What are the differences in Life Insurance and why do I like Indexed Universal Life Insurance?
Life Insurance Can Be Bought in Many Forms
Life insurance can be bought in many forms and universal life is one of those forms. Universal life insurance is a permanent type of insurance that is based on a cash value. With this type of insurance, the insurer pays a somewhat higher premium than he or she would with a term life policy. A portion of that higher premium is used to pay for the life insurance itself and the remainder is placed into an investment portfolio.
Premiums are usually paid monthly and that portion that is used as investment is credited, with interest to the policyholder’s account. The portion that is used to pay for the insurance itself is deducted from the total amount that is sent in. This is known as the COI or Cost of Insurance portion. In the event no payment is sent in for a month, the amount of the COI is deducted from the cash amount in the account.
The amount of interest that will be credited to the account is determined by the insurer. In many cases, this will be determined by a financial index of some type. Because only the amount of interest credited and not the cash value itself varies, universal life policies offer a stable investment option for some consumers.
I will just briefly touch on Term Life Insurance. I really consider these policies to be suited for specific needs, hence the work term. Since Term policies are sold in increments of 10, 20 or 30 generally, if you have for example a 30-year mortgage to protect, a 30 decreasing term policy may be a consideration. If you are going through a divorce and need to insure a support payment for specific term, term life could again be a consideration.
If you need life insurance and finances are a little tight, term premiums tend to be more reasonable, but remember they will increase at the end of the term, so consider a convertible term policy. A convertible term policy is one that can be converted to a permanent policy after a specified number of years.
Insurance Invested in the Market
It should be noted that there is a similar type of policy that was designed from aspects of the universal life policies and that is called the Variable Universal Life (VUL) insurance policy. VUL policies allow the cash value to be directed to a number of separate accounts that operate like mutual funds and can be invested in stock or bond investments with greater risk and potential reward.
While these polices offer the upside potential of the market, the cash value also is exposed to downside risk of the market. Although the death benefit will generally remain constant, if the owner decides to take a policy loan or surrenders the policy early, market value adjustments and surrender penalties may apply.
Flexible Premium and Stable Cash Value
Universal life insurance is also more flexible than whole life insurance in two important ways:
The death benefit amount and often the premium payment amount are more flexible. Under certain conditions, the death benefit can be increased or decreased without actually losing the policy or having to begin anew as would be the case with whole life.
The second way universal life offers more flexibility is that it allows for a larger range of premium payments. These can range from the minimum amount allowed to cover the policy up to the maximum amount allowed by the IRS.
The main difference between whole life and universal life is that universal life shifts some of the risk for maintaining the death benefit to the insured. Conversely, with a whole life policy, as long as all the premium payments are made, the death benefit is guaranteed to be paid once the insured dies. With universal life, the policy will lapse and the death benefit will no longer be available if the cash value or premium payments are not enough to cover the cost of insurance.
My Favorite: Indexed Universal Life
Lastly, there are the Indexed Universal Life policies that work by investing in Index Options such as the S&P 500, the Russell 2000, the Dow, and other indexes. These types of contracts only participate in the movement of the specified index and do not participate in the actual purchasing of stocks, bonds, or mutual funds.
The Life Insurance Policies give you the benefit if a face amount with cash value buildup. As mentioned the cash is not directly invested in the markets, rather they participate in the upside potential of the stock or bond markets in various indexes. The owner/insured may choose the index, the level of participation and how often the interest is credited. A contract may be divided into more than one strategy. Here’s the best part, if the index is up at the end of the crediting period, you make money, if it is flat or down, you lose nothing, In other words, in your Indexed Universal Life Policy, you have the upside potential with NO downside risk. Does not get better than that.
You can also add some nice features to your policy such as, terminal illness riders, long term care rides, vitality riders, spouse and child riders to name a few,
And in the End
Always remember, qualifying for Life Insurance is based primarily and two things: attained age and health status. You and your agent will fill out an application asking several questions, an APS or attending physicians statement and a medical will be ordered. The medical will be basic, blood work, weight, blood pressure and can vary depending on the face amount. There are also various table ratings or categories that will carry levels of premiums based on the two primary qualifiers.
Before purchasing any Life Insurance Policy, make sure you speak with a licensed, qualified broker or agent. He or she can answer your questions and help you decide which type of policy is best for you. Please feel free to ask any questions or leave any comments below. I will get back to you ASAP.