Understanding Universal Life Insurance – Forbes Advisor

How does universal life insurance policy work

Video How does universal life insurance policy work

If you’re looking for a life insurance policy with coverage for life, universal life insurance might be the right option for you. Universal life insurance can offer a guaranteed death benefit, allows you to build on the cash value of the policy, and can give you the flexibility to adjust your premium payments and death benefits.

We’ll go over what you need to know about universal life insurance and break down the different types of universal life policies. Make sure you’re working with a trusted financial advisor or experienced life insurance agent when considering these policies. they can be complex.

how does universal life insurance work?

Universal life insurance is a type of permanent life insurance. Unlike term life insurance, which is meant for a specific period, like 20 years, universal life insurance is in effect for the rest of your life (unless you stop paying the premium).

Some forms of universal life insurance also offer a cash value component. you can take money out of the cash value through a withdrawal or loan. When you die, the insurance company will reduce the death benefit payment to your beneficiaries by the amount of outstanding withdrawals or loans. but for some buyers, accessing the cash value is more important than paying the beneficiaries in full later.

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There are a few types of universal life insurance policies and it’s crucial to understand what you’re buying. their costs and features are quite different.

Generally, guaranteed universal life insurance has the lowest risk, while variable universal life insurance has the highest risk because the cash value is tied to stocks and bonds. on the other hand, you can potentially accumulate more cash value with index universal life insurance and variable universal life insurance than with guaranteed universal life insurance.

If you’re considering a universal life insurance policy, think about how much risk you’re willing to take. don’t be fooled by promises of big investment returns that might not come true. be sure to look at the guaranteed portions in the policy illustration and not just the optimistic projections.

comparison: types of universal life insurance

Overall, universal life insurance policies have the largest market share based on premium, according to Q3 2021 figures from limra, an industry-funded financial services research company. indexed universal life and fixed universal life account for 34% of life insurance premiums. variable universe life makes up another 13%.

guaranteed universal life insurance

A guaranteed universal life insurance (GUL) policy offers a death benefit and premium payments that will not change over time.

You select an age at which the policy ends (for example, 90, 95, 100, 105, 110 or 121). choosing a higher age will increase the premium.

Guaranteed universal life insurance typically has little or no cash value and is typically the cheapest type of universal life insurance you can buy. you’re paying for lifetime coverage, similar to a whole life policy.

gul is sometimes called “no-forfeiture universal life insurance.” This is to address recent issues where traditional unsecured universal life insurance policies lapsed because the cash value was unable to cover policy expenses and the cost of insurance. Some policyholders who wanted to keep their insurance in force suddenly found themselves paying much higher premiums than they ever expected.

These new policies without expiration promise to remain in force. But there’s a catch: If you make a late payment or miss one, the policy will likely end. since there is usually no cash value, there will be no money to take away. the insurance company will keep the premiums you paid.

who can benefit from a guaranteed universal life insurance policy?

Guaranteed Universal Insurance insurance may be a good option for someone who is primarily looking for lifetime coverage and is less concerned with the “investment” component of the cash value. Unlike other types of universal life insurance, a GUL policy does not offer flexibility with premium payments or the amount of the death benefit.

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what if I no longer want my guaranteed universal life insurance policy?

Financial situations can change over the years and you may find that you no longer want the gul policy. There may be little cash value in a gul policy, so there may be little money to take if you surrender the policy.

but some companies offer another way out: in some cases, an additional return of premium clause can be added when purchasing the policy. these riders give you the option of getting a full or partial refund of the premiums you paid, but only at certain points after you purchase the policy.

Within a period of time such as 60 days in specific years after you purchase the policy, such as 15, 20 or 25 years, you can cancel the policy and get some or all of your premiums back. the percentage that is returned to you may be based on the policy year, the face amount of the policy, and/or the age at which you purchased the policy, depending on the company.

here too, if you’re interested in this option, make sure it’s built into the gul policy before you buy it.

average cost of guaranteed universal life insurance

The averages below are examples of annual rates for a $1 million healthy non-smoker gules policy, guaranteed to be over 100 years old.

indexed universal life insurance

Indexed Universal Life (IUL) offers lifetime coverage and may have some flexibility with the death benefit and premiums. You may be able to adjust your death benefit and payments within certain limits if your needs or budget change.

