Universal Life Offers Flexibility for Life Changes
According to LIMRA, an insurance research association, premium for universal life (UL) policies in the U.S. grew 43 percent during the first six months of 2011. The number of policies in force grew by 14 percent during the same quarter. What accounts for the appeal of UL policies?
Universal life, a form of whole or “permanent” life insurance, has become the most popular type of permanent life insurance. Like a traditional whole life policy, it pays a death benefit when the insured dies, no matter how long he or she lives. Some universal life products will pay benefits beyond age 120—something to consider with today’s longer lifespans. And like a traditional whole life policy, it builds cash value. This cash value grows on a tax-deferred basis, allowing you to build a nest egg for later in life.
With any whole life policy, once you have built up a cash value, you can withdraw or borrow it. This gives you a low-cost source of loans, even if your credit record isn’t spotless. The insurer uses the policy’s death benefit as collateral for the loan, so if you die before repaying, the insurer will reduce the death benefit that goes to your beneficiary by the amount of the outstanding loan. If you choose to take a withdrawal, you can usually withdraw up to 90 percent of the cash value, and you will not incur income taxes. You can also use the policy’s cash value to pay premiums to keep your policy in force if you can’t afford to pay them otherwise.
In addition to these features, universal life offers flexibility that whole life policies can’t match. All whole life policies have three parts: premium, death benefit and cash value. With traditional whole life, all these components are fixed. You select the death benefit and the insurer determines the premiums you’ll pay and how your cash value will accumulate.
With a universal life policy, the insurer treats the three elements of the policy separately. The insurer determines your premium based on the death benefit you initially select, assuming you’ll pay them on a regular basis, typically monthly, quarterly or yearly. Whenever you make a premium payment, the insurer allocates a portion of the payment to the cost of providing your life insurance coverage and covering administrative expenses; the rest is credited toward your cash value account. However, you do not have to pay the entire level premium due each payment period. You can pay a larger or smaller amount, and more or less frequently, subject to minimum and maximum amounts that your policy may state. As long as the value of your cash value account covers the cost of your death benefit, the policy will remain in force.
Death benefits are also flexible under a universal life policy. When your policy is issued, it will state a specific death benefit, but you can increase or decrease that amount as your financial situation changes over the years. (An increase may require medical underwriting, meaning you will need a new medical exam.)
Most policies allow you to choose whether your beneficiary will receive a level benefit, or a minimum guaranteed amount, when you die, or the policy’s face amount plus the cash value of the policy. The second option will cost more.
Your cash value under a universal life policy will accumulate interest according to a schedule determined by the insurer. Often, universal life policies are pegged to a stock index or other interest rate index.
Variable universal life insurance (VUL) gives you control over the cash value portion of your policy as well. With VUL, you can choose where you want to invest your policy’s cash value—generally from a selection of mutual funds. This allows you to take advantage of long-term increases in the stock market…but also means you assume the risks inherent in investing. Because VUL involves securities investments, the SEC and federal securities laws regulate VUL products. To sell VUL, an agent must have a Series 6 or 7 license in addition to a life insurance license.
Many American families lack adequate life insurance. If you haven’t invested enough in life insurance protection because you are unsure what type or how much to buy, a professional insurance agent can help you evaluate your financial and family situation and tolerance for risk and come up with an appropriate insurance plan. For more information, please contact us.
In 2010, half of U.S. households (58 million) said they needed more life insurance coverage. Currently, 48 million middle-income households lack sufficient life insurance coverage, reported LIMRA. The independent life insurance research organization found three significant factors that caused consumers to delay buying coverage:
- Competing priorities: The top two reasons consumers delay buying life insurance are because they have other financial priorities, or because they think they can’t afford it.
- Lack of knowledge: Among those likely to buy in the next year, at least half are stalling because they don’t know how much to buy, what type to buy, or worry about making the wrong decision. In fact, 44 percent who say they need life insurance say they haven’t bought because they don’t know how much to buy.
- Procrastination: Fifty-four percent of those likely to buy life insurance in the next year say they just “haven’t gotten around to it.”
Nobody who has experienced the loss of a breadwinner ever regrets their decision to buy life insurance. We can help you determine how much and what type to buy. For more information, please contact us.
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