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When shopping for a life insurance policy, you might notice that universal life insurance branches off into “non-guaranteed” and “guaranteed” policies.
Though grouped together as universal life insurance, it’s important to realize that non-guaranteed and guaranteed coverages are not alike. If you buy a non-guaranteed policy without knowing what it is or how it works, you are subjecting yourself to potential heartache down the road.
Read on to learn the difference between these two types of polices, and see why we are strong advocates for guaranteed universal life insurance (GUL).
Non-guaranteed universal life insurance is a type of permanent life insurance, meaning you are buying coverage for life. A non-guaranteed policy carries a death benefit like any other life insurance policy but with an investment component attached to it. Many life insurance agents will try to sell you the latest trend on the market while downplaying the real-life risk involved.
Universal life insurance policies became extremely popular during the 1980s, when interest rates were at an all-time high of 15% or more. With current interest rates hovering around 3%, the vast majority of these policies are underfunded.
When a policy is underfunded, it means that the insured must pay additional money in order to keep the coverage.
We’ve heard horror stories of clients seeing their rates jump by as much as 72.4% 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.
This is why we are always skeptical of any policy that involves a savings or investment option, given the market risk
Many people mistake the words “cash value” or “cash accumulation” for dollar signs. 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 to out to your beneficiary or beneficiaries, and is essentially lost. For more information about cash accumulation and reviewing your life insurance, please read here.
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 In addition, you will have to pay interest on the money you have withdrawn until the loan is paid back.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 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.
In a GUL policy, the insured assumes no risk and is locked in for coverage up to a specific age.
Guaranteed universal life insurance is not whole life insurance and does not build a cash value. It is more similar to term life insurance, with your term being defined by age rather than years.
Without the cash value and expensive management fees of non-guaranteed coverage, guaranteed universal life is relatively affordable and one of the most popular choices for estate planning, pension maximization, and guaranteeing a modest inheritance.
So, why exactly do we recommend guaranteed universal life insurance?
Your Cost of Insurance Will Not Change
In a non-guaranteed policy, the cost of coverage will often increase every year or two. This can wreak havoc on an older adult’s finances at a time in life when they do not have the capability to increase their income and afford a more expensive policy. With a guaranteed policy, even as you age, your premium is fixed. You can guarantee your premium to age 90, 95, or 100.
Your Coverage Isn’t Tied to an Investment
In order for a non-guaranteed policy to hold at the same rate you were quoted, the investment has to perform well. Unfortunately, many policies don’t perform as expected, especially with the way interest rates have plummeted over the past few decades.
When this happens, not only does the cost of your policy increase because you’re getting older, you are also losing money on your investment on top of it.
You Aren’t Pouring Extra Money into Your Policy
When you buy a non-guaranteed policy, you will pay extra to build your cash value. Here’s the zinger, though: when you die, that cash value is lost. It does not go to your family—only the death benefit does. If you’re looking to invest, the savvier thing to do is to buy a GUL, and invest any money you save elsewhere, separately from your life insurance. That way, the invested money is there for your family in addition to your death benefit.
You Will Pay Less Up Front
To accommodate the cash value component, non-guaranteed universal life insurance has a much higher up-front cost compared to GUL—possibly even 3 to 4 times the cost of your coverage each month.
You Don’t Run the Risk of Losing Coverage
Perhaps most importantly, guaranteed universal life insurance provides peace of mind in knowing your premiums will not skyrocket.
Non-guaranteed coverage has an inherent risk of becoming unaffordable, in which case you might find yourself unable to secure any life insurance.
The best way to compare any two types of life insurance policies is by putting the two side by side. Here’s a chart to help you understand the key differences between non-guaranteed and guaranteed universal life insurance:
There’s no cost to apply for guaranteed universal life insurance. You only pay for the coverage itself once you’re approved and have accepted the policy.
Whether you’ve been shopping for life insurance on your own already or don’t know where to start, JRC Insurance is your friend in the insurance industry. We will truly look out for your best interests and help you find the affordable, reliable life insurance coverage you need. Call us toll free at 855-247-9555, or get a free life insurance quote online.
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