Universal Life Insurance Explained 2023

If you’re in the market for life insurance with whole-of-life coverage, universal life insurance could be the right choice for you. Universal life insurance offers a guaranteed death benefit, allows you to take advantage of the policy’s cash value, and has the flexibility to adjust Your premium payments and death benefits.

We’ll cover what you need to know about universal life insurance and break down the different types of universal life policies. When considering these policies, make sure you are working with a trusted financial advisor or an experienced life insurance agent. They can be complex.

How Does Universal Life Insurance Work?

Universal life insurance is a type of whole life insurance. Unlike term life insurance, which is for a specific period, such as 20-year universal life insurance, is good for the rest of your life (unless you stop paying premiums).

Some forms of universal life insurance also offer a cash value component. You can withdraw funds from the cash value through withdrawals or loans. When you die, the insurance company will reduce the death benefit paid to your beneficiaries by the amount of any withdrawals or outstanding loans. but for some It is more important for the buyer to get the cash value than to pay the beneficiary in full later.

There are several types of universal life insurance policies, and it’s important to know what you’re buying. They are completely different in cost and functionality.

Guaranteed universal life is usually the least risky, while variable universal life is the riskiest because the cash value is tied to stocks and bonds. On the other hand, you can build more cash value with indexed universal life and variable universal life than guaranteed universal life Life.

If you’re considering a universal life insurance policy, consider how much risk you’re willing to take. Don’t be betrayed by the promise of great investment income that may not come true. Be sure to check the Guarantee section on the policy illustration, not just the rose colored section predict.

Compare: Types of Universal Life Insurance

Based on premiums, overall universal life insurance policies have the largest market share, according to industry-funded financial services research firm LIMRA for the third quarter of 2021. Indexed universal life and fixed universal life accounted for 34 percent of life insurance premiums. Changing Universal life accounted for another 13%.

Guaranteed Universal Life Insurance

Guaranteed Universal Life (GUL) policies provide death benefits and premium payments that do not change over time.

You choose the age at which your policy will end (eg 90 95 100 105 110 or 121). Choosing a higher age will increase the premium.

Guaranteed universal life insurance usually has little or no cash value and is usually the cheapest universal life insurance you can buy. You pay for whole life insurance, which is similar to whole life insurance.

GUL is sometimes referred to as “No Failure Guarantee Universal Life Insurance”. This is to address the recent problem of traditional non-guaranteed universal life insurance policies failing because the cash value does not cover the policy fees and the cost of insurance. Some Policyholders who wanted to keep their coverage in place had to suddenly pay much higher premiums that they never anticipated.

These newer non-expiration policy commitments continue to apply. But there’s a catch: If you pay late or miss a payment, the policy may end. Since there is usually no cash value, no money is taken with you. The insurance company will keep the premium you paid.

Who can benefit from a guaranteed universal life insurance policy?

Guaranteed universal insurance may be a good option for someone who is primarily looking for whole life insurance and is less concerned with the “investment” part of the cash value. Unlike other types of universal life insurance, GUL policies do not offer flexibility Premium or death benefit amount.

What if I no longer want my guaranteed universal life insurance policy?

Over the years, financial circumstances may change and you may find that you no longer need a GUL policy. The cash value of a GUL policy can be small, so if you surrender your policy, you may get very little money.

But some companies offer another way out: In some cases, you can add back premium riders to your policy when you buy it. These riders give you the option to get a partial or full refund of the premiums paid, but only at certain points in time after you purchase the policy.

Within a time window such as 60 days after a specific year (eg 15 20 or 25 years) after purchasing the policy, you can abandon the policy and get back some or all of your premiums. The percentage refunded to you can be based on policy year, policy face value and/or the age you purchased Policies vary by company.

If you are interested in this option, please ensure it is included in the GUL policy before purchasing.

Average Cost of Guaranteed Universal Life Insurance

The averages below are examples of annual rates for a $1 million GUL policy covering healthy non-smokers aged 100 or over.

Indexed Universal Life Insurance

Indexed Universal Life Insurance (IUL) provides lifetime coverage and may have some flexibility in death benefits and premiums. If your needs or budget change, you can adjust your death benefit and payments within certain limits.

There is a cash value component in the IUL, usually linked to a stock market index (such as the Nasdaq 100 S&P 500) or a combination of indices. You can also choose to invest at a fixed rate.

