June 7, 2022
What is Universal Life Insurance? Universal Life insurance policies are popular life insurance products due to the flexibility, including flexible premiums, they offer the policyholder when compared to other life insurance products. People who choose universal life insurance (over term life insurance or whole life insurance) are typically looking for permanent coverage but also looking to maximize their life insurance coverage over the long-term and are less concerned with building cash value.
What Makes Universal Life Insurance Policies Different?
A universal life insurance policy is different than the other most common type of permanent life insurance – whole life insurance policy (for additional information regarding the different types of life insurance policies, refer to this article). Universal life insurance is known for its flexibility—the policy allows you to adjust your premium payments (within limits) and death benefit amount depending on your needs. If, after some time, you decide to lower or stop paying your scheduled premiums, you can use the cash value to cover the premium payments. In order to do so, you need to have sufficient cash value in the policy.
With most kinds of life insurance, you can purchase a policy, put it away, and simply pay your premiums as they come due. Assuming you make those payments, the policy will provide entire life coverage for the insurance policy beneficiaries. The difference with universal life is that you can make changes to your premium payments after taking out the policy.
Universal Life Insurance Premiums Are Flexible
A universal life policy, and other similar types of policies like variable universal life insurance (also known as VUL), break down the different components of the policy cost – namely, the cost of insurance (also known as the term charge), the expense charges, and the investment or savings account. The cost of insurance is set by the insurance company upfront, at the time the policy is issued, and will generally set the maximum level of life insurance premiums that could be charged each year.
The cost of insurance is determined by the insurance company underwriting, a combination of your age and health. While the expense charges are impacted by the amount of life insurance paid, since the expense charges typically include a “load” (% of premium amount). The investment component is what generates the policy’s cash value growth. When reviewing your policy with your financial advisor, you should review these key items, including the level of guaranteed death benefit to make sure you understand each of these components of your policy and all of the insurance options in the policy. While you may focus on the guaranteed death benefit and premiums, you can also calculate the minimum premiums to keep the policy in-force.
Cash Value Growth in a Universal Life Policy
With universal life, when you make a premium payment that is greater than the cost of insurance and the expense charges, that extra amount gets added to the cash value (also known as account value) in your life policy. This cash value grows at an investment rate, depending on the type of policy you have. Typically, the cash value is invested in the life insurance company’s general investment account and earns a minimum rate of return that is guaranteed. The rate of return can be higher than the guaranteed rate in any given year.
The cash value in a universal life policy grows tax-free and can be used to offset future premium payments (more on that point below). Additional information on how you can take advantage of the cash value in your universal life policy is described more fully below.
Expense Charges Vary Based on Premiums
The expense charges on your universal life policy typically have a fixed and a variable component. The fixed component is typically in the form of a monthly “policy fee” that is deducted every month from your policy cash value. The exact amount of the policy fee is listed in the policy document. The variable part of the expense charge is typically called a “policy load” and is also listed in the policy document. The policy load is usually a fixed percentage of the amount of premium paid.
What this means is that every time you make a premium payment, some percent goes directly to the insurance company rather than into the cash value. The policy load may change over the years of your insurance policy (also written directly in the policy document). So, your fees will vary depending on the amount of premium you pay.
Important Things to Know About the Premium Amount
As previously discussed, one of the great attributes of universal life insurance is that the premium payments are flexible. Make sure you understand how making different premium payments impacts your policy and coverage amount. There are a couple of things to note that you need to be aware of with respect to the flexibility of the premiums:
- Initial Premium Level. Since the policy has flexible premiums and can be changed, the initial premium that you pay when initially purchasing the policy may be insufficient to provide entire life coverage. If you are currently looking to purchase a Universal Life policy, make sure you ask your life insurance company or agent for this information, so you are not surprised down the road.
