Universal Life Insurance, Part 6 – The Good, The Bad And The Ugly
This is Part 6 – You can start at the beginning – HERE
<< Part 5
Who Should Consider Buying A Universal Life Policy?
Is Universal Life Insurance right for you? I have a problem when people call me and tell me they paying $50-100 per month for a Universal Life policy because they bought for an investment or retirement. Someone told them it was a good way to force-save or it was a way to pay for junior’s college expenses. Then they tell me their income (which usually is not very high) and that they are not contributing to a retirement plan. This only compounds my frustration. If your income is not high, you should think twice, however, those making less money are the best targets for “investment” life insurance.
Universal Life offers a tax-deferred build up of cash value. For some in the very highest income bracket, may consider this an “investment” type policy. If you buy one for purposes of investment, over-fund the contract and let the cash grow on a tax-deferred basis. Also consider, if the initial current or projected interest rate is at let’s say 8%, ask for an illustration that uses 6 or 6.5%. Base your premiums off the lower projection. That gives you some fudge factor if things don’t hit projections.
At some point (much later on) you may be able to get cash via loans or withdrawals and still get a tax-free death benefit. Again, this is advanced financial planning. This strategy is for very high-income people who already have substantial investments, savings and have maxed out all available tax deferred retirement options to include 401Ks and IRAs.
If you are not in the top income bracket here are some financial planning suggestions: (trust me on this – I learned the hard way)
- Buy some low-cost life insurance if you have dependents – buy it here
- Have 6 months income saved that is readily available – people get sick – people get fired
- Eliminate all debt except for a home mortgage – have only one credit card – if you ever get to a billing period where you can’t pay off the balance, stick the card in your shredder
- Max out your contributions to your 401k or IRA – many ignore this. At least, take advantage of any company matching funds. If a company will give you 25 or 50 cents for every dollar you contribute, you have an immediate positive return
- Get some health insurance if you don’t have any – even a catastrophic HSA plan is better than nothing
The first 3 suggestions will keep most people busy for some time.
Who Should Buy Universal Life Insurance?
If you are looking for level lifetime coverage with no anticipation of cash value growth, Universal Life can be a good choice. You are simply getting a guaranteed death benefit in the future for a fixed cost. If this is what you want, I have no problem with it, although I would prefer you max out your retirement plans options first. Also, if you buy it, plan to keep it. If you cancel this type of policy early, there will be substantial surrender charges assessed against your cash value.
As I mentioned above, the newer contracts offer better lifetime guaranteed-premium coverage than the 1980’s and 1990’s versions. Be sure you are paying the lifetime guaranteed premium as many policies offer lower premiums but don’t guarantee them for life. Don’t find yourself in the same situation as those described above. This is not always clear. Everything will be listed in the proposal you will have to sign. Read everything. If you apply, ask for copies of the policy delivery receipts to be faxed to you prior to final meeting with the agent. When the agent arrives, there will be little time to examine everything before they want you to sign and get out the door. If you get stuck, fax me a copy of the proposal and I will tell you what you’re getting. We offer this service free of charge. If more research or company contact is needed, our fee is $225 per hour with a two hour minimum
Already Own A Universal Or Variable Life Policy?
If you already own a Universal or Variable Life policy, you get an “Annual Report” each year. You glance at it – it’s a bunch of columns of numbers that make no sense. You then file it away with the other previous year’s reports and forget about it until next year. You need to get it out and read it. Fax me a copy and I will go over it with you. Next, you need to contact the company and ask for a “mid-stream” proposal. Some companies call it a “mid-point,” “current” or “in force” proposal. If you have a lot of money invested, you want to get that report. It’s free for the asking. It is a snapshot report that says, “here is where you are today and here is where you will be in the future.” The report will have columns of numbers stating this year projecting values into the future. There should be 2 or 3 set of columns – usually to the left, it should say “Guaranteed Values.” It will list the death benefit and accumulated value (that’s funny money) and cash surrender value (that’s real money). The columns on the left will show a “Guaranteed” interest rate. These columns represent the worst-case scenario and assumes the company is paying the minimum interest and charging the maximum admin and mortality charges.
There may be a middle set of columns that say something like “mid-interest rate.” This is set up the same way as the “Guaranteed” columns, but this group shows a middle interest rate scenario (between the guaranteed rate and current listed rate). The third columns show the same data but using the current interest rate and current charges that the company assumes it will charge in the future.
Benefits and Your Universal Life Insurance Policy
Now if you see any zeros in any of the columns going out into the future, it’s time to pay attention as the policy may pre-decease you. Where you need to look is under the “death benefit” column. If the zeros start in the Guaranteed “death benefit” column, this means that if the company falls back to the pre-stated guarantees in the policy immediately and stays there for the duration of the policy, it will lapse on you in the first year you see a zero in that column. That means your “bucket” is empty. This is probably an unlikely scenario, but it’s something to pay attention to as time goes on. If the zeros are listed in the “mid-point” or especially the “current” “death benefit” columns, that means problems may be fast approaching. Here you need to make a decision to start putting more money in – surrender the policy and get the remaining cash value out – possibly exchange the contract for better, more current contract – let the policy die (no pun intended). Today’s contracts are better, but it depends how much money you have in the contract. If you are planning to put more money in, you need to do it as soon as possible. Once the bucket starts to empty, it does it in a hurry. So, carefully consider who should buy Universal Life Insurance. It may not be you.
Questions? Comments? Suggestions? 1-800-542-5530 – admin@americaquote.com
Questions? Comments? Suggestions? 1-800-542-5530 – admin@americaquote.com
