22 July 2014 0 Comments

The Permanent Policy With No Cash Value

shutterstock_92389585Whole Life Insurance is the original type of permanent life insurance.  The premium is level, the cash value grows every year and the death benefit is guaranteed for life.  That all makes sense.  How, then is it possible for a Universal Life policy to have a level premium with a death benefit guaranteed for life, but with a cash value that is minuscule or non-existent?  That doesn’t seem to make sense.

It’s all in the policy design… and it is possible… and if you are looking for the lowest level premium for a lifetime guaranteed death benefits, this class of Universal Life delivers just that.  This current class of Universal Life uses a Secondary Guarantee to accomplish this.  Although both the guaranteed and projected cash value on an illustration for this policy might drop to zero, there is another set of guarantees being used only for the purpose of calculating the guaranteed death benefit.

It’s like a shadow cash value account that is based on a different set of cost-of-insurance and interest factors.  As long as that shadow account stays in the black, the death benefit is guaranteed.

The shadow account value is not shown on the policy illustration because it is not available for any purpose other than to support the death benefit.  If it were shown, people could mistake it for a surrender value available for other purposes.  As long as the column “Guaranteed Death Benefit” continues to show the policy’s original amount that shadow account has not gone into the red.  It is possible to have a policy that illustrates zero cash value for many years and continues to produce a guaranteed death benefit all the way to age 121.  The premium is a lot less than traditional Whole Life.

Keep in mind that if you withdraw cash value or do not pay the premium on time, as shown in the illustration, the death benefit guarantee will end sooner.  Most companies will credit the premium paid within the grace period as though it had been received on the actual due date, but it is always best to pay the premium on or before the date it is due.  Each year your annual policy statement from the insurance company should show you exactly for how long the death benefit is guaranteed assuming continuation of the current premium pattern.  It is always smart to check these calculations each year when you get that statement.

Secondary Guarantee Universal Life is a great way to keep premiums low without sacrificing death benefit guarantees.

Next…how life insurance can be the best or the worst financial tool to produce retirement income.

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