Are you in the process of buying universal life insurance? Stop and read this before you sign a policy.
While universal life is one of the most common types of life insurance out there, it’s also one of the most commonly misunderstood. Every day, we receive countless calls from clients with a universal life insurance policy that is causing them undue stress, because they didn’t stop to read the fine print. In extreme cases, the circumstances are downright dire.
This is not meant to scare you away from universal life insurance. We just want to educate you so that you know what you are buying and can gain the peace of mind you seek in a life insurance policy.
Quick Article Guide
1. What is Universal Life Insurance?
2. What is Cash Accumulation Value in Life Insurance?
3. Non-Guaranteed vs. Guaranteed Universal Life Insurance
4. What is Indexed Universal Life Insurance?
5. What is Variable Universal Life Insurance?
6. Why We Recommend Guaranteed Universal Life Insurance
7. How to Get the Best Universal Life Insurance Rates and Coverage
Universal life insurance is a type of permanent life insurance, meaning it provides coverage for your entire life. Compared to its permanent counterpart, whole life insurance, universal life offers a little more flexibility for you to adjust your policy as you age.
Whole life insurance is often expensive, because it provides a fixed premium for your entire life, even if you become the world’s oldest person. Universal life insurance can be customized to provide coverage to the age of your choice: 90, 95, 100, 105, 110, or even 121.
Many universal life insurance policies come with a “cash accumulation” account, which is where people often set themselves up for an unpleasant surprise later on in life.
When you buy a universal life insurance policy with cash accumulation, a captive agent at a big company might not adamantly caution you about the risk involved. After all, they are trying to hit their sales quota, keep their job, make a living, and earn a commission.
What is the Risk?
Have you ever made an investment that didn’t involve at least some sort of risk? Probably not, and cash accumulation in life insurance won’t be the investment to change that.
In theory, you build the cash value in your universal life insurance and accrue interest. What many people don’t realize, though, is that the words “cash accumulation” don’t guarantee savings. A sales-focused agent also might not tell you that you should review your cash accumulating policy frequently, because there is a very real possibility that the cash value could go down to zero. That’s because the cash accumulation is designed to cover your cost of insurance and mortality risk charges, which increase as you age and become more of a “risk” to insure.
If the cash isn’t keeping up with the rate increases, it will slowly dwindle until you are faced with paying the charges out of pocket. Usually when this happens, the policy becomes unaffordable. In worst-case scenarios, someone who is in relatively poor health with no cash value can be left without the resources to pay their premium, and without options to buy a more affordable policy.
Clearing Common Misconceptions
Risk aside, cash accumulation in life insurance isn’t the jackpot that it sounds like. Understand that:
- The cash value is not a death benefit and is not paid to your family upon your death. If you do not withdraw the money in your cash accumulation account, the insurance company keeps it.
- If you do withdraw money from the cash accumulation account, you are essentially taking out a loan that you will have to pay back (with interest, and a surrender fee of up to $750).
- If you still have an outstanding loan balance when you die, the amount of the loan is subtracted from the payout that your loved ones will receive.
- All in all, the cash value is not truly yours in any way, shape, or form.
Not all universal life insurance policies are created equal. There is a huge difference between a non-guaranteed universal life insurance policy vs. a guaranteed universal life insurance policy.
Non-Guaranteed Universal Life Insurance is coverage for life accompanied by a cash value component that is—just like the name implies—non-guaranteed. The cash could accumulate, or it could disintegrate, depending on the market.
In the 1980s heyday of non-guaranteed universal life insurance, interest rates soared up to 15 percent, making it somewhat of a no-brainer. Fast-forward to 2016, and interest rates are hovering around 3%, creating what Forbes aptly describes as a looming retirement disaster for universal life policyholders. Many people who bought a non-guaranteed universal life policy 30 years ago are struggling to afford their coverage today because their policy is “underfunded,” meaning the rate increases have become out-of-pocket costs.