When you pay your premium, some of the money goes toward (potentially high) policy fees and charges, and the rest goes toward cash value.

Knowing the boundaries of potential investment gains is important. Indexed universal life policies have participation rates and caps. The participation rate is the fraction of the index return that your cash value actually earns. For example, if your index goes up by 10% If your participation rate is 50%, you get a 5% upside. Also, there is usually an upper limit, the maximum percentage you can earn regardless of index performance.

If your index plummets, you still have a “bottom line” where the guaranteed minimum return can be 0%. You can still lose all your cash value if policy charges and expenses drain your money.

Having an IUL policy does not mean your money is actually invested in the index. In practice, insurance companies still invest mostly in bonds. So the index is just a barometer for calculating cash value gains and losses. and your return calculation will not include any dividends you may receive Otherwise, if you invest directly, you can pay for it out of your own pocket.

Despite its complexity, indexed universal life insurance is a popular product. This may be largely due to advisors leading clients to adopt these policies.

If you’re considering purchasing indexed universal life insurance, make sure you understand what you’re buying. The Center for Economic Justice issued a warning in July 2020 that consumers should not purchase indexed universal life insurance. Consumer advocacy group cites misleading and deceptive Sales involving IUL.

“Consumers should avoid IULs because insurers and agents who sell the product are under no obligation to serve the consumer’s best interest. Mix a multitude of complex products designed to juice illustrations with opaque and unexplained features, you have the recipe for the future financial disaster,” Center for Economic Justice Director Birny Birnbaum said in a statement.

A consultant selling an IUL may sell a policy based on the rosy picture depicted in the policy illustration. Illustrations typically focus on the non-guaranteed elements of the policy, such as cash value benefits and cash value loans that appear to cost nothing.

But that’s what the non-guaranteed part of the policy is — predictions that might never happen. Policyholders may pay far more in premiums than they expected to keep their policies in force.

Be sure to check the guarantee section in the policy description and ask yourself if you agree that this is a reality.

One way to better understand the policy is to have your advisor or agent order a report from Veralytic on the applicability of this product to you. Veralytic is a life insurance analytics company that measures the quality of cash value life insurance products and the companies that supply them them.

Who Can Benefit From An Indexed Universal Life Insurance Policy

People who want the flexibility to vary their death benefits and premiums and are willing to take on more investment risk may find an IUL policy attractive.

Variable Universal Life Insurance

Variable Universal Life (VUL) insurance also allows you to vary your premium payments and death benefit amount within a certain range. You will usually need to actively manage this type of policy as you will choose sub-accounts for your cash value investments. You can also choose Fixed rate option on cash value.

With variable universal life insurance, you have the potential to earn good cash value returns (if you invest wisely), and you have some degree of control over your investments.

However, if your investment options hit rock bottom, your cash value could also drop. Additionally, these policies tend to cost more than other universal life policies and are often much more complicated.

Who Can Benefit From A Variable Universal Life Insurance Policy

People who want to take an active role in selecting sub-accounts for the policy’s cash value may be attracted to VUL policies. For those who want to invest passively or avoid risk, variable universal life insurance policies can be disadvantageous.

Other Types of Universal Life Insurance

•  Cash accumulation UL: A universal life insurance policy designed for the rapid accumulation of cash value at an early stage.
•  Current assumption UL:  Traditional UL policies are designed to provide coverage at low cost, as there is no guaranteed death benefit. Your cash value grows based on a “credit rate” offered by your insurance company, which can change. You can change the timing or amount of your payment or modify Death benefits, but you will need to ensure that you have sufficient funds in your policy account to cover policy charges, insurance costs, and any loans or withdrawals you have taken. Failure to do so may invalidate the policy. These policies have come under some scrutiny recently Premiums rise unexpectedly when policyholders’ cash values ​​fall below minimum requirements.

How to Take Money from Cash Value

When it comes to getting cash value from your policy, you typically have a few options. Make sure you understand your policy’s rules about withdrawing cash value and any financial implications of that decision.

