Universal life insurance is a versatile option for those seeking lifelong coverage with added flexibility. This type of policy allows policyholders to adjust premium payments and death benefits, making it an attractive choice for individuals with varying financial situations. However, it's essential to understand the complexities and potential risks associated with universal life insurance before making a decision.
One of the key advantages of universal life insurance is its potential for tax-deferred growth. As the cash value component of the policy grows over time, policyholders can benefit from tax-free accumulation. This feature can be particularly appealing for individuals looking to supplement their retirement savings or create a tax-efficient legacy for their beneficiaries. However, it's crucial to consult with a tax professional to fully understand the implications and potential benefits of this aspect of universal life insurance.
How does universal life insurance work? Universal life insurance, often known as adjustable life insurance, is differentiated by its flexibility to change premium payments. This is a useful feature if your cash flow is variable. You can also change your death benefit amount. This means you can reduce your death benefit as your need for life insurance lowers over time. Alternatively, you may be able to increase your death benefit amount, but this will most certainly need further underwriting (questions about your health).
Universal life insurance can be kept in force for the rest of your life (provided you make the premium payments). It often includes a cash value component. You can withdraw cash value or take out a policy loan. If you surrender a universal life insurance policy, the coverage terminates and you receive the cash value minus any surrender charges.
It's worth noting that the flexibility of universal life insurance comes with increased responsibility for the policyholder. Unlike traditional whole life insurance, where premiums and benefits are typically fixed, universal life insurance requires more active management. Policyholders must carefully monitor their policy's performance, especially in the case of indexed or variable universal life insurance, where the cash value is tied to market performance. This hands-on approach can be beneficial for those who want more control over their policy, but it also means that policyholders need to be more financially savvy and willing to adjust their strategy as needed.
Benefits of Universal Life Insurance: It can be less expensive than whole life insurance because it does not provide the same guarantees. You can change the premium payment amounts and amend the death benefit amount within specific limits. Universal life insurance policies include a cash value component, albeit some have a low cash value. If you accumulate monetary value, you can withdraw it or borrow against it.
The disadvantages of universal life insurance It can be difficult to understand because there are several sorts with quite diverse characteristics. Not all universal life insurance policies ensure that you will obtain monetary value. Policy loans and withdrawals diminish your cash value and may cause your policy to lapse without additional premium payments. Variable universal life insurance requires active management due to the underlying subaccounts.
Another important consideration when evaluating universal life insurance is the impact of interest rates on policy performance. In recent years, persistently low interest rates have posed challenges for some universal life insurance policies, particularly those issued in the 1980s and 1990s when interest rates were higher. Lower-than-expected returns on the cash value component can lead to the need for higher premium payments to keep the policy in force. Prospective policyholders should carefully review the policy's guaranteed minimum interest rate and consider how different interest rate scenarios might affect their policy's long-term viability.
Guaranteed Universal Life Insurance A guaranteed universal life (GUL) insurance policy provides a death benefit and fixed premium payments that do not alter over time. You'll typically choose an age at which the coverage will expire (such as 90, 95, 100, 105, 110, or 121). Choosing a higher age raises the premium. Guaranteed universal life insurance often has low cash value and is the most affordable type of universal life insurance available. You are paying for lifetime coverage, not the prospect for big cash value.
GUL is sometimes known as "no-lapse guarantee universal life insurance." This is to solve recent issues in which traditional, non-guaranteed universal life insurance plans lapsed due to insufficient cash value to satisfy policy fees and insurance costs. Some consumers who wished to keep their insurance had to pay unexpectedly high premiums. Newer no-lapse policies promise to remain in force. However, there is a catch: if you make a late or missed payment, your policy will most certainly be terminated. There is usually minimal cash value, thus there will be no money to take away. The insurance provider will keep the premiums you have paid.
While universal life insurance offers many benefits, it's important to consider how it fits into your overall financial plan. For some individuals, a combination of term life insurance and separate investments might be more suitable and cost-effective. Others may find that the flexibility and potential for cash value growth in universal life insurance aligns well with their long-term financial goals. As with any major financial decision, it's crucial to thoroughly assess your needs, risk tolerance, and financial objectives before committing to a universal life insurance policy.
Who can benefit from a Guaranteed Universal Life Insurance policy?
Guaranteed universal insurance can be a decent option for someone who wants lifelong coverage and isn't concerned with the "investment" component of cash value. A GUL policy, unlike other types of universal life insurance, does not allow for flexible premium payments or death benefit amounts.
Indexed Universal Life Insurance
Indexed universal life insurance (IUL) provides lifelong coverage with flexible death benefits and premiums. If your requirements or budget change, you may be able to adjust your death benefit and payments, subject to certain limitations. The cash value component of an IUL is linked to a stock market index, such as the Nasdaq-100, the S&P 500, or a combination of indices. You can also choose a fixed-interest investment. When you pay premiums, a portion of the money goes to (possibly hefty) policy fees and costs, while the rest goes to cash value.
