What is Universal Life Insurance and How Does it Work?
Everyday our agency receives phone calls from individuals who ask, “What is universal life insurance?”
Some of the people we speak with are calling to compare different types of life insurance coverage, while others want to know if universal life insurance is too good to be true.
In this article we’ll explain the fine print of universal life insurance and tell you everything you need to know about these policies.
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What is Universal Life Insurance and How Does it Work?
Universal life insurance, also commonly referred to as a “UL” policy, is a form of life insurance that offers flexible premiums, a level or increasing death benefit, and a tax-deferred investment opportunity to the insured.
With universal life insurance, the insured pays the premium of their life insurance as well as some additional money to “overfund the policy” and build a cash value. This cash value gains interest overtime and may be borrowed from or used to subsidize the cost of the life insurance policy in the future.
On the surface level, universal life insurance seems like an excellent product. It provides the insured with an opportunity to invest and also gives a death benefit to their family, that is if the investment value performs well. Universal life insurance policies are often pitched as an alternative to investing into a 401(k) because they offer a life insurance benefit plus a tax-deferred savings account.However, this is where things can get tricky, and many people do not understand how their universal life insurance policy actually works. For instance, if you take a loan from your universal life policy and happen to pass away before the amount is repaid, your death benefit will be reduced by the amount owed.
Furthermore, if you don’t withdraw the savings portion of your universal life insurance policy while you are still alive, the insurance company actually gets to keep it. In other words, the cash value of your traditional universal life policy will not be paid out to your family or beneficiaries.
We explain these important rules and restrictions later in the article, or you can skip to: Universal Life Cash Value – The Fine Print.
Universal Life Insurance vs Whole Life Insurance
Many people confuse whole life insurance with universal life insurance. Although both policies may be able to provide protection for your entire life, there are three major differences between whole life policies and universal life policies.
First off, whole life insurance tends to be much more straightforward than traditional universal life insurance. With whole life insurance, the concept is simple: pay a set rate for a guaranteed death benefit and the money will be there for your family when you pass away.
Universal life insurance works differently than whole life insurance so it important to understand each type of coverage before you purchase your life insurance. We’ve outlined the three major differences below:
1. The Cost of Insurance or COIUnlike whole life insurance, the cost of a universal life insurance policy is not guaranteed. When you purchase traditional whole life insurance, your monthly rates are guaranteed to stay level for your entire life. With universal life insurance, however, the cost of insurance, or COI, increases as you get older. This is also known as a rising cost of coverage.
Many people initially overlook the rising cost of insurance because universal life insurance is less expensive than whole life insurance. In addition, people often mistakenly believe the cash value accumulated by their universal life insurance policy will cover the increase in cost later in life.
The truth is, the vast majority of universal life insurance policies become under-funded because the interest they actually earn in their policy is not enough to offset the rising cost of coverage.
The NY Times recently published an article about universal life policies titled, “Why some life insurance premiums are skyrocketing.” In this article, one of the examples involved a universal life insurance policy’s rate increasing by 62% in a single year when the client turned 65.
This is troublesome because rapidly rising rates will quickly deplete any cash value that may have accumulated over the years. When this occurs, additional money must be paid into the universal life policy to keep it funded. For most retired people on fixed income, this scenario is a recipe for disaster, and it often results in a lapsed life insurance policy due to non-payment.
2. Flexible Premium Payment OptionsWith traditional whole life insurance, a flat premium must be paid in order to keep the policy active and in-force. If a payment is missed, the amount must be paid within 30 days or you risk losing your coverage. In an uncertain economic environment, losing a job or dealing with an unexpected financial burden can make it difficult for someone to pay for the cost of coverage.
With universal life insurance, you may be able to temporarily decrease the amount of your payments or occasionally skip a payment, but the money you take from your cash value must be paid back.
Although this may seem like a great benefit, it’s important to note that when your cash value is exhausted, your policy will lapse unless additional money is paid into the policy to offset the difference. The flexible cost of coverage also works both ways. In other words, the insurance company can increase the cost of your universal life insurance policy as you get older.
With whole life insurance, your payments are fixed and level regardless of changes to age or health. If you’re retired and on a fixed income, level payments are much easier to budget for. After retirement, many people cannot afford to make larger payments and when the cost of their universal life insurance policy rises, they often lose their insurance. For many retired people, buying a new insurance policy may be impossible or unaffordable depending on their health and budget.
