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Universal Life Insurance - Definitive Guide

 min read
CEO, Capital for Life

Universal Life Insurance

Life Insurance Policy

In this definitive guide, we provide a complete overview of universal life insurance for high net worth clients.

If you want to understand:

  • How does universal life insurance work?
  • Find out what types of policies are available


  • How to pay for a universal life insurance in creative ways
  • Using advanced strategies such as taking retirement income or borrowing from your policy's cash value

You'll enjoy the practical tips and ideas in this new guide for high net worth clients and wealth managers.

Let's get started.

What Is Universal Life Insurance?

Universal life insurance (UL) is a type of permanent life insurance. It is a whole life insurance policy and is designed to pay out a cash lump sum upon death.

UL is also known as 'jumbo' life insurance because of its high coverage level. The death benefit of universal life insurance can range from $1m to $150m and beyond.

How does universal life insurance work?

In a universal life (UL) policy, the premium paid goes toward insurance costs and administrative fees, with the remainder going into investment returns to build up the cash value component. A key feature of UL insurance policies is the flexibility of premium payment.

Policy loans and withdrawals are allowed under UL insurance policies. Surrender charges often apply to withdrawals during the first few years of an insurance policy. But policy loans are available without penalty from the start of year two onwards. Some universal life policies have no lapse guarantees meaning they have guaranteed life cover, regardless of investment performance.

Types of universal life (UL) insurance

It is important to understand the different types of universal life policies. Your choice depends on the features you want your policy to include. The amount of investment risk that you are comfortable with is another consideration.

The three main types of universal life insurance policies are:

  1. Fixed universal life insurance policy
  2. Index universal life policy
  3. Variable universal life insurance policy

Fixed Universal Life Insurance

Fixed universal life insurance (FUL) is a type of permanent life insurance. The premiums are used to cover insurance and administrative costs. The rest of the premium is invested into a cash account. The value of this cash account increases based on the insurer's fixed interest rate.

How does Fixed Universal Life Insurance work?

A fixed universal life insurance policy's rate of return is fixed every year. The insurer declares an interest payment for the upcoming year at the beginning of the year. During the course of the year, the cash account of the policy will be credited with this payment. Investments that have a fixed return offer investors peace of mind.

Index universal life insurance (IUL)

An index universal life policy is a type of whole life insurance. Insurance premiums are flexible and cover both the cost of insurance and the insurer's fees. The remainder of the premium is invested in a cash account with the return linked to stock market returns. You can choose to link your policy returns to popular indexes such as the S&P 500, the Hang Seng and Eurostoxx, which are used by insurers for benchmarking returns.

Reasons why investors choose index universal life insurance:

1. Premiums are lower than traditional or fixed universal life insurance policies.

2. Stock market-linked returns offer attractive investment growth potential

3. No stock market losses

4. Minimum guaranteed crediting rates

5. Low-interest rates mean lower returns from other types of universal life policies.

IUL or equity index-linked universal life insurance policies are the most popular type of universal life insurance policy.

How does Index Universal Life (IUL) work?

Index universal life policy returns track the growth of the stock market. But, you won't lose money when the market you are tracking drops in value, unlike investing in an equity index fund. There is a lifetime guarantee against stock market losses from the insurance company.

As a result of this guarantee against losses, the maximum return you can earn is capped. The annual stock market return cap for international life insurance policies is typically between 9% and 11%.

Most insurers offer a guaranteed crediting rate of 1-2% annually as well. This applies to policyholders who cash in their policy when the growth rate has not exceeded 1-2% per year.

In addition, the policyholder may switch out of an index return account. A fixed-rate account is typically offered as an alternative. Alternatively, the policyholder can have some exposure to stock market returns and some to a fixed-return account.

Variable Universal Life Insurance

Variable universal life insurance (VUL) is a type of permanent life insurance that offers a cash value component that is invested in a variety of investment options, such as stocks, bonds, and mutual funds. The performance of the cash value is dependent on the performance of the underlying investments.

How does Variable Universal Life Insurance work?

VUL policies allow policyholders to choose how their premiums are invested and offer the potential for higher returns than other types of permanent life insurance. However, they also carry more risk, as the cash value is subject to the fluctuations of the financial markets.

VUL policies generally have flexible premiums, meaning policyholders can choose how much they want to pay and can adjust their premiums as needed. They also allow policyholders to make changes to their policy, such as altering the death benefit or changing the investment options.

Like other types of permanent life insurance, VUL policies have a cash value component that accumulates over time and can be accessed through policy loans or withdrawals. However, these withdrawals or loans may reduce the death benefit or cash value of the policy.

