Universal life insurance (often abbreviated to UL ) is a type of cash value life insurance, sold primarily in the United States. Under the terms of the policy, the overpayment of premiums above the current insurance cost is credited to the cash value of the policy. The cash value is credited monthly with interest, and the policy is debited each month with the cost of insurance (COI), as well as other policy fees and fees taken from the cash value, even if no premium payment is made. month. Interest credited to the account is determined by the insurance company, but has a contractual minimum rate (often 2%). When the income level is pegged to a financial index such as stock indices, bonds or other interest rates, the policy is a "Universal Past" contract. These types of policies offer the advantage of guaranteed premium rates over the life of the insured at a much lower premium cost than an equivalent lifetime policy; Insurance costs are always increasing as found on the cost index table (usually the 3rd contract). This not only allows easy cost comparison between operators, but also works well in non-reversible life insurance (ILIT) trusts because cash is of no consequence.
Video Universal life insurance
Similar types of life insurance
A similar type of policy developed from universal life insurance is the universal life insurance policy policy (VUL). VUL allows cash value to be directed to a number of separate accounts that operate like a mutual fund and can be invested in stock or bond investments with greater risk and growth potential. In addition, there is a recent addition to the universal life index of contracts similar to an equity-induced index whose credit interest is associated with positive index movements, such as S & amp; P 500, Russell 2000, and Dow Jones. Unlike VUL, the cash value of the UL Index policy generally has the ultimate protection, less insurance fees and policy administration fees. The participation of the index UL in the index may have restrictions, margins, or other participation modifiers, as well as the minimum guaranteed interest rate.
Universal life is similar in some ways, and developed from, life insurance , although the actual insurance costs in UL policy are based on renewable life insurance every year. The advantages of universal life policies are premium flexibility and customized death benefits. The death benefit may be increased (subject to insurance), or decrease in the policy owner's request.
Flexible premiums, from the minimum amount specified in the policy, to the maximum allowed by the contract. The main difference is that universal life policies shift some of the risks to sustain death benefits for policy owners. In a lifetime policy, as long as any premium payment is made, the death benefit is guaranteed until the due date in the policy, usually 95 years of age, or up to the age of 121 years. Violation of UL policy when cash value is no longer sufficient. cover insurance and policy administration fees.
To make UL policy more attractive, the insurer has added a secondary guarantee, where if a certain minimum premium payment is made for a certain period, the policy remains in effect for the guaranteed period even if the cash value drops to zero. This is commonly called the no lapse guarantee rider, and this product is usually called guaranteeing universal life (GUL, not to be confused with the universal life insurance group , which also usually shortened to GUL).
The trend up to 2007-2008 was to reduce the premiums on GUL to the point where there is virtually no surrender value at all, essentially creating a long-term policy that can last up to the age of 121. Since then, many companies have introduced both GUL policies that have a premium slightly higher, but in return, policy owners have a cash surrender value that shows better internal returns when they surrender than the additional premiums that can result in risk-free investments outside the policy.
With the requirement for all new policies to use the latest mortality table (CSO 2001) starting January 1, 2004, many GUL policies have been replicated, and the general trend leads to a slight increase in premiums compared to the policy of 2008.
Many people use life insurance, and especially cash value life insurance, as a source of benefits for policy owners (as opposed to death benefits, which benefit beneficiaries). These benefits include loans, withdrawals, additional assignments, separate dollar agreements, pension funds, and tax planning.
Loan
Most universal life policies come with the option to take out loans on certain values ​​associated with the policy. This loan requires interest payments to the insurance company. Insurance companies charge interest on loans because they can no longer receive any investment benefits from the money they lend to policyholders.
Participating loans are generally associated with certain Universal Life Index policies. Since this policy will never suffer losses on the part of the investment because of the hedging, participating loans are secured by the Account Value policy, and allow any existing index strategy before making the loan to remain in place and unaffected for any index re-materialized. A standard loan requires the conversion of any ongoing index allocation to be terminated, and the amount at least equal to the loan moves to the Fixed Account policy.
Repayment of principal is not required, but interest payments are required. If the interest on the loan is not paid, it is deducted from the cash value of the policy. If there is no sufficient value in the policy to cover interest, then the policy terminates.
Loans are not reported to any credit agent, and payments or non-payments do not affect the policyholder's credit rating. If the policy is not yet a "modified endowment", the loan is withdrawn from the policy value as the first premium and then any profit. Taking Loans on UL affects the long-term viability of the plan. The cash value removed with the loan no longer earns the expected interest, so the cash value does not grow as expected. This shortens the life of the policy. Usually the loan causes a higher than expected premium payment as well as interest payments.