3. Accumulating a Cash ValueUndoubtedly the most common reason that people are drawn to universal life insurance is because they like the idea of accumulating a tax-deferred savings while simultaneously providing a life insurance benefit to their family.
Although this may seem beneficial, accumulating a cash value with a universal life insurance policy may not be as straightforward as it seems. Most of the people we speak with are completely unaware of the fine print regarding the cash value in their policies.
The cost of universal life insurance policies rise as the insured gets older and these policies charge expensive fees. These fees and the increasing cost of coverage diminish or offset the investment potential of your policy which leaves many policies without a cash value after 25 years. In fact, the vast majority of these polices that were purchased more than 25 years ago are underfunded today.
To avoid losing your hard earned income over time due to an increasing cost of coverage or poor-performing investments, purchase a term life insurance policy or permanent life insurance coverage that does not require an investment, and invest the difference elsewhere.
Purchasing life insurance that does not require an investment and investing the money in your mortgage, an annuity, or a 401(k) is much more advantageous than purchasing a universal life insurance policy. In addition, accessing your “cash value” may cost you a lot more than you might think. To learn more about the restrictions regarding the cash value in a traditional universal life insurance policy, continue reading below.
Universal Life Cash Value – The Fine Print
Most people buy universal life insurance because they love the idea of being able to invest their money and provide a benefit to their families all under one monthly payment. However, this is where most people overlook the fine print and many people expect to earn a much higher rate of interest on their investment than they will ever actually see.
Unfortunately, life insurance agents that sell traditional universal life policies tend to focus on an assumptive rate of return instead of the guaranteed rate of return that the policy will likely produce.
According to the Wall Street Journal article, “Retiree’s Stung by ‘Universal Life’ Cost,” many agents focus on this assumptive rate of return when selling universal life insurance. According to the article, “During the sales process, agents typically work up “illustrations” to show how the savings build. But the 8%-10% rates highlighted by many agents in years past weren’t guaranteed.”This practice continues today and in addition to overpromising the rate of return you can expect to see, agents often neglect to discuss the fees and restrictions related to accessing the cash value of your universal life policy. In fact, most universal life insurance purchasers are not aware of the loan charges, high interest rates, and annual investment fees that they will have to pay until they actually need to borrow from their policy.
Cash Surrender Fees
When you take a loan from your universal life insurance policy, the insurance company will charge you what is known as a “cash surrender fee.” The cash surrender fee for taking a loan from your universal life policy could be as high as 10%, and this is money is not credited to your cash value, but rather it is kept by the insurance company.
It’s also important to note that cash values are not a sure thing with universal life insurance policies, especially as the cost of your insurance rises. If the market changes or your investment value does not perform as well as you had hoped for, you may not have enough cash reserves to take a loan from your policy.
It’s Never Really Your Money
The idea of being able to take a loan from your traditional universal life insurance policy seems simple enough. If you fall on hard times, you can borrow money from your policy to carry you until you get back on your feet. However, just like any other type of loan, a loan from your traditional universal life insurance policy must be paid back with interest.
For you to borrow your own money, most universal life insurance policies charge high interest rates that range from 5% to 9%. This interest rate is charged in addition to the cash surrender fees that you will pay for taking a loan on your universal life insurance policy. It’s also important to note that the death benefit provided by your policy will be reduced by the amount of the loan until the loan is paid back.
What Happens to My Cash Value When I Pass Away?
If you pass away before withdrawing the cash value from your traditional universal life insurance policy, the money you have accumulated over the years belongs to the insurance company. This means the cash value will not be paid to your family.
With traditional universal life insurance, only the death benefit of your life insurance policy is paid out to your beneficiaries. This scenario presents a challenge for people as they age because they want to use the cash value they have saved up, but they do not want to reduce the money they intend to leave behind for their family.
Giving away all of the additional cash value that has been paid into your policy over the years doesn’t make financial sense. This is your money! For this reason, many financial advisers recommend their clients purchase term life insurance policies and invest the difference into a 401(k), annuity, or a savings account.
This allows the insured to easily access their cash when they retire. By investing into a 401(k), annuity, or savings account, you can also avoid the expensive money management fees or annual investment fees that are charged by universal life insurance policies.
