How does Universal Life Insurance Work?
Get the details before you request your free online universal life insurance quote
Note: I am an
insurance broker and can show
you any company, but my favorite UL product is Genworth
(formerly GE Financial, First Colony Life)
Modern Universal life insurance (or "UL) is different from Whole life in that the new UL products have what is called a "secondary guarantee". What this means is that no matter what happens, as long as you pay the prescribed premium, your policy will stay in force. With most UL's, you stop paying premium at age 100.
UL
is different from Whole Life in that it does not guarantee to
"endow" for the face amount at endowment age (usually age 100).
To endow means that the policy will have the same amount of cash
value at endowment age as the face amount. If you care about
the cash value in the policy equaling the face amount at age 100,
then you should either put more money into a UL or get a Whole Life
Policy - Whole life is MUCH more expensive, though!
Genworth Universal Life Insurance
Company Product features:
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Lifetime Coverage as opposed to "term" insurance coverage.
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Limited Pay Provisions whereby you can pay the policy up in, say, 10, 20, 25 years...this is called a "limited pay" UL. This will cost you more as opposed to paying the premium over a lifetime.
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Cash withdrawals or loans can be made as long as there is enough cash buildup in the policy - UL does build cash on a guaranteed and non guaranteed basis.
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Cheaper than Whole Life because it does not endow for the face at age 100 (do you really want this anyway?).
I
can help you decide what universal life insurance company
to do business with - I offer free consultation by email or by phone!
Universal
Life insurance policies now offer contractual lifetime guarantees and lapse
protection. This web-page is for the purpose of helping you learn what is
involved if you want to convert your term policy, do a 1035 exchange from an
underperforming older policy, or simply purchase Universal Life Insurance as a
new policy.
Should you convert your term policy (term conversion)? Is Universal Life Insurance a better option than term insurance? These are the questions that I want to help you answer on this website.
Generally, there are 3 different types of
life insurance as described in my web-page "term
versus permanent insurance". Assuming you know the difference in types
of coverage, I will move on to the purpose of this web-page which includes
information about the subjects below. Click a subject to learn more about
it:
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Universal Life - Universal Life is often a better choice than term insurance depending upon the situation. Generally speaking, Universal Life or "UL" is coverage for when you die - Term insurance is for if you die.
*A little Trivia*...Ever
wondered if your term life insurance policy was going to pay off? Have you
ever considered that if the company thought that you were going to die
within the term period (10, 15, 20 year term period), would that company
issue you a policy? The answer is no! If you are approved for a term
policy, chances are the company will never have to pay a claim - because
their underwriters and actuaries have determined that you will live longer
than the term coverage period. In the life insurance industry, we say "If
you are approved for a (10, 15, 20 year) term policy, you will live at least
as long as the policy term length"! Statistically, 2% of term policies ever
have to pay a claim within the term period. Conversely, this means that the
life insurance company has a 98% chance that they will not have to pay a
claim on your life!
This is essentially why UL is more expensive than term
coverage. Contractually speaking, a modern UL policy will cover you as
long as you live where term will only cover you for a set period of time
(usually 10, 15, 20, 25, or 30 years). UL is "universal" because it is
also flexible - you can elect to pay as much as you want to in it or as
little as you want to in any given year as long as you meet the minimum
premium requirements. Term, on the other hand is a set, fixed premium
that you are locked into and cannot waiver from. Further, UL builds
cash value that you can elect to withdraw as a loan or, depending upon how
much you have built up, take out and not have to pay back. Please
remember, though, that if you do pay less than the prescribed premium or if
you take money out for a loan that you may be putting the longevity of your
policy at risk. If you to take a loan or pay less than the "lifetime
guarantee, designated, or target" premium, make sure you pay that money back
into the policy before its too late. Universal life takes the money
that you put into it and invests it - giving you a combination of "current
interest rates", "guaranteed interest rates", and "secondary guarantees".
Modern UL plans will guarantee a lifetime of coverage - signed, in black and
white, legal and binding agreements that say that the policy will be in
force as long as you live (provided you continue to pay the prescribed
premium. This "prescribed premium" that I keep referencing is often
called the "target, designated, or lifetime guarantee" premium. The
premium for a UL policy is typically 3-5 times that of a term policy.
Consider, though, that you are building cash value, covered for as long as
you live, and able to withdraw money.
