Universal Life Insurance Explained:
Universal Life Insurance is a form of permanent life insurance. Often referred to as UL, it builds cash value inside of the policy from excess premium payments that are left over after the cost of insurance is paid. Cash value inside of the policy is credited with a certain interest rate that is determined by the insurance company. There is also a minimum interest rate guarantee as well, which promises no less that a certain amount, usually around 2%. The Death benefit and premiums can be altered if the policy holder decides, giving this type of policy a great deal of flexibility.
Types of Universal Life Insurance:
Similar variations of UL have been developed over the years, such as variable universal life (VUL), and Indexed Universal Life (IUL). I talk more in depth about IUL in a different video, so be sure to watch it when you have a moment. An IUL uses a financial index that determines how much interest is credited to the policy’s cash value, versus a set rate. The S&P 500 is often a popular index used for IUL. Normally, IUL polices have downside protection in the form of a minimum guaranteed rate, and also have a cap on the amount of interest one can have credited.
Creation of Universal Life Insurance:
UL was a creation from the concept of whole life insurance and term life insurance. While the policy builds cash value (as does a whole life policy) the actual cost of insurance is calculated similar to that of renewable term life insurance. UL has adjustable death benefits, as well as flexible premium options.
Universal Life Insurance Versus Whole Life Insurance:
A big difference between whole life and Universal life, is that with whole life, as long as premiums are paid, the policy can never lapse. With a UL, the policy owner takes on some of the risk for making sure the policy is funded properly to maintain the death benefit. If a policy does not have sufficient cash value to cover cost of insurance, and other fees, the policy will lapse. This is why it is important to talk with your agent about how to structure a policy properly to accomplish your objectives, so that the policy will be funded properly. Also, with a UL, cost of insurance and other fees are laid out in detail for the owner, unlike with a whole life policy, where this information is not as clear.
No Lapse Guarantee Options:
Some polices offer a “No Lapse Guarantee” where as long as a minimum amount is paid into the policy each month, the insurance company promises that the policy will remain in force for a guaranteed period of time, even if cash value is not sufficient to sustain it. This version of UL is called guaranteed universal life or GUL. Keep in mind, you typically pay up for any type of guarantee, so premium is typically a little higher for these policies compared to a standard UL.
Uses of Universal Life:
Many different uses for UL. Some of the most popular are to supplement retirement, college funding, and mortgage protection.
Loans & Withdrawals:
Loans may be taken from your UL policy. Any loan taken will have interest payments assigned to it. Loans do not have to be paid back, however if not paid back will be deducted from the cash value of the policy. Loans taken from the policy will affect the growth of the policy’s cash value, and generally shorten the life of the policy. Any outstanding loan at the time of insureds death, will simply be deducted from the death benefit. Withdrawals may also be taken from the policy, and can be structured in a way where they are tax free.
Single premium UL is an option when an individual would like to dump a one-time amount into a policy, instead of making on going premium payments. Prior to 1988, these were very popular, however in 1988 the IRS made changes to the tax code, and single premium polices became modified endowment contracts or (MEC), losing the huge tax advantages as enjoyed prior. Today, one can roll cash value from another policy, into a single premium UL policy, and avoid the policy becoming a MEC by exercising a 1035 exchange.
Fixed premium ULs have premiums of a specified amount over a period of time, or even the life of the policy. Normally these type of polices have a guarantee, so long as that fixed amount is paid.
Flexible premium ULs give the most options to the policy holder. Premiums may vary, but keep in mind paying different amounts affects the policy over the long haul. It is important to be sure your policy is funded properly to avoid a lapse in coverage.
We Can Help:
Palmetto United offers universal life insurance products through the top life insurance companies, which allows our clients to benefit both on price point and utilization of reputable carriers. Some of the carriers we represent are Transamerica Premier Life Insurance Company (formally Monumental Life), Foresters, Prudential, American Amicable Life Insurance Company, AIG, Americo, and Gerber just to name a few. To obtain information, or to receive a life insurance quote, contact Randy Wolfe today.