Universal Life Insurance: A Definitive Guide
Everything you should know about Universal Life Insurance
Juggling life especially if you have financial constraints can be a tough job, especially if you don’t have a plan.
Many people try to make ends meet by working day and night to provide a peaceful life to their families, but this is only until they’re alive. This is why most people want to get themselves insured so that the death benefit is later on cashed by their families.
What is Universal Life Insurance?
Universal Life (UL) Insurance is a kind of life insurance that comes with a savings element and an investment element too. The best part about this is that it is flexible premium universal life insurance and adjustable life coverage; if you keep paying premiums for the duration of the policy, your beneficiaries will receive a death benefit when you die, and there is accumulated cash value as well.
Cost of premiums in universal life insurance are relatively low; and you can also adjust the death benefit!
How does Universal Life Insurance work?
There are two major components when it comes to life insurance premiums:
- Cost of Insurance (COI)
- Cash Value (saving component)
COI is the amount of premiums that need to be paid regularly to keep the policy alive. This is a combined rate of mortality, policy fee and other miscellaneous charges to keep the policy working. This amount is greatly affected by the age of the policyholder and also other factors such as their medical condition and amount covered by the insurance
Just like permanent life insurance, there is a saving component known as cash value in universal life insurance. This universal life insurance cash value earns interest depending upon the current market rate and is accumulated. In some cases, the policyholder may also be able to use a portion of his cash value which will not affect his death benefit.
Can you cash out a Universal Life Insurance Policy?
Of course you can. There is an accumulated cash value component in UL and whole life policies which allow policyholders to borrow and use that money at any point in time.
You can easily borrow that money or withdraw it against your cash value account, which is still considered a better option than surrendering your policy altogether.
If you withdraw a certain portion of your cash value, it isn’t taxable! But, there is a fair chance that this withdrawal may lead to a reduction in your overall death benefit. So if your main goal for the policy was to claim a full death benefit for your family, withdrawing a certain amount may mess up with that plan.
The death protection part is the insurance component of any universal life insurance policy, which means it pays a guaranteed death benefit and an accumulated cash value- which is literally a major feature of this type of life insurance.
The death protection component of universal life insurance is always annually renewable!
Universal Life Insurance Pros and Cons
What are the advantages of Universal Life Insurance?
Universal life insurance plans provide flexible policy options as compared to whole life. Moreover, there are interest gains which could also result in getting higher payouts at the end. There is also a higher chance of increasing cash value of the policy.
Universal life insurance is a good idea for people who are looking for an easier and less complicated insurance option than whole life insurance, and unlike term life insurance, this has lifetime coverage for the insured.
Moreover, it is easier to borrow against the accumulated cash value of the universal life insurance policy and there are also no tax implications if you do this.
What are the disadvantages of Universal Life Insurance?
Since there is a lot of flexibility involved in a UL insurance policy, this also comes with a lot of sensitivity involved in the process. If you’re not careful, your policy could lapse if you’re unable to pay higher premiums.
Yes, cash value can be used to reduce premiums, however, you can be out of cash value if the interest rates on the cash value decrease. This could in turn actually lapse your UL policy.
There is definite uncertainty when it comes to return gains, you might not get what you expect when you signed up for the policy- these can decrease! This is a major reason why UL is a bad idea.
Universal life insurance vs term is one other reason why you should opt for the latter- term life is relatively simpler and only gives a death benefit. So if your only goal is to secure money for your family you should definitely go for universal term life insurance and not consider UL as an option.
Types of Universal Life Insurance
There are mainly four basic types of universal life insurance that you must know:
Indexed Universal Life Insurance:
What is indexed universal life insurance?
An indexed UL insurance is a policy type which is attached with how well the market grows; here the interest rate doesn’t grow at a fixed rate, rather according to the market indexes like the S&P 500. This fixed indexed universal life insurance feature means that when the market crashes or has a shutdown, you won’t lose your money like you would have if you had invested in a direct index fund.
An equity indexed universal life insurance is a combination of permanent life insurance and a cash value which is bound to increase with market returns. This allows policyholders to place their cash value in an equity indexed account which is then related to the market returns.
This type of insurance gives you fast interest gains but the process gets complicated very quickly. Transamerica Indexed Universal Life Insurance gives a wide range of available policies to their clients to help them choose the best universal life insurance plan.
Indexed Universal Life Calculator
A good indexed universal life calculator can not only calculate your premium value but also an estimate of the cash value sum as well. Unlike other insurance calculators, an indexed UL calculator does not ask for any personal information EXCEPT age and whether you have used tobacco during the last year or not (because smokers pay higher premiums due to greater risk of death).
There are 4 time intervals associated with the base policy: 10, 20, 65 and 75 years. The projection of cash value is determined on the basis of several factors such as age at the time of application, accredited interest rates and target death benefit amount.
Indexed UL insurance for retirement is also usually considered as a good idea; the advantage of this is that a negative market index will not affect the policy.
Variable Universal Life Insurance
A common question:
What is variable universal life insurance?