Expensive Management Fees
Most people are unaware of the hidden administrative and money management fees they will be charged when purchasing a universal life insurance policy. Sometimes these fees are referred to as annual investment fees, and according to CNN Money, these fees are often 3% or more and can “really drag down your returns.”
The annual investment or management investment fees charged against your cash value are designed to make sure the universal life insurance company is profitable even when their portfolios perform poorly.
Please keep in mind, these annual investment fees are charged in addition to the rising cost of your life insurance policy and unless your investment performs extremely well, they can outweigh any interest you may have gained, causing your cash value to diminish.If you decide to purchase universal life insurance, make sure you review your policy to see if you will be responsible for any money management fees, administrative fees, policy charges, or any other investment fees that may be charged in addition to the rising cost of your insurance or COI.
Funding a 401(k) vs Universal Life Insurance
Universal life insurance is often positioned as an alternative to investing into a 401(k). In a recent article on the Forbes website, they compare funding a 401(k) to purchasing a universal life policy by using a real life example. In the example, the client had an option of purchasing a traditional universal life insurance policy at an annual rate of $8,700 versus purchasing a 30 year term policy for $700 a year and investing the difference into a 401(k).
Additionally, the universal life insurance policy and 401(k) both assume a growth rate of 8%. It is also important to note that in the current market, a universal life insurance policy rarely yields a rate higher than 3%. This is due to the current treasury rates averaging about 2%.
Nonetheless, we assume the traditional universal life insurance policy performed at an annual rate of 8%, in 30 years, the client could expect to have a cash value of approximately $600,000.
Using the same scenario listed above, if the client purchased the 30 year term policy and invested the difference into a 401(k), the approximate cash value (assuming the same rate of growth of 8%), would have been $980,000. That’s 39% more money for retirement expenses. Even if you dramatically lower the interest rates for the 401(k) and the universal life insurance policy, the 401(k) is always a better option.
Moreover, if this client needed lifetime insurance coverage to fund an inheritance or reduce estate taxes, purchasing a permanent policy without an investment value and funding the difference into a 401(k) would still be a better choice. This is because a lifetime policy for $500,000 until the age of 100 would run approximately $2,675 per year.
Furthermore, if the client took the amount he saved by purchasing a permanent policy with no cash value and invested it each month into a 401(k), after 30 years, the 401(k) would be worth over $680,000. That’s an additional $80,000 of money for retirement and a lump sum of $500,000 to leave behind for his loved ones.
Assumptive vs Guaranteed Interest Rate
Universal life insurance policies offer a guaranteed rate of interest based on current market conditions. It is extremely important to pay attention to the guaranteed interest rate that is documented in your policy, not the assumptive interest rate that your agent will show you. Remember, the assumptive interest rate is only a hypothetical illustration of how well your policy may perform in ideal conditions. However, earning these assumptive interest rates is not likely.
The vast majority of traditional universal life insurance policies do not earn more than the interest rate guaranteed by the insurance company, and this rate is disclosed in each policy. As mentioned earlier, many agents tend to stress the assumptive rate of interest your policy may be able to offer, but it’s important to note that universal life insurance policies rarely perform this well.
Some purchasers of universal life insurance policies have actually sued the insurance companies for being misled by their agents. In reality, low interest rates have had an overwhelmingly adverse effect on universal life insurance policies causing many to lose their coverage later in life.
According to Henry Montag of Financial Forums, Inc., the majority of universal life insurance policies sold in the past relied on a growth rate of 7-10% to earn enough interest to keep their rates affordable. With interest rates at an all-time low, universal life insurance policies sold in the marketplace today cannot guarantee high rates of interest, despite what your agent may entice you with.
The guaranteed interest rates offered by your policy are tied into the current market conditions. As mentioned in the WSJ article, “Retiree’s Stung by ‘Universal Life’ Cost,” insurance companies are not liable for any assumptive rates of return your agent may have suggested. When pressed about this confusion, universal life insurance companies say, “…sales materials clearly disclosed that only a minimum rate…would be guaranteed.”
Over the last few decades, insurers have had to reduce the interest payments they offer to universal life insurance policy owners. These reductions are due to lower interest rates in the marketplace which causes the insurance companies to earn lower yields on their own investments. Most universal life insurance policies sold in the last ten years are earning less than 3% interest, and this is not enough to offset the rising cost of insurance as one ages.
