Anyone, please help me with more information on UL policies. Id it really difficult to choose between UL and term policies?
Total Comments: 6
Posted: Mon Oct 11, 2010 04:06 pm Post Subject:
Universal life is a form of cash value insurance built on the framework of Annual Renewable Term insurance. Additional premiums (beyond what is necessary to cover the cost of insurance and other fees and expenses) are calculated and paid to enhance the cash accumulation of the policy.
If cash accumulation (premiums paid plus interest credited by the insurer) is sufficient each year, as the cost of insurance increases due to age, the cash accumulation reduces the Net Amount at Risk (NAR) in a way that the amount of premium necessary to cover the Cost of Insurance (COI) does not increase each year.
That only happens when a Universal Life policy is properly funded. Most agents quote premiums for Universal Life at a "minimum" funding level. When you read the basic illustration for such a policy, you WILL see that the "guaranteed" cash value eventually arrives at ZERO, and the life insurance amount at that same point is also ZERO, meaning you have paid many years' worth of premium and have no cash value or insurance to show for it. Same as if you had purchased a lower cost term life policy for the same length of time.
In fairness to UL policies, the "guaranteed" columns of a basic illustration are the "worst case scenario". If the company pays only the minimum interest rate guaranteed, and if it has to charge the maximum cost of insurance, then the guaranteed columns will be true as stated. The reality is that somewhere between the illustrated numbers of the guaranteed and non-guaranteed "elements" of the policy will the truth exist.
When UL policies are only funded with minimum premiums, the policy will eventually lapse without value unless sufficient interest is credited to the policy in all the years of the contract, but especially so in the earliest years of the policy.
To protect insureds against such an eventuality, newer UL and Variable Universal Life policies are now being issued with (or may have a rider attached that provides) a "secondary" guarantee which states that as long as premiums are paid, the policy will provide a death benefit. The "catch" (if any), is that missing just one premium payment could end the guarantee. Some secondary guarantees last for the life of the insured as long as premiums are paid, some are only good during the first 20 years of the policy. You have to read the language of the provision to know what's correct about your policy.
A policy with a secondary guarantee can be effectively written with the minimum premium necessary to provide the guarantee. But it must also be understood (communicated by the agent to the insured) that such a policy is not likely to have any significant cash value that could ever be borrowed against in the future, or received if the policy is later surrendered. And that business ("tax-free loans") as discussed by agents can be misleading. That's why agents are prohibited by the insurance companies they represent from giving clients tax advice.
If you have more specific questions, feel free to email or PM me.
Posted: Thu Oct 14, 2010 06:37 am Post Subject:
Max Herr is truly knowledgeable and his posts reflect it. The benefit that I'd count most with these UL policies is the coverage worth that mostly remains consistent throughout the year.
I guess the rate of premium also stays somewhat static. Intially the rates seem more than other policies, but due to their consistency they seem to come down with the age of the policy holder.
Posted: Thu Oct 14, 2010 09:23 am Post Subject:
No cash value is generated on the money that we put on a term life policy. The premiums is bound to be lesser than WL policies. The renewal fees may not remain the same once the initial term gets over.
Posted: Thu Oct 14, 2010 09:14 pm Post Subject:
I guess the rate of premium also stays somewhat static. Intially the rates seem more than other policies, but due to their consistency they seem to come down with the age of the policy holder.
Universal life? Absolutely not. The Cost of Insurance is built directly on an Annual Renewable Term basis. It can only increase with time.
What mitigates against a true need to increase the premium is the accumulation of cash value. A policy built on the premise that the secondary guarantee will keep the policy alive despite minimum premiums throughout the life of the guarantee is only good if ALL premiums are paid on time, without fail. Depending on the actual language of the guarantee, missing one payment can eliminate the guarantee. In the absence of cash value or increasing premium payments each year, the policy will collapse, and a term policy of the same duration would have probably been a bit less expensive in terms of total premium paid.
Posted: Fri Oct 15, 2010 03:12 am Post Subject:
Max you certainly try hard to educate people, but that might have blown the sides off this thing.
If the OP is truly looking to make an insurance purchase, and is coming to a place like this and stating it's hard to choose between a term and UL contract, there's is something wrong with the OP's approach. There are two completely different reasons for owning either contract. It's kind of like saying, I'm having a hard time deciding between a Will or a Trust (they are two different tools with two different objectives).
While Max certainly did a good job defining UL, and dicussing it's bad points, and beating agents up a bit (he does that all the time, now worries :wink: ). He then spawned into a discussion that was a tad misleading to UL in practice.
Though there are still current assumption UL contracts (for simiplicity's sake we'll refer to it as regular UL) and Secondary Guaranteed Universal Life (again, we'll shorten this up too with GUL). These again are two different contracts with two different purposes.
To get back to the main point of this thread though, one can't realistically pop onto an internet forum about insurance and expect to ask a question as vague as the one posed here and expect to really come up with an answer. Max has done a decent job defining UL, but ultimately discussing how it works...no there's a lot of stuff missing.
Again, it would imprudent for the OP to assume that they are going to become an expert on this topic and make a timely decision on this matter. Best to find a good agent or advisor who can guide in this sort of process.