• To withdraw funds from your cash value:You can withdraw money from your policy tax-free. However, if you withdraw more cash value than the premium paid for, the investment gains you receive will be taxed as income. Also, withdrawing the cash value reduces your death benefit and your beneficiaries will receive less.
•  Borrow against your policy: Typically, you can borrow tax-free from the cash value of your policy. If you die before the loan and interest are paid off, the outstanding balance will be deducted from your death benefit.
•  Surrender the policy: If you decide you no longer want or need life insurance, you can contact your insurance company to disenroll. You will receive the cash value less any surrender charges.

Add riders to your universal life policy

Like other life insurance policies, you can add riders to a universal life insurance policy. Life insurance riders are a way to add extra coverage or features, usually at an additional cost.

For example, a comom rider is a “premium waiver” rider. If you are totally disabled and have this rider, the insurance company will waive further premium payments.

Accelerated death benefit riders are usually included automatically in the policy at no additional cost. It allows you to withdraw money from your own death benefit if you are diagnosed with a terminal illness. (Regulations on when funds are available vary by company.) Other common options are long-term Sickness riders and long-term care riders, both of which allow you to benefit from a death benefit when you have certain health conditions.

Universal Life Medical Examination

Many sellers of universal life insurance use “full underwriting,” which means they take the time to review your application verification information and require you to undergo a life insurance medical exam.

A physical exam usually includes height, weight, blood pressure, and blood and urine samples. It is usually done by a paramedical professional hired by the insurance company and can be done at home.

There are all kinds of data about you available to insurance companies, which they can use for their pricing policies. This includes data about consumer credit, your prescription drug history, your answers to past personal health and life applications, and your motor vehicle records. it’s also common The insurance company requires your medical records.

Who Should Consider Universal Life Insurance?

If you want life insurance that lasts your entire life, you might consider universal life insurance. For example, universal life insurance can fund a trust to care for children or other dependents with special needs after you’re gone.

If you have large long-term savings goals and need both an investment vehicle and life insurance, you might also consider universal life insurance, but only if you’ve maximized other savings options, such as retirement planning.

Alternatives to Universal Life Insurance

Universal living is not the right choice for every situation. Other types of life insurance may be better, depending on the length of the policy and the assurance you want.

Whole Life Insurance: Large Guarantees at High Costs

Like universal life insurance, whole life insurance provides you with protection for the rest of your life. It also includes a cash value component.

The biggest difference between whole life insurance and universal life insurance is the cost: whole life insurance is generally the most expensive way to buy whole life insurance, because of the guarantee in the policy: the premium guarantee does not change the death benefit is guaranteed The cash value has a minimum guaranteed rate of return.

In addition, indexed and variable universal life insurance can give you flexibility in payment and death benefit amounts after purchasing the policy.

Whole life insurance, on the other hand, guarantees that your premiums, cash value guaranteed rate of return and death benefit will not change. Whole life insurance is for people who like predictability and are willing to pay for it.

Additionally, many whole life insurance policies pay dividends. These are like annual bonuses paid to customers by mutual insurance companies, although not guaranteed. You can use the dividends to pay your premiums, add them to your cash value, or simply take the money.

Term Life: The Cheapest Life Insurance Option

Term life insurance  Provides level premiums for a fixed period of time, such as 5 10 15 20 25 or 30 years. It has no cash value component. But this is the cheapest way to buy life insurance. For example, you can buy a 20-year policy to cover a young child’s formative years and college years. or one 30-year policy when buying a home and applying for a mortgage.

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Frequently Asked Questions (FAQs)

What is the difference between whole life insurance and universal life insurance?

The main difference between whole life insurance and universal life insurance is that universal life insurance can have more flexibility. You can usually vary your premium payments and death benefits with universal life insurance. Whole life insurance has set premium payments.

But both types of policies have cash value, and you can add riders to either.

Should I cash out my universal life insurance policy?

One of the main reasons to cash in on universal life insurance is that you no longer need life insurance. But before you run off with the cash, make sure you won’t need life insurance in the future. Circumstances in life can change, and you don’t want to regret cashing in on your policy.

If you need cash now, consider taking out a loan against your policy instead of cashing it out. This gives you options for the future, including keeping your life insurance in force.

What happens to the cash value of a universal life policy at death?

Cash value in life insurance Really meant to be used in your life. Any cash value is usually returned to the life insurance company upon your death. Your beneficiaries receive a death benefit, not a death benefit plus cash value. That said, some policies will include a cash value in the payout, but at a higher price.