It's crucial to recognize the limits of your prospective investing gains. Indexed universal life insurance policies have participation rates. The participation rate is a fraction of the index gains that your cash value will get. For example, if your index increased by 10% and you had a 50% participation rate, you would gain 5%. Gains are frequently capped, which means you can only gain a certain amount no matter how great the index performs. If your index falls, an IUL policy will still provide a "floor" that ensures a minimum return rate, which might be 0%. However, if policy charges and expenses consume all of your cash worth, you may lose it entirely.
Having an IUL policy does not imply that your money is truly invested in the index. In actuality, insurers invest primarily in bonds. So the index is simply a barometer for calculating cash value gains and losses. Furthermore, any dividends that you would have received if you had invested directly in the index will not be factored into your gains.
Despite its complexities, indexed universal life insurance remains a popular policy. This could be largely owing to consultants directing clients toward these policies. If you're thinking of buying indexed universal life, make sure you understand what you're getting.
In July 2020, the Center for Economic Justice published a warning that consumers should not purchase indexed universal life insurance. The consumer advocacy group cites misleading and dishonest IUL sales practices. Consumers should avoid IULs since the insurers and agents who offer them have no obligation to act in the consumer's best interests. In a statement, Birny Birnbaum, director of the Center for Economic Justice, stated that combining hugely complicated products designed to juice images with opaque and unaccountable features is a prescription for future financial disaster.
Advisors are selling IUL may promote policies based on the rosy views depicted in policy drawings. Illustrations frequently focus on non-guaranteed insurance elements, such as cash value gains and loans against cash value that appear to be cost-free. However, non-guaranteed aspects of the policy are only forecasts that may never come to fruition. Policyholders may have to pay significantly more in premiums than expected to maintain a policy in force. Examine the guaranteed portions of a policy depiction and ask yourself if you're okay with it being the reality.
One method to gain a better perspective on a policy is to request that your adviser or agent order a Veralytic assessment on the product's suitability for you. Veralytic is a life insurance analytics organization that assesses the quality of cash value life insurance products and the companies who provide them.
Who can benefit from an Indexed Universal Life Insurance Policy?
Someone who wants the freedom to adjust their death benefit and premiums and is willing to take on additional investment risk may find an IUL policy interesting.
Variable Universal Life Insurance
Variable universal life (VUL) insurance also allows you to adjust premium payments and death benefit amounts within certain limits. You'll need to actively manage this type of insurance because you'll be selecting sub-accounts for your cash value investments. You may be able to include a fixed interest rate option for cash value in your investment portfolio. Variable universal life insurance provides you with the possibility for good cash value returns (if you invest correctly) as well as some control over your assets. However, if your investment selections fail, your cash value may plummet. Furthermore, these policies typically have greater fees than conventional universal life insurance and are often much more complex.
It's important to note that the regulatory landscape for universal life insurance, particularly indexed and variable products, is evolving. In recent years, there has been increased scrutiny from state insurance regulators and consumer advocacy groups regarding the marketing and sale of these complex products. Some states have implemented or are considering new regulations to enhance consumer protections, such as requiring more transparent disclosures about policy costs, risks, and potential returns. As the regulatory environment continues to shift, prospective policyholders should stay informed about any new requirements or protections that may affect their decision-making process.
Who can benefit from a Variable Universal Life Insurance policy?
VUL policies may appeal to people who desire to actively choose the sub-accounts for the policy's cash value. A variable universal life insurance policy is not suitable for those seeking a passive investment or who are risk averse.
Who Should Consider Universal Life Insurance?
Consider universal life insurance if you want to be able to change your premium payment amounts (within certain limits). Furthermore, life insurance customers who want the possibility of increasing cash value by more than a tiny fixed proportion may investigate several types of universal life insurance. Both indexed and variable universal life insurance have the potential to increase cash value accumulation—provided the underlying investments perform well.
Alternative Types of Life Insurance
Cash accumulation UL: A universal life insurance policy that is specifically designed to generate cash value quickly in the early stages.
Current assumption UL: A standard UL policy is intended to provide coverage at a cheap cost because the death benefit is not guaranteed. The "crediting rate" supplied by the insurance, which can alter, determines how much your cash worth grows. You may be able to change the timing or amount of your payments, or the death benefit, but you must ensure that your policy account has enough funds to meet the policy's fees, insurance costs, and any loans or withdrawals you've made. If it doesn't, the policy may lapse. These plans have lately come under attention when several policyholders received substantial, unexpected premium increases when their cash value fell below the minimum limits.
Whole life insurance: Because of the guarantees included in the policy, whole life insurance is typically the most expensive way to purchase life insurance. Premiums are guaranteed not to fluctuate, and the cash value has a minimum guaranteed rate of return.
Term life insurance: Term life insurance has a fixed premium for a specific time period, such as 5, 10, 15, 20, 25, or 30 years. It lacks a cash value component and, unlike universal life insurance, does not allow you to change premium payments. However, it is the cheapest way to purchase life insurance.
