Read on to learn how Universal Life Insurance works in 2021, the plan’s advantages and disadvantages. Therefore, you can decide whether Universal life insurance is the correct type of life insurance for you!
What is Universal Life Insurance?
Universal Life is based on term life and has an additional cash value. In other words, Universal life insurance is the combination of the pure insurance elements of term life with the savings account features of whole life insurance. Here, instead of choosing a specific term and paying a 100% premium for that policy, a portion of the premium goes to the policy’s cash account. This cash account accrues interest and is tax-deferred. It is flexible and has the advantage of increasing or decreasing future insurance or stopping premiums if there is significant cash accumulation. If you can’t afford high coverage, you can start with lower coverage and buy more coverage by increasing your premium. Besides, you have an option to pay up the policy in 10, 15, 20 years, and in any case, you are covered up to age 100.
Features of universal life insurance policy
Protection and Accumulation is distinguished
Unlike Whole Life, the illustrations and annual reports sent to Universal life insurance customers clearly show the specific components of the contract: Fee, Protection Benefit, Account Value, Interest Rate, Cost of Risk and other costs.
Excluding the first few years (2 – 5 years), the customer is free to decide on the premium rate and premium payment period. However, customers need to understand and carefully consider the risks of this flexible fee payment.
Cost of Insurance (COI)
COI is the price of the Insurance Benefits and is deducted monthly from Account Value. COI is calculated as follows:
COI = Mortality rate X Net Amount at Risk
- The mortality rate is taken from the Table of mortality of each insurance company
- Net Amount at Risk = Insurance Amount (or Death Benefit) – Account value
- Other costs
Initial cost: business commission, appraisal, issue contract, etc.
Cost of contract management
Withdrawal fee: may be free or may be charged a fee for withdrawals for a limited number of years.
Cancellation fee: can be free or charged a cancellation fee for a certain number of years.
All mentioned costs (or fee calculation) are indicated in the Table of Figures and Terms of Contract for each year.
Including Guarantee Rate and Unsecured Rate
Interest rate is Calculated on the account value used by the insurer to invest.
The guaranteed interest rate is the minimum interest rate the insurer commits to pay, and The Unsecured Rate is the interest rate used for illustration purposes only.
The actual interest rate the customer may receive may be greater or less than the Unsecured Interest rate, and its minimum is equal to the Guaranteed Interest rate.
- Pay the fee
The customer is flexible in deciding the premium rate and the payment period (after the first few years, which are mandatory). Customers may not even need to pay fees if the account value is enough to offset the costs in the contract.
However, please always consider the risks of the flexibility in fee payment.
- Increase/Decrease in Sum Assured
Increase in Sum Assured: Health and financial status is required
Decrease in Sum Assured: no need to prove health or financial status.
- Switch between basic and advanced benefits
Clients may need to prove health status, and this kind of switch is only allowed for a certain period.
- Additional investment
Clients have the right to invest more (pay additional fees, in addition to the basic premium) at any time when the contract is in force. The additional investment amount may be limited (5-10 times as the basic premium).
- Full or partial withdrawal
The Client is not subject to the withdrawal amount’s interest but may reduce the Sum Insured / Death Benefit precisely to the amount withdrawn.
Pros and Cons of Universal Life Insurance
Advantages of Universal Life insurance
Universal Life gives the insured the flexibility to buy insurance, as mentioned above. Because this policy is involved with cash, you can suspend premiums as long as your cash value is enough to cover the premium. You can also increase or decrease death benefits over time. Alternatively, you can usually borrow from that insurance policy.
Its flexibility is possibly one of the most attractive features of universal life insurance. You can choose when and how much premium you pay at a specific time, as long as payments meet the minimum amount required to keep the policy active and after you have already made your first regular payment.
Therefore, you can pay more premiums than required if your financial situation is good and vice versa, pay less premiums or even skip payments if your budget is tight.
Cash value grows at a variable rate of interest, which could yield higher returns.
Plus the flexibility, you have more opportunities to increase the universal life insurance policy’s cash value.
Disadvantages of Universal Life insurance
Universal Life Insurance is much more expensive than Term Life Insurance. A positive cash value is required to remain active, in accordance with the Universal Life Insurance policy.
Unlike whole life insurance, the insured does not have the available guaranteed level premium.
The interest rate is variable, which means that the interest on the cash value could be lower than expected at times.
To sum up
Now that you have learned how Universal Life Insurance policy works, its essential features and all about the pros and cons of Universal Life Insurance, you can better decide how Universal Life Insurance could fit your needs in the long term.
Contact Insurance Direct Canada (IDC) to get a thorough assessment of your need for life insurance. We do not let you make this difficult decision on your own.
Frequently Asked Questions
Unlike a Term Life Insurance Policy, a Universal Life Insurance Policy (and a Whole Life Insurance Policy) is a permanent life insurance policy. It is called ‘permanent’ because it has no deadline, no expiration involved, as long as the policyholder pays for the required premiums. Therefore, you can feel assured for your whole life when thinking of an insurance payout after your death. But please remember, always keep your premiums regularly settled.
You should buy a Universal Life Insurance policy when you are looking for a type of insurance covering you for your whole life, and you have the power to adjust the policy for every specific period and get some interest besides its protection role. Although the Universal Life Insurance offer’s interest rate is typically lower than a Whole Life Insurance policy, Universal Life Insurance gives you a more affordable premium rate besides the flexible death benefits.
Let me tell a bit more about the flexibility characteristics of the Universal Life Insurance Policy:
You can request an increase or decrease in the insurance amount when your insurance needs change without jumping into a new insurance policy. Especially, you have the choice to create your own “payment strategy” to suit your financial situation and needs.
The good news is yes! The premium is guaranteed to stay the same over the period and is predetermined when you choose the period of time you want to get covered and sign the contract with an insurance company.
However, the premium rate depends on how old you are when you apply for the insurance policy, a rate of return on a cash value also matters.
Please make sure that you do not need the protection from a life insurance policy anymore before choosing to cash out the policy. Once you give a formal decision of having your UL insurance policy cashed out, the insurance company will respect and follow your decision. Though they will advise you to have more thoughts about the decision, some alternative options may be given, such as getting a policy loan from the current insurance policy.
The answer is no. The designated beneficiaries will only be entitled to the death benefit of the Universal Life Insurance Policy. And the cash value will be returned to the life insurance company once the insured passes away. However, there are still some exceptions that cash value plus face value will be provided to the beneficiary, so it is recommended that you read and ask the agent carefully. And for sure, with this benefit, you will be supposed to pay a higher premium.
It would help if you were very careful about the premium distribution ratio between the main benefit and the supplementary riders. If too much premium is spent on the riders (for both primary and contingent beneficiaries), the total policy reimbursement will always be less than the total premium you have paid. In addition, you need to pay attention to the premium payment time. If the premium payment period is short while the insurance value you choose is high, your refund value will also be less than the total premium paid.
It is hard to answer this question with some lines. We already have an article about the comparison of Term and Universal Life Insurance. Please have a look here.
To sum up: A Term Life Insurance policy is an insurance option for a limited period (usually 30 years is max), so the premium you need to pay is much cheaper than the premium of a Universal Life policy. A Universal Life Policy gives you cash value accumulation while a Term Policy does not. You are expected to pay an about $300 annual premium for a 20-year term life policy, while the Universal Life Insurance policy may cost you approximately $3,000 annually.