Birth of Universal Insurance and Variable Insurance

• Prior to the 1980s, insurers sold primarily fixed-premium term and whole-life insurance to individual policyholders.
• With competitive pressures significantly reducing sales of whole-life products, insurers had little choice but to innovate in the 1980s to meet demand.
• They did so by redesigning whole-life into a hybrid product that included a traditional income protection component and a long-term investment component using market-based yields (and thus were interest rate–sensitive).
• The first of these new complex products, universal life insurance, revolutionized the industry.
• Its popularity was rooted in its flexibility.
• Universal life is permanent insurance combining term insurance with a cash account earning tax-deferred interest.
• Under most contracts, premiums and/or death benefits can fluctuate (within the contract’s bounds) with policyholder preference.
• The policy stays in effect as long as the cash value is sufficient to cover premiums.
• Additionally, the insurer usually guarantees the cash value will not fall below a minimum value.
• The cash value of the policy can also be used to pay the term insurance portion of the policy.
• Like whole-life, loans can be taken against the cash value of the policy.
• In general, products with interest-crediting rates set by insurers are retained on the general account.
• Thus, the reserves of most universal life policies are general
  account liabilities.
• An insurer’s profit comes in part from the spread between its return on general account assets and its set crediting rate paid out to the policyholder.
• Mortality and expense margins also contribute to an insurer’s bottom line.

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2013 - State of the Life Insurance Industry - NAIC