20 September 2012 0 Comments

Understanding Life Insurance Policies — “UNIVERSAL LIFE”

Unlike Whole Life, Universal Life (UL) does not have a fixed premium.  You will probably select a planned premium, but you don’t necessarily need to pay the planned premium to keep your policy going.  This is good, because it gives you more flexibility, but it can also be bad because if you pay too little, the policy may lapse without some gigantic future premiums.  UL must be managed to avoid these types of surprises.  Your annual policy statement from the insurance company should tell you for how long your policy will last based on both guaranteed and current assumptions, with and without the continuation of planned premiums.

Early versions of UL did very well based on current credited interest and mortality charges.  However, if you were looking for a guaranteed premium and death benefit, they did not do as well as Whole Life (WL).  With the more modern UL versions, this weakness was corrected if the policy includes a “secondary guarantee.”  Now, lifetime guarantees are available with UL that cost much, much less than WL.  I’m not going to elaborate; just ask your agent to explain how those secondary guarantees work in your policy.

UL policies designed to guarantee a minimum premium for a lifetime death benefit will not develop much cash value.  If cash during your lifetime is more important and you still want the flexibility of a UL policy, then you should look at Indexed Universal Life (IUL).  I’ll be dealing with IUL in more depth in my next entry.

The reason for premium flexibility with UL is because each month the policy expense charges (including pure cost of insurance) are withdrawn from the policy’s cash value.  As long as this does not result in a negative cash value, the policy will stay in force, even if no current premium is paid.  If you get to the point where the cash value goes negative, you will need to pay enough premium to cover the policy charges, but you will not be required to prove “insurability“.

With UL you have an option of selecting a death benefit that is level, or increases with the policy’s cash value.  The increasing option will cost much more since the pure cost of insurance is always charged on the full initial amount, not the net amount (Original face amount minus the cash value).  For this reason, most people opt for the level death benefit.  However, if you currently own a UL policy and have recently been diagnosed with a life threatening illness, ask your insurance company to change to the increasing option.  If they do this without asking you for current evidence of “insurability“, you have just increased the amount of your death benefit and the long term cost is not likely to matter.

Up next is Indexed Universal Life…opportunity and concerns.

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