- Premiums Can Change. In addition to the point made above, the performance of the policy has an impact on the premium that is required to keep the policy in force. A Universal Life insurance policy has a guaranteed minimum interest rate (or rate of return), but frequently your life insurance agent will present the policy assuming a higher interest rate (even though that rate is not guaranteed). If the rate turns out to be lower than what was assumed, the premium amount that needs to be paid will be higher than planned. In the case of other types of universal life insurance, like variable universal life insurance, the rate of return may be tied closely to the stock market (through a mutual fund investment or market index). If the stock market, mutual fund or market index do not achieve the rate of return projected upfront by your financial planner, then the amount of monthly premiums will be impacted.
- Borrowing Against the Cash Value Impacts Premiums. One of the benefits of Universal Life insurance is that you can build up cash value in the policy, tax-free. While this cash value earns interest, there may come a point in time when you decide that you want to borrow against the cash value as a source of income. In most circumstances, the cash you borrow against the policy is tax-free but will be deducted from the policy benefit at time of payout (unless the loan is repaid beforehand). Also, since you have to pay interest on the amount borrowed, a policy loan impacts what is required for your premium payment. Your premiums now need to cover both the loan interest and the policy costs.
- Insurance Coverage Amount May Be Adjusted. With Universal Life insurance, you may be able to reduce the policy’s death benefit if the premium payments get too high. If you have accumulated cash value in the policy, you may be able to withdraw some or all of that cash value from the policy (not through a loan as described above). A withdrawal will reduce your coverage amount (usually dollar for dollar) and may have tax implications (if you withdraw more than you paid in through premium payments), but will result in lower total future premium payments since the coverage amount is reduced.
A universal policy will lapse and terminate if you stop paying the premiums and the cash value becomes depleted. However, there are options if you no longer want or can afford your Universal Life insurance policy. You can surrender the policy for the remaining surrender value (the cash value component of the policy after a surrender charge is applied) back to the insurance company, lapse the policy if there is not enough cash value, or you can sell your policy in a life settlement transaction.
Universal Life Can Adjust to Changes in Your Financial Plans
Policyholders put in place a financial plan that includes a life insurance policy to protect their loved ones. But, changes in financial plans can happen over the life of the policy, and universal life provides the flexible premiums to allow a policyholder to adjust the policy and make the life insurance work for the current situation. With universal life insurance policy, as opposed to term life insurance or whole life insurance, you can lower premiums and find adjustments to prevent a policy lapse. This is what differentiates a universal life insurance policy from other permanent life insurance policies and term life insurance policies.
Universal Life Insurance Policies Can Be Sold
Are your clients experiencing higher premiums or a significant increase of the premium needed to keep their Universal Life Insurance policy in force? Do your client’s beneficiaries no longer need the death benefits of their life insurance policy? Did you know that your clients can sell their life insurance policy?
Your clients can sell their life insurance policy in a transaction called a life settlement. Life settlements are safe, secure transactions that are regulated in most states (43 of 50 states). You can refer to your state’s insurance department to see the companies that are licensed or registered to purchase life insurance policies in your state.
If your clients cannot afford the required premium increase or higher premiums, we can help you evaluate your clients life insurance policy to see if they can sell it for cash! You can get an instant estimate of the value of your client’s life insurance policy by visiting the LCX Life settlement calculator. There is no medical exam required when your clients sell their policy.
When your clients sell their life insurance policy, you can help them make those adjustments to their retirement plan and explore annuities, long-term care, or other financial products that better meet their current needs. Your client will no longer need to make premium payments on their life insurance policy, and they can use the money they receive from the sale as they see fit, whether that is to help their loved ones or help support their retirement plan.
You can also call LCX Life at 888-388-0988, contact us here, or email us firstname.lastname@example.org to discuss your client’s situation. Our team is available and ready to explain to you all that you would want to know about life settlements. Remember to visit our Life Settlement Genius portal for client materials and additional information.
Remember: Never let your clients abandon a life insurance policy without looking at the life settlement option first!