Guaranteed Universal Life Insurance
Life insurance has been a staple of financial protection for American families dating back for decades. It has provided stability and security, ensuring that heirs will be taken care of once a loved one passes on. As America has grown more sophisticated, so too, have life insurance products. Applicants can now access a wide variety of policy options to meet their personal needs, including products such as mortgage life insurance, decreasing term life insurance, key person insurance, credit life insurance, and many others.
The key to many of these is flexibility. As American family life continues to evolve at an ever dizzying pace, what may have worked well for one period in a person’s life, perhaps does not work so well with their current conditions. However, the bottom line is that all families still want financial security. With those goals in mind, guaranteed universal life insurance has become a much more popular option for life insurance applicants.
It is similar to universal life insurance, which is an offshoot of whole life insurance. What is different between whole life and universal life is that with whole life, premiums and the amount of the death benefit are fixed. It remains in effect for the entire life of the policy holder.
Universal life insurance provides premium flexibility and adjustable death benefits. It can be adjusted upward or downward depending on the desires of the policy holder. In addition, the policy holder can use some of the cash value of the policy to pay for insurance premiums. However, if and when the cash value of a universal life insurance policy reaches zero, the policy lapses.
To make universal policies more attractive, insurance companies began adding a secondary guarantee that would keep the policy in force even if cash values dropped to zero. This guarantee kicks in once a certain number of premium payments have been made.
Commonly referred to as a “no lapse guarantee” rider, it has been given the name of guaranteed universal life insurance.
Why is there a need for guaranteed universal life insurance?
As Americans continue to live longer, many of them are also choosing to work well past 65 years old, either because they want to, or because economic necessity has forced them to do so.
Statistics show that older Americans who are either retired or close to reaching retirement age have more debt and financial obligations than ever. In the past, the traditional wisdom has been when it comes to life insurance that as a person gets closer to retirement age, with less financial obligations, there was less of a need for corresponding life insurance. But because of the rise in debt and obligations, the need to protect a family’s assets with the passing of a family member has taken on added importance much later in life.
Guaranteed universal life insurance is an attractive option for many that bridges that gap of financial insecurity, allowing policy holders to lock in a guaranteed death benefit and premium payments while providing flexibility and stability for households.
As guaranteed universal life insurance has grown in popularity, more and more insurance providers are beginning to offer it as an option. This increased availability is making the marketplace more competitive and driving premiums down thereby making it an even more attractive life insurance option.
Because it offers flexibility and a cash value option, guaranteed universal life insurance offers policy holders many possible ways to put the cash value and death benefit to work for them, some of which include:
- Paying off funeral, burial and final medical expenses
- Income replacement for surviving beneficiaries
- Debt repayment, including personal or business debt
- Estate liquidity, to help settle a variety of financial issues
- Key person insurance to protect a business from the negative issues related to losing a key employee
- Mortgage acceleration to help pay off real estate properties
- Pension maximization
- Protection from creditors
Many people also use a universal life policy or a guaranteed universal life policy to tap the cash value while they are still alive.
One of the key provisions of a universal life policy is that most will allow policy holders to take out a loan against the cash value of the policy. Borrowers will have to pay interest on the loan or it can be covered by the remaining cash value of the policy. Taking a loan out means those funds will not draw interest in the policy account and that will affect how quickly the cash value will accrue. The other important thing to remember is that any outstanding loan amounts will be deducted from the death benefit that is paid out if the policy holder passes away.
While loans make sense sometimes, at other times taking a loan out against the policy value is more appropriate. Insurance companies are able to structure tax-free internal policy loans against the cash value, in some cases providing an investor with years of tax-free income. However, withdrawing from the policy means that the death benefit will be permanently lowered as well.
How does guaranteed universal life insurance compare?
The two most popular forms of life insurance remain term life insurance and whole life insurance.
Term life insurance gives applicants coverage for a pre-determined and set period of time. This most commonly takes the form of 10-, 20- or 30-year increments with the premium remaining constant throughout the term. When the term ends, there is no longer an agreement between the insurance company and the individual, and the policy simply expires.
Whole life insurance is permanent in that it stays in effect until a person dies, as long as premiums continue to be paid. Premium payments are also fixed for the term of the policy, but because a death benefit payout is expected more often than not, premium rates are often higher than with term life insurance. One of the advantages of a whole life policy is that it accumulates cash value over time, thus creating an amount that a person can borrow against if needed.
Guaranteed universal life insurance is similar to whole life insurance because it is also considered a permanent policy, meaning it is supposed to last the entire life of the policy holder. Unlike whole life, Guaranteed universal life insurance offers policy holders flexible premiums so that the amount of premium that is paid can be adjusted each year. The flexibility comes from withdrawing some of the policy’s cash value to pay the premium. Although you still need to make the full premium payment, having the ability to tap the cash value provides policy holders with options to cover that amount.
Some carriers offer guaranteed universal life insurance options and adjust the amount of the premium higher while making the policy amount lower, so that in addition to offering a guaranteed death benefit, the policy almost immediately begins to generate a larger cash value. This expedites flexibility in the policy, meaning that a holder can access a higher cash value sooner, or begin making premium payments from the cash value earlier in the life of the policy.
One other key difference between a universal life policy and a whole life policy is that with a whole life policy, interest rates that help grow the amount of the cash in the policy are adjusted once a year. With a guaranteed universal life insurance policy, interest rates are adjusted and paid monthly. This works to a universal life policy holder’s advantage when interest rates are rising, because there is more sensitivity to positive market changes.
Whether an applicant decides to go with whole life or guaranteed universal life, a couple of options worth exploring with an agent include possibly setting up a lifetime of guaranteed monthly income for beneficiaries or including a rider that gives a policy holder the ability to waive premiums if they become disabled and can’t work.
How Can PolicyZip help?
Because guaranteed universal life insurance policies have become a popular financial protection and investment vehicle, many more insurance companies than ever now offer this as a product option for clients. While this means lower premiums overall due to increased competitiveness, it can lead to more questions because more options are available.
You can do the legwork yourself to come up with the best possible option for your situation, but an even better way to proceed is with the help of an experienced, unbiased and knowledgeable life insurance agent who understands the nature of the various types of policies that are available.
And deciding on the type of policy you want is only half the battle. Applying for the policy and working through the entire process is best handled with an agent who is working on your behalf. You will need to fill out an extensive medical history as part of your application, undergo a physical exam, provide explanations of any risk factors or conditions you currently have, ranging from obesity, high blood pressure and diabetes, to more serious issues such as kidney disease, COPD, heart disease, among others.
PolicyZip has access to all major insurance companies and can assist you in obtaining the right kind and amount of coverage for your needs. We can also assist you if you are turned down for coverage from one insurance company, or are unsatisfied with the proposed premium you are quoted.
To see how PolicyZip can meet your needs, call us at (719) 451-7552 and talk with an expert.