Insider Guide to Universal Life (Companies + Rates)
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In this article, I’ve laid it all out there. Everything you need to know about universal life insurance and where to look for it is all right here. You might not know about the four types of universal life, but by the end, you will.
Of course, learning about life insurance can seem like a drag, but it makes choosing a policy that much easier. Almost as easy as it is to compare quotes for FREE by using the tool at the right!
What is universal life insurance?
Universal life insurance is permanent life insurance with a savings component. The savings component is also known as “cash value” and “cash accumulation.”
A universal life policy will stay in effect throughout the policyholder’s life, as long as the premiums are paid.
Any time the policyholder pays more than the premium, the savings component increases; that money can then be used later on to pay the premiums or for another investment, like retirement.
– Origin Story
During the late 1970s and early 1980s, the Federal Reserve was fighting inflation with high-interest rates, and the only types of life insurance out there were term or whole. It’s essential also to mention that the general mentality at the time was “buy term and invest the rest.”
Many companies that sell life insurance are mutual companies, which means the policyholders are the owners of the company. So during the time of high-interest rates, mutual companies established a DIR, or Dividend Interest Rate. The DIR is the backbone of the process that annually pays dividends to the policyholders.
You’re probably wondering what any of this has to do with universal life insurance. Well, above is the environment in which universal life was born — a combination of term and whole life insurance all in one policy.
The selling point for the first generation universal life policies was the cash accumulation portion of your policy would eventually accrue enough interest to pay the monthly premium. A plan that will pay for itself seems too good to pass up.
If the interest rates could stay high forever, universal life would be great. However, in the 1990s, interest rates began to plummet. This caused a problem when universal life policies were advertised with vanishing premiums within 10 years.
False promises of self-sustaining policies led some companies into the courtroom. Lawsuits arose due to allegedly deceptive sales practices.
Later on in this article, there are examples of how universal life has negatively impacted some Americans, but first, let’s lay out the evolution of universal life insurance.
Due to the falling interest rates, dividends also began to decline. This sparked the beginning of variable universal life, which presents the policyholder with the option of various stock and bond subaccounts to invest the cash value in.
Variable life seems not very favorable. Below is what Peter C. Kratt, CFP®, LIC has to say about it.
“VULs [Varible Universal Life] are toxic insurance assets because of extreme investment volatility that destroys policy owner confidence when the inevitable investment crashes occur.”
The first decade of the new millennium saw the creation of two other types of universal life: guaranteed and indexed. One is more like term life, and the other is still associated with the stock market. Both are discussed in detail further down in this article.
– How does it work?
Universal life policies consist of both a death benefit, which your loved ones receive upon your death, and a cash value portion, which is accessible to you while still alive. Additionally, universal life policies are known for being flexible.
The cost of insurance or COI is the minimum premium needed to keep the policy active. The COI is based on mortality, interest, and expenses. Any amount of premium that is more than the COI is deposited into the cash value part of the policy.
It’s important to mention that COIs increase over time due to age, insurability, and risk. At the same time, the cash value portion is subject to the current market or minimum interest rate. If not managed well, this can cause difficulties later on.
When a death benefit is paid out, it is tax-free. Universal life is considered tax-advantaged, which means any growth within the cash value portion is untaxed. You may also borrow against it tax-free, as long as you are in good standing. However, if you are to withdraw money or surrender a portion of the cash value, it can be subject to taxation.
– Whole vs. Universal
Whole and universal are both types of permanent life insurance, meaning you will have coverage for the rest of your life as long as your policy is in good standing. The requirements for keeping a policy in good standing vary from whole to universal.
Long-term goals are what whole life insurance policies are based around.
It’s about a surviving spouse or child’s monetary needs after death. To achieve this, whole life requires consistent payments of a fixed premium for the guarantee of a fixed death benefit.
With universal life, flexibility is the name of the game. After the first payment, policyholders have the freedom to increase/decrease the amount and/or frequency of the premium payments. In addition, the value of the death benefit is also flexible, along with the cash value portion.
The death benefit under a universal policy can be one of two types: fixed or increasing. A fixed death benefit will pay out a guaranteed amount at death. An increasing death benefit is equal to the face value of the policy plus the cash value amount.
