The Potential End of the GUL Due to Low Interest Rates
As a result of increasing inflation, we've seen an uptick in interest rates.
While low-interest rates can increase consumer confidence to encourage borrowing and investing, they also have drawbacks.
One such drawback is that some insurance companies are no longer offering guaranteed universal life insurance (GUL).
So, what does this possible discontinuation of this product mean to consumers like you? Here’s what you should know about the possible end of GUL policies and some alternatives worth considering.
Here’s what we'll cover in this post:
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Here’s what we'll cover in this post:
What is Guaranteed Universal Life (GUL) Insurance?
Guaranteed universal life insurance combines components of term life insurance and whole life insurance. Like whole life insurance, GUL provides coverage for your entire life. However, like term life insurance, it doesn’t provide the additional bells and whistles that come with a whole life policy, such as the cash value component.
Usually, GUL policies are a good fit for people who need affordable life insurance protection for their entire life. Some of the features and benefits traditionally offered by a guaranteed universal life insurance policy include:
- Affordable coverage for your entire lifespan
- Guaranteed death benefit
- Death benefit flexibility if your needs change
- The possible return of payments (premium amounts)
Why Low Interest Rates Jeopardize the Longevity of GUL Products
Life insurance companies use the premiums they collect from their customers to fund investments in fixed-income securities such as mortgages and bonds. The money generated from these investments is used to pay future death claims.
If the amount of interest earned from these securities continues to remain as low as it is today, the insurance companies will not have the funds they need to pay all of their future claims.
Of course, a company could raise the rates they charge their customer to help pay claims (and all the carriers have over the last 10 years), but there is a limit to how much they can raise their premiums.
Imagine a world where interest rates are always 0%. On average, the premiums a life insurance carrier would need to collect from the insured would be equal to the claim at life expectancy, or a little higher, since they would need to cover their expenses.
The insured may say, "I can just save that money myself," especially if they think they will outlive their life expectancy. And when you consider that fact that most American's plan to outlive their life expectancy, the market for such a product would be limited.
Since companies can either choose to raise their premiums on GUL products or drop them altogether, many have chosen the latter. Due to the risk of not fulfilling future contracts, some of the companies that offer GUL products are in the process of doing away with them.
Many European and Canadian-owned insurance companies started eliminating the GUL products they offered years ago, and now the trend is continuing with US-owned carriers. Since these companies assume interest rates will remain low, they believe their best bet is to stop offering GUL products to future customers.
How do Interest Rates Impact Active GUL Products?
It’s important to note, if you currently have a GUL contract, insurers will continue to fulfill your agreement. But, other concerns may arise. For starters, while some GUL policies may have an excess cash value, that will likely vanish in the future.
Also, while an insurer guarantees a GUL policy for a specific amount of time, what if the policyholder outlives the policy’s term? In this case, what is the policyholder entitled to?
Premium payments and how you handle them can influence the coverage’s guarantee period, depending on the policy. For example, if you’re late paying or even miss a payment completely, your guarantee period will shorten.
There have also been instances where an early premium payment nullified or altered the guarantee, although insurance providers have done their best to address this. So, premium payments are just one influence on a policy; however, changes to the death benefit may also affect them.
What are your Alternative Options?
If you are still considering a GUL policy, fortunately, several remaining companies continue to offer GUL products. Almost all the companies that have left the GUL market are stock insurance companies.
Unlike stock insurance companies, mutual companies and privately held insurance companies do not have the financial pressure to show quarter by quarter profit to stockholders. They can take the long-term view.
So, if you’re in the market for a new contract, mutual companies like Nationwide and Pacific Life might be worth considering. Or, you could review the products offered by privately-held insurers such as the North American Company.
Remember, for estate planning purposes; a GUL provides clean and straightforward options. Since the policy’s guaranteed amount can help pay for final expenses and leave a tax-free inheritance to your heirs, it’s a good solution for minimizing future estate taxation.
When selecting any life insurance product, it’s essential to ask yourself:
- What guarantees do I have?
- What death benefit is guaranteed?
- Why am I buying the product?
With the insurance industry’s ever-changing landscape, it’s important to partner with an insurance professional, especially if you’re using life insurance for estate planning purposes.
Insurance professionals like the independent brokers at JRC Insurance Group specialize in estate planning life insurance and can help match you with the best policy based on factors like age and health.
Finding affordable coverage is challenging enough, let alone if you have specific health issues or are getting on in years. Our highly-skilled, experienced agents shop over 50 top-rated insurance carriers to find the policy perfect for you, regardless of whether you’re 60 or 80.
Our agents scour the market to find the best policy because our client’s come first. We are an owner-operated, no-fee brokerage, and we carry that “client first” priority into everything we do, including estate planning.
So, if you’re looking for a safe, ensured way to protect your hard-earned assets, we can help. Call us today, toll-free at 855-247-9555, or click on the form below to get started.
Louis Lopes, CLU ChFC
Chartered Life Underwriter, Licensed Life and Health Agent
Louis has been in the insurance business for over 30 years. He specializes in “high risk” cases as well as more complex coverages for long term care, disability, and estate planning.