Universal Life Insurance
Flexible Cash Value Life Insurance Protection
Universal Life Insurance | Table of Contents
What is Universal Life Insurance?
The uniqueness of Universal life insurance is it’s a cash-value life insurance product allowing for flexible premiums and flexible death benefit protection manufactured using two components:
- Annually renewable one-year term life insurance covering the “at risk amount” (the difference between the policy’s cash value and death benefit) to the insurance company.
- A cash value component representing a policy owners equity that generates a rate of return.
How Universal Life Insurance works
A universal life insurance policy will stay “in-force” as long as there are funds to pay the periodic cost of the term insurance component of the policy. This Cost Of Insurance, or COI, is paid through additional out-of-pocket premium payments or debits from the policy’s accumulated cash value.
The cash value of a universal life insurance policy increases when the premium contributions and/or the interest credited to the cash value exceeds the COI during any period, and it will decrease when these are lower than the COI.
Because a universal life insurance policy is manufactured with one-year renewable term insurance, the policy may expire before the insured dies. When this happens, the policy ends, and the policy owner receives the final cash value. Unlike whole life insurance, the cash value isn’t guaranteed to equal the death benefit at the policy’s expiration.
Just as with whole life insurance, the cash value of a universal life insurance policy represents the policy owner’s equity. It can be borrowed against or withdrawn (partially or fully) at any time. Funds generated by these activities are guaranteed to be paid within (6) months of being requested but are often sent immediately.
What are some of the features of universal life insurance Policy?
Universal life insurance is a cash value life insurance product that is different from whole life because it combines the features of term life insurance with cash value. This gives the policy owner flexibility in the way they pay premiums as well as the flexibility to adjust death benefits. For this flexibility, the policy gives up the guarantees provided by whole life insurance as the contract typically isn’t guaranteed to have any cash value or death benefit past the age 121 although some contracts have “maturity extensions” that will provide additional value.
Other features of universal life insurance include:
- Policy owners can make partial withdraws against cash value
- Policy owners borrow against the policy cash value
- Loans against policy may not need to be repaid during insureds lifetime
- The cash value earns tax deferred interest
- The death benefit is 100% income tax free
- Optional riders allow for continued funding in the event of a disability
- Can provide coverage for long-term care that exceed cash value
- Can provide coverage for critical illnesses that exceed cash value
Types of Universal Life Insurance Contracts:
Straight Universal Life Insurance Coverage provides death benefit protection and invest a policy’s cash values into the issuing life insurance company’s “general account.
Variable Universal Life Insurance provides death benefit coverage and invests a policy’s cash value into various mutual fund like accounts that give the potential for additional gains above those of straight universal life insurance.
Joint Universal Life Insurance is used as an estate planning tool and provides death benefit proceeds after the death of two insured people.
Equity Indexed Universal Life Insurance invests policy cash values into an insurance companies “general account” but is credited to the policy owner based on the performance of a named stock index
Guaranteed Universal Life Insurance provides death benefit protection as long as the required premium is paid even if the cash value runs out.
Financial Strategies For Universal Life Insurance
- "The SALLO Strategy"
- Protect a Family's Income
- A Bond Portfolio Without Interest Risk
- Fund Business 'Buy/Sell" Agreement
- Recruit and Retain Top Employees
- "Split Dollar" for Business and Estate Planning
- Supplemental Executive Retirement Plan
- Supplemental Executive Retirement Plan
- Key Employee Insurance
- Increase Social Security In Retirement
- Increase Pension Income
- Reduce Taxes In Retirement
- Fund a Profit Sharing Plan
- Liquidity to Pay Estate Taxes
- Create Charitable Legacy
- Equal Out Children's Inheritance
- Save For Children's Education
- Protect Assets From Lawsuits and Creditors
What Are Optional "Riders" Available With Universal Life Insurance
Some of the more common riders available with whole life insurance policies include:
1) Accelerated Death Benefit Rider – This rider provides for payment of a portion of the death benefit while the policyholder is still alive if they are diagnosed with a terminal illness.
2) Living Benefits Rider – This rider provides for accelerated payment of the death benefit if the policyholder becomes chronically ill or disabled.
3) Waiver of Premium Rider – This rider waives the policy’s premium payments if the policyholder becomes disabled. The insurance carrier makes them on behalf of the ower thus allowing the cash value to continue to grow as scheduled.
4) Child Rider – This rider provides for additional term life insurance coverage for the children of the policyholder. It may cover all current and future children.
