Universal Life Insurance (UL) was introduced in 1979 more than 130 years after other types of life insurance were being sold in the United States. The premiums paid into a UL go into a side account that earns interest tied to short-term interest rates. ULs often provide a better alternative to Return of Premium (ROP) term plans. UL products came on the scene at a time when interest rates on short-term investments were in the double digits and when a certain CEO was on his way to becoming a billionaire by selling the ‘buy term and invest the difference’ concept through over 50,000 part-time agents.
In 1980, money market accounts and one year CDs returned as much as 12%. Shortly after UL’s arrival, the banking industry lobbied Congress to regulate their tax advantaged status. So Congress passed TEFRA (1982), DEFRA (1984), and TAMRA (1988), establishing the Guideline Premium Test (GPT), the ‘7-year pay’ test, and Cash Value Accumulation Test (CVAT), regulating the amount of money that could be dumped into a life insurance policy without losing it FIFO (first-in, first-out) status. By 2002, short term interest rates fell to less than 2%, and then moved back up until the 2008 market crash. Two years later in 2010, the average money market rate had fallen to about .25%. The UL industry has survived many challenges; nevertheless, it remains a taxed favored favorite life insurance product.
- FLEXIBLE PREMIUMS:
There are various universal life (UL) plans available; however, in general the premium options for UL policies include a minimum premium, a target premium, a scheduled premium, and a MEC (Modified Endowment Contract) premium, which is the maximum allowable premium for 6 of 7 years without losing FIFO status. In the early years of the policy, the premiums are lower like that of term plans. This gives the owner the option of paying lower premiums or building up cash quicker. The excess portion of the payments, the amount over the cost of insurance, is put into a savings account or accumulation reserve that builds up with interest.
- GUARANTEED CASH VALUE WITH TAX-DEFERRED GROWTH:
Like traditional Whole life plans, UL plans have a base guaranteed interest rate of return on the accumulation account. Typically the cash values can be used to pay premiums due; however, they usually cannot be surrendered without stiff surrender charges during the policy’s early years. ULs enjoy the same tax-deferred growth on their savings accounts as whole life plans.
- PROTECTION AND NON-FORFEITURE VALUES:
In many states life insurance policies and their values are protected from creditors. By law, in every state of the US, life insurance policies have non-forfeiture values. They will be listed near the front of your policy. The NAIC (National Association of Insurance Commissioners) Standard Nonforfeiture Law for Life Insurance is a guideline used by most states. Nonforfeiture values in a life insurance policy are values protected by law that cannot be forfeited even if the policyowner ceases to pay the premiums. These benefits include: cash surrender value, loan value, paid-up insurance, and extended term insurance.
- DEATH BENEFIT OPTIONS:
Most UL plans offer flexible death benefit options. They offer a level death benefit which allows the cash values more accumulation because fewer premiums are required to pay for the death benefit. However, for clients wanting an increasing death benefit, they can choose that option on a UL, and a larger portion of their premiums will be used for that option.
- TAX-FREE WITHDRAWALS AND DEATH BENEFITS:
The death benefit is guaranteed to never be less than the face amount of the policy less any policy loans and interest. However, most modern whole life policies, in which the dividends are placed into the policy, will have scheduled death benefits that may increase as much as two or three times the initial face amount. Additionally, the portion of any cash withdrawal is normally tax-free until the withdrawal exceeds the premiums paid into the policy. And unless the estate is named beneficiary, normally the death benefit of a life insurance plan is tax-free.
Most life insurance policies have riders or additional available amendments to the standard policy contract. A rider is an amendment or endorsement to an insurance policy, which for an extra premium gives the policyowner extra benefits or options. Examples include children insurance riders, living benefits, coverage for other insureds, accidental death benefit, term riders, and waiver of premium. Many ULs also offer a ‘no-lapse’ rider.
- FOR MORE INFORMATION (see the following articles):
Permanent Life Insurance – This link explains the nature of permanent or cash value life insurance plans.
Advantages & Disadvantages of Universal Life Insurance – This link addresses the most important advantages and disadvantages to universal life insurance plans.
What policy should I buy? – This link may help you decide which life insurance product is the best for you.