What is Universal Life Insurance?
Universal life insurance is one of the most common types of life insurance.
While the concept of universal life insurance is relatively easy to understand, the many different types of universal life policies, along with the nuances and fine print in each individual universal life policy, can be confusing for consumers who are trying to navigate the process themselves.
In this article, JRC Insurance Group provides a basic guide to help you decide whether universal life insurance is right for you.
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Quick Article Guide
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Universal life policies are designed to provide coverage for your entire life, making them a form of permanent life insurance. Universal life insurance provides greater flexibility in regards to premiums and policy adjustments than whole life insurance, another type of permanent life insurance that locks in a set premium until you die, regardless of how long you live. Another option, term life insurance, provides coverage up to a specified age.
Universal life insurance can be customized to provide coverage to the age of your choice: 90, 95, 100, 110, or even 121.
A key feature of a non-guaranteed universal life policy is a cash accumulation account.
In theory, this savings mechanism accrues interest to build your cash value, which you can—again, in theory—borrow against.
What many people don’t realize, though, is that the words “cash accumulation” don’t guarantee savings. We receive calls daily from clients who were sold a non-guaranteed universal life insurance policy that was supposedly destined to rake in big bucks, only to perform poorly and dwindle down to zero, without the client ever knowing until it was too late.
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.In the 1980s heyday of non-guaranteed universal life policies, consumers were hitting an instant mini-jackpot of high-interest rates and fast-accumulating funds. They invested and overfunded with a “set it and forget it” mentality, thinking the money would continue to pile up. That typically hasn’t been the case, as interest rates have since plummeted. In the same vein as the horror stories we’ve alluded to, Forbes points to a looming retirement disaster for universal life policyholders.
Many people mistake the words “cash value” or “cash accumulation” for dollar signs. Here are a few things to keep in mind when you hear a life insurance agent talk about a policy with a cash value component:
- 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.
Universal life insurance breaks into two-difference categories: non-guaranteed universal life and guaranteed universal life. They are similar in many ways but dramatically different in a pivotal way.
Non-Guaranteed Universal Life Insurance is an investment that is designed to build cash value. You are buying coverage for life, along with a death benefit but with an additional investment component that is—just like the name implies—non-guaranteed.
To elaborate a little on the past and present of non-guaranteed universal life, millions of people jumped on what was seemingly a no-brainer back in the ’80s, when interest rates were at an all-time high of 15% or more. But with current interest rates hovering around 3-4%, 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.
This is why so many people who bought a non-guaranteed universal life policy 30 years ago are struggling to afford their coverage today. It’s also why there is little justification for buying a non-guaranteed policy today with interest rates as low as they are.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 its permanent life counterparts 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.
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
We’d like to offer an important disclaimer about one of the newest types of universal life insurance: indexed universal life (IUL).
Investopedia offers the following definition: “An indexed universal life insurance policy gives the policyholder 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.”
With an IUL, you are basically “participating” in a stock market index, with a cap on both the upside and downside percentages. Many insurance agents will rave about how you can retire on an IUL policy, use it to send your kids to college, etc.
Unfortunately, as is the case with most things in life, “If it sounds too good to be true, it usually is.” While IUL is certainly an attractive investment on paper, it is an inherently questionable one in real life—and that’s not just an opinion.
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.”
Unfortunately little has changed over the last decade. In 2019, the New York Department of Financial Services began warning consumers about purchasing Indexed and traditional Universal Life insurance after receiving more than 1,400 complaints. Despite these concerns, interest in IULs continues to grow.
Always remember that if a life insurance policy has a cash value component, it carries a market risk of potential poor performance, which could ultimately affect your coverage.
Another type of universal life insurance policy to be wary of is variable universal life insurance (VUL).
A brief overview from Investopedia: “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, as “exposure” and “the possibility of an increased rate of return” are not guaranteed. We recently got a call from a frustrated consumer who had a VUL since 1996.
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 client’s VUL policy’s rate of return failed to produce the necessary funds to keep the policy affordable.
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.
At JRC, we strongly recommend guaranteed universal life insurance over non-guaranteed universal life insurance, for several reasons:
1) Your cost of insurance will not change. With a guaranteed policy, even as you age, your premium is fixed. You can guarantee your premium to age 90, 95, or 100. The annual increase in the cost of coverage for a non-guaranteed policy can disrupt your finances at a time in life that should instead be smooth sailing.
2) Your coverage is not tied to an investment. As many non-guaranteed policies don’t perform as expected, we say it’s better to do away with the risk altogether.
3) 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. All the while, that cash belongs to the insurance company. If you’re truly looking to invest, the smart thing to do is to buy a GUL and invest any money you save elsewhere, separately from your life insurance.
4) You will pay less up front. 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.
5) You will never lose your coverage unexpectedly. Perhaps most importantly, guaranteed universal life insurance provides peace of mind in knowing your premiums will not skyrocket and become unaffordable.
We can make all of the recommendations in the world, but in the end, it’s all about finding the right life insurance for your needs.
Most clients looking for universal life insurance end up extremely happy with a GUL policy, but as independent agents, there is no reason for us to push any specific type of policy or provider on you.
Save yourself the hassle of calling multiple companies, and let us do the work for you! For a free, no-obligation quote, call us at 855-247-9555, or click the button below.
Co-Founder and Managing Partner
Justin is a co-founder, managing partner, and a licensed life insurance agent at JRC. He began working in the insurance industry after graduating from SDSU in 2004, and he takes pride in helping his clients find the most affordable coverage available. Justin is an avid sports fan that enjoys barbecuing, fishing, golfing, and spending time with family and friends.