Even with years of experience in the life insurance industry, it always saddens us when a client calls because of a dire situation with their life insurance policy. In some form or another, most of the horror stories we hear have to do with an unexpected rate increase. Sometimes we’re able to maneuver the client into a new policy that they can afford. But in cases that involve advanced age and/or poor health, there might be nothing anyone can do.
Life insurance is meant to provide peace of mind, but if you don’t understand how it works before you buy a policy, it can become a source of extreme stress.
Use this guide to avoid being among the many people who make the mistake of thinking their cost of life insurance is fixed while it quietly increases every year until the policy eventually becomes unaffordable.
Quick Article Guide
1. The Risk in Non-Guaranteed Universal Life Insurance
2. The Truth About Cash Accumulation
3. Avoid Surprises with Guaranteed Universal Life Insurance
4. Guaranteed Over Non-Guaranteed: A Real-Life Example
5. “Buy Term and Invest the Difference”
6. How to Find the Best Guaranteed Rates
If you purchase a non-guaranteed universal life insurance policy, the answer to the title of this article is an emphatic, “NO.” Your premium or cost of insurance will increase each year as you age. With non-guaranteed universal life insurance, your mortality risk charges increase as you get older and are seen as more of a “risk” to the insurance company.
The increasing cost of insurance and mortality risk charges are paid for by your “cash accumulation” or “cash value,” the investment mechanism attached to a non-guaranteed policy. The problem is that cash accumulation in life insurance isn’t a replenishing well of money like many people think it is. It is an investment with a market risk, and if your investment doesn’t perform well, the cost of insurance and mortality risk charges can dwindle your cash accumulation down to zero.
For example, if you’re paying an $80/month premium for a non-guaranteed policy and have $5k in cash accumulation, it’s not the $80/month that you have to keep an eye on. That will stay the same, but this is precisely where many are lulled into a false sense of security.
The cost of insurance and mortality risk charges are being taken out of the cash accumulation account. Within 5-7 years, these costs have wiped out the cash accumulation and become out-of-pocket costs. For example, let’s say that your cost of insurance by the age of 60 has grown to $300 a month. Your $80/month payment is no longer covering the cost of your insurance so the additional $220 is being taken from your cash value.
Once your cash value has been exhausted, $80/month will no longer fund your policy and to keep your coverage, you must pay $300/month. Within 5 years your payments may need to be $500/month because the cost of your insurance will continue to increase as you age…you can see how a non-guaranteed policy can become instantly unaffordable once the cash value reaches zero.
We’ve heard of clients seeing their rates jump by as much as 72.4 percent per year once they reach their 80s, according to InvestmentNews. One example shows an 84-year-old who must pay nearly $30k just to keep his $400k policy for another year.
There are a few common misconceptions about cash accumulation that we absolutely must clear up.
First, understand that the cash value in your non-guaranteed universal life policy is not a death benefit. If you die before you withdraw the cash value in your policy, your insurance company keeps the money. It is not paid out to your beneficiary or beneficiaries. The extra money you have paid into your policy for all of those years is lost.
If you do withdraw the cash value in your policy, the life insurance company considers this a loan, and you will be charged a “cash surrender” fee of up to $750 dollars. In addition, you will have to pay interest on the money you have withdrawn until the loan is paid back.
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. In other words, the extra money you pay into these types of policies is never really your money.
Lastly, cash value increases the up-front cost of buying a universal life insurance policy by up to 2 or 3 times that of a comparable guaranteed universal life insurance policy, which we will talk about next.
At JRC, we strongly recommend guaranteed universal life insurance (GUL) for those seeking a universal life insurance policy.
Contrary to non-guaranteed universal life insurance, GUL allows you to lock in a set rate for the rest of your life, without the volatility of cash accumulation. It does not build cash value, enabling you to keep your monthly payments low. It also does not carry the expensive management fees of whole life insurance.
Instead, a GUL policy offers fixed premium rates through the life of the policy, just like a term policy. While term policies offer fixed rates for a specific number of years (10, 15, 20, 25, 30), GUL policies are set to specific ages (90, 95, 100, 105, 110, and even 121). The later the age, the higher the likelihood of your policy paying out a death benefit, and the higher the cost. With this in mind, you have the option of tailoring your GUL policy to your needs, life expectancy, and budget. In many cases, especially after the age of 60, guaranteed universal life can be even more affordable than a comparable term life policy.
In 2015, we worked with a 66-year-old male in excellent health named Frank. Frank was shopping for a $500,000 policy to leave money behind for his daughters, and he needed the coverage to last for his entire life to ensure that they received the money he intended to leave behind for them.
For his non-guaranteed universal life insurance policy, he was quoted at a planned annual rate of $12,000 dollars. However, for his policy to last his entire life, he would need to earn more than 5% on the money he invested. If the market did not perform well in the coming years, the cost of this policy would dramatically increase.
The males in Frank’s family typically live until their late 80s, and with Frank’s current health standing, he plans to live until at least the age of 90. We decided to compare Frank’s options for a guaranteed universal life policy until age 95. With this policy, there are no surprises. Frank’s rate of $9,350 per year will not increase, even if the market flops. The dollar amount may not seem like a huge difference, but let’s see what happens if Frank lives until age 90.
Note that this example assumes Frank’s non-guaranteed policy performs as planned; however, according to the Wall Street Journal, the vast majority of these polices are underfunded due to fluctuations in the market and decreasing interest rates. If Frank’s policy became underfunded, he would need to pay additional money into the policy to keep his coverage.
Why take the risk? Even if the investment value grows as hoped, Frank would have been able to save $60,000 over the course of his coverage—money that he or his family could easily access without cash surrender fees or reducing the death benefit he intended to leave behind for his family.
Term life insurance is another option with guaranteed rates. While term life does not provide coverage for your entire life, many people utilize it for income replacement or to cover a major debt that they would not want to leave behind to their loved ones, such as a mortgage.
Term life and GUL are somewhat similar in that they don’t involve cash accumulation. The main difference is that GUL provides coverage up to a specific age, while term life provides coverage for a set number of years.
The benefits of term life insurance include:
- Affordable coverage
- Flexible options
- A fixed rate for a set period of time
- No startup costs
- No surrender charge
- No hidden fees
- The freedom to cancel or change your policy at any time
For the general population of working class Americans, life insurance is not a sound investment. At our independent agency, we typically only advise the ultra-wealthy (as in, $300k per year and up) to consider investing with life insurance, mainly as a tax shelter. Even then, many experts will still tell you to steer clear.
If you’re looking to invest, the safest and smartest strategy is to “buy term and invest the difference.” We’d also extend that mantra to include GUL.
When you buy term life insurance or guaranteed universal life insurance, you can take the money that you would have been paying on whole life insurance and put it into stocks, bonds, or any other investment vehicle. That way, you can bolster your financial leave-behind, while the cash accumulation in a life insurance policy would default to your insurance company and not your beneficiary.
Life insurance is complex, but JRC is here to make it easy for you. We will shop dozens of carriers on your behalf to find the coverage you need at a rate that doesn’t fluctuate. If for some reason you decide you still want to buy non-guaranteed life insurance, we will thoroughly explain how your policy works so you know what to look out for.
There’s no cost for you to apply for life insurance with us. You only pay for the coverage itself once you’re approved and have accepted the policy. Call us toll free at 855-247-9555, or get a free life insurance quote online.
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