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Whole Life - Whole life is generally twice as expensive as Universal Life because it guarantees that the policy will endow for the face amount at age 100; that is, the cash value in the policy at age 100 is guaranteed to be equal to the face amount - but this costs money! If you are simply looking for coverage for a lifetime, Whole Life is NOT the way to go, UL is. Further, some whole life policies offer dividends on gains; albeit small ones. Whole life covers the insured until age 100 (not for life) at which time the insurance company gives the insured the face amount or endowment amount. My opinion: If you are looking for an investment, invest in the stock market, land (they're not making anymore of it!), or other property. If you are looking to invest in a permanent life insurance policy, you are making the wrong decision*
*Whole life can be good in situations where you are looking for a small "final expense" or "burial" policy because you can get as little as $2000 worth of coverage. If you do not qualify for regular insurance (that is underwritten), then you may want to look into a "guaranteed issue whole life" or "simplified issue whole Life". Again, though, these policies are expensive and have limitations like waiting periods.
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Interest Rate - With UL, you get to enjoy interest on the money that you put into the policy. Some of the money goes towards internal expenses like "mortality cost", staffing, paperwork, office equipment (for the company that binds the coverage) or the like. The money that is left over is invested, internally at the company. If the company does well with the investments your policy cash value gains volume. If the company does not do well with the investments, you may perhaps not build as much cash value on a guaranteed basis. No matter what, though, with lifetime guaranteed policies that feature secondary guarantees you will never get any less than a policy that covers you for life.
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Guaranteed Interest Rate - Usually around 3-4% lately; this is the "worst case scenario" for your policy. If the company's investments do not do as well this is the worst that could happen. This is one side of the contract whereby the company contractually states what will happen in the future with your policy. If buying a UL contract, make sure that the longevity of the policy is based upon this guaranteed interest rate; if not, your policy may be relying upon the current interest rate.
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Current Interest Rate - This is a "best case scenario" for your policy. This side of the policy is a "what if" scenario. Current interest rates are usually illustrated as being higher than the guaranteed interest rate. The current interest rate is for those policy owners who are more daring and willing to put their faith in the insurance company. Often times, people will look at the current interest rate when buying a policy. This could be dangerous because the company reserves the right to lower (or raise) this current rate at any time. What does this mean for you? This means that your money could grow with the raising of the rate or it could not grow.
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Assumed Interest Rate - This is the same thing as the "current interest rate". In the insurance business, there are 2-3 different terms for everything to make the agents look smart :)
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Guarantee - A guarantee is a guarantee. If your policy contractually states that it is guaranteed to cover you for as long as you live whether by illustrating that fact numerically or in the verbage of the policy than it is guaranteed.
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Secondary Guarantee - This is a responsibility that the insurance company takes on to ensure that, no matter what happens your UL policy will be in force as long as you live (as long as you purchased a lapse protection, lifetime guaranteed product).
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Lifetime Guarantee - A lifetime guaranteed UL policy contractually states that you will be covered as long as you live. Policy "illustrations" usually show the face amount (death benefit) as covering the insured up to age 120.
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Limited Pay - With Universal Life, you can pay the policy up in as little or as many years as you'd like and still be covered for life. For instance, if you are now 55 years of age and you will be retiring at 65, you may want to look into getting a "paid-up policy" whereby you will pay for the next 10 years and at age 65 have a policy that is paid for (and will cover you for life). Modern policies offer limited pay provisions whereby you do not lose that "secondary guarantee" or "lifetime lapse protection". Opting for a limited pay policy is going to be more expensive, though, because you are squeezing a lifetime of premiums into a shortened number of years...but it can be worth it if you add up a lifetime of premiums!
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Paid Up Policy - This is the same as a limited pay policy (see above). You can pay 1 year, 4 years, 16 years, 40 years or whatever you like. The point is that at some point in your time on earth your policy will become an asset - you will no longer have payments on it and it will be "in force" for as long as you live.
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Lump Sum - With UL, you can "dump in" money in the form of a "lump sum". This lump sum of money can be used as a "single pay" or it can be used to increase the strength of the policy either in cash value or in longevity of coverage. Lump sums usually come from other (underperforming, old) UL or Whole Life policies...you may want to consider taking some money out of underperforming investments and putting that "lump sum" into a Universal Life Policy if your main goal is "wealth preservation" or Life coverage.
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Cash Value - How much "cash value" you have in a UL policy depends upon the amount of excess cash that is in the policy not needed to cover mortality expenses or the company's overhead. You have "guaranteed cash value" and you have "current or assumed cash value" (both explained above). You can elect to withdraw your cash value or you can leave it in the policy to propel the policy's longevity; this is your choice. Again, remember though, that if you pull ANY of your cash out of your policy it may lapse in the future; you may lose the "secondary guarantee" or the "lifetime protection".