Guarantees are whole life’s specialty; whole life policies have a cash value portion that accumulates interest at a fixed rate. Another bonus of whole life policies is the annual dividends paid to owners, either in cash or added directly to the cash value.
The upside of universal life is fluidity. Policyholders are able to partially withdraw funds in addition to the flexible payment and coverage. Due to the flexibility, it requires more responsibility and attention to detail than does having a whole life policy.
The biggest downside of both is the cost. Whole life is often expensive, especially when compared to term life. Universal life tends to have costly premiums in the beginning, to build up the cash value. Over time, the premium will be dependent on how well the policy is managed, along with favorable or unfavorable interest rates.
The prime time to buy a whole life policy is when you are young, to lock in a lower premium for one of the most expensive types of life insurance. On the other hand, universal life policies are perfect for those who need more freedom with their money now, like the self-employed.
Types of Universal Life Insurance
Alright, let’s say universal life sounds like it would fit with your life. There are a few different types of universal life you should be aware of before jumping into the first policy that comes along.
Below is a breakdown of non-guaranteed, guaranteed, indexed, and variable universal life policies, along with examples of when each type performs its best.
– Traditional or Non-Guaranteed Universal
Everything I have discussed above, unless specified, refers to this type of universal life insurance. Traditional universal life insurance is built around being flexible, which resulted in there being a lack of guarantees.
There is a great benefit in being able to adjust premium payments, death benefits, and savings.
It is when low-interest rates and increasing premiums cause trouble that people begin to be dissuaded from choosing this type of policy.
When interest rates are high, this type of policy’s cash value grows fast and tax-free, which can be a huge plus. The policyholder must know, though, that when interest rates are low, your cash value portion might not grow fast enough to compensate for increasing premiums over time.
The first universal life policies were written under the assumption that double-digit return rates would continue. When interest rates plummeted, many policyholders were surprised by the steep increase of out-of-pocket money needed to cover premiums.
Also, maturity dates are very common with universal life policies. When the policyholder reaches a certain age, usually in the 90+ range, they will receive a payment, and their coverage will end. Many times the cash value is paid out as an endowment, which is then taxed.
Outliving your insurance policy can negatively impact you. Insurance companies can pay out cash values while eliminating death benefits. This can be a slippery slope for retirees to manage with longer life expectancies, fixed incomes, and fluctuating interest rates.
Many of the first universal policies purchased have now caused havoc and destroyed hope for a comfortable retirement. I dig into this retirement disaster in the section below.
Essentially, this type of insurance is mainly for the diligent and those who do not mind the risk. However, there are better options out there to cater more to people’s real-life goals.
Non-guaranteed universal life policies are the original design for universal life insurance. However, like with many first tries, there are many improvements to yearn for. That is why three more types of universal life insurance have been created since.
– Guaranteed Universal
Guaranteed universal is gaining popularity as a permanent life insurance option, and for obvious reasons. It is the least expensive form of permanent insurance. Also, it happens to be similar to term insurance, in as much as there is an age that the policy covers until, i.e., 95,100,121.
Of course, long-term coverage isn’t the only guarantee. Additionally, premiums won’t increase as you age, death benefits will remain the same as long as premiums are paid, and there is no need for additional money to build an investment.
The reason for that is that guaranteed universal plans are not tied to an investment. This is the main difference between guaranteed universal and whole life insurance; guaranteed policies don’t have a cash value aspect that requires funds.
Not having a cash value aspect is the reason guaranteed is less expensive than whole life.
It is a great option when you don’t want to pour excess money into your policy. Also, with this type of universal life, there is less money required upfront.
As mentioned above, guaranteed universal sets up an age that the policy will cover until. This is known as an “endowment age,” which is when the cash value equals the death benefit. It is best to view the cash value as a living benefit to go along with the death benefit.
With this type of policy, as well as whole life, if the endowment age is reached or the death benefit is paid, any excess cash value is usually absorbed by the insurance company.
So what is guaranteed universal life ideal for?
- Leaving an inheritance
- Avoiding estate taxes
- Paying for final and burial expenses
- Maximize pension
– Indexed Universal
So what type of universal life policy has guaranteed death benefits as well as a cash value portion? Indexed universal life policies include cash values that grow dependent upon market indices like the S&P 500 or Nasdaq 100.