Exceptional loans deducted from the death allowance on the death of the insured.
Withdrawal
If done in IRS Rules, the Life Universal Index Equity policy may provide tax-free income. This is done through a withdrawal that does not exceed the total premium payments made into the policy. In addition, tax-exempt withdrawal may be made through an internal policy loan offered by the insurance company, against any additional cash value in the policy. (This income may exceed the policy premium and still be 100% tax-free.) If the policy is properly regulated, funded and distributed, under IRS regulations, the UL Equity Indexed policy can provide investors with many years of free income tax.
Most universal life policies come with the option to withdraw cash value rather than take out a loan. Withdrawals are subject to deferred sales charges and may also have additional fees specified by the contract. A permanent withdrawal reduces the death benefit of the contract upon withdrawal.
Withdrawal is taken first and then profit premium, so it is possible to take tax-free withdrawal from policy values ​​(this assumes the policy is not MEC, that is "modified endowment contract"). Withdrawal is considered a material change that causes the policy to be tested for MEC. As a result of withdrawal, the policy may become MEC and may lose its tax benefits.
Value withdrawal affects the long-term viability of the plan. The cash value removed with the loan no longer earns the expected interest, so the cash value does not grow as expected. To some extent this problem is reduced by the associated lower mortality benefits.
Additional tasks
Assignment of collateral is often placed on life insurance to guarantee the loan on the death of the debtor. If the assignment of a guarantee is placed on life insurance, the assignee receives any amount because before the recipient is paid. If there is more than one recipient of the right, the assignee is paid on the date of the assignment, ie, the date of the previous assignment is paid before the next assignment date.
Maps Universal life insurance
Type
A Single Premium UL is paid with a single, substantial, initial payment. Some policies contractually prohibit more than one premium, and some policies are generally defined as single premiums for that reason. This policy remains in effect as long as the COI does not overload the account. This policy was very popular before 1988, since life insurance is generally a tax-deferred plan, so interest earned in the policy is not taxable as long as it is still in the policy. A further withdrawal of the policy is taken primarily, rather than obtaining the first withdrawal and so tax-free from at least some portion of the value is an option. In 1988 changes were made in the tax code, and the single premium policy purchased thereafter was "modified immutable contract" (MEC) and subject to unfavorable tax treatment. Policies purchased before changes in the code are not subject to the new tax laws unless they have "material changes" in the policy (usually this is a change in the benefits or risk of death). It is important to note that MEC is determined by total premiums paid in a 7 year period, and not with a single payment. The IRS defines the method of testing whether a life insurance policy is a MEC. At any point in the life of a policy, a premium or material change to the policy may cause it to lose its tax advantage and become a MEC.
In MEC, premiums and accumulations are taxed as annuities on withdrawals. Accumulated accumulated taxes are suspended and still transfer tax free to the recipient under Internal Revenue Service Code 101a under certain circumstances.
Fixed Premium UL is paid with periodic premium payments related to the guarantee of no leeway in the policy. Sometimes guarantees are part of the basic policy and sometimes the guarantee is an additional driver for the policy. Generally this payment is for a shorter time than the applicable policy. For example, payments can be made for 10 years, with the intention that after the policy is paid. But it can also be a permanent permanent payment for the life of the policy.
Since the basic policy is inherently based on the cash value, premium policy remains only functional if it is tied to a guarantee. If the guarantee is lost, the policy will return to a flexible premium status. And if the guarantee is lost, the planned premium may no longer be sufficient to keep the coverage active. If the plan experience is not as good as predicted, the value of the account at the end of the premium period may not be sufficient to continue the policy as originally written. In this case, policyholders may have the option of:
- Leave the policy itself, and let it potentially expire sooner (if the COI costs drain the account), or
- Make an additional premium payment or higher, to keep the death benefit level, or
- Lower the death benefit.
Many universal life contracts taken in the high-interest periods of the 1970s and 1980s faced this situation and fell when paid premiums were insufficient to cover insurance costs.
Flexible Premium UL allows policyholders to change their premiums within certain limits. UL policy is inherently flexible premium, but any variation in payments has long-term effects that must be considered. To remain active, the policy must have sufficient cash value available to pay for the insurance fee. A higher than expected payment can be required if the policyholder has missed the payment or has paid less than originally planned. It is recommended that annual illustrative projections be requested from the insurer so that future payments and future outcomes can be planned.
In addition, Flexible Premium UL may offer a number of different death benefit options, which typically include at least the following:
- level of death allowance (often called Option A or Option 1 , Type 1 , etc.), or
- the number of levels at risk (often called Option B , etc.); This is also referred to as an increased death benefit.
