Universal life insurance is a type of permanent life insurance. It allows for a greater degree of flexibility and often lower cost than whole life insurance, another popular type of permanent insurance. The flexibility extends to the amount of premiums paid, as well as their frequency; it allows a policyholder to change the death benefit as well as death benefit options (level or varying with cash value increases).
After the initial payment, a policyholder may vary the premium amount and frequency of payment, or even skip premium payment as long as there is enough cash value in the policy to cover the policy charges. Many universal life insurance policyholders opt to increase their premium payments in the early years, so as to potentially lower the premiums in later years.
The product is also more transparent than whole life insurance, in that policyholders can see exactly how the various policy elements (premiums, death benefit, mortality charges, interest, and expenses) interact. Unlike whole life insurance, the cash value, expense and mortality charges and pure insurance amounts are unbundled. This unbundling allows for a much greater degree of performance transparency.
However, this type of policy does carry some risk. The policy’s premium is not guaranteed – it is a projection based on an assumed interest rate and cost of insurance. If these assumptions are not met in the future, the policy might lapse, unless additional premium is paid into the policy to bring it up to speed.
Lapse Protection in Newer Universal Life Policies
As many Universal Life policyholders faced the potential of lapsed policies, the insurance companies knew they needed to create a policy that had more guarantees built in. To that end, insurance companies developed a version of universal life that had secondary guarantees added, where if certain minimum premium payments are made for a given period, the policy will remain in force for the guarantee period even if the cash value drops to zero. These policies are commonly referred to as No-Lapse Universal Life or Guaranteed Universal Life Insurance.
One of the key features of this type of policy is the guaranteed death benefit available at an affordable premium rate. While these policies are often a good choice for those wanting low-cost permanent protection, there are some risks involved. It’s important to note that any of the following changes can affect the length or existence of the lapse protection guarantee:
- A change in the amount and/or frequency of premium payments.
- A loan or partial surrender from the policy.
- A change in the death benefit option.
- An increase in the face amount of the policy (including adding additional riders).
- A decrease in the face amount of the policy.
Universal life insurance, with or without lapse protection might be a good fit for your long-term life insurance needs. Before purchasing this type of policy, we advise you to speak to an experienced life insurance professional. If you would like to discuss these or other options with us, feel free to Contact Us any time.