Perhaps those of you with some insurance acumen or a Universal Life Insurance policy are puzzled by my not including Universal Life as one of the major types of life insurance. My decision, not arbitrary, is based on the design of universal life and the mechanics of how it works . . . and sometimes, doesn't work.

Because Universal Life is so popular, I am going to give this particular form of life insurance considerable attention.

Universal Life Insurance is not Whole Life, it is Term Insurance with something called a "side fund." Let me explain . . .

With Term Insurance, your cost is a function of the probability of mortality. Term Insurance becomes more costly as you get older because the probability of death increases with age.

Let's assume ten men, age 50, want to purchase life insurance with a $10 death benefit. Let's further assume, that the probability of death is ten percent - that is one of the men will die prior to reaching age 51.

If the insurance company collects $1.00 from each of the men, it will have sufficient funds to pay the $10.00 death benefit. Of course, the insurance company will collect more than $1.00 from each of the insureds in order to pay the expenses of conducting business and earn a profit.

With Universal Life, the premium is typically established at a level greater than the amount dictated by mortality tables. The extra funds are deposited in an interest bearing account and it is anticipated that the interest earned will be sufficient to pay the higher insurance costs during the policy's later years.

A truly inspired concept during the high-interest 80's, a concept not without problems in the low-interest 90's. You see, some "side funds" are not generating the monies necessary to meet those higher insurance costs associated with getting older. Policyowners have had their premiums increased - sometimes very substantially - and policies have been terminated.

So, imagine yourself at age 43. You have been notified that the Universal Life Insurance policy you purchased at 35 is in imminent danger of being terminated or requires substantially higher premiums. What if the new premium schedule is a "budget buster?"

You begin to look for insurance elsewhere and discover -

You're eight years older . . . higher premiums

As you are now being treated for hypertension, your premiums are because of the potentially greater mortality risk

Stuck between a "rock and a hard place" that Universal Life Insurance policy isn't as attractive as it appeared a few years ago. If you are shopping for Universal Life Insurance, you may want to give extra consideration to plans with long term guarantees.

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