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Life Insurance Articles
Universal Life Policies
Universal life insurance policies are similar to whole life insurance policies in that they are designed to provide lifetime insurance protection. Universal life policies offer much more flexibility than whole life policies, however, by allowing the owner to make adjustments in premium payments, lower or increase the death benefit, and withdraw funds as well as borrow funds. Universal life policies also provide complete disclosure regarding annual expenses and returns.
The downside of universal life policies, though, is that the flexibility to adjust or skip premium payments and the potential for negative returns can sometimes lead to policy lapse. This can happen if the premiums paid and interest earned are not sufficient to cover the monthly fees and cost of insurance which is required to keep the policy in effect.
Several years ago in the late 80s, a new insurance product called Universal Life No-Lapse Secondary Guarantee policies was created to address this problem. Simply stated, these policies provide that the policy will stay in force and the death benefit coverage will continue as long as the policy owner continues to fund the policy at the premium level required to maintain the guarantee. This means the policy will not lapse even if the cash surrender value is not sufficient to cover the policy’s monthly charges.
Prior to the creation of these no-lapse secondary guarantee policies, it was often impossible, or very expensive, to establish a premium in a universal life contract that would provide a lifetime guarantee.
In order to provide such a guarantee, companies use one of two structures:
Premium-based - the guarantee is provided as long as a specified premium requirement has been satisfied.
Shadow account - the guarantee is provided as long as the net shadow account is positive - where the shadow account is a hypothetical cash value determined using a specific calculation formula.
As insurance products have evolved over the years, many no-lapse policies now include provisions that give you the option of paying a lower premium than the guaranteed value. In the event the investment side of your policy does not perform as well as projected, you can restore the no-lapse protection by paying additional premiums. This is called the "catch up provision."
Even with these additional options, the no-lapse secondary guarantee policies still involve some downsides and risks. Make sure you understand all the limitations and restrictions involving the guarantee clause as well as any catch up provisions of any universal life policy you may be considering.
Generally you will not be allowed to withdraw or borrow funds against the cash value of this type of universal policy without losing your guarantee. Some policies may limit the guarantee to a certain number of years, so it’s very important that you ask the agent about possible guarantee limitations. For example, if you’re considering purchasing one of these policies at age 40 and the policy’s guarantee has a limit of 20 years, that guarantee isn’t going to be worth anything if you live beyond 60. Some companies now offer policies that are guaranteed to age 120 if premiums are paid through age 100, but just make sure you know which one you’re getting before you make your purchase.
Helpful Resources
In addition to helping you find the best insurance rates possible, we also offer a useful resource section with informative articles on health and life insurance topics that can help make the process of buying insurance a bit easier. Understanding the difference between the various types of both life and health insurance policies is key to making certain you get the best policy for your particular needs.
