What is universal life insurance?
Universal life insurance is a type of permanent life insurance that offers a very strong death benefit. Also, this insurance has a component of savings: You, the insured, pay the premiums and the insurance company deposits the money in interest-earning accounts. with (the so-called Cash Value or value of the policy) you can consider it as a kind of asset similar to a savings account or investment product. However, you take no risks in the market, and you cannot lose what you already gained.
Universal life insurance policies are used primarily:
- As a liquid planning tool in case of death (inheritance planning).
- To compensate tax burdens on inheritances, as happens with goods abroad (tax planning); for example, the inheritance tax applicable to the value of real estate in the United States in case of death of the holder can be as high as 40%.
- To plan assets with complex structures for different members of the same family (inheritance planning); that is, to create liquidity in the context of the succession of family businesses without harming those relatives not interested in the family business; or liquidate existing debts, without having to badly sell existing businesses or investments.
- To guarantee family safety; that is, to protect the lifestyle of the family in the case of a tragic loss (estate planning).
- To avoid a probate.
- As an attractive alternative investment (diversification).
Characteristics Of a Universal Life insurance Policy
Universal Life Insurance unlike traditional term life insurance, the premiums you pay earn interest. A universal life insurance company can offer interest on the value of the policy or Cash Value by collecting your premiums and depositing them in their own general investment account to make conservative investments of minimum risk with long-term fixed income (the real underlying investments vary slightly from one insurer to another).
A universal life insurance policy is available through a variety of options and benefits. You have the flexibility to pay the premium in full in a single payment or in a multi-year fashion through monthly or annual payments. Additionally, The policy itself is also very flexible. You can adjust your death coverage and change beneficiaries if your circumstances change over time. Also, you have the right to make additional payments to accumulate more cash value. However, the IRS determines the limits of accumulation based on the death benefit you chose.
You also have full access to the savings component (Cash Value) of the policy; that is, you can withdraw funds from the insurance policy when you wish, perhaps to satisfy a need for liquidity, or to withdraw profits when the value of the policy has increased substantially. When buying a universal life insurance policy, you must determine who will be the beneficiary or beneficiaries of it. This does not necessarily have to be a physical person, it can also be a structure, like trust.
What Are Living Benefits?
Life Insurance companies offer living benefits, which you can use before you pass away. Generally, you have the option to accelerate a percentage of your life insurance benefit or your premiums if you suffer a qualifying medical event. In the case of Universal Life insurance, the FREE living benefits work as follows:
Chronic Illness Benefit- You qualify If you cannot perform 2 of the 6 “activities of daily living” (continence, dressing, eating, toileting, transferring, bathing). Additionally, you qualify if you suffer from a mental disease like Alzheimer’s or dementia. Specifically, you can accelerate a percentage of your death benefit while you are still alive.
Terminal Illness Benefit- A terminal illness is true if your attending physician determines you have a life expectancy of 24 months or less. In this case, a Universal Life policy will allow you to accelerate 50% to 100% (depending on carrier) of the death benefit while you are still living. This can be very useful if you or your family needs cash to cover extra medical bills or other expenses.
Let’s Explore the main types of Universal Life Insurance:
- Traditional Universal Life Insurance
- Index Universal Life Insurance
- Survivor Universal Life Insurance
- Guaranteed Universal Life Insurance
- Variable Universal Life Insurance
Traditional Universal Life insurance
A traditional universal Life Insurance is the first type of Universal Life Insurance that was created more than 30 years ago. This type of permanent insurance offers protection for a lifetime. Additionally, the cash accumulation earns an average of 4% interest, which is much better than what the bank offers. This interest is declared by the life insurance company and it may vary from year to year.
Additionally, The insurance company offers a minimum interest guarantee (Usually 2% to 3%) during low-interest years. This protects your current cash accumulation and your future death benefit stability. Also, it’s easy to determine how much insurance protection you need and the amount of premium you wish to pay. You can increase your accumulation by paying more premium every month or making a lump-sum payment at any time as long as you follow the IRS guidelines*. Many companies also offer interest bonuses if you keep the policy for 10 years, or longer.
Indexed Universal Life Insurance
Indexed Universal Life Insurance provides additional accumulation accounts utilizing indexes to accrue interest. Therefore, you can choose to allocate premiums to the declared interest account, or to the indexed interest Accounts.
- Declared Interest Account: Premiums allocated to the declared interest account earn an interest declared by the insurance company every year ,usually averaging 4%.
- Indexed Interest Account: Premiums allocated to the interest account earn interest based on the performance of well known indexes like: S&P 500, Nasdaq 100, Russell 2000, among others. You may not know this, but indexes have been averaging 7% in the last 15 years.
Each year, The insurance company compares the index values to see if they went up or down. If the index has a positive return over the course of the year, your indexed account will be credited accordingly, up to a current cap. If the index decreases over the course of the year, you don’t lose a dime. In fact, most companies will credit you 1% when this happens. Of course, the insurance company will adjust the caps every year, but you will always have the upside potential advantage with no downside risk.
Survivor Universal Life Insurance
Survivor Life Insurance, or second to die life insurance, are insurance policies that insure the lives of two people, typically a husband and a wife. A Survivor Universal life insurance policy is generally available as a traditional or indexed universal life insurance. Best of all, a second to die life insurance often provides more affordable life insurance than two separate policies.
Joint Survivor life insurance policies are effective tools often used by wealthy individuals in estate planning. By placing policies in third-party ownership such as a trust or in the name of children, a joint and survivor policy can be used to pay for estate taxes. Estate taxes can be delayed until both spouses die thus the design of these special insurance policies. Also, it is ideal to protect assets and to help pay debt like Reverse Mortgages. Careful planning by your tax and legal counsel, coupled with a properly structured second to die life insurance policy, can help you preserve your net worth for your heirs.