As mentioned earlier, unlike term or whole life insurance, universal life insurance will adjust your cost of insurance as you get older. This is also known as a rising cost of coverage. Insurance companies argue that as you age, your probability of passing away increases and this is used as justification to increase your rates.
Low Interest Rates Spell Trouble for Universal Life Insurance
When universal life insurance was first introduced to the market in 1978, the Treasury rates were at the brink of an all-time high. In 1982, the 10-year Treasury yields were hovering at an astonishing 15%. With interest rates that high, double-digit growth seemed inevitable for anyone investing money into a universal life insurance policy.
With this type of growth, an adjusting cost of insurance did not seem like a real concern. In the early 1980's, even the most conservative investors expected rates-of-return that were four to five times today’s current Treasury rates.
Fast forward to last decade, and the owners of these policies must continue to pay additional money into their universal life insurance policies to prevent their coverage from lapsing. Unfortunately, many people have experienced the cost of their life insurance policy doubling in recent years.Some retirees living on a fixed income can not keep up with the rate increases, forcing them to walk away from their universal life policies. What’s even more alarming is that fact that many people in this situation cannot qualify for a new life insurance policy due to their age or underlying health issues.
Keep Your Cash and Secure New Coverage
One of the problems we often see with universal life insurance policies is that many people do not monitor the balance of their cash value. In fact, we often receive calls from clients who have mistakenly waited until all of the cash in their policy had been exhausted by an increasing cost of coverage.
When this occurs, the insurance company sends a letter to the insured advising they must pay a higher monthly rate for their coverage to remain active. Often times this rate increase is more than double the current cost of their policy.
If you receive a notice that the cost of your universal life insurance policy is increasing, or if the cash value in your policy is diminishing, we recommend purchasing a new policy as soon as possible. Once you have secured new coverage, withdrawal the remaining cash in your policy and put it into a savings account or pay of your high interest debts.
You can secure a term policy or a guaranteed universal life insurance policy that does not accumulate a cash value and save the money you have built up over the years before it’s completely gone. Guaranteed universal life policies, (also known as GUL), are permanent insurance policies with level rates and coverage until age 90, 95, 100, 105, 110, or 120.
These policies are usually a fraction of the cost of a universal life insurance policy because there is no investment component. Guaranteed universal life insurance policies work just like a term policy except the coverage is set to a specific age, usually 90 or later, instead of a 10, 15, 20, 25, or 30 year period.
A New Trend in the Insurance Industry
In recent years, guaranteed universal life insurance policies have become much more desirable than traditional universal life insurance due to the guaranteed death benefit and level cost of coverage they offer. Unlike traditional universal life insurance policies, a guaranteed universal life insurance policy’s rates will not increase over time, and there are no risky investment strategies to worry about.
With guaranteed universal life insurance you can lock in your rates and coverage until age 90, 95, 100, 105, 110, or even 120. Because of this, these policies are also the most common type of insurance recommended by estate and trust attorneys and there is no risk as long as the premiums are paid. However, if you’re like most people and believe your need for life insurance will diminish as you get older, consider purchasing a term life insurance policy instead.
A term policy will offer you the least expensive life insurance for a set period of time. The idea behind this strategy is that by selecting a term length that exceeds a set timeframe for your primary need of coverage, like paying off the mortgage, you will no longer need coverage once your financial goals have been met. Once this policy is established, you can start saving the difference.
Almost every financial advisor will tell you to keep your investments and your life insurance completely separate. Term life insurance will allow you to insure yourself for a set number of years and instead of paying additional money into a universal life insurance policy with restrictions, you can put the extra money into a savings account or 401(k). We’ve outlined the major differences between traditional universal life insurance and term life insurance below.
Term vs Universal Life Insurance
Term life insurance offers the most coverage for a fraction of the price of traditional whole life insurance or universal life insurance. The downside is that the coverage is not designed to last a lifetime, but a set amount of years instead. The purpose of term life insurance should be to protect a major life event, or events, like providing income replacement for your family until retirement age, ensuring the cost of your children’s education, or paying off the mortgage.
If your need for life insurance disappears when the mortgage is paid off, your children move out, you retire, etc., term life insurance makes the most sense. Below we’ve laid out the two major differences between term and universal life insurance.
