Universal life insurance is permanent and offers more flexibility than whole and occupational insurance. Universal Life enables you to adjust premiums, death benefits, cash value, and policy items. The universal life premium typically increases due to growth in the insured.
Why is a flexible death benefit appealing? Take, for example, buying universal life insurance, which pays a death benefit for your children. The kids are growing up and you want to increase the death benefit to support the new grandchildren. You can increase your death benefit after a medical examination. Of course, your premium will also increase as your coverage expands.
Universal life insurance premiums can be paid later
If it costs less for your insurance company to insure you when you pay your universal life insurance premium, the excess money goes into a cash-value account. Over time, it becomes more and more expensive for insurance companies to Insure you, so paying your premiums up front will increase the cash value. You can also pay additional funds into a cash-value account, which usually bears interest at money market rates, or invest the cash value in stocks and bonds.
- Fixed universal life insurance pays a set interest rate on the cash value.
- Index Universal Life Insurance tracks a stock market index, such as the S&P 500, so returns are volatile. A drop in the index will not affect policy.
- Variable universal life insurance uses cash value to invest in stocks, bonds, and mutual funds. If the value of your investment falls, you may lose money.
Universal Living Cash Value
Ultimately, the cash value portion of the policy may be used to reduce or pay your lifetime premiums. Keeping a close eye on cash value is critical to ensure your premiums will be paid. You may have to pay some of the difference. If the premium is not paid in full, the policy will lapse and you will have no coverage.
Once your Universal Living Cash Value Account reaches a certain level, you can withdraw a portion of these funds without affecting the death benefit, but you will be taxed. Universal life insurance tends to offer a loan facility, but if you die before the loan is repaid, the amount you owe will reduce the death benefit. After 10 or 15 years, the Universal Living Policy can be terminated or surrendered in exchange for your cash value.
If you don’t use the full balance of your cash-value account for universal life premiums, the insurance company will keep what’s leftover when you die. Unlike whole life, your beneficiaries are only entitled to death benefits.
The selling point of universal life insurance is that, over time, its cash value should increase enough to cover future years of premiums. In theory, the insured can only pay the initial premium in one lump sum, which is then paid automatically using a cash value account. However, in times of poor market performance, policyholders may not have sufficient funds in their cash value accounts to pay their premiums. If you don’t have enough money in terms of cash value to cover the increased premium, but you haven’t ‘t paid it, you may even pay the premium you paid and lose your policy for not paying it.
Is it universal life insurance?
Universal Living is a good fit for younger seniors who are diligent about managing their financial balances and are prepared to add money to their cash value accounts if the balance drops low enough to cover insurance premiums. If you don’t pay your premiums on time, you will lose your pension. Universal life insurance is not a wise choice in your later years because less of your premiums will go into a cash-value account, and the account is unlikely to accumulate to a point where it provides any benefit.
Variable Life Insurance for Seniors
Like Universal Life, a variable lifetime includes an investment element and a death benefit, but there is no guarantee that there is no rider’s death benefit value, which adds to the premium cost. Cash value accounts add value and can be used to pay premiums or increase death benefits. Variable Whole life insurance has three death benefit riders:
- Death Benefit: The beneficiary receives the same payment regardless of the death of the insured. A variable whole life insurance policy with a horizontal death benefit typically has lower premiums, but the death benefit holds less value in future dollars.
- The benefit of Variable Death: Payments depend on the cash value account associated with the policy. Investments in this account can go up or down, resulting in uncertain payments, but the assured can change the investments held over time.
- Premium Return: When the cash value reaches a certain level, part of the premium paid will be refunded.
- Minimum Guaranteed Death Benefit: Guarantees that the policy will not lapse because the cash value drops too low.
Concerns about Variable Lifetime Investments
While flexible premiums can reduce the cost of variable life insurance policies, the structure of these policies creates some risk if the value of the investment drops below a certain level. Without the Minimum Covered Death Benefit Rider, the Cash Value Account could be reduced enough to cause the policy to lapse, leaving your beneficiaries without any payment. Outside of market conditions, management fees for managing a portfolio reduce cash value.
It’s not all bad news for a fickle lifetime policy. The insured can start with riskier investments to increase cash value and then move to lower-risk financial instruments later in life. In a nutshell, variable whole life insurance is a higher risk, whole life insurance with little or no guarantees and the potential for higher returns.
Is variable whole life insurance for you?
Because maintaining a set balance in a cash value account is critical, the best candidates for variable whole life insurance are those who understand inventory, bonds, and other investments. A variable whole life policy can be rehabilitated if you are willing to buy a minimum guaranteed death benefit and carry the investment over many years. For wealthy seniors, a variable whole life can be a sensible addition to a very well-rounded financial plan. For others, this life insurance can be a gamble.
Variable Universal Life Insurance for Seniors
In addition to features similar to universal life insurance such as flexible premiums and the ability to withdraw funds or loans from a cash-value account, variable universal life insurance adds more control over the cash value portion through a variable account. These accounts, also known as sub-accounts, are used to create investment portfolios related to the insured’s risk tolerance over many years. Although variable universal life insurance is usually sold as a minimum death benefit, you may need to purchase riders to get this option on some policies.
Here’s how subaccounts work with variable universal life insurance:
- Your Personal Mutual Fund: Insurance companies offer options to invest in stocks, bonds, and money market funds, effectively helping you create a mutual fund that helps grow your cash account.
- Better risk management: You can put riskier investments into variable accounts early in the policy to take advantage of the potential for higher returns. Assuming you’re younger now, you can afford typical market volatility. As you get older, you can switch to lower-risk investments, or create a portfolio that has more exposure to bonds and money market funds but includes some stocks for higher returns.
- Fees and Limitations: Most variable universal life insurance policies limit the number of times you can change your investment each year, which is called a transfer. There is a penalty for exceeding this number. In addition, there is an investment management fee for each transfer.
Tax Advantages of Variable Universal Life Insurance
When you transfer investments, there is no capital gain tax. If you withdraw your funds, there are no tax consequences. Since death benefits are not taxable, your beneficiaries are also protected by income tax.
Focus on Variable Universal Life Insurance
Taking an active role in managing investments with variable universal life insurance is attractive to many who need life insurance. The increase in cash value can cover insurance premiums and allow you to withdraw money to cover some lifetime expenses. However, financial markets can be very volatile at times, which will affect investments and cause your cash value to drop significantly. You must ensure that the cash value account is adequately funded to pay premiums at any time.
Variable universal life insurance includes a high surrender charge, usually paid within the first 15 years of the policy. If you cancel your insurance, you will lose thousands of dollars, possibly your entire cash value.
Is variable universal life insurance right for you?
This type of life insurance for people is best for those who understand the stock and bond markets. Without this knowledge, sub-accounts may fail and force you into surrender charges. Your insurance broker, who must be licensed and registered with the Financial Industry Regulatory Authority (FNRA) to offer variable universal life insurance, should offer to assess your investment options, but you can control the mix of stocks, bonds, and money market funds in your account.
Variable universal life insurance is not suitable for seniors because of the period of surrender and the low chance of turning the account into enough to offset expenses before death. Younger seniors with comfortable accumulated wealth and understanding of how to create a balanced portfolio for their age can benefit from the tax advantages of variable universal life insurance, especially if they also hold an all-in-one life insurance policy.