Universal Life Insurance

Universal life insurance is a type of permanent insurance that provides both an investment savings feature, as well as premiums that are lower than whole life insurance but a little higher than term life insurance.  Most universal life insurance plans offer a flexible premium option, while others require a single lump-sum premium or scheduled fixed premiums.

The Basics

Universal life provides much more flexibility than whole life insurance.  In fact, policyholders have the capability of adjusting their premiums and death benefits.  Universal life insurance premiums are comprised of two key components – the cost of insurance (COI) plus the cash value (savings component).

The cost of insurance is the minimum amount of premium required to keep the policy in force.  COI includes a charge for policy administration, the charges for mortality, and any other expenses that keep the policy active.  It’s important to note also that the COI will vary by policy due to the differences in the policyholder’s insurability, age, and risk amount to be insured.  Premiums paid in excess of the COI accumulates within the cash value component of the policy.  While the cost of insurance will increase with the insured’s age, the accumulated cash value is available to cover any increases in the COI.

The Cash Value Account

Similar to a savings account, a universal life insurance policy accumulates a cash value.  This cash value earns interest depending on the current market performance or the minimum interest rate, whichever is greater.  As the cash value grows, the insured may access a portion of the cash value while not affecting the guaranteed death benefit.  Taxes will need to be paid on any withdrawals taken from the excess cash value of the universal life insurance policy.  Interest will be calculated on the loan amount and the cash surrender fee will be applied.  Furthermore, any unpaid loans will decrease the available death benefit by the outstanding amount owed, plus loan interest will be deducted from the remaining cash value.

Universal Life Flexibility

As mentioned previously, universal life insurance has flexible premiums as opposed to whole life insurance.  Whole life insurance maintains fixed premiums during the life of the policy, and any missed premiums must be paid within the specified time in order to keep the policy active.

The premiums of the universal life insurance policy cover the cost of insurance, plus any excess premium is added to a cash value account that accumulates interest.  As long as there is enough in the cash value, the insured may skip payments without the risk of lapse.  However, it is crucial that the policyholder keeps a keen eye over the rising cost of insurance and plans accordingly.  Furthermore, if there has not been enough interest credited to the cash value, higher premium payments may be required.

Furthermore, universal life insurance allows the insured to build their wealth while having a solid life insurance policy in place, unlike term life insurance.

Bottom line, the primary benefit of securing a universal life insurance policy is that you will have the option of not paying insurance premiums for life, yet continue to be insured for retirement.  As you get older and have gained more financial responsibilities, the ability to be able to cut down on expenses such as life insurance is certainly an advantage.

Other Types of Universal Life Insurance

Consumers who prefer to be a little more aggressive in building the cash value in their Universal Life Insurance policies have two additional options in either Indexed Universal Life or Variable Universal Life insurance. Additionally, for consumers who are more concerned about having a lifetime death benefit and not as much concerned about the cash value account, there is Guaranteed Universal Life insurance offered by many insurers in the marketplace.

What is Indexed Universal Life Insurance (IUL)?

Indexed Universal Life insurance is very similar to traditional Universal Life insurance in that it provides a death benefit along with a cash value component. In the IUL policy, the funds in the cash account will grow depending on how the underlying index, like the NASDAQ 100 or S&P 500 perform.

There are some specific limitations that are applied within the cash component of the IUL plan through which the policyholder is limited to a maximum amount of interest that can be earned each year. But to offset the cap on earnings, the IUL policy also has a guaranteed minimum interest it can earn, known as a floor.

Here is an example of how the Cap and Floor effect your policy values:

If one of the indexes that your policy’s cash account is linked to returns 13% for a certain time period, if your policy has a 10% Cap rate the policy will be credited with the maximum amount allowed by the Cap which is 10%. If, however, your policy has a 3% floor rate and the linked index has a loss of 8% for a given year, your policy will still earn the 3% floor amount.

The Advantages of Indexed Universal Life Insurance

Even though the IUL provides many of the same benefits as other kinds of permanent life insurance, there are some specific benefits that should be considered

Death Benefit is Tax-Free – One of the most popular benefits of any type of life insurance is that the death benefit is paid to the beneficiary on a tax-free basis.

Growth is Tax-Deferred – Since the cash account within the IUL grows on a tax-deferred basis, the funds will compound and accumulate faster than if they were taxed.

Opportunity for Additional Growth – Unlike other permanent life insurance products, IUL policies allow for interest crediting based on the performance of the underlying index accounts without the threat of a negative interest period resulting from a down market.

Tax-Free Income – Probably the most popular benefit of the IUL is the ability to take a tax-free income from your policy after it has built sufficient cash value.

Annual Reset – Unlike traditional stock or mutual fund investments, your gains in your IUL policy are locked in or “reset” each year and will never be reduced because of a market downturn.

For more information about Indexed Universal Life Insurance and to review illustrations that can closely project how this policy can become a source for retirement income, call to speak with one of our insurance professionals at (631) 391-2993 during normal business hours or contact us through our website.

What is Variable Universal Life Insurance (VUL)?

Like traditional Universal Life insurance and Indexed Universal Life Insurance, the VUL provides a death benefit with an investment component. As premiums are paid, a portion of those funds is invested into separately managed investment accounts (sub-accounts) which are structured similarly to mutual funds. Each sub-account contains an array of stock and bond accounts and money market options that earn interest over the year that results in an interest credit to the policy’s cash value (after fees are deducted).

The VUL, however, does not provide the “floor” protection that the IUL has and therefore, even though there is the possibility of higher earnings, there is the risk of losing money if the sub-accounts fail to perform.

The growth in the VUL is tax-deferred which allows the policyholder to access that cash and create an income stream from the earnings in the policy. The risk with the VUL is that there is a chance that additional premiums will need to be paid into the policy if the cash value falls below a certain level in order to keep the policy in force. The VUL is a viable investment option for individuals who want life insurance protection along with cash accumulation but are willing to accept additional risk.

What is Guaranteed Universal Life Insurance (GUL)?

For individuals who are more concerned about having life insurance coverage for a lifetime without the premiums charged by Whole Life Insurance, Guaranteed Universal Life Insurance will be the best option.

The GUL offers the affordability of term insurance and the dependability of whole life insurance. Yes, it does cost more than term but not as much as whole life so it is considered a better option. Like traditional universal life insurance, the GUL policy has multiple advantages included with permanent protection.

Simply Built Policy

Compared to other universal life policies, the GUL is quite simple. You make your payments and your policy stays in force until the age you applied for.

Customizable Policy Term

Although lifetime insurance coverage provides protection until age 121, you may feel that paying premiums for that long just doesn’t make good financial sense. With the GUL you can select a shorter coverage period thereby reducing your monthly premium.

Affordable Lifetime Coverage

Since your GUL policy is focused on the death benefit, the policy will not build the cash value that traditional Universal Life insurance builds. Any cash accumulation is used to pay for the cost of insurance going up as you age which helps to keep the monthly premium affordable even while guaranteeing lifetime coverage.