1. Pay for the Cost of the Insurance OnlyWith term life insurance, there is no cash value or investment features. You only pay for the cost of your life insurance coverage until you no longer need it. The cost of a level term life policy does not change and the coverage amount is guaranteed, although, some term policies will allow you to reduce coverage if your needs change in the future.
Level term life insurance is guaranteed to stay the same price for the entire term of your policy regardless of changes to your age or health, but you can cancel the policy at any time without penalty.
The most common term amounts include 10, 15, 20, 25, and 30 years. However, there is a risk-free insurance product that is very similar to term insurance that offers coverage to the age of 90 or later called guaranteed universal life. which may be a better fit for your needs.
Because term life insurance does not build a cash value, it is a lot less expensive than a universal life insurance policy that offers the same death benefit. However, with term life insurance, periodic payments must be made to keep your policy active and there is no cash value to borrow from or manage.
2. Term Life Insurance is Not PermanentThe main disadvantage of term life insurance is that it is not designed to last your entire lifetime. Most term life policies end, or term-out, by age 80. This keeps the cost of coverage down because the majority of people who purchase term life insurance will outlive their policy.
As mentioned earlier, term insurance policies are ideal for someone who wants to carry coverage until a specific life event, but not someone who needs lifetime coverage. Luckily there are affordable life insurance products available that offer permanent options for coverage without risky investments.
In recent years, the insurance companies have begun to offer a form of permanent life insurance that offers guaranteed coverage and rates until age 90, 95, 100, 110, or even 120. These policies are called guaranteed universal life insurance policies and they work just like term insurance.They cost a fraction of what most whole life and universal life insurance policies cost, allowing the policyholder to save the difference. Unfortunately, most agents shy away from offering guaranteed universal life insurance because the commissions paid to the agent are much lower than traditional universal life insurance.
Universal Life vs Guaranteed Universal Life
The clients we work with often askk us, “What’s the difference between universal life and guaranteed universal life insurance?” Although the two types of insurance sound extremely similar, they work very differently. First off, traditional universal life Insurance requires an investment to build a cash value.
In order to build this cash value, you must pay additional money above and beyond the actual cost of your life insurance. This is also known as ‘overfunding’ your policy and it causes traditional universal life insurance to be more expensive than other forms of life insurance.
It’s also important to note that traditional universal life insurance rates are not guaranteed to stay level as you get older. The cost of traditional universal life insurance increases with age, also known as a rising COI or cost of insurance.
As you get older, the rising cost of a traditional universal life insurance policy often exceeds the cash value you have accumulated over the years and this may cause your policy to lapse.
According to the Wall Street Journal article, “Draining Away,” as we reach our golden years, about 70% of these policies, “Aren’t generating enough income to pay costs.” This means the insured must pay a higher cost for their life insurance each month, (usually at least double), or allow the policy to cancel due to lack of funds.
For many people this spells disaster because buying any form of life insurance after the age of 75 can be a challenge, especially if you have any serious health issues.
With guaranteed universal life insurance, you do not need to pay additional money into your policy to build a cash value. Guaranteed universal life insurance policies have no investment value and the rates are level until the age of your choice. This means that the cost of your insurance, or COI, will not increase as you get older so the rate will always remain the same up until the age of 90, 95, 100, 105, 110, or even 120.
These policies are less expensive because you are only paying for the cost of the coverage, just like term insurance. Like term policies, guaranteed universal life insurance policies require a free mini-medical exam to determine your final rate or cost of coverage. This means that unless you are a cigarette smoker or have serious health issues, guaranteed universal life insurance is usually a lot less expensive than whole life insurance without a medical exam.
Do You Need Permanent Life Insurance?
The truth is that most people do not need life insurance once they have reached retirement age, but there are a few exceptions to this general rule. If you are uncertain that you need life insurance, below is a list of the four most common reasons that people purchase permanent life insurance.
- To pay for final expenses and burial costs
- To maximize a pension
- To settle or reduce estate taxes
- To leave behind an inheritance
1. To Pay For Final Expenses
If you haven’t set money aside for final expenses, you may need life insurance in order to prevent leaving your family with a financial burden. Currently, the average funeral and burial expenses ranged in cost from approximately $7,000 to $10,000 dollars.
To avoid this situation, you can purchase a small burial or ‘final expense’ policy, or if you already have a term policy, you may be able to convert it into a permanent policy. Most term life insurance policies offer a conversion option which allows you to convert all or a portion of your term policy to permanent coverage without having to complete a new medical exam or pulling your medical records.
