Universal Life ***
MR. WATSON: The next policy offers more choices. It's called a universal life policy .
MR. WATSON: If you see the word UNIVERSAL, the PREMIUMS WILL ALWAYS BE FLEXIBLE.. Universal Life: PREMIUMS are flexible. Variable universal: the PREMIUMS are flexible. If you remember this "trick", it will make things easier to remember.
MR. WATSON: Again, if the word "universal" is in the title, the premiums will be flexible and the death benefit will be adjustable. No other policy allows this.
MR. WATSON: A universal life policy is flexible, it's a totally unbundled policy. It unbundles
- the insurance (protection) element, (can be raised or lowered)
- the savings (accumulation) element, (the interest rate changes every year) and
- the expense (loading) element. (cost of the insurance)
MR. WATSON: Unlike whole life insurance, where everything is fixed, Universal life has flexible premiums. You can overpay it, you can underpay it, you can eventually stop paying premium payments. You pay a premium, this goes into the cash value, and every month the company deducts an amount to cover the cost of insurance. The balance stays in the cash value to earn interest.
Universal life has an adjustable death benefit. You can raise it each year; you can lower it each year. You can do whatever you want to do with it. You can leave it alone.
Universal life has two death benefit options. When you purchase a universal life policy, you choose either Option 1 or Option 2:
- Option 1 is level. Means the policy death benefit stays level. The cash value is part of the death benefit.
- Option 2 is increasing. It just means the death benefit goes up. The cash value is in addition to the death benefit.
MR. WATSON: The interest rate that universal life policies earn is higher than anything that we've talked about before. It's higher than whole life. Why? Because it's invested in the more aggressive types of bonds and mortgages than whole life. But it's still regulated by the state because the insurance company is taking the risk by investing the cash values.
It has two interest rates:
- a guaranteed minimum rate (it can't fall below this) and
- a current rate (what they hope to pay)
MR. WATSON: As long as I have sufficient cash value in the policy, I can stop paying the premium payments. Do y'all understand?
ALL: Yes
MAN: It's more or less that you are paying a little bit in advance if you want to.
Loans or Withdrawals
MR. WATSON: With Universal Life the policy owner can take loans, tax free. But, she may also take withdrawals, her own money. With whole life, you could not take a withdrawal, you had to borrow. She needs to be careful because withdrawals would be her own money and could be taxed if she takes more than what she put it. This is also called a partial surrender and the death benefit would be automatically reduced by this amount. She also could not put this money back. Be careful for the wording. Loans vs withdrawals.
MR. WATSON: Who regulates this thing?
ALL: State.
MR. WATSON: A Note...Something to keep in mind though. The cash values can grow quickly. The interest rate is adjusted on the anniversary date of the policy. Every year. If the cash values grow too quickly they can exceed a ratio that is set by the federal government. There must be so many dollars of insurance to so many dollars of cash value or the IRS will claim this is not really an insurance policy, but a tax shelter. The insurance company will then add an amount of pure insurance called the "corridor" to maintain this ratio. Don't worry about this, its just a side note.
Indexed Universal Life
MR. WATSON: This is a Universal Life policy. The only difference is where the cash values are invested.
MR. WATSON: Remember! Index means average, so the cash values are invested in an index fund. The S & P 500. A fund that consist of 500 stocks. The average of these stocks.
The cash values are invested in the S & P 500. This does not allow the policy owner to pick and choose the investments but does allow somewhat stock market based returns. If you ever see the word "equity" in this course, Equity Indexed Annuities or Equity Indexed Universal Life, this means that the cash values are invested into huge mutual funds like the S & P 500 or the Nasdaq-100. Equities means "stocks", indexed means "averaged".