Guaranteed Universal Life Insurance (GUL), on the other hand, offers guaranteed rates and coverage, with no cash value. You only pay for the protection you need.
Just like term life insurance, guaranteed universal life insurance generally costs less than permanent life insurance, because it requires a medical exam, which allows the insurance company to better gauge the risk they are taking if they insure you. But, unlike a term life policy, a GUL policy offers coverage up to much later in life and is highly likely to pay a death benefit.
Indexed universal life insurance (IUL) is another type of policy that we give clients a “buyer beware” disclaimer on. Investopedia defines IUL as giving you “the opportunity to allocate cash value amounts to either a fixed account or an equity index account. Indexed policies offer a variety of popular indexes to choose from, such as the S&P 500 and the Nasdaq 100.”
You’re basically “participating” in the stock market without being fully tied to it. IUL us a hot product right now, but our bet is that it will soon cool off. In 2014, the State of New York’s insurance regulator probed 134 insurers on how they market such policies out of concern that they were exaggerating the potential gains to consumers. After continued scrutiny, IUL was hit in 2015 with regulations that the Wall Street Journal called, “A Dose of Reality for a Hot-Selling Insurance Product.”
We provide a deeper dive into the risks of indexed universal life insurance here.
You might also come across variable universal life insurance (VUL). Investopedia summarizes: “The premium amount for variable universal life insurance is flexible and may be changed by the consumer as needed, though these changes can result in a change in the coverage amount. The investment feature usually includes sub-accounts, which function very similar to mutual funds and can provide exposure to stocks and bonds. This exposure offers the possibility of an increased rate of return over a normal universal life or permanent insurance policy.”
Again, the common theme with these types of policies is underperformance. We recently got a call from a frustrated consumer who had a VUL since 1996. His insurance company had contacted him stating that his policy needed an additional $10k in funding to avoid a lapse in coverage. Even after paying the $10k, his annual cost of coverage has gone up substantially, rendering the policy unaffordable.
Being in his 70s and not in the best of health, there are limited viable options available—this at a time when he needs coverage the most. The VUL’s rate of return failed to produce the necessary funds to keep the policy affordable.
At JRC, we are strong proponents of guaranteed universal life insurance over non-guaranteed universal life insurance. Why?
- Your cost of insurance will not change. There are no surprises with a guaranteed policy. Your rates are locked in to the age you choose: 90, 95, 100, and beyond.
- You will pay less up front. Did you know that the cash value in a non-guaranteed policy increases the overall cost by up to 3 or 4 times that of a comparable GUL policy? With a GUL, you can get the exact same coverage, or perhaps even better coverage, for a fraction of the cost of a non-guaranteed policy.
- Your coverage is not tied to an investment. You don’t want your family’s financial protection to be uncertain. If you want to invest, we recommend separating your investment from your life insurance. This is often best accomplished with GUL or term life insurance. The industry saying goes, “Buy term and invest the difference,” and GUL functions very similarly to term life, with longer coverage.
- You will never lose your coverage unexpectedly. Perhaps most importantly, guaranteed universal life insurance guarantees protection for your family. Your premiums will not skyrocket and become unaffordable like with non-guaranteed universal life.
Because of their longevity and likelihood of payout, GUL policies are ideal for:
- Pension maximization
- Estate planning
- Leaving an inheritance with life insurance
- Final expenses and burial costs
Whether you’re buying universal life insurance, whole life insurance, or term life insurance, be sure to work with an independent agent who can shop multiple carriers. Agents at big-name insurers are only able to sell policies from their employers, and often specialize more in home and auto insurance than in life insurance. These are just a few of the reasons to choose an independent agent over a captive agent.
Need help buying life insurance? JRC is your friend in the insurance agency.
Our agents are genuine, knowledgeable, and passionate about helping people protect their families with life insurance. Call us toll-free at (855) 247-9555, or click the button below to get a free life insurance quote online.
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