A Guide to Guaranteed Universal Life Insurance
What is guaranteed universal life insurance?
Guaranteed universal life insurance, or GUL for short, is a form of universal life insurance that emphasizes the death benefit over the cash value. Its goal is to provide the maximum death benefit for the lowest amount of premium, and by design accumulates little to no cash value. It can be a cost effective way to secure a permanent death benefit.
How does it differ from traditional universal life insurance?
On the surface traditional UL and GUL are similar: you pay premiums, various expenses are taken out, and interest is credited. But, the expenses and interest credited are not the same for traditional UL and GUL. Both types offer guarantees, but the guarantees in GUL are much stronger. Consequently, the amount of interest credited to GUL policies typically is less than traditional UL policies.
Both types of policies have flexible premiums (as long as you pay enough so that the policy does not lapse), but with GUL it is designed to pay a low premium. If your intention is to pay a high premium for a given death benefit to accumulate cash value, GUL would not be a good choice because it would accumulate cash value very inefficiently.
So, in a nutshell, traditional UL is intended to offer a death benefit and accumulate cash value, while GUL is designed with a maximum death benefit in mind.
How does the policy not lapse if there is no cash value?
Because insurance charges and other expenses are deducted from your cash value, typically if a policy has no cash value then it will lapse since there are insufficient funds to cover a policy’s costs.
With GUL, this is where the “guarantee” comes in. GUL policies have a secondary account (referred to with various names such as shadow account) that determines if your policy will lapse. If you look at a contract for GUL, just like traditional UL policies it will describe how your cash value is calculated and the rates and expenses used to calculate it.
But the contract will also have a section that specified how your secondary account value is calculated. This account has its own set of charges, interest rates, etc. If this account is greater than zero (and it will be if you have paid the required premiums), then your policy will not lapse, even if your cash value is zero.
The secondary account is behind the scenes and not something that you will see, although in theory if you are really bored you could calculate its value yourself by reading the contract’s description of the calculation.
You’ll sometimes see GUL products called universal life with secondary guarantees or universal life with guarantees. GUL is sort of confusing since traditional UL also has guarantees, just not the additional, stronger guarantees of GUL.
What are the guarantee options?
This is probably the easiest part of the product. All you need to do is pick the age to which you would like to guarantee the death benefit. A lot of times companies will have minimums for this (such as 80+), but this typically is not an issue since the product is usually purchased to provide a death benefit in old/very old age.
Most people pick a lifetime guarantee. You could also pick something like age 90 or 95, but in most cases it doesn’t make a ton of sense. A lifetime guarantee is usually not much more expensive than a guarantee in the 90s.
It wouldn’t be very much fun to live to age 96 only to see your policy lapse because you chose to guarantee it to age 95 instead of for your entire life. That’s what we expect to happen with term insurance, but we don’t mind as much in that case because those premiums are usually lower since we typically buy it when we are younger.
What are the funding options?
Since GUL policies have flexible premiums, the funding options are virtually limitless, with some caveats. First, there are minimum premiums that must be paid in order to satisfy the no-lapse guarantee requirements. Note that these minimum premiums are not sufficient to fund a policy over its entire life.
For example, the no-lapse guarantee premium could be $100 per month for the first ten years, but after that you’ll need to pay more, perhaps $300 per month. A level premium might have been $200. (These are completely hypothetical, but should illustrate the tradeoff: you can pay less up front and more later versus paying a level amount).
You could increase premiums by x% or $y per year. You could pay for your entire life. You could pay to a certain age and then stop. You could begin with larger payments and then decrease them. Fortunately, insurance company software allows you to illustrate and solve for most any payment pattern you could think of. But most people like to keep it simple and pay a level premium. This keeps things easy (you don’t have to call the company/agent each year to change the premium) and also makes budgeting easier since the premium won’t change over time.
Is there an ideal way to fund a GUL policy?
Although we just said that most people pay a level premium, even that has some variation. Do you want to pay until you are 80, 85, perhaps 100? Or for a certain number of years, such as 15 or 25? The answer to this question is that some funding approaches are better than others, and it’s probably easiest to see why this is the case with some examples.
We’ll use a 55 year old man who is in pretty good health. If he wants to guarantee a death benefit of $100,000 for his entire life, his premium would be around $124 per month for the rest of his life. But if he only wanted to pay premiums until age 90 (while still having a death benefit for life), he would only have to pay about $127 per month. I think most people would agree that the latter is a more attractive option.
Paying premiums for a shorter amount of time also helps the internal rate of return (IRR) if you live a long time. But how quickly should you pay all your premiums? We saw that switching from paying to age 100 to paying to age 90 had a very modest impact. But if you switch it to paying to age 65 (for example) the impact will be much larger. So, it’s a good idea to see roughly where the breakpoint is for when the premium increase becomes large. Take a look at the table below:
|Pay to Age||Monthly Premium||Increase Over To Age 100 Premium||Percentage Increase Over To Age 100 Premium|
Assuming that there is at least a little wiggle room in your budget, for only $7 more per month, you can save potentially 15 additional years of paying premiums by paying to age 85. And keep in mind, just in case it was not clear before, the death benefit is still guaranteed for your entire life even though you stop paying premiums at age 85. Even paying to age 80 is a relatively modest increase at $14 per month (about 50 cents a day). So it’s obvious that it’s more advantageous not to pay to age 100, but if you pay through an age younger than 80 or so the increases start to become larger.