You won’t lose money when the market dips, however, because your principal is guaranteed. There is usually a cap on how much you can earn, which is a fair exchange for continual growth. You can also add more to the account without limits.
It is great that you can add to the account whenever, but the best part is being able to access that money without penalty at any age.
However, because indexed universal is a long-term life insurance policy, you should plan on leaving it alone for at least 10 years for it to become a substantial asset.
That being said, if you are interested more in investment than life insurance, it may be best to go with term insurance and another investment option, i.e., 401k or IRA. Those who want life insurance and to dip your toes safely into the investment pool, this type of universal life may be right for you.
Here’s a video to explain.
Next up is variable universal.
– Variable Universal
The last type of universal life insurance we will see is also the most like a mutual fund. Variable universal policies allow the owner to choose from a variety of subaccounts to invest their cash value in. The amount invested is also up to the policyholder.
These types of policies are great for people who want a moderate level of control about where and how much they invest their cash value. Compared to the other types of universal life, variable universal definitely has the most investment freedom.
When I think of variable universal life policies, I think of the lack of limits it has compared to whole life. Not only is there no endowment age, death benefits can continually increase, and, with a variety of investments, there is also the high rates of return in a separate account.
If managed properly, a variable universal policy can be worth a lot more than whole life, all while paying the same premiums.
– Which one’s best?
Really, what it comes down to is what you want out of your policy. For some people, playing it safe with guaranteed universal is also cheap, which is nice.
Personally, I would go with indexed universal because of the thrill of being involved with the stock market. At the same time, I would be protected against any downturns the market may take.
Each type of universal life could work for many different people; they each have their strengths and weaknesses.
Each company, however, does not offer each type individually or may offer hybrid options.
– Who might benefit from universal life insurance?
Universal life policies are great for people who want a lot of control over their money; a lot of control means a lot of responsibility. If you don’t have the discipline to check in with your policy often, this type of insurance may not be for you.
The number-one selling point for universal life is flexibility. Therefore, this type of policy works well for people with a fluctuating income. Many people who are self-employed can benefit from the freedom that flexible premiums and death benefits provide.
Though we can’t predict the future, sometimes being prepared for the possibility of change is what’s best. That is when universal life policies should be considered.
– How Universal Life Insurance Can Go Wrong
As you might have noticed, there isn’t a long list of people that I recommend hop in line to buy a universal life policy. That doesn’t mean these policies are inherently bad, just that things can go wrong.
Within the last decade, we have seen the misfortune universal life policies are bringing to those who purchased the first universal life policies. Those policyholders who are into their 80s and 90s are being crushed or are in danger of being crushed by unexpected circumstances.
Earlier in this article, I mentioned a retirement disaster; this disaster mainly affects the owners of the first round of universal life policies. So let’s recap to paint a picture to make sense of it all.
Back in the 1980s, interest rates were high, which helped the universal life policies take off. In the 1990s, though, they started to dip. Let’s look back in history at the average rates by year for back then.
|Year||Average Interest Rate||Year High||Year Low|
As we can see, in 1981, rates were at a whopping 16.39 percent. That seems insanely high, but optimism drove the expectation for these rates to stay sky-high. Twelve years later, rates were not even a fourth of what they were in 1981.
If your memory’s good, you’ll remember that many companies were tied up in court due to lawsuits for deceptive sales practices. A quarter of a century later, it seems obvious that returns were never going to stay high as the early decade had deceivingly suggested.
From 1994-2007, rates stayed somewhat stable, fluttering between 3.22-6.24 percent. There is the exception of 2002, 2003, and 2004 when rates dropped in-between 1-2 percent.
|Year||Average Interest Rate||Year High||Year Low|
Those little dives are nothing when we look onto the most recent years. Unless you have been living under a rock, the Great Recession of 2008 is not a new concept for you. Let’s turn to the numbers.
So the decline begins in 2008 but hits bottom in 2014 with 0.09 percent. This year has the highest rate since 2007. For eight consecutive years, the rate stayed under 1 percent.
|Year||Average Interest Rate||Year High||Year Low|
These tables are the backdrop for the retirement disaster that looms in front of us. Due to low-interest rates, the cash value portion of the initial universal life policies was unable to accumulate enough money to pay the premiums.