VUL policies may be suitable for policyholders who are comfortable with market risk and have a long-term investment horizon. It is important to carefully review the investment options and fees associated with a VUL policy before purchasing one.

Group Universal Life Insurance

Group universal life insurance (GUL) is a type of permanent life insurance policy that covers a group of people. Many companies provide life insurance coverage to employees by buying GUL policies. The death benefit for the policy is paid to the beneficiary of an employee who dies while he or she is employed.

As an additional benefit, spouses can be included in a group universal life policy. Most group policies also cover accidental death.

The policy of each group member has a cash value that can either grow in value or be accessed for personal use. In some cases, employees may be able to take their group insurance policy with them if they leave the company.

GUL policies can be part of an employee benefits package and can be used to attract, hire and retain key personnel in an organisation.

Universal Life Insurance Companies

The world's largest life insurance companies offer universal life insurance to high-net-worth clients.

Here is a list of companies that provide universal life insurance in different forms.

  • AIA
  • Prudential
  • Manulife
  • Sun Life
  • Transamerica

When purchasing a policy, you should consider the insurer's financial strength.

Financial strength is a measure of the insurer's claims paying ability.

Read more about why financial strength of a life insurance company matters to policy owners.

Buying a Universal Life Insurance Policy

Paying for a universal life insurance policy can be done in 5 different ways and each has its pros and cons.

Premium financing life insurance is such a popular strategy that Capital for Life has dedicated a complete guide to the topic which can be found here - Universal Life Insurance Premium Financing - The Definitive Guide

Here is a quick overview of the 5 ways a universal life policy can be financed.

  1. Single pay
  2. Single pay with premium finance
  3. Multi-pay
  4. Life pay
  5. Lombard loans

Single Pay Universal Life Insurance

Single premium life insurance (SPL) is when a policy is fully funded in a single upfront payment. It is the cheapest and quickest way to buy a life insurance policy.

Premium Financing Single Pay

Premium financing life insurance is where a high net worth client borrows the majority of the single premium, typically 90% from a bank or premium financing company to pay for a life policy. Only the remaining 10% of the premium must be paid by the policy owner.

Multi Pay

Multi-pay for universal life insurance allows the cost of the insurance premiums to be spread over a period of time, typically 5 to 15 years, but in some cases as long as 30 years.

Life Pay

Life pay allows the cost of a life insurance policy to be spread over an insured individual's lifetime. The premium is paid annually and only ceases upon the death of the life insured.

Lombard Loans

A Lombard loan is a bank loan backed by assets such as stocks, bonds, and mutual funds that are pledged to the bank. The Lombard loan can be used to pay the premium on a life insurance policy. The assets pledged to the private bank serve as collateral and protect the creditor from default risk. If you do not repay the interest on your Lombard loan, the bank can sell your assets to recover the money it lent to buy the life insurance policy.

Discover why high net worth individuals choose premium finance lending in our definitive guide Premium Financing Universal Life Insurance.

Cost of Universal Life Insurance

The cost of buying universal life insurance depends upon the following factors:

  1. Age
  2. Gender
  3. Are you a smoker?
  4. Amount of life cover you want (US$)
  5. Where you live (country and city)
  6. Type of life insurance product you want
  7. Any special features (riders) you want to be added to your policy

Get an easy online quote for universal life insurance by visiting our quotes page.

Personalise a Universal Life Insurance Quote

With a universal life insurance quote, you will get a standard premium cost. From there, you can customise your quote.

The insurer will need to know more about you in order to provide you with a customised quote. It will want to know about your health, your lifestyle and your finances in detail.

If you decide to proceed with an application, life insurance underwriters will use these details to evaluate your application.

Assuming all goes well, the insurer will make you an offer of life insurance. It will tell you which risk class you fall into.

If you qualify for the best life insurance rates, you will fall into one of the following risk categories:

  • Standard plus
  • Preferred
  • Super preferred

If you fall into any of these risk classes, you will pay a lower premium for your life insurance cover.

Most people will fall into the standard risk class for insurance cover.

Smokers pay a higher premium for life insurance than non-smokers. However, insurers still award different risk classifications for smokers based on health factors. The most common risk classifications for smokers are:

  • Standard smoker
  • Preferred smoker

Finally, if you have added a rider benefit to your universal life quote, you will incur an additional charge. A premium rider is an additional benefit to an insurance plan. Some examples of life policy riders include:

  • Waiver of premium
  • Return of premium
  • Accidental death
  • Long term care insurance

Once you've received your personalised life insurance quote and you are happy with the cost and features, you'll need to accept the terms. This is done by paying the first premium and, once it is accepted by the insurer, your policy will be considered on-risk. Your policy is live and your coverage has begun.

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Universal Life Insurance - Definitive Guide

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