This makes converting a term policy the ideal choice for anyone who has had serious health issues. However, the cut-off for converting most term policies is age 70, so you may want to call your insurance company to make sure you’re still eligible.
If you’ve missed your conversion opportunity, or if you don’t have any existing life insurance, consider purchasing a small whole life insurance policy. These policies offer up to $50,000 of coverage without a medical exam and the rates stay level for the rest of your life.
If you have some additional debts or if you need more than $50,000 of coverage, you can also buy $50,000 or more of affordable lifetime coverage by purchasing a guaranteed universal life insurance policy. These policies are also referred to as “term-to-age 100” polices because they do not require an investment value and the rates are guaranteed to stay level.
2. Life Insurance for Pension Maximization
Permanent life insurance is commonly utilized for pension maximization. Most traditional pension plans offer the option of a single-life payout or a joint-life payout. With a single-life payout, only the owner of the pension plan receives a monthly payment until they pass away.
If they die before their spouse, the spouse will no longer receive a monthly payment from the pension plan. On the other hand, a joint-life payout allows both the owner of the pension plan and their spouse receive a monthly payment until they both pass away.
This allows the pension earner’s spouse to continue collecting an income even if they outlive their spouse. The catch is that the monthly payout from a joint-life pension plan is much lower than the payout for a single-life pension plan.
Depending on their health, a pension earner is often able to buy a life insurance policy for less than the monthly deduction they would face by selecting the joint-life pension payout option. The best type of policy for pension maximization is a non-cash accumulating permanent policy, also known as a guaranteed universal life insurance policy.
These policies are a fraction of the price of traditional universal life insurance or whole life insurance policy and there’s no risky side investments involved. With guaranteed universal life insurance, there are no surprises; these policies work just like a term policy to the age of your choice (90, 95, 100, 105, 110, or 120). This allows the pension earner and their spouse to have additional income each month and still protect each other's retirement income.
As an example, we recently worked with a client named Jim and his spouse Jeanie. Jim's work was offering him a monthly single-pay pension of roughly $5,000 per month, but if he elected for a joint-pay pension, the monthly payout for him and his spouse would be reduced to about $3,500 before taxes.While working with Jim, we learned that Jeanie would need about $2,500 a month for bills. A couple hundred dollars less than the amount of Jim's joint-pay pension option after taxes. Jim was 64 years old and was in excellent health. Jeanie was also in good health and had just turned 63 a few months prior.
To leave a sufficient amount of money behind, Jim decided to purchase a guaranteed universal life insurance policy with $700,000 in coverage. His policy is guaranteed until the age of 95, and its fixed monthly cost is $974.00. Even if he passes away tomorrow, Jeanie will have more than enough money to last the rest of her life. She can invest the untaxed payout from Jim's life insurance policy into an annuity.
By utilizing life insurance to maximize Jim's pension, Jim and Jeanie will also have an extra $6,300 each year to enjoy during their retirement. Most of the men in Jim’s family live until their mid-80’s, but if he outlives Jeanie, he'll have the flexibility to cancel his policy, at any time without penalty, and save the cost of his coverage each month.
Jim will also have the option to continue to make the payments on his policy and leave the proceeds behind to his grandchildren or his favorite charity. For more information about guaranteed universal life insurance, please skip to here.
3. Permanent Life Insurance for Estate PlanningEach year the IRS releases their updated estate tax exemptions. In 2022, the estate tax exemption for an individual was set at $12.06 million or $24.12 million for a married couple. At the time of your passing, if your estate or the combination of all of your assets is worth less than $12.06 million, your heirs will not face any estate taxes.
On the flip side, this means that if your estate or total assets are worth more than the yearly estate tax exemptions, the IRS will collect taxes on the amount that exceeds $12.06 million (or $24.12 for married couples).
It is important to note that this amount is taxed at a 40% tax rate and must be paid within nine months of your passing. If the amount is not paid, the IRS is able to seize the assets you intended to leave behind for your loved ones.
In order to avoid this scenario, people often purchase permanent life insurance to protect their estate for future generations. This allows the estate taxes to be settled without forcing your dependents to sell off the hard earned assets you intended to leave behind for them. This strategy is also known as “estate planning” and it involves creating an irrevocable life insurance trust, or ILIT, which will be named as the owner of your life insurance policy.
