Universal life insurance policies are designed to provide flexible premiums and flexible death benefit options which can be tailored for a lifetime of protection. They offer premiums structures like that of increasing premium term plans which allow lower premiums in the early years or a guideline or target premium for life. There are various types of universal life (UL) insurance plans, but the following are common advantages and disadvantages.
- ADVANTAGES OF WHOLE LIFE INSURANCE:
- FLEXIBLE PREMIUMS – Perhaps the most notable feature of UL products is there various premium options. Normal ULs will offer at least four premium choices on the application. A minimum premium which as it implies is the lowest available premium for the selected face amount of coverage; a target premium which is based on the amount needed to sustain the death benefit based on actuarial expectations and projected performance; a MEC (Modified Endowment Contract) premium, which is the maximum allowable premium for 6 of 7 years without losing the policy’s tax advantaged status; and a scheduled premium which a premium amount chosen by the policyowner between the minimum monthly premium and what would be allowed for a single premium dump-in amount.
- LONG TERM VALUE – If funded properly UL policies can offer a good value for the long run. Most reputable insurers offer interest rates on their UL accumulation accounts above the policy’s guaranteed interest rate.
- GUARANTEED PROTECTION – Universal Life plans can provide guaranteed protection as long as the target premiums are being paid.
- DEATH BENEFITS OPTIONS – All UL plans offer at least two death benefit options. They offer a level death benefit option which allows the cash values more accumulation because fewer premiums are required to pay for the death benefit. And, for clients wanting an increasing death benefit, they can choose that option on a UL, where a larger portion of their premiums will be used to increase the death benefit rather than the cash values.
- TAX-DEFERRED CASH BUILD-UP – Cash values in life insurance policies accumulate tax-deferred. Additionally, in many states the cash value is protected from creditors.
- FLEXIBILITY – Most universal life insurance plans allow riders and extra cash dump-ins which give the policy more flexibility. Additionally, by paying in extra premiums the policyowner may be able to stop paying future premiums.
- TERM RIDERS – Most whole life plans allow term life insurance riders. These riders, especially on children, provide an excellent way to provide needed coverage on a dependent at a much lower cost than it would be to buy permanent policies on each dependent.
- ROP ALTERNATIVES – Because of their tax advantaged status tied into their term like design, UL plans often offer a better alternative to Return of Premium term products.
- NON-FORFEITURE VALUES – By law permanent policies offer certain options in the event the policy lapses after premiums have been paid into the policy. These values include cash surrender value, paid-up insurance, or extended term insurance.
- NO–LAPSE GUARANTEE RIDER – In order to solve problems related to market changes and minimum funding, most reputable insurers who sell ULs have added ‘no-lapse’ riders. However, along with their cost, the period covered by these riders can vary from 5 years to the life of the policy. These riders may require a specific premium amount to be paid.
- DISADVANTAGES OF UNIVERSAL LIFE INSURANCE:
- MINIMUM FUNDING LENDING TO LAPSES – Minimum funded UL plans have been called a ‘ticking time bomb’ because if interest rates fall too low they can ‘cost policyholders or their families tens, or even hundreds, of thousands of dollars…(Life Insurance Selling; May 1988, p. 88, 90)’ or they can lead to unforeseeable future lapsing.
- PROBLEMATIC – Even during their best periods of high interest rates top selling agents have called ULs problematic. The reason is that most policyowners do not understand them. For example, if the owner takes out a significant portion of the UL’s cash value in their advance ages, then the policy will often require additional premiums or be subject to lapsing.
- HIGH SURRENDER CHARGES FOR YEARS – Though loans can be used the pay premiums on a UL policy whenever they are available to meet the required premiums, anyone who has surrendered a UL policy in its early years has faced those dreadful surrender charges. All UL plans have contractual surrender charges which allow the policy to function according to the insurers projections. These ‘surrender charges’ are based on a percentage of the available cash value. They typically last until the policy’s tenth or fifteenth year; and they normally began at over 90% of the available cash value and decrease down to about 50 % or 60 % of the available cash value by the tenth year.
- MONITORING – UL policies should be at least annually monitored by the policyowner to be aware of the market fluctuations and interest rates and how they have affected their accumulation units and future projections. The policyowner should also look at the ‘Guaranteed Maximum Cost of Insurance Rates’ page, to get an understanding of how, unlike whole life plans, UL premiums are based on increasing premiums directly related to the age of the insured.
- SHORT-TERM INTEREST RATES – Traditional Universal life policies are not variable plans, and thus are regulated in such a way that their interest rates are limited to that of conservative short-term investments.
- LOW GUARANTEED INTEREST RATE – Modern UL plans typically offer a low guaranteed interest rate; normally lower than those offered by whole life plans of highly rated carriers.
- PROBLEMATIC: LOWER THAN EXPECTED MARKET RETURNS – Universal life policies which consistently received lower than expected interest rates will require significantly more premiums as the insured gets older; or they will lapse quicker than expected based on their funding. Additionally, the policyowner may not meet the requirements for the no-lapse guarantee rider.
- MODIFIED ENDOWMENTS – If too much money is put into a life insurance plan it can become a Modified Endowment Contract (MEC) which would make withdrawals taxable until all the gain is realized. Additionally, MEC can be subject to IRS 10% penalties as are IRAs.
- CAN BE OVER–PRICED TERM INSURANCE – Certain UL plans that are funded at the minimum premium levels and that received low interest rates on the side account can end up being more costly than 20 or 30 year term plans. If someone needs coverage for less than 30 years, they should investigate when the death benefit would end based on the non-guaranteed mid-point projections in the legally require illustrations.
- BUY TERM AND INVEST THE DIFFERENCE OPTION – For people who understand and still choose to follow the buy term and invest the difference option, they should investigate variable whole life and variable universal life products which offer the tax advantages of permanent life insurance plans, along with a full range of mutual fund side accounts. However, these plans require registered representatives to sell them and responsible buyers who understand their market risk and loss potentials.
FOR MORE INFORMATION (see the following articles):
Your Life Insurance Choices? – This link addresses the various types of life insurance plans available, some purposes for their design, and provides links to information and quotes on various products and their uses.
What policy should I buy? – This link may help you decide which life insurance product is the best for you.
Term Life vs. Permanent Life Insurance – This link explains and compares the differences in term life insurance versus permanent life insurance plans.