1 March 2013 0 Comments

More on “When The Premium Stops”: Universal Life

family celebrates winterIn my post on February 2, I started a discussion of what happens when premium payments are stopped and how this does not necessarily mean that insurance stops.  I started with Whole Life.  Now it’s on to Universal Life.

Universal Life (UL) does not have a stipulated premium that must be paid, so there is no Automatic Premium loan provision available as there is with Whole Life.  Although there is not a required premium with UL, there is a planned premium.  The planned premium is what the policy owner intends to pay in order for the policy to perform as planned.  If the planned premium is not paid it does not mean that the policy will terminate.  As long as the policy’s cash values are sufficient to cover administrative charges and cost of insurance (COI), the policy will remain in force for the full face amount.  Some UL policies even include a provision that continues the coverage when there are no cash values…more on that shortly.

This continuation of the full death benefit for a period of time when planned premiums are discontinued is similar to the “Extended Term” non-forfeiture option available with whole life—with one major difference.  If the UL planned premium has been discontinued and the death benefit is still in force, premium may be restarted in order to extend the death benefit.  That is what the Extended Term option in whole life policies does not allow.  Once that whole Life option has been elected, there is no way to continue coverage beyond the original term extension.

This premium flexibility in the UL provides a great planning tool.  To illustrate, here’s an actual case:  The insured has a $300,000 UL policy that he intends to keep in force until he dies.  He just turned age 70 and is in good health.  The current monthly premium is $110 which, if he continues to pay, guarantees the $300,000 death benefit through age 121.  If, instead, he discontinues paying premiums today, the death benefit is guaranteed to continue through age 95.  If he continues to pay premiums and later on decides to discontinue premiums, the guarantee period will extend further.  He could also reduce the premium to less than $110 per month.  If it appears that he will live beyond the extension period, premiums can be resumed at any time.  The amount required will depend on for how long the premium recess went on and to what age the guarantee is to be extended.  Each year the policy statement he receives from the insurance company will inform him of the duration of coverage guarantee assuming premiums are discontinued.

Above, I mentioned that some UL policies will guarantee death benefits even when there are no cash values. This policy is one of those.  It includes a lapse protection rider which continues protection even if the policy’s cash values are totally depleted.  The rider generates a secondary cash account, based on higher interest and lower COI factors.  This cash account is not available for any purpose other than to provide death benefits, but does a great job of improving death benefit guarantees.   Essentially, with this rider UL can be structured to perform like term insurance to any age.

Coming up, I’ll share some thoughts my wife and I had after seeing the movie, “56 Up.”

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