In the second part of my series, I will be discussing how Universal Life Insurance evolved into what it is today. When Life Insurance was first starting out, there were typically 2 options: Term or Whole Life.
Term gave a duration of fixed coverage, and Whole Life was exactly as it sounds – coverage for your entire life. The problem with Whole Life was that it was an inflexible product.
Under typical Whole Life:
- The annual premium is fixed based on the death benefit.
- The Cash Value grows on a guaranteed basis (plus dividends if the company is successful) since the returns are based on guarantees it is typically a lower rate of return (3-5%).
- Premiums are designed to be paid for one’s entire life (or to age 65).
People began wanting more flexibility with their Life Insurance, and thus the concept of Universal Life Insurance was formed.
Universal life can be structured in many different ways depending on one’s goals. But, generally:
- The premium payments are more flexible, meaning they can be designed to be higher or lower depending on if you want to accumulate more income into the policy, or if you only care about having a death benefit for life.
- Returns revolve around interest rates and the insurance companies performance in the market place with it’s invested capital.
- Premiums can be adjusted while the policy is in force to adjust to life style change or change in preferences.
- Death benefits can be level (Face Value) or increasing (Face Value + Cash Value).
- Some Universal Life policies can be structured to use the death benefit towards Long Term Care expenses.
As I discussed in my previous post (Term vs. Permanent Insurance ), one is not necessarily better than the other, but different and used for achieving different goals. Within each vertical of life insurance, there are certainly better products available over others but it truly depends on what the goals are for you.
Two brief examples of where Universal Life or Whole Life would be the better fit:
- A young family ultimately wanted to obtain life insurance coverage for their entire life to have an asset to leave to their heirs. They believed having the cash value aspect was a nice safety net for emergencies but found that they would likely be secure with their current retirement assets.
- In this case, Whole Life would probably be a good solution, the death benefit will always be there when the family passes, and they have the cash value of the policy built up in case of emergencies.
- A young family wants to have life insurance coverage for the majority of their working career (till age 67) and then wanted to stop paying premiums and begin taking distributions from the policy to use as tax free income.
- In this case some form of Universal life coverage would be more beneficial, as we could structure the policy to have a lower death benefit but still be funding an excess sum of money into the policy to generate more investment return.
With all of the different products available, it is best to work with an independent insurance broker when looking into any Life, Disability or Long Term Care needs as they will be able to survey the entire market and find what the best product for your particular needs are.