Universal Life Insurance      
  • GET A QUOTE: Call Toll Free (800) 707-4690
  •  

    Universal Life

    In this segment
    Understanding Universal life
    Learning about interest
    Borrowing against your cash value
    Deciding on death benefits
    Determining premiums
    Determining the pros and cons of Universal life insurance
    Universal life insurance provides flexibility to policyholders. It's similar to whole life, in that you have a cash value that grows, and it encompasses a term life policy, where you decide the terms and renew the policy annually. However, Universal life isn't simple like term insurance - or even like whole life. In fact, balancing the options can be quite complicated. So in this segment, I'll discuss the basics of Universal life insurance, the elements that you get to compare for your particular needs, and your options in designing the right policy for you.
    How Universal life works
    Universal life insurance is a form of whole life insurance - but with much greater flexibility. Like life, you have two components: a term insurance policy and an investment account from which the term insurance premiums are paid. But with Universal life, you get to choose your options, and the choices are generally laid out in front of you. You know how the premiums may change the death benefit and cash value, and it's much clearer how much of the premiums go toward your insurance protection, how much toward your cash value, and how much toward administrative expense (including commission).
    Start with a planned death benefit that you work out with your agent's help. You determine your planned premium, based on how much you can afford and the cost of the insurance. The company subtracts and expense charge based on its fees, usually a fixed percentage of the premiums. You're left with a cash value that generates interest.
    But understanding Universal life doesn't end there. From that cash value, the company subtracts the current cost of insurance (the mortality charge), including the charges for any options (or riders), and monthly administrative expenses. Then the company adds in interest that your investment money earns. You're ending cash value is not accumulated value that belongs to you when you terminate the policy (or to your beneficiary when you die).
    Often, companies charge you may surrender charge to terminate the policy, leaving you with the surrender value the surrender charge is usually a small percentage of the total cash value.
    Other aspects of Universal life to consider include:
    All the earnings in your investment account are tax-deferred.
    If you stop paying premiums, the Company continues to pay the premium for you by deducting from your policy's cash value. The company does so until no cash value is left (these deductions are usually called automatic premium loans). This is one way to continue coverage without paying premiums.
    The interest rate is a fixed rate, although it may be a tiered interest rate, in which a part is paid at one rate while the balance is paid at a higher rate. For example, your interest rate may be 4% for the first $1000 and 7% for the balance.
    You can withdraw money that has accumulated in your cash value. If you do, your death benefit decreases because it depends partially upon the accumulated cash value.
    You can borrow against the cash value of your policy at a fixed rate, generally below market rates.
    If you increase your coverage, you may have to re-qualify by taking a medical exam.
    You probably have to pay a termination fee or surrender charge (back-loading). This fee decreases each year you have the policy, but it does lower the amount of your cash value.

    Generating Interest
    Insurance companies frequently have two or more interest rates that kick in at different levels. For example, the guaranteed interest rate may be 4% on the first $500 and 7% on balances over $500. With a balance of almost $8,000, the total interest is just under 7%.
    When you're choosing a policy or company from which to buy your Universal life policy, take the one with the highest guaranteed interest so that your cash value grows most quickly.
    The interest earned continues to increase and eventually will equal and then exceed the amount you contribute. At this point, the money you pay is, in effect, going directly into your own account.
    The interest rate is calculated daily, so you get compounded interest (interest on your interest). For a policy with an interest rate of 7%, the annual percentage rate (APR) is actually more than 8%.
    Borrowing Against Your Cash Value
    Universal life policies allow you to borrow against your cash value, usually at interest rates below what you can get elsewhere, even for loans secured against other assets. However, borrowing against your policy generally lowers the interest you receive on your cash value, making it equal to or less than the interest at which you borrow.

    Premiums
    The amounts of your death benefit, accumulated cash value, and premium are all interrelated with Universal life. The more you pay per month in premiums, either the more protection you're buying or the more cash value your building. You can't have both. The higher the protection you buy, either the higher your premiums or the lower your cash value. In the more cash value you want to build, either the higher the premium or the less protection you're buying.
    Because your primary goal in buying insurance is protection, your primary consideration should be the amount of the death benefit. Cash value and your premium cost should be secondary factors, but clearly, your premium should be in line with how much you can afford to pay.
    Choosing Your Premium
    If you want a Universal life policy and the leaves that you can afford the premium, you need to balance the following three considerations to determine your cash value:
    Determine how much you can afford from your monthly budget.
    Decide how much protection you want to purchase.
    Balance the amount of protection you want to purchase with the amount of premium you can afford.
    You invest in a life insurance policy to be covered in case you die, not because life insurance is a good investment. You can generally make more money by putting your money into other investments.

    Pre-paying your premium
    With Universal life, you can buy in up-front by putting a significant sum into your account, which allows your cash value to increase more because your account is starting at a higher level. Pre-paying also allows you to lower your premiums because the accumulated cash value is earning more, which means that more of your earnings can contribute to the cost of the insurance. On the other hand, prepaying also means that you must take a lump sum of cash from somewhere.
    Is pre-paying for you? Not likely, unless you really want insurance but can't afford monthly payments. People have generally used pre-paid insurance as an investment to build cash value without incurring any tax consequences. But with IRAs, Roth IRAs, and 401(k)s, chances are you won't be interested in this option.
    Summing it Up
    Let's compare the pros and cons of Universal life insurance.
    Pros
    Cons
    A lot of flexibility - you can tailor the premiums, cash value, and death benefit to suit your needs.
    Complicated terms and options; you have to depend on your agent to guide you to the best plan for you.
    Premium remains constant for the entire time you're covered, and you can opt for either a fixed death benefit or an increasing death benefit.
    Premiums are considerably higher than for term insurance, and if your death benefit remains fixed, you actually reduce the accumulated cash value.
    Coverage can be paid-up by the profits from your cash value, and most of your premiums are going to you.
    Whether from your monthly budget or your accumulated cash value, you're still paying the premium. Not appropriate as an investment due to poor rate of return.
    Lifetime coverage and no medical exam (unless you make changes to the policy).
    Death benefit coverage may become unnecessary later in life when you have no dependent beneficiaries.
    Tax-deferred cash-value earnings, and if you decide to cash-out, the premiums you paid reduce the gain.
    Returns aren't as high as other tax-deferred plans such as IRAs and 401(k)s (which allow you to invest your money where ever you want.

     

  • GET A QUOTE: Call Toll Free (800) 707-4690