Exactly what the lawsuits in the 1990s foreshadowed — empty promises of vanishing premiums wreaking havoc on policyholders finances — is precisely what happened. Now I may sound dramatic, but let me illustrate further how messed up some people’s lives now are because of their failing universal life policy.
The only way to understand this mess is through real-life examples. Let’s look at two examples, Bernice Sack and Nicholaus Vertullo, to gauge the impact of being blindsided by their failing policy.
Bernice is 95, and when she purchased her universal life policy over 35 years ago she was paying $56 a month. That has jumped to over $285 a month. Living off a fixed income while having your life insurance try and squeeze the rest out of you is sure to be stressful.
Insurers have been acting upon the fine print in many of these policies, which allows them to increase long-static monthly premiums. Some have been buried underneath premiums that have increased over 200 percent.
This brings me to our second example, Nicholaus Vertullo who is 86 years old. Vertullo is paying $30,000 a year for three policies worth $475,000 in total coverage. He has been paying the same policies for over thirty years but is now paying triple what the original premiums were.
These scenarios are extremely disheartening for an entire generation that was under the impression their life insurance would grow a cash value adequate enough to cover the premiums in old age.
Aiming blame is a useless feat, but this crisis helps emphasize why shopping around and doing your research is a vital part of purchasing life insurance.
– Is Universal Life Insurance right for you?
Any type of permanent life insurance is going to be more expensive than term life. For example, a 35-year-old male with a $500,000 term policy will pay on average $430/year. If that policy were to be universal life, he would be spending $4,400/year, more than 10 times what the term policy cost.
Just because it is expensive doesn’t mean it can’t be useful.
The flexible benefits would allow for more money to go to your beneficiaries. The extra money would pay for extra peace of mind. Universal life provides a safety net in life and death.
So, it really comes down to asking yourself big questions: Would a permanent life insurance policy be worth it for my situation? Am I going to be able to afford to pay high premiums or should I find another way to invest and protect my money?
Shopping for life insurance should bring about a lot of self-reflection.
Universal Life Death Benefits
Simply put, death benefits are what you are paying for with any life insurance. When you die, you want your family to be covered; that is usually the main reason you buy a life insurance policy.
With permanent life, there are two death benefits options for the policyholder to choose from. Option one is a level death benefit, and option two is an increasing death benefit, but what does that all mean?
– Death Benefits
A leveled death benefit means that the face value amount of your policy is the amount to be distributed to your beneficiaries upon your death. For example, say you have a $500,000 policy, and when you die, let’s say you have $65,000 of cash value.
The insurance company will pay out that $65,000 of cash value plus $435,000 of insurance for a total death benefit of $500,000. Your beneficiaries will only receive the amount of your policy with option one.
Option two seems to be better suited for universal life policies; increasing death benefits grow because of the cash value that is added to the benefit. With this option, beneficiaries receive both death benefits and cash value.
Let’s use the above example situation for option two. If your policy is $500,000 and you have a cash value of $65,000, your beneficiaries will receive $565,000.
Now, the end result isn’t the only difference between these two options.
For starters, option one is cheaper. Option one is prime for the middle-aged buyer with possibly several beneficiaries, who are more concerned with having a larger initial death benefit than the cash value accumulation. It’s no surprise this option pairs well with whole life.
Although option two can be more expensive initially, it can have a larger payoff. By making excessive premium payments, one can take advantage of the tax-deferred growth. The fast-growing cash value works with the increasing death benefit, not against it like option one.
With permanent life insurance, the death benefits are just half of the equation. There is also a living benefit, that thing we call a cash value.
– Cash Value/Surrender Value
Even though whole and universal life’s cash value aspects can be similar, for the sake of this article, I’ll be referring directly to universal life in this section. I know, who would have thought that given the vague title, right?
So up to this point, cash value as been discussed in terms of savings, interest rates, and the stock market. Before I dig into what happens at the end of the line with universal life’s cash value, let’s recap and clarify how they work while your policy is still active.
After working hard to build up the cash value portion of your life insurance policy, you have achieved your goal of no longer having to pay your premiums out of pocket. This is a very common use of one’s cash value. Another is to increase death benefits.
Also, many people see the cash value as an opportunity to have money grow under tax-deferment. Borrowing against your policy is something else many policyholders appreciate having the freedom to do.
