15 August 2014 0 Comments

The Flexibility of Universal Life

shutterstock_148496540My previous entry dealt with how Universal Life (UL) could be structured to resemble a 20 year term policy.  This is just one of the flexibility features of Universal Life.  There might also be some flexibility in amount of death benefit, but here I’ll deal just with premium flexibility and access to cash value in Universal Life policies.

Universal Life policies have no stated premium.  There may be a premium that you pay on a regular basis, but that is the planned premium, not the stated premium.  If you skip a planned premium, it does not mean that the policy will lapse.  The cost of insurance and policy fees are withdrawn from the policy’s account value and as long as there is enough value to pay for these items the policy will continue in force.  With term insurance, if the stated premium is not paid, the policy will lapse.  With Whole Life if the stated premium is not paid, the policy will lapse if there is no net cash value, or if there is cash value it will be placed in the automatic non-forfeiture position which is likely to be a reduced paid up policy.  If the whole life policy has an automatic premium loan provision and sufficient net cash value to pay the stated premium, a policy loan—for which interest will be charged—will occur.

With a Universal Life policy you may also pay an unscheduled additional premium at any time. There will be some restrictions on the maximum payments allowed to be certain that the policy continues to qualify as life insurance.  This increased premium provision might be utilized when excess funds are available in a given year in order decrease or eliminate premiums in the future when premiums may not be so readily available.

The premium cessation feature in UL can be meaningful at advanced ages when a life threatening diagnosis has been made.  For example, if an insured is told they have a maximum of 2 years of life expectancy they should request an illustration from their insurance company showing the results if premiums were immediately discontinued.  If the guaranteed death benefit would continue for, let’s say, another 5 years, they could discontinue future premium payments and the policy’s death benefit would remain in full force with no reduction in death benefit such as would have occurred to repay a policy loan with the whole life automatic premium loan provision.

During your life time you can also access UL’s cash value by withdrawing the money as opposed to borrowing, thereby eliminating loan interest charges.  With all of this flexibility, however, you must keep in mind that the policy could lapse if excess cash is withdrawn or premiums discontinued for too long, so keep in touch with your agent for regular policy analysis to avoid costly surprises.

Coming up…needs of the International/foreign national for life insurance.

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