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 one of the two main types of permanent life insurance - the other is whole life insurance. UL insurance combines a high-value death benefit with a cash value that is linked to the investment performance of an insurers portfolio. Because of the high life coverage, UL is also called 'jumbo' life insurance. The death benefit of universal life insurance can range from $1m to $150m and more.
How does universal life insurance work?
The premium paid into a universal life policy pays for the cost of insurance and administrative fees, with the rest going into investment returns to build up the cash value component of the policy. A key feature of a UL policy is its flexibility in premium payments.
Universal life insurance policies allow policy loans and withdrawals. Withdrawals are subject to surrender charges in the early years of the policy. From policy year two onwards, you have access to policy loans without penalty. 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. A universal life insurance policy is designed to last a lifetime.
There are different types of universal life insurance (UL). What policy features you want to include will affect your choice. The amount of investment risk you are willing to take must also be considered.
The 3 types of universal life insurance policy:
- Fixed universal life insurance policy
- Index universal life policy
- Variable universal life insurance policy
Fixed Universal Life Insurance
Fixed universal life insurance (FUL) is a type of permanent life insurance policy. The premiums pay for the insurance and administrative costs. The remaining premium is invested in a cash account. This cash account increases in value according to the fixed interest rate of the insurer.
What is Fixed Universal Life Insurance?
The fixed rate of return on a universal life insurance policy is fixed every year. The insurer declares an interest payment for the upcoming year. This payment is credited to the cash account of the policy during the course of the year. A guaranteed fixed rate of return provides investors with peace of mind.
Index universal life insurance (IUL)
Index universal life (IUL) is a type of whole life insurance policy. The policy premiums are flexible and cover the cost of insurance and the insurer's fees. The remainder is invested in a cash account with returns linked to stock markets. Popular indices such as the S&P 500, the Hang Seng and Eurostoxx are used by insurers to benchmark returns.
5 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.
The most popular type of universal life insurance policy is an equity index-linked universal life policy.
How Index universal life (IUL) works
Index universal life policy returns track stock market growth. The difference is that, unlike investing in an equity index fund, you won't lose money when the market drops. You will receive a lifetime guarantee against stock market losses.
The maximum return you can earn is capped. For international life insurance policies, credit rates typically range from 8% to 10% per year. For policies based in the United States, annual crediting rates can reach higher capped rate of 12%.
In addition, most insurers offer a guaranteed 1-2% crediting rate each year. This only applies to a policyholder who cashes in his or her policy though where there has been less growth than the 1-2% per year.
A policyholder may also switch out of an index return account. Most policies offer the option of switching to a fixed-rate account. Or the policyholder can have some exposure to stock market returns and some to the fixed return account.
Variable Universal Life Insurance
Variable universal life (VUL) insurance is a type of permanent life insurance policy. The cash value of the policy can be invested in a wide variety of assets. The premium pays for the cost of and policy charges and the remaining funds can be used to invest.
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 a type of permanent life insurance policy offered to a group of people. Companies buy group universal life insurance policies for employees to provide life insurance coverage. If an employee dies in service, the policy's 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.
Universal Life Insurance Companies
Some of the world's largest life insurance companies offer universal life insurance for high net worth clients.
The following global life insurers offer the various types of UL cover.
- Sun Life
The financial strength of the insurer you use to buy a policy from is important.
Financial strength assesses an insurer’s claims paying ability. Capital for Life uses credit rating agencies to identify strong and stable insurers. Read more about why financial strength of a life insurance company matters to policy owners.
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.