This is a complete guide to Universal Life Insurance in 2021.
So if you are looking to understand:
- What is universal life insurance?
- Discover the different types of universal life insurance policies you can buy
- Creative ways you can pay the premium for universal life insurance
- Use advanced strategies like taking a retirement income or borrowing from your policy
Then you’ll like 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 whole life insurance policy, which combines a high-value death benefit with a cash value that is linked to the investment performance of an insurers portfolio. UL is also referred to as ’jumbo’ life insurance because of the high life cover. Universal life insurance coverage ranges from $1m to $150m plus of death benefit.
How does universal life insurance work?
The premium paid into a universal life policy used by the life insurance company to pay for the cost of insurance and the administrative fees, with the rest going into investment returns to build up the policy’s cash value. Flexible premiums are a key feature of this type of policy.
Withdrawals and policy loans are available from a universal life insurance policy. Surrender charges for withdrawals exist in the early years of the policy. Access to a policy loan is available without penalty from policy year two onwards. No lapse guarantees exist for some types of universal life policies.
Types of universal life (UL) insurance
Understanding the different types of universal life insurance policies is important. You are buying a permanent life insurance policy designed to last your lifetime.
There are different types of universal life insurance (UL) to select from. Your choice will depend upon what policy features you want to include. A choice of how much investment risk you want to take will also be needed.
The 3 types of universal life insurance policy:
- Fixed universal life insurance
- Index universal life
- Variable universal life insurance
Fixed Universal Life Insurance
Fixed universal life insurance (FUL) is a type of permanent life insurance plan. The premium pays for the cost of insurance and administrative costs. The remaining premium invested in a cash account. The value of this cash account increases in line with the insurer's fixed interest rate.
What is Fixed Universal Life Insurance?
A fixed universal life insurance policy benefits from a fixed rate of return every year. The insurer declares an interest payment for the year ahead. The return gets added to the policy's cash account. This guaranteed fixed rate gives cautious investors peace of mind.
Index universal life insurance (IUL)
Index universal life insurance (IUL) is a whole life insurance policy. Premium payments are flexible and pay for the cost of insurance and insurer fees. The rest gets invested into a cash account with returns linked to stock markets. Insurers use popular indicies like the S&P 500, Hang Seng and Eurostoxx to benchmark returns.
3 reasons why investors choose index universal life insurance:
- Cheaper premiums than traditional or fixed universal life insurance policies.
- Attractive growth potential with stock market-linked returns
- No stock market losses
- Minimum guaranteed crediting rates
- Low interest rates mean lower returns from other types of universal life policies.
Equity index-linked policies are the most popular type of universal life insurance policy.
How Index universal life (IUL) works
Equity index universal life policy returns link returns to stock market growth. But unlike investing in an equity index fund, you won’t lose money when the market drops. The insurer provides a lifetime guarantee against any stock market losses.
There is a cap on returns you can earn. Crediting rates are typically up to 10% a year for international life policies. Whilst annual crediting rates are as high as 12% for US-based policies.
Most insurers also offer a guaranteed crediting rate of 1-2% each year. In reality, this only applies if a policyholder cashes in their policy and there has been no growth.
Policyholders can also switch out of the index return account. A fixed-rate cash account is usually available. Or a policyholder can have some exposure to market returns and some to the account of the fixed return.
Variable Universal Life Insurance
Variable universal life (VUL) insurance is a type of permanent life insurance policy. The policy's cash value can invest in a wide range of assets. Flexible premiums pay for the cost of insurance and the rest used to buy investment assets.
What is Variable Universal Life Insurance?
The cash component of a variable universal life policy invests into a portfolio of shares, bonds, mutual funds and ETFs.
These investments in the VUL insurance policy get held in separate accounts.
The policy performance links to these investments and can generate large gains. But, large losses can also occur with volatile assets held in a VUL policy.
VUL insurance gives greater flexibility than fixed or index-based UL policies. Investors need to track investment returns to make sure the policy does not lapse.
Group Universal Life Insurance
Group universal life insurance (GUL) is permanent life insurance offered to a group of people. Companies buy group universal life insurance for employees to provide life insurance coverage. If an employee dies in service, the death benefit gets paid out to their beneficiaries.
A group universal life policy can include a spouse on a policy as an extra benefit. Accidental death is also usually covered by a group policy arrangement.
Each group member has a cash value to their policy which they can grow in value or access for their own needs. Depending upon the group scheme, an employee may be able to take the policy with them on leaving the company.
A GUL policy can be part of an employees benefits package and used to attract, hire and keep key people in a business.
Buying a Universal Life Insurance Policy
Premium financing life insurance
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.
- Single pay
- Single pay with premium finance
- Life pay
- 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. The remainder of the premium is paid by the life insured or policy owner.
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 allows the cost of the life insurance policy to be spread over the rest of the insured individual's life. Premiums are paid annually and never stop.
Lombard lending is a bank loan backed by assets like shares, bonds and mutual funds that are pledged to the bank. The Lombard loan can be used to pay the premium to buy a life policy. The assets pledged to the private bank act as collateral and protect the creditor from the risk of the loan defaulting. If you fail to repay the interest or capital on your Lombard loan, the bank can sell your assets to recover the money it is lent to buy the life policy.
Find out the other reasons why high net worth individuals choose premium finance lending in our definitive guide to Premium Financing Universal Life Insurance.
Cost of Universal Life Insurance
The cost of buying universal life insurance depends upon the following factors:
- Are you a smoker?
- Amount of life cover you want (US$)
- Where you live (country and city)
- Type of life insurance product you want
- 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
Once you get a universal life insurance quote, you will get a standard premium cost. Or, you may have a fixed budget you want to fund your policy with. In which case, you'll get a standard amount of life cover.
The next step is to personalise your quote.
To get a personalised premium, you need to tell the insurer more. It will want to know details about your health, lifestyle and finances. Medical and financial underwriting is part of the application process for life cover.
Assuming all goes well, the insurer will make you an offer of life insurance. It will tell you which risk class you fall into.
To qualify for the best insurance rates, you will need to be:
- Standard plus
- 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.
If you are a smoker, your premiums will be higher than a non-smoker. But insurers still differentiate health status between smokers.
- Standard smoker
- Preferred smoker
Finally, if you have added any rider benefits to your quote, these will add extra cost to your quote. Riders for life insurance are special features in policies. Examples of life policy riders are:
- Waiver of premium
- Return of premium
- Accidental death
- Long term care
Once you are happy with your personalised life cover quote, you need to accept the offer of insurance. To do this, you can pay the first premium and if the insurer accepts it, your policy is on-risk. In other words, it is live and your life cover has started.