The policyholder can also purchase Flexible Premium UL with a large initial deposit, after which to make irregular payments.
Criticism
Unlawfully sold to individuals as an investment
In the US, it is illegal under the Investment Advisory Act of 1940 to offer Universal Life Insurance as an "investment" for individuals, but is often offered by agents as tax-finance vehicles benefiting from which they can borrow the required later without tax penalties. It also makes it an alternative for individuals who can not contribute to Roth IRA due to IRS revenue limits.
It is illegal to market the Universal Life Index (IUL) as "investment security", as defined by the Securities Act of 1933 & amp; Securities Act of 1934. The Acts of Congress gave birth to the SEC, in reaction to the destruction of the 1929 stock market that preceded the Great Depression. Today, the SEC oversees FINRA and they both manage the marketing and sale of securities. IUL is an insurance product and does not meet the definition of security, so it does not fall under the authority of SEC or FINRA.
Therefore, under the authority of SEC and FINRA, Index Universal Life Insurance can not be marketed or sold as "security", "variable security", "variable investment" or direct investment in "security" (or the stock market), because it is not. However, IUL can be marketed and sold as an investment.
Conflicts of interest
Agents that sell Universal Life Insurance often receive the same commissions as the first year of the premium target that provides incentives to sell this policy on other lower-cost life insurance policies.
Advocates reply that it is inappropriate to state that term insurance is cheaper than universal life, or in this case, another form of permanent life insurance, without qualifying statements with other factors: Time, or duration of coverage.
While life insurance is the cheapest in a short period of time, say one to twenty years, permanent life insurance is generally the cheapest in the long term, or for the life of a person. This is mainly due to the high percentage of premiums paid in commissions during the first 10-12 years.
Risk of misunderstanding against policyholder
Interest rate risk: UL is a complex policy with risks for policyholders. Flexible premiums include the risk that policyholders may have to pay a premium that is greater than planned to maintain the policy. This can happen if the expected interest paid on the accumulated amount is less than that assumed on the purchase. This happened to many policyholders who bought their policies in the mid-1980s when interest rates were so high. When the interest rate is lowered, the policy does not produce as expected and the policyholder is forced to pay more to keep the policy. If any form of loan is taken on the policy, this may cause the policyholder to pay a higher than expected premium, since the loan value is no longer in the policy to obtain for the policyholder. If policyholders skip over payments or make late payments, they may have to make it in later years by making payments larger than expected. Market factors related to stock market crashes in 2008 have adversely affected many policies by increasing premiums, reducing benefits, or reducing protection periods. On the other hand, many older (mainly well-funded) policies benefit from a very high interest rate of 4% or 4.5%, which is common to policies issued before 2000. Policies of the era may benefit of the voluntary increase in premiums, which capture this artificially high level.
Unlimited warranty, or death benefit guarantee: A well-informed policyholder must understand that the flexibility of this policy is irrevocably bound to risk for policyholders. The more policy guarantees, the more expensive they will be. And with UL, many guarantees are associated with the expected premium flow. If the premium is not paid on time, the guarantee can be lost and can not be recovered. For example, some policies offer "non-quoted" guarantees, stating that if the stated premiums are paid on time, the coverage remains valid, even if there is no sufficient cash value to cover the cost of death. It is important to distinguish between this unsecured collateral and the guarantee of actual death. The scope of death benefits is paid by the cost of death (also called the cost of insurance). As long as these costs can be deducted from the cash value, the benefits of active death. The "no-hose" guarantee is a safety net that provides a guarantee if the cash value is not large enough to cover costs. This warranty is lost if the policyholder does not make the premium as agreed, although the scope itself may still apply. Some policies do not provide the possibility to return this guarantee. Sometimes the costs associated with the warranty are still reduced even if the guarantee itself is lost (the fee is often put into the insurance fee and the fee does not change when the guarantee is lost). Some policies provide an option to return the guarantee within a certain time period and/or with an additional premium (usually pursuing a premium and interest-related deficit). Pause guarantees can also be lost when a loan or withdrawal is taken against the cash value.
Use as tax haven
This product is increasingly being used as a way to avoid income tax and real estate rather than serving as insurance.
Miscellaneous
The single largest asset class of all but one of the largest banks in the United States is a permanent cash value insurance, commonly referred to as BOLI, or Bankable Insurance. During the recent economic downturn, banks accelerated the purchase of BOLI because it was the safest investment they could make. A banker describes BOLI as "a constantly rescheduled city bond that I never marked in the marketplace." The majority of BOLI are the current assumptions of Universal Life, usually sold as single premium contracts.
References
Source of the article : Wikipedia
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