By Todd Phillips

The interest paid on standard universal life products is determined by the board of directors of the company based on the company's interest earnings, and is influenced by their level of expertise and competition in the field.  While this may be comforting to some, many insured investors think the investing of the cash values is better off in their own hands.  Thus, the creation of the variable line of products: variable life, variable universal life and variable single-premium life.

History

Variable life was introduced in the Netherlands in the 1950s by DeWaerdye, LTD.  By the 1960s, it’s popularity had spread into the United Kingdom.  From there, British influence led to the introduction of a combination life insurance/equity investment contract in Canada.

The extended bull market, and low interest rates of the late 1990’s helped fuel variable life sales substantially.  By 2001 LIMRA studies showed that Variable Universal Life was the fastest growing segment of the insurance market, representing approximately 44% of all new insurance sold.

As expected the 2000-2002 recession slowed sales in all variable products as investors fled due to poor market returns, and sought the shelter of guaranteed products such as fixed and indexed universal as well as standard whole life insurance.

Today the stock market remains as volatile as ever.  To stay competitive and combat volatility, Insurers now offer Variable Universal Life with “Guaranteed No Lapse” provisions similar to those found in Universal Life contacts.  Expect the No Lapse feature to come at increased mortality costs or restricted fund allocations.

How It Works

The concept remains the same as universal life:  there is a minimum premium requirement which goes to the costs of insurance and the balance goes into your chosen mix of side funds.  The primary difference from universal life is you control the investments, choosing between several (between 20 to 100) investment sub-funds ranging from most investment sectors from money market to Gold to Emerging International to Corporate Bonds. You are able to mix and match investment and change from fund to fund tax free with no transaction fee, usually you are limited to 12 times major allocation changes per year; however, we do have some which can be traded daily.

The company will charge around 2-3 percent for asset management fees, mortality costs and administration.  For example, if your investments return 20 percent gross, your net return could be around 17 percent.

Tax-Deferred Growth

Each tax season mutual fund owners pay what is called a distribution tax.  The tax you must pay a tax on the capital gaines both long and short term for the stocks sold within the mutual fund.  You also must pay income tax on any dividends received from the fund.  Such a tax can eat away up to 5% of your realized return each year.  By moving your investment dollars from a taxable mutual fund into a variable life product, you can invest in the same types of mutual fund vehicles but the money grows tax-deferred; no capital gain or distribution tax is due.

Tax-Free Income

As with all permanent insurance policies, you can withdraw the money income tax free.

Makes For A Great Gift

Another great way to take advantage of variable life policies is to use them as gifts to children or grandchildren. By purchasing a variable life policy for a grandchild, the grandparents not only lock in that child’s insurability, they also provide the child with a growing fund that can be used for various purposes during their life (e.g. college, marriage, and home purchase).

If the premium amount paid each year is within the $13,000 per year per donor/doneee (IRS limit for gifts), it becomes a tax-free gift from the grandparent under a UGMA/UTMA.

Who Should Buy Variable Universal Life

VUL is not for everyone, but it can make an attractive addition to your portfolio if you have a suitable risk tolerance and want the control of making your own investment decisions with your insurance policy.

You should purchase variable universal life if you:

• Want life insurance that will last a lifetime as long as you keep sufficient cash in the policy.
• Want to give loved ones a benefit that is not taxed (as with all insurance products.)
• Like to know where the money is going – (full disclosure)Like the flexibility of being able to change policy features such as death benefit and premium payments
• Want to take advantage of the tax-deferred growth.
• Want to be able to withdraw money tax-free.
• Want control of your investments within the policy (pick from numerous investment portfolios).
• Want to take an active role in your investment (can change allocation e.g. from growth to value or bonds to hard assets).
• Are willing to take on more risk for the potential of higher market returns.
• Don’t mind paying a little extra to have the options and flexibility of variable universal life.  (You would need to earn roughly 2% gross annually more on your investments with a variable policy to breakeven with a universal policy).

see universal life

By Todd Phillips

The first creation under the umbrella of permanent insur­ance that actually separated the cost of insurance from the investment deposit was universal life. The first generation had heavy front-end loads and used 1958 mortality table assumptions, but the product continued to improve and, within two years of its creation, companies began to introduce the "second generation."  Universal life, a consumer-created product, has become the mainstay of the insurance industry.