5) Spouse Rider – This rider provides for additional term life insurance coverage for the policyholder’s spouse.
6) Guaranteed Insurability Rider – This rider allows the policyholder to purchase additional life insurance coverage at specified intervals without having to undergo a new medical exam.
The age is typically limited to below age 40, so it is useful as a policy for young professionals with high earning potential and business owners.
Other life insurance options instead of this rider are to have layered term insurance policies with guaranteed conversion options. Talk to a decision tree financial professional to find which life insurance option would be best for you.
7) Waiver of Deduction Rider- This rider eliminates the cost of insurance deduction if the policy owner becomes disabled.
What are Universal Life Insurance Cash Values Invested In?
Depending on the contract, the cash values of universal life insurance are invested into the “general account” of the life insurance company or a group of “separate accounts” where the policy owner has a variety of “mutual fund-like” choices to pick where their money is invested.
The General Account of an insurance company is typically allocated in very conservative fixed income securities (bonds, preferred stocks, mortgages) and generates conservative investment returns. The insurance company will also guarantee a minimum interest rate that will be credited to the policy cash value as the insurance company manages the investment risk on behalf of the policy owner. The policy owner instead retains the risk in the insurance company. All universal life policies except variable ones allocate their cash values into an insurance company’s general account.
Separate Accounts, those available in Variable Universal Life Insurance, may have choices that include large cap, mid cap, small cap, international, real estate or commodities and the return generated by the policy depend on the performance of those choices. The policy owner retains the investment risk when using separate accounts.
What type of investment return will universal life insurance generate?
The return generated by the cash value will depend on not only the investment earnings, but also:
- The cost of insurance
- The policy's expenses
- Commissions (or load) paid to servicing agent
Universal cost of insurance inside of a universal life insurance policy is always the amount it requires to purchase one year term insurance on the insured individual based on their current age, sex and their health status at the time the insurance was applied for. This cost of insurance is subtracted each month from the cash value which is created through the both the premium payments and credited interest (see illustration above.) The healthier an individual was at the time the insurance was taken out, the lower the one-year term cost of insurance being taken out.
In addition, there is flexibility with the death benefit. The (2) choices to consider.
Option A – level – allows the cash value of a universal life insurance policy to increase without increasing the death benefit amount. As the cash value rises, the net amount at risk to the insurance company decreases, and there is less one-year term insurance withdrawn. This allows the cash value to grow more efficiently. When the insured dies, the cash value is retained by the insurance company and the full death benefit is paid to the policy beneficiaries.
Option B – increasing – allows the cash value to “push” the death benefit higher. As the cash value grow, the amount at risk to the insurance company remains the same. When the insured dies, the beneficiaries receive both the cash value and the amount at risk to the insurance company.
A policy expenses include all of the costs required to manufacture and service the policy including home office support, underwriting, and other business expenses.
The commission or load on a universal life insurance policy includes all of the commissions and fees the servicing agent or representing receives to place and service the policy.
What are the commissions on universal life insurance?
Commissions and fees reduce the return in any investment account. When it comes to universal life insurance, that holds true too.
There are (2) ways agents and advisors are paid to place universal life insurance.
The first way, which is the traditional way, is through up-front and renewal commissions based on the premium paid. The “first-year” commissions on a universal life insurance policy may be as much as 100% of the base premium and 5% of excess premiums paid. The renewal commissions are typically 2-3% of all premiums paid after the first year.
The up-front loads require a policy owner to own a policy for many years before the cash surrender value will be equal to the total premiums paid however these front-end loads do not affect the death benefit. Once the front-end loads are paid for, the cash value is able to grow more efficiently without the burden of ongoing fees being debited based on its amount.
The second way advisors can be paid to place universal life insurance is to place the policy in a managed account the same way traditional investment portfolios are managed. These fees are typically 1% of the cash value amount.
When choosing the second option, a policy owners cash surrender value can be equal to the premiums paid within a short period of time as the up-front load on premiums are eliminated. However, as the cash value increases, the fees be charged against the account will increase as well.
is Universal Life Insurance Right For You?
Universal life insurance is a flexible life insurance solution with a lot of uses, but, like whole life insurance, requires significantly more premium for the same amount of death benefit protection when compared to term life insurance.
To find out if it is a solution that can help you manifest the future you desire, we recommend you participate in the “Wealth Manifestation Process” so you can understand factors such as the opportunity cost of those additional premiums. You can find out more about the process by clicking here.