There is a cash value component to IUL which is often linked to a stock index, such as the Nasdaq-100, S&P 500, or a combination of indices. you may also have the option of a fixed interest investment.

When you pay premiums, some of the money goes toward (potentially high) policy fees and charges, and the rest goes toward cash value.

It is important to understand the limits of the possible returns on your investment. Indexed universal life insurance policies have participation rates and caps. the participation fee is a portion of the index earnings that will actually receive its cash value. For example, if your index is up 10% and you have a 50% participation rate, you will get a 5% advantage. Also, there is usually a cap, which is the maximum percentage you can get regardless of index performance.

If your index crashes, you will still have a “floor” that guarantees a minimum rate of return, which may be 0%. Still, it’s possible to lose all of your cash value if policy fees and expenses eat up your money.

having an iul policy does not mean that your money is actually invested in the index. in reality, insurers continue to invest primarily in bonds. therefore, the index is just a barometer for calculating cash value gains and losses. and the calculation of your earnings will not include any dividends that you might otherwise receive if you invested directly.

Despite its complexity, indexed universal life insurance is a popular product. that may be due in large part to advisors guiding clients to these policies.

If you’re considering purchasing indexed universal life insurance, make sure you understand what you’re buying. The Center for Economic Justice issued a warning in July 2020 that consumers should not purchase indexed universal life insurance. consumer advocacy group cites deceptive and misleading sales practices involving iul.

“consumers should avoid iul because insurers and agents selling the product are under no obligation to work in the best interest of the consumer. mix enormously complex products designed to illustrate illustrations with opaque and inexplicable features and you have a recipe for future financial disaster,” birny birnbaum, director of the center for economic justice, said in a statement.

Iul-selling advisors can promote policies based on the rosy images painted on policy illustrations. Illustrations often focus on non-guaranteed elements of the policy, such as cash value gains and cash value loans that appear to cost nothing.

But the unsecured portions of the policy are just that: projections that may never happen. policyholders could potentially shell out much more in premiums than they expected to keep a policy in force.

Be sure to examine the warranted parts of a policy illustration and ask yourself if you agree if that’s the reality.

One way to get a better perspective on a policy is to ask your advisor or agent to request a report from Veralytic on the suitability of the product for you. Veralytic is a life insurance research company that measures the qualities of cash value life insurance products and the companies that offer them.

who can benefit from indexed universal life insurance

Someone who wants the flexibility to make changes to a death benefit and premiums and is willing to take on more investment risk may find an iul policy attractive.

variable universal life insurance

Variable Universal Life Insurance (VUL) also allows you to vary premium payments and the amount of the death benefit, within certain limits. Typically, you’ll need to actively manage this type of policy because you’ll be selecting subaccounts for your cash value investments. You can also choose a fixed interest rate option for cash value.

With variable universal life insurance, you have the potential for good returns on your cash value (if you’ve invested wisely) and you have some level of control over your investments.

But your cash value could also plummet if investment options run out. Plus, these policies tend to have higher rates than other universal life policies and are often much more complex.

who can benefit from variable universal life insurance

A person who wants to play an active role in choosing subaccounts for the policy’s cash value may be attracted to vul policies. A variable universal life insurance policy would probably not be a good fit for someone who wants a passive investment or is risk averse.

other types of universal life insurance

  • cash accumulation ul: a universal life insurance policy designed specifically to build cash value quickly from the start.
  • current assumption ul : a traditional ul policy designed to offer low-cost coverage because the death benefit is not guaranteed. Your cash value grows based on the “credit rate” offered by the insurer, which can change the rate. You may be able to change the timing or amounts of your payments, or modify the death benefit, but you must make sure your policy account contains enough money to cover policy charges, the cost of insurance, and any loans or retirement you want. I have taken if you do not, the policy could expire. These policies have come under scrutiny recently, after some policyholders were hit with large, unexpected premium increases when their cash value fell below minimum requirements.

how to get money out of cash value

Generally, you have a few options when it comes to taking the cash value of a policy. Make sure you understand the policy rules for withdrawing cash value and all the financial implications of that decision.