What is Universal Life?

Universal life (UL), often referred to on the policy as “flexible premium adjustable life,” is composed of the same elements as any permanent product. The difference is with universal life, the elements have been "unbundled,” and therefore charges, and expenses are disclosed to you.

In other insurance products such as whole life, these elements are visible only to the actuary who designed the product. The actuary takes them all into account but determines one composite premium rate for the product.  This can make it impossible to determine where the money is going and does not allow for much flexibility.

Advantages of Universal Life

One of the main attractions of universal life is its flexibility. With universal life, you truly are in the driver's seat.  You can tailor design the plan to suit your needs and budget.  Each company has a minimum annual insurance premium that has to be paid each year to cover mortality, an amount that is based on the amount of insurance you desire and age.  But other than that, like Burger King, you can “have it your way.”

You can decide:

• How much additional premium you would like to deposit into the savings element of the policy. (Remember, this grows tax-deferred and can be withdrawn tax-free.)
• To pay your premiums for only a few years and then pay no more.
• When you want your premiums to stop and start.
• To increase or decrease the face amount without canceling the existing policy.

Features:

Minimum Guarantees

While universal life is not guaranteed quite to the extent of whole life, it still offers a guaranteed interest rate and has a maximum amount of charges.  Most policies offer a guaranteed minimum interest credited to the cash value between 3.5% to 5%.

Current Rate

If you own a universal life policy or have ever received an illustration of premiums, you will notice two major columns:  one showing the guaranteed assumptions and the other illustrating current assumptions. The current assumptions column illustrates how your policy would grow if things stayed the same as current conditions for the remainder of your life.  This includes the current charges and interest credited on the premium deposited. The current rate usually is set by the insurance company, but may be indexed to T-bills or another current money rate.

The goal, if you own a universal policy, is to have interest rates up because that means you will be earning more on your cash in the policy.  If market interest rates drop lower than when you purchased the policy, you may have to increase the premium deposits in order to keep the policy in force, and the cash accumulation will be less than illustrated.  Of course, you can expect the opposite to happen if interest rates go up.

Death Benefit Options

You can choose the traditional, level death benefit, which is constant; or the second option, which provides a death benefit equal to the face amount plus the cash value.  Many policies also offer an accelerated death benefit, which allows you to withdraw a percentage of your death benefit to help pay for a terminal illness or nursing care.

Riders

A brand new feature as of 2008 is the Long-Term-Care rider. These newer contracts allow you to take withdrawals from your Death Benefit while you are living for Long-Term-Care purposes/Chronic Illnesses.  Typically the triggering benefit is you need a doctor’s note stating you cannot perform 2 of the 6 Activities of Daily Living (ADLs) which includes:  Bathing; Continence; Dressing; Eating; Toileting; and Transferring. The benefits also can be triggered by having cognitive impairments such as Alzheimer’s.

Guaranteed No Lapse – You can add a feature to your Universal Life policy that like whole life, will guarantee coverage for your desired time frame or age, the most often is issued for the rest of your life which is illustrated to age 120.

Monthly Deductions

In effect, the level term costs are deducted each month to pay for the insurance in force. The balance of the deposit is invested into your side fund.

Access to cash accumulation

You can either borrow your money tax-free or make partial withdrawals.  Withdrawals are taxed on a "first in, first out" basis.  If the money is borrowed, the insured usually pays the company loan interest rate typically around 8%, but at the same time the borrowed funds continue to accumulate interest usually around 4%-6%.  The difference is called the “Net Cost of Loan.”

Reports

You receive an annual report of all trans­actions, with summaries of current cash values, death benefits and all expenses charged, as well as of loans and withdrawals.

Unscheduled payments

You can add money at any time, provided it doesn't conflict with the 1984 DEFRA guidelines that spell out specific ratios between cash value and death benefits.

