to cash values on a more favorable basis.
All of these factors can make CAUL a better product for certain clients. Essentially, clients who are willing to take the greater interest rate and cost of insurance risk in a CAUL may receive significantly greater cash values that they may access on more favorable policy loan terms than would be possible with a SGUL.
Different needs
The primary difference between the two products is in their underlying purpose: the need for the security of a guaranteed death benefit versus the desire to accumulate greater cash values or for the chance to obtain death benefit protection for a lower outlay. The advantages of CAUL versus SGUL should be evaluated only after determining one's need.
CAUL will appeal most to those for whom the purpose of SGUL does not exist. This may include those who are more interested in cash values or are willing to accept additional policy performance risk in exchange for a potentially lower premium outlay.
