Universal Life

Universal Life Insurance Is Also Permanent Life Insurance: Like Whole Life insurance, Universal Life is designed to last your entire life. Universal Life can also offer you a cash value benefit that you can access through policy loans or withdrawals with no intent to pay back.

Three Types of Universal Life

I. GUL: Guaranteed Universal Life (term for life or permanent term)

Guaranteed Universal Life can give you the best of Whole Life and the best of Term Life. 

The best of Whole Life is that you get a policy that covers you the rest of your life and your heirs/beneficiaries receive a tax-free death benefit. 

The best of Term Life is that you get a more affordable premium as compared to a Whole Life policy.

You buy a GUL policy purely for the protection and the death benefit it offers your beneficiaries when you die. 

A GUL policy is best geared towards someone who is looking to have at least $50,000 in death benefits. 

Benefits Of A GUL Policy

1. It eliminates the risk of you living too long or outliving your Term Life insurance policy. Can you imagine having a Term Life policy and fully expecting to pass away before the end of the term (10-40 years) and a month after the policy term ends, you pass away? 
2. The protection of the death benefit
   • Can provide a guaranteed death benefit for your whole life.
   • Death benefit passes to beneficiaries generally tax-free.
3. No Lapse: It’s doesn’t end…unless you live past age 125 (or whatever max age is set).
4. Stable: No risk of market fluctuations as you would have with an Indexed policy and certainly a Variable policy.
5. Return of Premium may be available: That means if, after some time, you don’t want the policy any longer, then you may be able receive back the premiums you’ve paid into the policy. This does mean that you will be paying a higher premium for this benefit.
6. Living Benefits: You may have the option of additional benefits that could cover you for:
   • Critical Illnesses (cancer, heart, etc.)
   • Terminal Illness: Getting access to the death benefit before you die.
   • Long-Term Care
7. Better option than Final Expense: If you are somewhat healthy and you simply need a policy that will be for your “final expenses” (burial, funeral, taxes, debt) and leave a a modest death benefit to your heirs, then a GUL could be an excellent choice for you.

The Downsides Of A GUL Policy

1. Little to no cash value: Remember, you don’t buy a GUL policy for the cash value. You want cash value? Get a Whole or Universal Life policy.
2. You must be insurable: Meaning, you have to be healthy enough to go through medical underwriting and qualify for the policy.

II. Indexed Universal Life

As the name implies, it is a Universal Life policy that is tied to a market index (S&P, Dow, Nasdaq). The cash value in your policy earns interest based in part on market returns. 

“Upside potential without downside risk” is often one of the benefits you hear when it comes to an Indexed Universal Life policy. Basically what that means is, your cash value will grow each year based upon market returns up to a certain limit or a “cap rate.” 

The market could go up 10% in a year, but you are capped at 6%. So, theoretically you lost out on 4% of the gain. 

But…if the market goes down by 10% in a year, then typically the “floor” is zero and thus you earn 0% and haven’t lost anything. 

The Benefits Of An IUL Policy

1. Market Growth: As just mentioned, you can capitalize on some of the market growth and therefore have the potential for bigger gains in your cash value account as compared to a Whole Life policy.
2. Cash Value For Tax-Free Income: Most people purchase an IUL not for the death benefit, but to accumulate money and take distributions later…like on a 401K or IRA…but, without having to pay income taxes.
3. Flexible Premium and Flexible Death Benefit: You are not locked into paying the same premium each month/year as you are in a Term or Whole Life policy. This can be advantageous if you know your income is going to be increasing over time and as your income increases you can put more into the policy. At the same time, if you don’t keep up with your premiums the insurance company can take money from the cash value to pay the premiums.

The Disadvantages Of An IUL Policy

1. Fees! Which can increase over time and may eat into the payments you make or the value of your cash account. As an example, you may incur any of the following fees:
   • Premium load charges
   • Monthly charges
   • Premium expense charges
   • Mortality Charges
   • Administrative expenses
   • Riders
   • Surrender charges
2. Complexity and The Need To Manage: You have to take the time to manage your policy and make sure the cash-value portion is keeping up.
3. Risk and Potential Premium Increase: If the stock market index does not rise at the pace predicted, then the investment/policy could fail to meet your goals and the expected future benefits. If you sustain a lengthened period of low returns, you will likely have to pay more into your account to keep it from going down in value or even lapsing.
4. Caps: 
   • Put a limit on how much you can fully participate in the success of the market. 
   • They can also come down over time, therefore  further limiting your account’s potential.
5. No Long-Term Guarantees & Only Projections: If you don’t put in the premiums that are expected and the policy was built on and you don’t get average market returns, then your policy and plan may not pan out as you had hoped for.

Who Should Consider An Indexed Universal Life Policy?

1. You are under 65.
2. You are healthy.
3. You are a high income earner or have a high net worth.
4. Your time horizon for needing income from the policy is 10+ years.
5. You want “market-like” returns, but no market losses.
6. You want tax-free income in retirement. 
7. You’ve maxed out your other investments and you are looking for something that is flexible, can provide tax-free income, then an IUL might be right for you.

III. Variable Universal Life

A Variable Universal Life policy is a permanent policy that can grow in value. Instead of the cash-value earning a guaranteed return (Whole Life) or market-like returns (Indexed Universal Life), the cash-value returns “vary”. There are three ways it can vary:

1. How much you put in once or on an ongoing basis.
2. How well you invest the money within the policies sub-accounts.
3. Your overall return and benefit. And that is based upon how well you do at the first two.

With a Variable Universal Life policy, instead of earning a percentage of a market indexes return, you actually have a portion or all of your cash-value investments in the market (stocks, bonds, mutual funds, etc.).

If you invest well over time, then you may end up better off with a Variable policy versus an Indexed policy. If you don’t, well then, you may not be better off and you may lose.

The Benefits Of An VUL Policy

1. The death benefit: **This could decrease if you don’t make your minimum premium payments.
2. Flexible premium options: If you flex too much to the low side, then you will not likely get the benefit and return you were planning on.
3. The potential to earn higher returns—thereby giving you more income later.
4. Tax-free income later.

The Disadvantages Of An VUL Policy

1. Cash-value could go down and thereby defeat your plan.
2. Fees and Surrender Charges: And they may be even higher than an IUL policy.
3. More Complex than an IUL policy…and they can be complex.
4. Not for those who are risk averse.