Life Insurance Doctor

Term Blends

While Universal Life is itself a combination of term insurance and a side fund earning interest, term blends may still be found in new policy illustrations. The main reason such blends may be offered is to lower the potential impact of sales commissions on the economics of the policy, because commission rates are different on the permanent portion versus the term portion.

Indeed, at least one carrier illustrates its age 45 male/preferred Universal Life with a premium of $9,217 for the generic Universal Life policy, and $7,575 for a term-blended version. In theory, the only difference in cost is the amount of the funding premium. However, when assessed with a probability analysis, it appears that the term-blended variety is more dependent on the ability of the insurance company to maintain its projection of relatively low term rates for the next 30-60 years. If the insurer is not able to do so, the liability is the policy owner’s, not the insurance company’s.

Premium Financing

Premium financing for large policies has been introduced in the last several years and involves securing an independent source of borrowable funds to pay life insurance premiums. Special variations of Universal Life policies are used in which the death benefit can be defined as a specified amount plus the amount needed to repay the lender both principal and interest. Because the concept was introduced during a time in which interest rates have been historically low, there is not enough experience to suggest what could happen to such plans if interest rates spike or invert. Premium financing plans work best when the policy owner has sufficient resources to payoff the loans and resume premium payments should some external economic event otherwise begin deteriorating the plan. Premium financing should never be used for long-term or lifetime needs of life insurance in order for the policy owner to afford the policy premiums. In the last 25 years, the yields on 10-year Treasury bonds have ranged from 14.6 percent in early 1982 to as low as 3.75 percent in March 2003.