Once an ILIT is established, the life insurance becomes separate from your estate so it is untaxed. It’s important to note that life insurance is considered to be an asset and it remains untaxed unless your estate’s value exceeds the estate tax exemption for the current tax year. If you’re married, you can also leave your estate to your spouse, but when they pass away, your loved one’s may face the same estate tax issue as well.
Last year we worked with a client who had a sizeable estate and needed to protect her assets for future generations. We recommended that she purchase a guaranteed universal life insurance policy that remained in-force until the age of 100 or later.
Since our client had already set up an ILIT, when she passes away, the life insurance policy will pay her trust which in turn will settle her estate taxes with the IRS. It will also allow her entire estate to be passed on to her daughter, tax-free, allowing her to grieve instead of having the burden of coordinating estate sales to settle with the IRS. To learn more about how irrevocable life insurance trusts work, see our guide to estate planning life insurance.
4. Life Insurance to Leave an Inheritance BehindPermanent life insurance is a great way to leave an inheritance behind, especially if you are in excellent health. We have worked with a few clients who needed to leave an inheritance for a special needs child. (If you have a special needs child that will need financial support after you are gone please see our article titled: “Life Insurance to Financially Support a Special Needs Child”).
We have also had clients who wanted to be able spend their retirement savings guilt-free and still leave something behind for their loved ones. If you want to leave an inheritance behind and spend your retirement savings guilt free, a permanent life insurance plan that does not build a cash value is the best option. The type of policy we always recommend in this situation is a guaranteed universal life insurance policy.
Earlier this year we worked with Richard and his wife, Linda. Richard is 67 years old, recently retired, and in great health. Linda is also in very good health and is 64. Richard and Linda have plenty of money to retire with, but they wanted to leave a small nest egg behind for their grandchild to help with the cost of their college education.
Richard and Linda have three grandchildren between their two adult children. They would like to leave $100,000 behind for each grandchild, so they'll need $300,000 in permanent life insurance coverage.Rather than trying to save $300,000 on a fixed income, Richard decided to buy a permanent life insurance policy amounting in $300,000 of coverage. Most of the men in Richard’s family live until roughly the age of 90 so we recommended a policy with level rates until the age of 95.
The monthly cost of this policy was $535.46, or about $6,425.00 per year. If Richard lives 25 more years, until roughly the age of 92, his policy will have costed him and Linda about $160,638.00. This is roughly half of the amount of money they want to leave behind.
If Richard and Linda hadn’t purchased a policy, that means they would have to save about $1,000.00 per month to reach their goal of $300,000, and on a fixed income, this would affect their ability to enjoy retirement.
JRC Can Help You Save Money on Life Insurance
At JRC Insurance Group, we work with more than 50 top-rated life insurance companies and our agents are experts with multiple years of experience. With a few questions about your health and long-term goals, our agents will be able to recommend the best insurance product and the best insurance company available to you.
We are an owner-operated, nationally-licensed insurance agency and our number one priority is our clients. We take our time with each client to make sure they understand the type of insurance they are applying for and to make sure they receive the best rates available.
Give us a call toll-free today at 855-247-9555 or request a free quote online using the form below and you’ll be able to shop dozens of life insurance companies in minutes. JRC Insurance Group, your friend in the insurance industry.
Managing Partner and Co-founder
Cliff is a licensed life insurance agent and one of the owners of JRC Insurance Group. He has helped thousands of families of businesses with their life insurance needs since 2012 and specializes with applicants who are less than perfect health. In his spare time he enjoys spending time with family, traveling, and the great outdoors.
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Some of the questions we received from our website visitors:
All the information is very useful. The question is what remedy can you do if a universal life insurance was already purchased almost 20 years ago. What's the best strategy to handle it after 20 years? Thanks
Mr. Hsu, Thank you for your question and visiting JRC’s life insurance website. We're unsure whether you're considering options to close out your existing universal life policy or replace it if we could help you find another policy which would better fit your needs, whether that's lowering your premium and or having a fixed premium cost. Your current age, health, and current need for life insurance will all be of importance. We'll be glad to help review your options. Call us when you have a copy of your most recent statement, which should show any accrued cash and "surrender" terms if you were to cash it in. Call us (855) 247-9555 and a licensed agent for your state who's experienced at policy assessments will help you. Best regards, and we look for to assisting you.