Variable universal life (VUL) insurance protection is a sort of a constant insurance strategy that takes into account the money part to be contributed to create more cash value. VUL protection strategies are based on temporary life coverage arrangements yet have a different sub account that puts the money in the market.
Subsequently, the gain from the money is not guaranteed then, each year.
VUL protection strategies will have a maximum cap and a floor (normally 0%) on the profits that the investment part gets. By keeping the death benefit component and savings component separate, the risk of investment in VUL insurance is transferred to the insured.
Variable Universal Life Insurance Pros and Cons
- A guaranteed death benefit
- Market fluctuation does NOT negatively affect payout
- Potential to earn greater returns
- Cash value can be rightfully invested- gives you control over this
- You are able to control your individual risk tolerance
- Does not offer guarantees
- Decrease in cash value due to low performing investment options
- A more complicated form of insurance
- Account could suffer losses if premiums rise
Group Universal Life Insurance
A group universal life insurance policy, typically referred to as GULP is usually offered to employees of an organization. Just like the name suggests, it is a group life insurance that works like a concept of bulk buying.
Life insurance for a group is relatively cheaper than buying for each individual, so many companies prefer to buy group universal life insurance for their employees.
A GULP typically features a savings component, where employees have an option to either pay only insurance premium cost or make other payments to add to their cash value which they can later borrow as withdrawals or universal life insurance loans.
Since the interest rate is fixed, the cash value grows at a constant rate over time. And employees can withdraw the cash value no matter how old they are and whenever they want to. Usually the cash value grows after a year, but before that it has very slow growth.
A GULP is also eligible to receive dividends but it isn’t guaranteed. Depending upon the regulations set by an organization’s board of directors and the amount of dividend each employee insured could receive, they could either use it as raw cash, buy more insurance and even use it to reduce their universal life insurance premiums.
The most important benefit of a GULP is that the person is insured regardless of his job status; they can leave the job or work somewhere else or even be retired and this policy will stay intact, unaffected. Moreover, there is an added benefit to employees who are diagnosed with any terminal illness during the time of the coverage, and the coverage is completely waived off if employees become totally disabled in an unfortunate circumstance. Metlife Group Universal Life Insurance is a company that specializes in GULP policies.
No Lapse Universal Life Insurance
Other types of life insurance policies automatically expire when the policyholder’s funds outweigh the universal life insurance cost. But if you have a no-lapse feature attached to your policy, your life insurance stays intact for your whole life, provided that the premiums are promptly paid.
This policy is different from other insurance policies due to little or no cash accumulation- one reason why a no-lapse universal life insurance is super cheap.
Insurance companies do NOT generally recommend this kind of policy to its clients because there is absolutely no accumulated cash value, so if that isn’t your goal of being insured in the first place, don’t go for it.
Universal Life Insurance vs Term
A term life insurance is a type of life insurance that only has a death benefit. The insurance amount is only transferred to the beneficiaries of a policyholder upon their death, which means no sum can be extracted during their life.
With only a guaranteed death benefit that term life insurance offers, many people choose term life insurance plans who just want to secure the life of their families after they’re gone so that they don’t face any financial hardships.
Universal life insurance policy on the other hand has an investment and savings component as discussed above, which means along with super adjustable and affordable premiums you can also reinvest the money of the cash value during your life.
Both policies have very low amounts of premiums as compared to whole life. Talking about universal life insurance vs whole life, it is evident that UL is a little less complicated and cheaper premium wise than whole life insurance. This is one reason people prefer to go for the former option.
What is a Corridor in relation to a Universal Life Insurance Policy?
Corridor is an idea in universal life insurance policy where the measure of protection assurance over the accumulated cash value has an incentive to qualify as extra security for tax purposes.
The face value in the death benefit is likely to increase only if the cash value sum surpasses the levels permitted by the IRS. This expansion in face value is called the corridor.
This corridor between the face value and cash value must be kept up consistently.
Universal Life Insurance Companies
There are many universal life insurance companies and some of which are also known as the best indexed universal life insurance companies as well. Here is a list:
- NorthAmerican Company
- AIG universal life insurance policy
- Trustmark universal life insurance
- Allstate universal life insurance
- Midland universal life insurance
- State Farm universal life insurance
- USAA universal life insurance
Universal Life Insurance Quotes
These are universal life insurance rates by age extracted online, courtesy of SmartAsset.
Assuming you’re a healthy individual looking for a universal life insurance policy of about $250,000 worth of coverage, these are the estimated rates that you may want to consider.
|25-35||$63 – $103||$54 – $83|
|35-45||$103 – $150||$83 – $130
|45-55||$150 – $244||$130 – $207|
|55-65||$244 – $427||$207 – $337|
A more accurate evaluation can be made via online calculators or better yet, asking an insurance company to give you exact rates.
Universal life insurance policy is the one with two components: savings and investment. Apart from having a guaranteed death benefit, you have accumulated cash that you can borrow from to pay off unexpected expenses during your life, or even reinvest that money! With flexible premiums and adjustable life coverage, this is an easy and less complicated form of life insurance that most people prefer.
The trick is to keep paying premiums on time to enjoy the benefits of universal life insurance.