According to some, universal life insurance (UL) is either the greatest solution to all of your financial needs, or it’s the biggest ripoff since Bernie Madoff.
Universal Life Insurance Overview
The reality with universal life insurance is that while it does have tremendous potential, there are many pitfalls to look out for.
Universal life insurance (UL) is a type of life insurance that when properly designed has the potential to provide lifetime guarantees or cash value accumulation to meet future needs.
With UL policies, your choices are typically a cash value accumulation policy or a guaranteed universal life insurance (GUL) policy.
The problems for consumers almost always occur with the cash value types of policies as we’ll explain in this article.
Guaranteed Universal Life Insurance
If you want a policy that is guaranteed and will last as long as you live, a guaranteed universal life insurance (GUL) policy is a great choice.
While we’re big believers in term life insurance, there are times when a GUL may be a better option for you.
With GUL, the premium you pay and the death benefit you receive are guaranteed to age 120 with most companies. As long as you pay your premiums on time, you won’t outlive this type of policy.
The appeal of a GUL policy is that they are simple to understand and you know what you are getting from day 1. Guaranteed universal life insurance policies are the most comparable to a term life insurance policy.
The disadvantage of a GUL happens if you decide that you no longer want life insurance in the future. Unlike a cash value policy where you may get money back when you cancel, a GUL policy typically has little to no cash value when canceling.
When is GUL a better option than term life insurance?
As you get older, the cost of term life insurance becomes more expensive to buy. In some cases you may be able to buy a GUL for a comparable price.
The same holds true if you have an existing term policy that is convertible. If you’ve developed health problems that would make new insurance costly, converting your existing term policy may be a better option…it’s worth a review at the very least.
Cash Value Accumulation Universal Life Insurance
With a cash value (CV) universal life policy, the goal is to provide you with a cash value equal to or more than your death benefit (endowment) when you reach age 100.
The concept with cash value accumulation policies is to build up enough cash value, and then to access that cash value as a way to supplement your retirement in later years.
The appeal is that you may access your cash value on a tax-deferred basis by using policy loans. As long as the policy remains active, you may avoid paying taxes on any gains in the policy.
The problem with most cash value life insurance policies is that they rarely perform as illustrated when you bought your policy. This is mainly due to the assumptions built into the illustrations by your insurance company and agent.
Index Universal Life Insurance
Index universal life insurance (IUL) is just another type of cash value accumulation policy.
In our current environment of low-interest rates, traditional cash value policies have lost some appeal as many are illustrating with 2-4% non-guaranteed interest rates.
Index UL policies, on the other hand, are illustrated using non-guaranteed interest rates in the 5-6% range that are tied to the performance of an index such as the S&P 500.
If ever there was a double-edged sword in life insurance, index universal life insurance is it. While the potential cash value accumulation is appealing, index policies are complicated to understand.
The Bottom Line with Cash Value Life Insurance
Whether you buy a traditional or index policy, you have to commit to paying for this type of policy for many years (think at least 20) before the benefits become available to you.
It’s important that you request “inforce illustrations” each year. This is different than the annual statement the company will send you.
The importance of the inforce illustration is to show you how the policy is performing vs how it was originally illustrated…if under performing you may need to pay additional premiums now to avoid big problems in the future.
Universal Life Insurance Illustrations – What to look for before you buy
The illustration is the most important document for you to review before purchasing universal life insurance.
Here’s a list of things to consider:
- Did you receive the full illustration with all numbered pages?
- Is your age listed correctly on the illustration?
- What medical underwriting rate class is being used?
- Does the illustration require that you pay premiums every year?
- What is the non-guaranteed interest rate?
- What is the guaranteed interest rate?
- How long does the guaranteed death benefit last for?
- How long does the non-guaranteed death benefit last for?
- What is the cash value in year 10, 20, 30, at retirement age and at age 100?
- Are there surrender charges? How much and how long do they last for?
- Are you planning to access the cash value in the future through policy loans?
- Does the policy have an over-loan protection feature?
- Did you receive an illustration showing these future withdrawals?
- Are you considering any of the riders that are available?
A standard illustration is typically 9-15 pages long, while some index universal life insurance illustrations may be 30-40 pages long.
Something to remember is that if your approval comes back more or less favorable than initially illustrated, new illustrations need to be shown to you as the policy will perform differently than originally illustrated.
With any cash universal life insurance policy, they need a lot of time to build up cash value to provide the promised benefits later on.
For older insureds and those with high-risk health issues, it is even more difficult to make the ul policy work due to the cost of insurance charges of these policies.
Universal Life Insurance Summary
Universal life insurance may be a great option to meet your insurance needs, but do not buy any policy unless you fully understand how it works.
With our life insurance service, we research the best life insurance companies for your universal life insurance needs. We’ll provide you with comparisons and show you the options that meet your needs.
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