The Investments of a Variable Life Insurance PolicyA variable whole life policy is one for which a policyholder can choose investments in which the premiums will be invested. He or she can usually select from several different investment objectives. Some insurance companies offer up to 50 different categories of investments. Show
Depending on who offers the policy, the options can range from conservative to aggressive. Options usually also exist for selection of domestic, international and emerging market asset allocation. The policyholder is completely responsible for deciding upon the investments. The insurance company simply manages the account. Policyholder investments are not co-mingled in any account that has insurance company or other investor assets. Insurance agents who sell variable whole life policies must be licensed to sell insurance and securities. Some insurance companies also allow policyholders to choose a death benefit that is fixed or one that is variable. A fixed death benefit pays a level amount to the beneficiary, regardless of increases or decreases to cash account. A variable death benefit, however, pays an amount determined by the cash value retained in the policy. While a variable death benefit may seem like a wise choice in a rising market, policyholders are cautioned to choose the death benefit carefully. A market downturn can result in losses that may reduce the amount of the death benefit, leaving a beneficiary vulnerable financially. Variable life insurance policies are not suited for those who prefer not to take financial risks or for those whose beneficiaries would not be able to do with a reduction in the death benefit. Also, while insurance policies can sometimes be a good vehicle to save for college tuition, a variable whole life insurance policy is usually not. Even though the cash account has the potential to increase, the policyholder risks incurring losses that might not be made back in time. Variable life insurance policies are considered to be securities and are not insured by the FDIC. While the insurance company selling the variable life policy must be a member of the Securities Investor Protection Corporation (SIPC), this organization may not be able to intervene. It is the job of the SIPC to “make whole” investors who have lost assets due to a bankruptcy or other financial calamity encountered by the company. Due to higher premiums than other kinds of insurance and a possible decrease in the value of the policy, the lapse rate of variable life policies is much higher. Therefore, suitability of this type of policy is most often financially stable families or individuals who can withstand the shock of market losses and who have other significant cash and liquid assets. Choosing a Whole Life PolicyThere are six main types of whole life insurance from which to choose: Participating Whole LifeThe participating whole life policy “participates” in the financial success of the insurance company. The policyholder can take the dividend as cash payment, add it to the cash account of the policy or use it to offset the cost of the premium. Earnings on a whole life policy grow and compound tax-deferred for as long as the insured pays the premiums. This policy provides one more way to save money for retirement. Compounded growth can accrue much more quickly as money is left in the account to grow over several years if not decades. Non-Participating Whole LifeNo dividend paid on a non-participating whole life policy. Costs, however, remain fixed for the life of the policy and are less than those for a participating policy. Level Premium Whole LifePremiums are paid in installments throughout the life of the insured and remain level. Limited Payment Whole LifeA limited payment whole life policy lets the policyholder pay the premiums for a set number of years rather than over his or her lifetime. Single Premium Whole LifeOne single lump sum premium is used to buy a single premium whole life policy. This policy is frequently used more as an investment strategy or as part of estate planning than it is for the death benefit. A single premium whole life policy can also be purchased in place of a single premium immediate annuity. One of the most significant features of a single premium whole life policy is that equity is available immediately. The policyholder does not have to wait years or even months to use the policy as collateral or to borrow against it. Intermediate Whole LifePremium payments are flexible. The policyholder can change the amount of the premium and the payment schedule based on current needs. Universal life insurance is defined as a flexible life insurance policy that comes with a cash value. You can decrease (or increase) how much you pay towards premiums. If you decrease how much you spend on premiums, the difference is withdrawn from your policy’s cash value. A universal life insurance policy can be a good fit for someone who is looking for some flexibility in their life insurance — and can afford that flexibility. It’s best for high earners who are trying to build a nest egg without entering a higher income bracket. Key takeaways
What makes universal life insurance different from other types of permanent life insurance is that it allows you to use the cash value to pay your premiums. But similar to other permanent policies, it lasts your entire life and pays out a tax-free death benefit to your beneficiaries when you die. Part of the premiums you pay goes towards the death benefit, while the remainder is contributed towards the cash value of your policy, which earns a small amount of variable interest and isn’t taxed while it grows. While you are alive, you can use the cash value to:
While the cash value grows tax-deferred, withdrawals are taxed as income. How does universal life insurance work?Universal life insurance allows you to adjust your premiums and death benefit depending on your needs. If, after some time, you decide to stop paying or lower your monthly premiums, you can use the cash value to pay them. However, you cannot do this until it has accrued enough interest. “For you to really start to see the fruits of your labor or a decent rate of return it takes years,” says Malik S. Lee, Managing Principal at Felton & Peel. And if the policy’s investments underperform, you’ll need to resume making your premium payments. If you completely deplete your policy’s cash value and still don’t make a premium payment, your policy will lapse. Because universal life insurance provides permanent coverage, some people choose it for their estate planning needs. The death benefit payout can be used to cover estate taxes. The cash value in universal life insuranceThe interest earned on the cash value of a universal life insurance policy is based on market index performance, such as the S&P 500, and is subject to market fluctuations. Your policy’s index depends on your insurer, as is the floor and cap on gains set by insurers. “The floor is almost always 0%. The cap for every product is different, but it’s usually between 8 and 13 percent,” says Patrick Hanzel, certified financial planner and Advanced Planning Team Lead at Policygenius. This means that universal life insurance isn’t always the best option to save money for the future. While you won’t lose money, the capped returns realize a much smaller gain than you could get by investing the same amount in an IRA or 401(k). For example, an insurer may set the rate of return on universal life insurance at 2%, while the rate of return on an IRA or 401k that matches historical stock market averages is around 10%. [1] The lower rates of return on a universal life insurance policy are why many financial advisors recommend buying term life insurance and investing the difference. Additionally, the fluctuating interest rates mean you’ll need to monitor your policy yearly. Not doing so can mean paying for a universal life insurance policy that is unaffordable. Average cost of universal life insuranceThe actual cost of universal life insurance isn’t fixed when you buy it, making it financially risky. Because universal life insurance policies are permanent and accrue cash value, the premiums are a lot higher. It can be difficult to create a long-term budget for this type of policy because of its flexible premiums. And before your policy builds up cash value, you’ll be paying a lot of money to have that flexibility. Additionally, the cost of a universal life insurance policy usually increases over time — on a policy that already has minimal investment guarantees — so it’s not the best vehicle for asset accumulation. You can get a universal life insurance quote from a license life insurance agent. The best universal life insurance optionsThe best three policies that fall under the universal life insurance umbrella are:
Who should buy universal life insurance?Universal life insurance products are for high-net-worth individuals with very specific tax or investment needs. If you have maxed out all other investment components, for example, you could benefit from adding a universal life insurance policy to your portfolio. Or, if you're a very high earner, you may consider adding a universal life insurance policy to your financial toolkit because it can help you build a nest egg without entering an even higher tax bracket. “Typically the people that are doing this strategy, they've kind of exhausted all other avenues already,” says Lee. “You need to go through — what I call — the savings hierarchy. You need to look at your most tax-efficient investment and saving tools first. Next, you have your tax-deferred vehicles. Lastly, you need to look at your taxable accounts — your life insurance strategies [for example],” says Lee. “Life insurance is the third option for me.” Comparing universal life insurance and variable life insuranceThe table below shows how universal life insurance and variable life insurance differ.
Differences between universal life insurance and variable life insurance
How to get universal life insuranceA Policygenius agent can work with you for free to get you the right policy for your needs. If a universal life insurance policy is best suited for your financial situation, an agent will help you customize the policy to your ideal price point. Is universal life insurance worth it?A universal life insurance policy is very expensive, and for most people, purchasing a term life insurance policy and investing the difference in an IRA, 401(k), or traditional investments provides greater returns for a lower cost. But for individuals in a high tax bracket, a universal life insurance policy can offer a tax-deferred asset accumulation option that also protects the financial security of their loved ones. There are four major benefits to universal life insurance: It lasts your entire life, accrues cash value at an interest rate that does not dip below 0%, the cash value accrual is tax-deferred, and premium payment amounts can be decreased. There are some major disadvantages to universal life insurance that make it not worth buying: It is a lot more
expensive than term life insurance, its cash value accrual capped at a relatively low interest rate, the actual cost of insurance increases with time, and using cash value to pay premiums risks a policy lapse. Universal life insurance is not a good investment for most people, but high earners may find it useful to grow tax-deferred savings. With a whole life insurance policy, you cannot use the cash value to pay your
policy’s premiums, but with universal life insurance you can. How is variable whole life different from variable universal life?Variable life insurance is a type of permanent life insurance with a flexible death benefit — the amount paid when you die. Variable universal life insurance, often called VUL, has a similar flexibility in its death benefit, while also offering adjustable premium payments.
What is the difference between whole life term life and universal life?Whole life insurance offers consistent premiums and guaranteed cash value accumulation. Universal policies provide flexible premiums and death benefits but have fewer guarantees. You can borrow against or withdraw the cash value with both a whole or universal policy.
Which of the following is a true characteristic of a variable universal life policy?The variable universal life policy DOES have cash value that varies with the performance of the investment. The correct answer is: It has no cash value.
Which type of insurance includes whole life variable life and universal life insurance plans?Cash value life insurance is a permanent life insurance policy that builds a cash value that can be accessed during your lifetime for any reason. Both whole life insurance and universal life insurance are examples of cash value insurance.
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Variable whole life and variable universal life are similar except for
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