Universal Life Insurance

Universal Life Insurance

Universal Life Insurance (UL), also called “Flexible Premium Adjustable Life Insurance,” entered the life insurance market in the early 1980s as a more flexible version of Whole Life Insurance. Like Whole Life, Universal Life Insurance features a savings element that grows on a tax-deferred basis. A portion of your premiums are invested by the insurance company in bonds, mortgages and money market funds. The return on the investments is credited to your policy tax-deferred. A guaranteed minimum interest rate applied to the policy (usually around 4%) means that, no matter how the investments perform, the insurance company guarantees a certain minimum return on your money. If the insurance company does well with its investments, the interest rate return on the accumulated cash value will increase. Universal Life allows you to choose from two death benefit options. Option A pays the death benefit out of the policy’s cash value; the more cash value you build up means the company is on the hook for less insurance (and therefore costs less). Option B pays the face amount stated in the contract, plus any cash values you accumulated over the years (costs more). Many Universal Life Insurance policies today offer a no-lapse guarantee: as long as you pay the minimum designated premium, the policy will stay in force to age 100 (or even to age 120). However, paying the minimum guaranteed premium is rarely sufficient to build up significant cash values. In summary: Universal life insurance is a “flexible premium, adjustable life insurance policy”. Universal life insurance policies are characterized mainly by their flexibility in

  • premiums,
  • death benefits, and
  • access to cash value.

Premiums

Universal life insurance is very different from traditional whole life insurance policies. Rather than the rigid rules of whole life insurance under which a policy owner must pay billed premiums no later than the end of the grace period or risk policy lapse, a universal life insurance policy owner can pay

  • billed premiums;
  • more than the billed premiums;
  • less than the billed premiums;
  • no premium.

Further, the policy owner may pay a premium at some time other than when billed. Under a Universal Life Insurance Policy, the policy owner has complete freedom concerning how much premium to pay and when to pay it. Universal life insurance represents a significant change from the traditional fixed premium whole life insurance products that preceded it. Earlier life insurance products were characterized by inflexibility in premiums, cash value, and death benefit. If the policyowner wants to reduce the premium for a whole life insurance policy, it is necessary to reduce the face value of the policy through a partial surrender of the policy. Unfortunately, this can result in the release of cash value to the policyowner and possible income tax liability. Universal life insurance policies unlock the connection between premium, face amount and cash value. Despite the premium flexibility, of universal life insurance, there are certain rules that apply to premium payments. Although a policyowner may choose to pay no premium into the policy on a particular premium-due date, any payments that are made must meet a certain minimum to help the carrier to manage the costs of premium collection and processing. There are three premiums normally associated with universal life insurance policies:

  • Minimum premiums,
  • Target premiums
  • Maximum premiums.

The minimum premium is the premium that, if paid each year, would generally be just enough to keep the policy in force for one more year without the accumulation of any cash value. The universal life insurance target premium is generally the amount of premium that will keep the policy in force for the insured’s lifetime. There is, however, no guarantee that the universal life insurance policy will remain in force for that period if only the target premium is paid. In fact, there is no guarantee that the universal life insurance policy will remain in force regardless of the premium level that is maintained by the policy owner. The maximum premium is the largest permitted premium that will enable the universal life insurance policy to maintain its character as life insurance. If you pay additional premiums, then the policy will be considered a “Modified Endowment Contract” or MEC. MECs lose much of the tax advantages of life insurance. No Lapse Guaranteed Universal Life Insurance Policies have a defined premium level at which the carrier guarantees that the policy will remain in force even if the cash value should dip below zero and the policy would otherwise lapse. Pros: Universal Life gives you the flexibility to adjust the death benefit as your needs change, as well as the flexibility to pay smaller or larger premiums – depending on your financial circumstances. This is often an important feature for families who may have fluctuations in their ability to pay. Cons: If your premium payments are too small for too long, the policy could lapse, leaving you without insurance protection. Also, if the insurance company does poorly with its investments, the interest return on the cash portion of the policy will decrease (but never below the minimum interest rate guaranteed in the contract). In this case, cash values will probably fall, forcing you to pay more premium in the later years.

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5 Responses to “Universal Life Insurance”

  1. L Windsor says:

    I have a universal life policy with Met Life for $500K started 7/19/1987. It has an accumulation fund of 2447.14 as of now. I have always paid the $78/mos premium.

    It say that if I continue to pay the premium as scheduled, on the basis of current interest rates and cost of insurance charges, my coverage will remain in effect until Feb 2012.

    YET, as I understand your info above, the policy should remain in effect until I am age 100, as long as I continue to pay the premiums of $78/mos established in 1987.

    Which is correct?
    Thanks,
    L Windsor

    • LifeInsurance.net says:

      Universal life policies have flexible premiums, you have a choice in how large of a payment you send in every month. Nevertheless, the underlying cost of keeping the policy in force remains the same whether you pay enough premium or not. If you short the premiums below the maintenance cost of the policy the policy eventually lapses. That seems to be the case here. Your agent set your premiums low enough that they can’t support the policy and keep it in force. He probably guessed that you would earn a higher interest rate than it actually worked out. Your best bet is to look at replacing the policy with a guaranteed policy, and pay the premiums at the guaranteed rate. Give us a call at the 800 958 0028 and we can advise you on your policy in particular.

  2. Kim Ranzau says:

    I recently got divorced and my ex-husband was ordered by the Court to obtain a life insurance policy for $750,000.00 to cover the child support for our 29 year old mentally handicapped daughter until she is 77 in case something happens to him. I finally received a copy of the policy and it is a Flexible Premium Adjustable Life Insurance Policy and the policy shows under Benefit Information – Initial Specified Amount $750,000.00, Minimum Specified Amount $50,000.00. I have a colleague who owns his own insurance agency and I sent a copy of the policy for him to look over. He is telling me that the Death Benefit is determined by the amount of premiums paid into the policy. Currently it is set up for semi-annual payments of $1,735.00. My concern is that if something happened to him that there would not be $750,000.00 worth of Life Insurance to take care of my daughter in her later years and she is not able to support herself.
    Can you give me more info about how these types of policies work. I have read the policy and tried to look up information on the internet, but it is confusing.
    Thanks, Kim

    • Matthew Mazzocco says:

      Kim, if the Net Death Benefit of the policy is $750k, then if anything were to happen it would pay out $750k ACCORDING to the payout schedule your husband set up in the policy. However, as this kind of policy does build cash value, the actual payout at the time of death is the amount of cash value PLUS the policy face amount(which as you state is $750k).

      I cannot offer any more detailed assistance with much accuracy without knowing the specifics of the policy. If you would like to provide more detailed information(not on public forum) I will gladly explain to you exactly what you have in detail without charge.

      I will offer this. Should something happen and your daughter inherit that amount of money, it would be wise that proper precautions are put in place to make certain that it will last her. One possibility is using the amount to purchase long-term-care coverage for her. Another is to use it to fund an annuity which can be allowed to grow for years until she needs the money. The solution may be a mixture of the two. Utilizing a Trust is also an option which can ensure that a responsible trustee will be administering the dissemination of her funds in her best interests.

  3. c.a.lerio says:

    I am 82 year old ,am i to old for no-lapse universal life,date of birth 1929