Nobody knows when they are going to die. There are many people who die while having large amounts of money put into their cash value. So let’s cut to the chase and talk about what happens to all that saved-up money.
The cash value portion of permanent life insurance policies has many roles to play, one of those being the cash surrender value. I won’t delve into why there are so many names, but let’s talk about what surrendering means when it comes to life insurance.
A cash surrender value is the sum of money a policyholder receives when they voluntarily terminate their policy before its maturity date, or an insured event happens. Universal life insurance, however, only has to wait a year after they obtain the policy to be able to partially surrender the cash value.
There is usually a surrender charge of up to 10 percent for the first seven to 10 years. After that, though, freedom is given to do as you please without surrender charges. The downfall of this is policyholders would be responsible for paying any income tax due to the cash value earnings.
When the policy is managed well, this surrender value would be added to the death benefits of your policy because with universal life it makes more sense to choose option two, remember? Regardless of which option, you must pay attention to rising COI that can cut into your stockpile.
How to Get a Universal Life Policy
Obviously, the internet is where everyone goes for everything, including life insurance. To get yourself a universal life policy, you should first start comparing quotes. There is a tool on the right for you to begin immediately if you so chose.
Now that you have an idea of how much you are looking at, it is time to start looking at who you can get it from.
– Who’s selling?
I had mentioned a couple of companies up above, but there are others like Allstate.
Here is a shortlist of a few more top insurance companies that sell universal life insurance as well as which type they specialize in:
- Allstate: Traditional and variable
- AIG: All four types
- AAA: Traditional
- Lincoln National Life Insurance: Guaranteed, indexed, and variable
- John Hancock Life Insurance: Guaranteed and indexed
– How much coverage is necessary?
The great thing about universal life insurance policies is that you have the ability to increase your death benefits. In general, seven to 10 times your salary is a good amount of death benefit to start out with.
For young people without any dependents or spouses, it can work out by just allowing the death benefit to grow over time. However, the more dependents you have, the more coverage you should start out with. These plans are dual-purpose and can be great if thought through thoroughly.
The death benefits provide protection and the living benefits or cash value helps build wealth.
– The Road to Getting a Universal Life Policy
Buying life insurance is nothing to take lightly, so if you are truly considering a universal life policy, there are a few steps you can take to guarantee your best option. First, your lines of communication need to be established and open to a few different groups of people.
The next step is to analyze your finances: past, present, and future. After your policy is purchased, you must remain diligent. Nothing should go unnoticed when it comes to your life insurance.
The phrase ‘communication is key’ can be overused but rarely is it wrong. When it comes to your life insurance, communication is not only key but crucial.
There are three groups of people you need to talk with prior to signing and dating anything.
- Family: Talking to your family may be the easiest or the hardest one to tackle. Many feel like they can talk openly and honestly with family. However, be wary of emotions when bringing up life insurance. Some people have a hard time discussing matters related to the death of someone close to you. Be prepared for a variety of reactions and have patience.
- Broker, Banker, or Financial Advisor: It can be difficult to choose a life insurance policy without knowing how much you can afford. Staying in contact with your broker, banker, or financial advisor throughout this process is highly recommended. They can provide options along with advice that is truly in your best interest.
- Insurance Agents: You should make sure to have a few conversations with a few different insurance agents from a few different companies. The more communication that is had the better you chances of landing the best deal.
Before buying a policy, talking to at least one agent is necessary.
– Financial Analysis
Finances are a word the makes many of us cringe. The truth of it is that if properly addressed, everyone’s finances can eventually be straightened out. Nobody is perfect and nobody is doomed forever but preparation will always save you a headache later.
It is possible to assess your finances on your own, however, I urge caution. There are many free apps and websites that are aimed at helping people manage their money and assets.
If you can swing the money for a broker or financial advisor, they usually pay for themselves in the grand scheme of things.
Trying to get a sit down with a banker may be a cheaper alternative for those with multiple accounts at one location.
What am I suppose to be looking for and analyzing exactly? Well, you should outline any potential family needs for starters, like how much does it cost to pay for utilities each month. That information will also come in handy for evaluating how much can be allotted currently for life insurance.