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Modified Endowment Contract (MEC) - Basically stated "don't put too much money into a permanent life insurance policy or you will create a MEC". The government decided, back in the late '80s to limit the amount of money that one could put into a permanent (namely UL) policy. This limitation came as a result of too many policies lapsing - they lapsed because the agent sold the policy on a current or assumed interest rate basis. Back at that time, current interest rates were overly inflated at 8,10,12%! The assumption was that the policy would last a long time - based on these current interest rates. Well they didn't, they lapsed! SO, at this point in time, modern policy illustrations alert the agent (and you) that you are putting too much money into the policy, it is gaining too much cash value, and you are creating a MEC. What happens? Well if you go to pull money out of a MEC policy, you will pay the tax man dearly. My opinion: don't try to over-fund a life insurance policy. Go for coverage of your LIFE.
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1035 Exchange - This is a seamless, legal transaction whereby you can take the cash value of an annuity or life insurance contract (or any account that has gained interest) and transfer it into a permanent life insurance plan. This is beneficial because you don't want to have to pay taxes on that money when you take it out. The money simply transfers from account to account without creating a taxable occurrence.
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Conversion - You can convert your "term insurance policy" to a permanent policy by filling out what is usually a 1 page conversion form and signing an illustration (or proposal) of what will be your new policy. This proposal for insurance has a page showing the current interest rate projection, the guaranteed interest rate projection, the length of guaranteed coverage, and other legal verbiage. Conversions are especially beneficial if you have a current term policy and you do not want to go through underwriting. You may have had cancer, stroke, heart attack, or any number of occurrences that now make you uninsurable. With a conversion to a permanent plan, you are converted at the rating class (preferred?) that you were given at the time that you bought the term policy. Policy conversions are a simple way to lengthen the amount of time your life is covered without going through the red tape of underwriting.
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Term Conversion - This is what I am describing in the above information on "conversion". A "term conversion" is done by taking your current term policy and "converting" it, seamlessly, to a permanent plan such as a UL or whole life.
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Lapse Protection - A policy that does not have enough cash value or premiums can lapse or cease to exist. If a policy lapses, you will have to go through underwriting again and buy a new policy. If you are in bad health at the time that your policy lapses, you risk either being declined for a new policy or being rated (or charged) higher due to the increased risk that the insurance company is taking on in you. As long as you pay the prescribed premium your policy will not lapse. Secondary guarantees prevent lapsing - this is called "lapse protection".
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Dump-In - A "dump in" is a term used to describe a sum of money (usually in the thousands of dollars) that is "dumped in" to a permanent policy in the first year of coverage. When using the term dump in, one is usually referring to a more liquid type of money like cash in a bank account (as opposed to a 1035 exchange whereby the money to be dumped in is in another policy or tied up in an annuity).
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Secondary Guarantee - A secondary guarantee is the company's way of saying "if you pay at least this much money into this policy, we will guarantee that no matter what happens (even if interest rates don't go our way) we will guarantee that your policy stays in force for as long as you live. "secondary guarantees" are usually contractual, binding statements that allow UL to be sold on a guaranteed basis.
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Endowment Contract - Usually referred to as whole life, an "endowment contract" refers to a life insurance policy that is guaranteed to have as much cash value in it at age 100 as it does face amount (or death benefit). This costs you more money, though, to "endow" so be careful what you buy - if you want lifetime coverage for a death benefit to your beneficiaries go for a Universal Life plan. If you want to pay even more for a policy and guarantee that there will be so much cash value at age 100, you may want to look at a Whole life, endowment contract.
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Single Pay - With just about any modern permanent plan (UL or WL) one can opt for a "single premium". The premium will be much much more, of course, than an ongoing premium for life or, say, a 15 pay, but it will be over and done with and you can sit back and forget about it for the rest of your life. The single pay money that you put into a policy gains cash value, current and guaranteed interest (remember that the current interest is not a guaranteed value, only a projection of what might be). At any rate, a single pay may be the way to go depending upon your financial situation.
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Convert Term Insurance Policy - Converting a term insurance policy can be a simple way to prolong your life insurance coverage for as little or as long as you want without having to go through the regular underwriting process. If you have a term policy and you want to convert it to a permanent policy (I would highly recommend Universal Life) give me a call and I will discuss the plusses and minuses with you. I charge nothing for advice and would be glad to handle your case whether its a term conversion or simply the purchase of a new life insurance policy.