  • Withdraw funds from your cash value: You can make a tax-free withdrawal from your policy. however, if you withdraw more cash value than the portion funded by your premium payments, any investment gains you earn are taxed as income. also, withdrawing the cash value will reduce your death benefit and your beneficiaries will receive less.
  • borrowing against your policy: you can generally borrow tax-free from the value cash from your policy if you die before the loan and interest are paid, the outstanding balance will be subtracted from your death benefit.
  • surrender the policy: if you decide that no longer want or need to live insurance, you can contact the insurer to redeem the policy. you will receive the cash value less any surrender charges.

add riders to universal life insurance policies

Like other life insurance policies, you can add riders to universal life policies. Life insurance riders are a way to add extra coverage or features, usually at an additional cost.

For example, an additional clause like m is a “waiver of premium” additional clause. If you become totally disabled and have this rider, the insurance company will waive additional premium payments.

Policies often automatically include an accelerated death benefit rider at no additional cost. allows you to take money from your own death benefit if you are diagnosed with a terminal illness. (Rules for when you can take advantage of the money vary by company.) Other common options are chronic illness riders and long-term care riders, which allow you to take money from the death benefit when you have certain health conditions.

medical exams for universal life insurance

Many universal life insurance sellers use “whole underwriting,” meaning they take the time to review your application, verify information, and request that you complete a life insurance medical exam.

The medical exam usually includes height, weight, blood pressure, and blood and urine samples. It is usually done by a paramedical professional hired by the insurance company and can be done at home.

There is a wide range of data about you available to insurers, which they can use in pricing policies. this includes data on consumer credit, your prescription drug history, your responses to previous individual health and life applications, and your motor vehicle registration. It’s also common for insurers to request your medical records.

who should consider universal life insurance?

If you want life insurance coverage that lasts your entire life, you might consider a universal life insurance policy. For example, universal life insurance can fund a trust to care for a child with special needs or other dependents after you’re gone.

You might also consider a universal life insurance policy if you have big long-term savings goals and need both an investment vehicle and life insurance, but only after you’ve maximized other savings options, such as retirement plans. retirement.

alternatives to universal life insurance

universal life is not the right choice for everyone’s situation. Other types of life insurance may be better, depending on the length of the policy and the guarantees you want.

whole life insurance: many guarantees at a high price

Like universal life insurance, whole life insurance gives you coverage for your entire life. also includes a cash value component.

The biggest difference between whole life insurance and universal life insurance is cost: Whole life insurance is generally the most expensive way to buy permanent life insurance because of the guarantees within the policy: guarantees that premiums will not change, the death benefit is guaranteed, and the cash value has a guaranteed minimum rate of return.

In addition, variable indexed universal life insurance can give you flexibility with payments and the amount of the death benefit after you purchase the policy.

Whole life insurance, on the other hand, guarantees that your premiums, cash value guaranteed rate of return, and death benefit will not change. whole life insurance is suitable for someone who likes predictability and is willing to pay for it.

Also, many whole life insurance policies pay dividends. They are like annual bonuses that mutuals pay to clients, although they are not guaranteed. you can use the dividends to pay premiums, add to your cash value, or just take the money.

term life: cheapest life insurance option

Term life insurance offers a level premium for a set period of time, such as 5, 10, 15, 20, 25, or 30 years. does not have a cash value component. but it is the cheapest way to buy life insurance. For example, you could buy a 20-year policy to cover the growing years and college time of young children. or a 30-year policy when you buy a house and take out a mortgage.

frequently asked questions (faqs)

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