When considering universal life, you have to make sure you understand how interest rates will affect your policy specifically. You need to be comfortable with the range of return rates and risk that is associated with the policy.
It’s important to think about the future where you are still living. That’s usually the upside of the cash value portion of permanent life insurance; that living benefit could potentially aid in having an enjoyable retirement. Make sure to think about what you want out of your retirement.
Now if you have gotten to this point and you believe a universal life policy would suit you best, there is one more thing we must discuss. Your own personal diligence is what can ultimately make or break your universal life insurance policy.
Universal life is all about flexibility and with flexibility comes responsibility. This type of insurance requires a more hands-on approach to managing it.
The number one thing is making sure that there is always enough money in the cash value portion to cover premiums; having your policy lapse due to negligence never feels good.
At this point in our travels of the world of universal life insurance, we know that most universal policies are affected by the stock market in one form or another. You will want to understand completely how interest rates affect your cash value.
It may seem overrated to be alert and well-educated in the world of insurance but when it comes to your insurance, you will be glad that you are. When it comes to universal life, the less effort and attention you put in the more money you will probably end up paying.
Universal life can be the right policy but it can also be complicated. Make sure you know your facts.
Changing Your Policy
Universal life insurance was designed to accommodate change and be adjustable to suit the owner’s needs best. These plans definitely have the least amount of resistance when it comes to alterations.
– Number One Purpose: Flexibility
Not knowing what the future may bring is okay when you have a universal life policy. Why? Because you can easily adjust your premium payments as well as your death benefits, for whatever reason you see fit.
Life happens should be the motto for universal life policies; they are set up to give the policyholder an immense amount of control over their policy.
– Why is it important to have a flexible policy?
Imagine for a moment that you finally got up the nerve to chase your dream of owning your own jelly shop. Starting your own business can be expensive and might take a while for it to turn a profit. This can put some stress on the wallet.
You can’t just leave your dream behind because money might be tight. The whole reason you got a universal life policy was for flexibility. By being able to adjust your payments and possibly borrow against your cash value, it is proving to do its job well.
But the best part of it all, of course, is the delicious jelly you will be selling in no time.
There are really two ways to cancel your policy: intentionally and unintentionally. Either you let your policy expire or you forcibly cancel it; the money usually factors into both scenarios,
So, when you wish to cancel your universal life policy, you would receive the surrender value of the policy. Remember, this may not be equal to the cash value due to possible surrender charges.
Most surrender charges occur in the early years of the plan. Also, with many plans, you may not be able to surrender within the first year.
The other way that your policy may be canceled is generally not good. It is common for people to have their policy lapse accidentally. This happens when there is no more cash value to pay the premiums.
Generally, there will be a grace period of thirty days in which you can make a payment. After that, there is a reinstatement period that can help avoid any additional underwriting that a new policy would present.
If the policy is not active, then death benefits can not be paid. That would be a terrible position for a beneficiary to be in.
Pay attention to your universal life policy.
– Possible to Transfer
Going right along with the life happens mentality, it can be just as easy to cancel your policy as it is to adjust it. You would simply need to fill out a change-of-ownership form from your insurance company.
One big reason to transfer your policy is to exclude it from your estate. However, if you die within three years of the transfer it will most likely still be included in your estate.
If you are considering transferring your policy before you die, it is important to be aware of the tax implications. Transferring while still alive leaves the policy subject to possible income or gift tax. Make sure you consult with a financial professional before committing to a transfer.
Pros & Cons
The best way to assess anything properly is with a pros and cons list. It is impossible to find a policy free of any negative attributes. So let’s recap on the good and bad things about universal life insurance.
- Adjustable premium payments
- Adjustable death benefits
- Cash value/savings component
- Four different types to choose from: guaranteed, indexed, variable, traditional
- The cost of insurance can increase faster than the cash value if interest rates are low, leaving policyholders with extremely high premiums
- Some plans can be negatively affected by poor market conditions
- More expensive than term insurance
Universal life insurance is the most flexible type of life insurance out there. Not only is it designed to have flexible payments and a cash value portion, but the death benefits are also adjustable.
Are you someone whose income isn’t always consistent from month to month? Or are you looking for a policy with a lot of freedom to control your money how you see fit? I think a universal life policy might just be perfect for you.
Start comparison shopping now! Use our FREE online tool on the right.