comparing permanent life insurance

Comparing Permanent Life Insurance

If you have a permanent life insurance policy, you should periodically set aside some time for comparing your options. Our complementary Life Insurance Audit Program is an objective review and evaluation of your existing life insurance plan. The analysis is designed to answer: Is your current program on track for your goals and needs? Is it possible to either increase death benefits at current funding levels, or reduce your premiums while maintaining the same coverage?

Sometimes, your purpose for life insurance will have changed over the years and a different policy may be more suitable today. Other times, we will confirm that your current plan is optimal for your situation and is performing as designed. If that’s the case, excellent! We should plan to review your policy again in 3-5 years or if you have significant life events or changes to your financial goals.

To help you consider how a review might help, I am going to explain five types of permanent life insurance. Specifically, that includes Whole Life, Universal Life, Guaranteed Universal Life, Indexed Universal Life, and Variable Universal Life. It’s possible that one of these options will be a better fit for your needs today.

Your Life Insurance Audit

The policy review provides an evaluation of your existing policy by looking at the In-force ledgers, policy design, medical underwriting, cost of insurance, and product chassis. By analyzing your current coverage, reasons for initial purchase, and current needs and goals, we can present options for optimizing the overall benefit and cost effectiveness of your coverage.

A Review includes:

  • A client snapshot of your existing coverage and its projected performance according to the insurance company.
  • A review of the structure of the policy, ownership, beneficiaries, and premium payments. We need to consider your current objectives and financial needs in this analysis.
  • Evaluation of the underwriting class on the original policy. An assessment of your current health, which could lead to a possible rate class improvement.
  • A review of the assumptions used in the existing policy which includes: interest rates / returns, cost of insurance, and expenses. All of these may have an impact on policy performance.
  • An objective evaluation on whether there is a more effective way to reach your current objectives. In many cases, the original purpose of the coverage has changed and a different approach may be preferable.

WL (Whole Life)

Whole Life insurance, sometimes referred to traditional life insurance, provides both cash value and death benefits. These policies have a guaranteed premium that provides for both guaranteed cash value as well as a guaranteed death benefit. The premiums remain fixed throughout the life of the policy, and are required to be paid. Each year, the company returns part of the paid premium as a dividend. You can use dividends to reduce future premiums, increase cash values, or receive the dividends in cash.

Features of Whole Life Insurance Include:

  • Fixed Premium – Budgeting is easy with a consistent premium payment.
  • Accumulation of a cash value – Cash value accumulates over time, and some policies may allow you to borrow against it.
  • Fixed benefit – The Death Benefits are guaranteed and will not decrease. They may increase with the purchase of “paid-up” additions via dividends.

UL (Universal Life)

Universal Life is a form of permanent life insurance that provides more flexibility than Whole Life. The premiums and death benefits can vary. This flexibility places responsibility on the policy holder to make sure the policy does not lapse. Universal life policies have current and guaranteed assumptions (interest credited as well as expense charges). It is important to monitor these policies to make sure the policy is performing as expected.

Features of Universal Life Insurance Include:

  • Flexible Premiums – Policyholders may be able to vary their premiums within certain limits as long as the policy retains sufficient cash value.
  • Flexible benefits – Policies may allow you to increase or decrease the death benefit according to your particular situation, subject to qualification requirements.
  • Loan access – You can borrow against a portion of your policy’s cash value in order to meet unexpected financial needs. Unpaid policy debt will reduce the proceeds payable at death.

GUL (Guaranteed Universal Life)

Guaranteed Universal Life provides inexpensive permanent life insurance that will last the insured’s life. These policies typically accumulate very little cash value. The benefit to you is that a GUL can provide a higher death benefit at a lower premium on a guaranteed basis. Unlike traditional universal life, GUL life insurance can remain in force even if the cash value drops to zero.