Posted: Mon Oct 11, 2010 04:06 pm Post Subject:
Universal life is a form of cash value insurance built on the framework of Annual Renewable Term insurance. Additional premiums (beyond what is necessary to cover the cost of insurance and other fees and expenses) are calculated and paid to enhance the cash accumulation of the policy.
If cash accumulation (premiums paid plus interest credited by the insurer) is sufficient each year, as the cost of insurance increases due to age, the cash accumulation reduces the Net Amount at Risk (NAR) in a way that the amount of premium necessary to cover the Cost of Insurance (COI) does not increase each year.
That only happens when a Universal Life policy is properly funded. Most agents quote premiums for Universal Life at a "minimum" funding level. When you read the basic illustration for such a policy, you WILL see that the "guaranteed" cash value eventually arrives at ZERO, and the life insurance amount at that same point is also ZERO, meaning you have paid many years' worth of premium and have no cash value or insurance to show for it. Same as if you had purchased a lower cost term life policy for the same length of time.
In fairness to UL policies, the "guaranteed" columns of a basic illustration are the "worst case scenario". If the company pays only the minimum interest rate guaranteed, and if it has to charge the maximum cost of insurance, then the guaranteed columns will be true as stated. The reality is that somewhere between the illustrated numbers of the guaranteed and non-guaranteed "elements" of the policy will the truth exist.
When UL policies are only funded with minimum premiums, the policy will eventually lapse without value unless sufficient interest is credited to the policy in all the years of the contract, but especially so in the earliest years of the policy.
To protect insureds against such an eventuality, newer UL and Variable Universal Life policies are now being issued with (or may have a rider attached that provides) a "secondary" guarantee which states that as long as premiums are paid, the policy will provide a death benefit. The "catch" (if any), is that missing just one premium payment could end the guarantee. Some secondary guarantees last for the life of the insured as long as premiums are paid, some are only good during the first 20 years of the policy. You have to read the language of the provision to know what's correct about your policy.
A policy with a secondary guarantee can be effectively written with the minimum premium necessary to provide the guarantee. But it must also be understood (communicated by the agent to the insured) that such a policy is not likely to have any significant cash value that could ever be borrowed against in the future, or received if the policy is later surrendered. And that business ("tax-free loans") as discussed by agents can be misleading. That's why agents are prohibited by the insurance companies they represent from giving clients tax advice.
If you have more specific questions, feel free to email or PM me.
Posted: Thu Oct 14, 2010 06:37 am Post Subject:
Max Herr is truly knowledgeable and his posts reflect it. The benefit that I'd count most with these UL policies is the coverage worth that mostly remains consistent throughout the year.
I guess the rate of premium also stays somewhat static. Intially the rates seem more than other policies, but due to their consistency they seem to come down with the age of the policy holder.
Posted: Thu Oct 14, 2010 09:23 am Post Subject:
No cash value is generated on the money that we put on a term life policy. The premiums is bound to be lesser than WL policies. The renewal fees may not remain the same once the initial term gets over.
Posted: Thu Oct 14, 2010 09:14 pm Post Subject:
I guess the rate of premium also stays somewhat static. Intially the rates seem more than other policies, but due to their consistency they seem to come down with the age of the policy holder.
Universal life? Absolutely not. The Cost of Insurance is built directly on an Annual Renewable Term basis. It can only increase with time.
What mitigates against a true need to increase the premium is the accumulation of cash value. A policy built on the premise that the secondary guarantee will keep the policy alive despite minimum premiums throughout the life of the guarantee is only good if ALL premiums are paid on time, without fail. Depending on the actual language of the guarantee, missing one payment can eliminate the guarantee. In the absence of cash value or increasing premium payments each year, the policy will collapse, and a term policy of the same duration would have probably been a bit less expensive in terms of total premium paid.
Posted: Fri Oct 15, 2010 03:12 am Post Subject:
Max you certainly try hard to educate people, but that might have blown the sides off this thing.
If the OP is truly looking to make an insurance purchase, and is coming to a place like this and stating it's hard to choose between a term and UL contract, there's is something wrong with the OP's approach. There are two completely different reasons for owning either contract. It's kind of like saying, I'm having a hard time deciding between a Will or a Trust (they are two different tools with two different objectives).
While Max certainly did a good job defining UL, and dicussing it's bad points, and beating agents up a bit (he does that all the time, now worries :wink: ). He then spawned into a discussion that was a tad misleading to UL in practice.
Though there are still current assumption UL contracts (for simiplicity's sake we'll refer to it as regular UL) and Secondary Guaranteed Universal Life (again, we'll shorten this up too with GUL). These again are two different contracts with two different purposes.
To get back to the main point of this thread though, one can't realistically pop onto an internet forum about insurance and expect to ask a question as vague as the one posed here and expect to really come up with an answer. Max has done a decent job defining UL, but ultimately discussing how it works...no there's a lot of stuff missing.
Again, it would imprudent for the OP to assume that they are going to become an expert on this topic and make a timely decision on this matter. Best to find a good agent or advisor who can guide in this sort of process.
Posted: Fri Oct 15, 2010 09:27 am Post Subject:
Excellent post, BNTRS.
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