Life insurance ownership is at a 50-year low—yet half of Americans recognize that they have a need for insurance, according to a LIMRA report.
So what is stopping most Americans from buying life insurance? One reason cited in the report is the difficulty of deciding what type of insurance to buy—term insurance only provides cheap coverage at a level price for a stated term of years, and whole life insurance provides expensive coverage with an inflexible premium payment regime. Today, consumers want control over their assets and life insurance with the ability to make changes as their family needs and circumstances change.
Universal life insurance can help provide the needed flexibility for many life insurance purchasers. UL has the features consumers want from life insurance—an income tax-free death benefit, coupled with the ability to access policy values on a generally tax-free basis when they need them for expenses such as education funding, down payments on homes or cars, or for retirement income. Through riders, UL also offers additional features such as the ability to accelerate part of the death benefit for certain medical conditions or nursing home expenses.
So how does it work? There is no set premium for a UL policy for a specified death benefit; rather, there is a range from the minimum premium necessary to keep the policy in force until the next payment up to the maximum amount that will qualify the policy as life insurance. Payments in excess of the minimum accumulate in the policy and are available for future expenses or to offset future premiums. This means that if circumstances change and the policy values are sufficient to carry the policy, premium payments can be reduced or suspended for a period of time, or the death benefit can be reduced.
How does a consumer decide on the premium amount? Policy owners typically choose to “over” fund their policies if they are planning to take withdrawals in the future for retirement income. Unlike qualified plans, there are no contribution limits for UL and, for high-income earners, overfunded UL policies can provide attractive income tax-free payments for retirement when structured properly. Policies also are overfunded when the plan is to withdraw funds for future needs such as education funding, paying for weddings and down payments on homes. Withdrawals and loans may result in a reduced death benefit. Less well-funded policies often are used for wealth transfer, whether providing income for a surviving spouse or a grandparent wanting to provide a legacy.
UL policies also offer flexibility in long-term growth potential. Most policies sold offer traditional crediting strategies, meaning the policy values are credited with an interest rate based on the return earned by the insurance company, subject to minimum guarantee (usually 3 percent). Crediting rates are about 5 percent to 6 percent and change from time to time with interest rate changes.
For policy owners who are looking for potential higher returns, indexed and variable UL policies are available. Indexed UL policies offer the potential of a share of upside market increases while protecting from market downturns. They credit interest based on the performance of one or more indices over a period of time. The S&P is the most popular reference index for this purpose. Calculation of the crediting rate can be complicated but, in general, if the index goes up, the policy is credited with interest based on the rate of increase. If the index goes down, then either a minimum interest rate (maybe 1 percent) or nothing is credited.
The values for these policies are invested in separate accounts selected by the policy owner that are managed by, and typically mirror, well-known mutual funds. The policy value will increase and decrease in the same way as the mirror mutual funds. If the separate accounts perform well, there is the opportunity for significantly higher returns on this type of policy.
For those concerned they'll live longer than expected and might have to pay more premium late in life, consider a no-lapse guarantee. This type of policy guarantees to pay the death benefit as long as the specified premiums have been paid. These products typically offer a higher guaranteed death benefit in relation to premiums paid compared with a traditional UL policy, so they are very attractive to clients who are using the policy for wealth transfer.
Take advantage of this flexibility to provide peace of mind to your clients, with the knowledge that the clients are protecting their loved ones with a death benefit and providing benefits to themselves with the policy values.
Hugh Smart is the director of advanced markets for Columbus Life Insurance. He can be reached at [email protected] or (513) 361-6715.
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