Great tips on how to be a savvy universal life insurance shopper.

A general rule is: Don't base your decision only on a good looking printout. When comparing illustrations for various UL policies, the reality of assumptions the illustration is based on should be examined, keeping these points in mind:

• Some companies automatically deduct 2 % from every premium, in addition to the 2% premium tax they are obliged to deduct by law.

• Some companies do not immediately invest your deposit when they receive it; they wait until a certain amount is collected, reducing by this the time during which your money works for you.

• In some cases, the return credited to your investments within a policy will reflect the return of the S&P/TSE Composite Index, the S&P 500, other indices, or selected mutual funds.

• There are two basic kinds of these options: total return, including dividends, and simple price index, excluding dividends. While, e.g., the TSE 300 achieved an 11.3% annual total return between 1982 and 1996, the price index in the same period was just 7.5%. This size of difference means that $100 would grow to $292 in 10 years in the first case, and to $206 in the second.

• Management fees and expenses differ very much from one UL policy to the other.
In some cases, insurance charges are guaranteed only for a few years; even if there is a guaranteed charge, illustration printouts may use currently applied insurance charges that can be considerably less than the guaranteed charges.

• It is not enough to see illustrations with one single return assumption; the sensitivity and volatility of the whole projection are also important. Sometime, e.g., the selection of a certain assumption projects a nice picture that would be quite different with a just slightly lower assumed return, because this second return wouldn't trigger various bonuses. An even 10% annual growth produces quite different result than another one - during the same time period - where the annual average is the same 10%, but where this average results from a series of wildly fluctuating yearly returns.

• Similarly to the previous point, it is very informative to play a bit with numbers in the case of a UL policy where the insurance company promises to credit to the policy 90% of the positive return of a certain equity fund, while whenever the return is negative they would apply the 110% of that negative return. This +/- 10% may not seem considerable, or too unfair, ... until some actual calculation is made. The effect on the return is huge in fact.

• Some UL policies are the same 'participating' type as many of the more traditional whole life policies are; they pay 'dividends', that might sound very good. In reality, paying out 'dividends' of this kind are totally at the discretion of the insurance company, therefore such policies should be avoided. Life insurance policy dividend is a possible return of the premium paid in excess of what the company needs to provide the guaranteed benefit in the policy contract. Instead of sharing in the profit of the investment by the insurance company, it is rather the passing of the company's risk to the policyholders. Some companies keep huge amounts of surpluses they are obliged to credit to policyholders in reserve funds, instead of actually paying it out to them. This is a good buffer for them against higher than expected administrative and distribution costs.