Increased coverage

Your face amount can be increased without buying another policy after providing evidence of   insurability when required.

Who Should Buy Universal Life?

• Universal life is best suited for people who:
• Wants life insurance that will last a lifetime
• Want to take advantage of the tax-deferred growth
• Want to be able to withdraw money tax-free
• Want to give loved ones a benefit that is not taxed (as with all insurance products)
• Like to know where the money is going – (full disclosure)
• Like the flexibility of being able to change policy features such as death benefit and premium payments
• Likes the comfort of having a guaranteed return
• Willing to trade the possibility of higher returns for lower risk (otherwise consider indexed or variable universal life)
• Does not want to take an active role in watching the investments of within the policy

Choosing which type of policy to purchase is the biggest decisions you will make while purchasing life insurance. There are numerous advantages and disadvantages to each type of policy, but it mostly depends on your savings mentality and individual financial situation.

I like to compare term insurance to renting, where God is your landlord and the property manager is your insurance company.  The cost of renting may seem less than buying, but often prices go up over time and when your lease is up, you have nothing to show for it. 

With Term Insurance you have a temporary roof over your head that lasts for a time, but once your term is up, the protection is gone.  Its not such a bag thing and when purchased for the right reasons, buying Term can make a lot of sense, especially in your early income years when you need lots of coverage to:  replace loss of income, payoff a mortgage and put children through college.  But in my opinion, protection is the most important aspect of life insurance.  If you’re going to buy the protection anyway, wouldn’t you want your dollars to go where you need it most? Put another way, the best life insurance policy is one that will be in-force when you die.  The value is in the financial protection it offers your family, yet that protection disappears after the term runs out. 

Term is cheaper because most people never end up actually reaping benefits from their policies. In fact, Northwestern Mutual recently did a study on all of the life insurance contracts, roughly 50% were permanent, 50% were term.  Get this… 97% of all their claims were from permanent policies.  In other words, only 6% of their term policy holders reaped a financial benefit.  Why?  Because the majority of their term policies expired, lapsed or were converted to permanent insurance before the insured died.

Permanent life insurance is like owning a house and paying a mortgage.  Each payment builds equity until sooner than later you own your home.  The protection might have a higher price, but it comes at a significantly lower cost over time – and it lasts for your entire life.

We hear all the time our clients say that permanent insurance is “too expensive.” But are they referring to the price or the cost?  The price maybe lower in the onset but the cost can end up being much lower. 

I look at term premiums as an expense similar to your auto insurance.  Sure its there if you ever wreck your car, but if not you have nothing but peace of mind that you had protection.  Permanent insurance on the other hand is an asset.  If you own a $100,000 permanent policy, you have $100,000, maybe not today, but your family will have it sometime in the future. 

Investors look at it the same way.  Savy institutional investors looking to diversify their portfolios like Warren Buffet will buy permanent policies’ rights to the insurance benefits because they know at some point they will receive a payoff.  They won’t buy a term.

We have been market leaders in the term insurance since we started the first national term quoting agency in America InsuranceQuote Services back in 1984.  Over the years we have helped more than 50,000 people buy Term Life insurance.  We did it because it is a cheap way to buy a lot of coverage for a little.  I have witnessed first-hand the value of term insurance when a close friend suddenly passed in his 40’s.  The Insurance Benefit his family received was able to put his children through college and payoff the house.  

But now after nearly 40 years in the business, I am seeing our Term clients’ policies run their course.  In fact, I had to hire a full time staff member just to keep track of our clients’ lapsing term policies.  The good news is they were fortunate to outlive their terms.  The bad news is their premiums are 10, 20 or even 30 times more if they want to continue their coverage. 

If you can afford to do so, I recommend Permanent coverage.  There are some fabulous new Flexible Premium Universal Life policies out today that not only guarantee a lifetime of coverage, but also have built in Long-Term-Care/Chronic Illness benefits you can use from the Life Insurance benefit while you are living. 

If you can't make up your mind between the two, check out Return of Premium Term Life where you get ALL of your premiums back at the end of your term.