Universal Life Insurance - Part 1

Short-term investments for long-term plans?

As interest rates skyrocketed in the late 1970s and early 1980s, money-market mutual funds were born. The public demanded an opportunity to participate in the higher yields of the day, and the mutual fund industry responded. As interest rates went up, the return on old, low-interest-rate, long-term bond and mortgage portfolios of whole life insurance contracts looked worse and worse. Money moved out of insurance policies and into money market accounts.

In 1979 the Federal Trade Commission released its report that was critical of the investment merits of life insurance. People in life insurance and people in long-term bond mutual funds  no one likes investments in long-term bonds when interest rates are rapidly increasing-the market value of those bonds deteriorates.

The life insurance market demanded a response, and the appropriate vehicle, a money-market mutual fund, was there to provide the investment du jour. The market-driven insurance industry was ready to offer short-term money-market investments within their insurance policies instead of the long-term bonds and mortgages of whole life.

It is interesting to note that it took a life insurance company executive, John Watts, working with a brokerage industry firm, E. F. Hutton, to get universal life into the marketplace. Watts was able to help brokers understand universal life as an investment alternative for people who were paying income taxes on their interest earnings. Universal life could provide tax-deferred interest earnings since those earnings occurred within the insurance contract, and under the proper circumstances, policy owners could even use those earnings without paying income taxes. Income tax­free earnings and the possibility of income tax-free spending rapidly caught on.