Universal Life Insurance
Universal life policies are a hybrid life insurance product that combines the protection of a conventional term insurance policy with the cash value accumulation feature of a whole life policy. It’s like buying a permanent or life-long term life policy and investing the difference in fixed income securities (like treasury bills, bonds, or CDs). Unlike traditional whole life policies, universal life divides the death benefit and cash value accumulation into two separate components. That allows the universal life policy to be flexible, in that you may pay minimum premiums as long as policy expenses and the cost of insurance coverage are met. The amount of life insurance coverage can be changed, and the cash value growth will depend on the amount of premium you pay
Different Types of Universal Life Insurance
1. Traditional or Non-Guaranteed Universal Life
Universal life insurance was developed out of whole life insurance and is similar to whole life insurance in certain ways. However, there are a few differences. Universal life is considered an “unbundled” product, which means that mortality expenses, interest rate, and other expenses are factored in to calculate premium rates and cash values. This offers flexibility in making your premium payments, but it also works against you as most life insurance agents sell this policy at the lowest allowable premium only, rather than the insurance companies’ guideline premium.
Because traditional universal life is a non-guaranteed product, it can end up costing you fortune (in the form of not having life insurance when you need it most, as well as income tax consequences of cancelling your policy, such as phantom income tax) if your policy is dropped (lapsed or cancelled) because of not having sufficient cash value or lack of further higher premiums.
2. No Lapse Guaranteed Universal Life
This is pretty much like a traditional or non-guaranteed universal life policy except your premium is guaranteed never to increase, and as long as that guaranteed premium is paid on time, your death benefit will always be always in force. Guaranteed universal life is a fairly recent invention, and it is popular, because it functions as your life-long term policy or term life without expiration and with fixed premiums. This is a great universal life policy for anybody who is 55-plus years old and looking for life insurance for the rest of life with minimum fixed premiums. This policy can be used for estate tax liquidity, final expenses, a legacy for the next generation, or any other permanent life insurance need.
3. Indexed Universal Life
Indexed Universal life can be guaranteed or non guaranteed with an option to tie your return to a major stock market index like the S&P 500 (or some other domestic/international stock market indexes). Interest crediting goes up and down in lockstep with the index. Non guaranteed equity indexed universal life policies have similar drawbacks to non-guaranteed universal life. New guaranteed indexed universal life is a better option as it provide an opportunity to earn better interest rate with few guarantees. In all types of universal life – the no lapse guaranteed universal life policy is the best option if you are looking for permanent life insurance benefit with cash value growth.
4. Variable Universal Life
The variable universal life is very similar to traditional universal life or non-guaranteed indexed universal life. In this policy you can invest in the stock market (mainly various kind of mutual funds) directly rather than just to tie to a stock market index. The investment inside the variable universal life insurance policy is called separate accounts. You can invest and manage variety of mutual funds inside the policy, and the performance of a VUL policy will depend on the performance of these mutual funds. The variable universal life insurance (VUL) policy has all the drawbacks of non-guaranteed universal life insurance policies. We at The Kantar Insurance Agency receive regular calls from so many people who have bought this policy when stock market was on top and now lost most of the cash value in their policy and required to pay premium again. We feel that this policy is ticking time bomb and no way you can will with this policy. Only way you can win with this policy is if you die sooner and your policy is still in force.