Universal Life Insurance Everything You Need to Know

By Michael Horbal – updated on – 09/21/2022

Universal life insurance (UL) is either the greatest solution to your life insurance needs, or it’s not.

Universal Life Insurance Overview

The reality with universal life is that it does have tremendous potential, BUT there are many pitfalls to look out for.

Universal life insurance (UL) is a type of life insurance that, when properly designed, has the potential to,

Provide lifetime guarantees or cash value accumulation to meet future needs.

With UL policies, your choices are typically a cash value accumulation or a guaranteed universal life(GUL) policy.

With either type, you can choose how beneficiaries receive the life insurance proceeds, whether it’s a lump sum or paid out over time.

The problems for consumers almost always occur with the cash value types of policies, as we’ll explain later.

Guaranteed Universal Life

If you want a policy that is guaranteed for as long as you live, a guaranteed universal life insurance (GUL) policy is a great choice.

While we’re big believers in term life insurance, there are times when a GUL may be a better option for you.

With GUL, the premium you pay and the death benefit you receive are guaranteed to age 120 with most companies.

As long as you pay your premiums on time, you won’t outlive this type of policy.

Why GUL?

The appeal of a GUL policy is that they are simple to understand, and you know what you are getting from day 1.

Guaranteed universal life insurance policies are comparable to a term life insurance policy.

Many GUL policies offer life insurance riders for chronic and terminal illnesses that may interest you.

You can even get riders for accidental death insurance with many carriers.

The disadvantage of a GUL happens if you decide you no longer want life insurance in the future.

Unlike a cash value whole life policy where you may get money back when you cancel,

A GUL policy typically has little to no cash value when canceling.

When is GUL a better option than term life insurance?

The cost of term life insurance for seniors becomes expensive to buy.

In some cases, you may be able to buy a GUL for a comparable price.

The same holds if you have an existing term policy that is convertible.

Converting your existing term policy may be a better option if you’ve developed health problems that would make new insurance costly.

It’s worth a review, at the very least.

Are you a tobacco user?

If you smoke cigars, cigarettes, pipe tobacco, or marijuana, we have a company that will give you an incentive to quit using.

With this program, you can get the first three years at a non-smoker rate. If you quit smoking by the end of the third year, you can request that all future years be charged at the lower non-smoker rates.

Underwriting Universal Life Policies

Another appealing factor with UL policies is underwriting.

Life insurers continuously look for ways to do away with the paramed exam, offering greater coverage through no-exam platforms.

The statistics show that the easier it is for consumers to get coverage, the more consumers will buy.

Underwriters check the Medical Information Bureau and prescription databases.

They will use height-weight measurements from your medical records and ask you about your family history of heart disease and cancer rather than have you complete the paramed.

Cash Value Universal Life

With a cash value (CV) universal life policy,

The goal is to provide you with a cash value equal to or more than your death benefit (endowment) when you reach age 100.

The concept with cash value accumulation policies is to build up enough cash value,

And then access that cash value as a way to supplement you and your spouse’s retirement in later years.

You may even use the appeal of a cash value policy to reward key people in your business.

The appeal is that you may access your cash value on a tax-deferred basis using policy loans.

As long as the policy remains active, you may avoid paying taxes on any gains in the policy.

The problem with cash value life insurance policies is that they rarely perform, as illustrated when you bought your policy.

This is mainly due to the assumptions built into your insurance company’s and agent’s illustrations.

Suppose you have an underperforming cash value policy.

In that case, we can look at using a 1035 exchange with an absolute assignment that allows you to transfer cash to a new policy in most cases without triggering a tax event.

You can also use a universal life policy for SBA life insurance loan requirements.

Index Universal Life Insurance

Index universal life insurance (IUL) is another type of cash value accumulation policy.

In our current environment of low-interest rates,

Traditional cash value policies have lost some appeal as many are illustrating with 2-4% non-guaranteed interest rates.

Index UL policies, on the other hand,

Are illustrated using non-guaranteed interest rates in the 5-6% range that are tied to an index such as the S&P 500.

If there was a double-edged sword in life insurance, index universal life insurance is.

While the potential cash value accumulation is appealing, index policies are complicated to understand.

The Bottom Line with Cash Value Life Insurance

Whether you buy a traditional or index policy,

You must commit to paying for this policy for many years (think at least 20) before the benefits become available.

You must request “inforce illustrations” each year.

This is different than the annual statement the company will send you.

The importance of the inforce illustration is to show you how the policy is performing vs. how it was originally illustrated.

If underperforming, you may need to pay additional premiums now to avoid big problems in the future.

Illustrations – What to look for

The illustration is the most important document to review before purchasing universal life insurance.

Here’s a list of things to consider:

  • Did you receive the full illustration with all numbered pages?
  • Is your age listed correctly on the illustration?
  • What medical underwriting rate class is being used?
  • Does the illustration require that you pay premiums every year?
  • What is the non-guaranteed interest rate?
  • What is the guaranteed interest rate?
  • How long does the guaranteed death benefit last?
  • How long does the non-guaranteed death benefit last?
  • What is the cash value in years 10, 20, 30, age 67, and at age 100?
  • Are there surrender charges? How much and how long do they last?
  • Are you planning to access the cash value in the future through policy loans?
  • Does the policy have an over-loan protection feature?
  • Did you receive an illustration showing these future withdrawals?
  • Are you considering any of the available riders?

A standard illustration is typically 9-15 pages long, while index universal life insurance illustrations are 30-40 pages long.

You should receive the full illustration at the beginning of the application process. For more on how the entire process works, check out our Life Insurance for Dummies guide – here.

Something to remember is that if your approval comes back more or less favorable than initially illustrated,

You need to show new illustrations as the policy will perform differently than initially illustrated.

With any cash universal life insurance policy, they need time to build up a cash value to provide the promised benefits later on.

For older insureds and those with high-risk health issues,

It is even more difficult to make the ul policy work due to the cost of insurance charges of these policies.

Final Words

Universal life insurance may be a great option to meet your insurance needs,

But do not buy any policy unless you fully understand how it works.

Our life insurance service researches the best life insurance companies for your universal life insurance needs.

We’ll provide comparisons and show you the options that meet your needs.

We also have policies that allow you to get up to $500k of life insurance with no exam, and in some instances, you may get up to $3 million in coverage.

Please take a few minutes to submit your request.

There is never any pressure or obligation with our insurance service. Thank you.

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Michael Horbal - Author

Michael J. Horbal

Owner of RiskQuoter

Too many people overpay for life insurance because they end up with the wrong life insurance company, agent, or both. That’s why I started RiskQuoter – To help you get the best life insurance rates available.

As an independent insurance agent, I’m licensed in all 50 states and the District of Columbia and offer 40+ life insurance companies to ensure you get your best rate!

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