These products are guaranteed to stay in force as long as the specified premium is paid. The premium is based on the death benefit and the duration of the guarantee. You can select an age up to 121. Consequently, the higher the death benefit, the higher the premium. The longer the guarantee period, the higher the premium. I think of GULs like a term policy that lasts to 95, 100, or a higher age. Just keep paying the fixed premiums, don’t touch the cash value, and you have a guaranteed death benefit. If the death benefit is your primary goal, a GUL will often cost significantly less than a Whole Life Policy.

IUL (Indexed Universal Life)

Indexed universal life products have the same features as the universal life products. IULs provide a return based on the performance of a particular stock index, such as the S&P 500. They typically credit the return of the index subject to both a Cap and a Floor. A Typical Cap rate could be as high as 10 – 13%. Most floors are 0%, with some products providing up to 1.5% as a floor.

Features of an Indexed Universal Life Policy Include:

  • Flexible premiums – Policyholders may be able to vary their premiums within certain limits as long as the policy retains sufficient available cash value.
  • Flexible benefits – Policies may allow you to increase or decrease the death benefit according to your particular situation, subject to current qualification requirements.
  • Loan access – You can borrow against a portion of your policy’s cash value in order to meet unexpected financial needs. Unpaid policy debt will reduce the proceeds payable at death.
  • Upside potential – Policies may be credited with all or a portion of the gain from the index, expressed as a percentage, but at a lower risk as the policy is not directly invested in the stock market.

VUL (Variable Universal Life)

Variable Universal Life products offer the ability to invest in the market through various Sub-Accounts. These Sub-Accounts, which are often a special “class” of a mutual fund, vary from conservative bond funds to aggressive small cap equity funds.

VUL Sub-Accounts are not guaranteed and can go up or down. Investors who already have significant stock market exposure elsewhere may prefer for their life insurance to be more safe and predictable. As an investment vehicle, a VUL is a very expensive way to access the upside potential of stocks. There are more effective ways to grow your money via stocks, if growing cash value is your primary objective.

Additional Life Insurance Considerations

Living Benefit Rider
Some carriers provide a living benefit rider. A living benefit rider can provide a pre-payment of the death benefit in the following circumstances:

  • Qualifying Chronic Illness – an permanent illness or physical condition that renders the insured unable to perform at least two of the six activities of daily living. The six ADLs are bathing, dressing, toileting, transferring, continence, and eating. Alternatively, a person can qualify if they require substantial supervision to protect the insured person from threats to health and safety due to severe cognitive impairment.
  • Qualifying Critical Illness – if the insured is diagnosed with any of the following critical illnesses: Major Heart Attack, Coronary Artery Bypass, Stroke, Invasive Cancer, Blood Cancers – Leukemia, Lymphoma and Multiple Myeloma, Major Organ Transplant, End Stage Renal Failure, Paralysis, Coma, Severe Burn.
  • Qualifying Terminal Illness – an illness or physical condition that is certified by a physician to be reasonably expected to result in the insured’s death within 24 months.

Considerations before replacing current coverage
Although the IRS allows for the replacement of a life insurance policy on a tax-free basis (IRS Section 1035), there are some important reasons to keep an existing life insurance policy.

  • Adverse changes in health. Since your current policy is based on your health status at the time of purchase, you may not qualify for the same rating.
  • Tax consequences. You should consult your tax advisor to determine if there are any adverse tax consequences of any exchange.
  • New contestable period and suicide period. An insurance company may contest a death claim on a policy within the first two years and can deny a claim from suicide.
  • New acquisition costs and/or surrender charges. You should consider the charge structure of your existing policy and make an assessment of the potentially higher early charges.

Next Steps

A Life Insurance Audit may show that it is in your best interest to replace your existing coverage with another type of policy. After that, here’s how to proceed.

  • Review the information contained in your Audit and determine if you would like to proceed.
  • Complete an insurance application with the appropriate carrier.
  • A para-med service will contact you to schedule your insurance examination. Only then will the insurance company make you a final offer. With this information, you can review final numbers.
  • Once approved, you can replace your existing coverage with the new policy. The values in your existing plan will transfer to the new company through the 1035 exchange process. Never cancel an existing policy until your new policy is delivered and reviewed.