Other than what you can afford, is there a better way to figure out which premium pattern might be most beneficial? The easiest way is probably to look at the IRR for various ages at death. If you aren’t familiar with the IRR, it is the annual rate at which the present value of the premiums and death benefit are equal (you can read more here and here if you’d like). Here’s a table that summarizes the IRRs for various ages at death:
|Pay to Age||70||75||80||85||90||95||100|
That’s a lot of numbers to look at, but the general trend is that the shorter the premium payment period, the lower the IRR in the event of an earlier death, and the higher the IRR in the event of a later death (although in the case of paying through age 65 versus 60, age 65 is almost always better; but those two options are most likely off the table anyway).
Any option will have a high IRR for an early death (that is where life insurance shines — in the event of an early or unexpected death). So probably what you want to do is look at the IRRs at the later death ages. The options of paying to age 70 through 85 are relatively similar. At that point it comes down to your personal preference and budget. Do you want to be paying premiums into old age? If not, think about picking 70 or 75, if you can afford it. Otherwise, 80 or 85 are still good options for a relatively small increase in premium versus paying to age 100.
This is just one example. It will vary by age, gender, health rating, etc., so there is no one solution for everyone. Also, when purchasing any policy and your budget is very tight, keep in mind that sometimes more insurance is cheaper. In this example something like $90,000 of insurance would actually be more expensive (but something like $50,000 would be cheaper).
This article covers a few tips that are very applicable to GUL/term policies to make sure you get the most bang for your buck.
How does it compare to term insurance?
Since GUL policies are designed to have the highest death benefit for a given premium and build very little or no cash value, you might think that it sounds a lot like term insurance. GUL and term do have some similarities, but also some differences.
First, GUL premiums are flexible, while term insurance premiums (usually) are level throughout the term period. As we saw above, the premiums for a GUL can be shorter than the coverage period. With term insurance you pay premiums throughout the coverage period.
GUL also offers longer coverage. Usually you won’t see a term product with level premiums for more than 30 years, and once you start getting a little older (55-60), companies might only sell you up to a 20 year term, for example.
As far as premiums go, for our example above a 30 year term policy would be about $83 dollars per month. If we adjust the original GUL slightly so that the guarantee now is to age 85 instead of 100 and the premiums are paid through age 85, the premium would be about $90 per month. (As a side note, you can compare this to the $131 required to be paid through age 85 for lifetime coverage from the table above).
So the premiums for a 30 year term and a GUL with a 30 year guarantee in this case are comparable. The GUL does offer more flexibility since you could always pay more than $90 if you wanted the guarantee to last longer, or pay longer than age 85 if you wanted to. The GUL might also have a few more benefits that we’ll go over below.
Note that these because of the additional benefits, among other things, the premiums might not scale up the same way for a term policy and a GUL. For example, $1 million of term coverage in this case would be about $593 per month, while the GUL with a 30 year guarantee and $1 million benefit would be about $834 per month.
Do I have access to the premiums I’ve paid in?
Like any UL policy, you have access to the policy’s cash value after any surrender charges. But in the case of GUL there probably will be very little or no cash value (and accessing the cash value could affect your death benefit guarantee, so watch out for this).
But many policies have so-called living benefits, which pay out when you suffer from a critical, terminal, or chronic illness. The amounts and contractual rules for claiming these benefits vary from company to company. So if you want access to cash value, a GUL is probably not your best bet.
What is the best age to buy it?
There is not necessarily a best age to purchase it. Most companies will issue it to people up to age 80-85, subject to underwriting of course. If you are very old, the premiums will be quite high. If you are young/very young, term insurance and accumulating assets is a better bet. A middle aged person who is getting a little old for term, but not so old that the premiums are cost prohibitive would be the most likely candidate for this product. A common use for the product is legacy planning, and middle age is often a time when people think about that kind of stuff and when they can afford it.
Are there any less expensive alternatives?
We thought GUL was already a pretty good deal, but who doesn’t want to save a few more dollars? The next cheapest option is a second-to-die GUL policy. These policies insure two people and pay only when the second dies. If the surviving spouse needs the income when the other spouse dies, these policies are not a good option. But if you are trying to pass on assets or leave a legacy to children, grandchildren, or other heirs, then this is a cost effective way to do it.
The amount of premium that a second-to-die policy can you save varies. If both insureds are healthy, it can save quite a bit. If one person is not terribly healthy, it can be a way for him/her to get coverage. But if one of the insureds is very unhealthy, then the savings will not be significant (versus the price of a GUL on the healthy insured).
Hopefully this article was helpful. It’s hard to go over every little detail, especially when people’s situations vary so much. But if you have questions or would like some help, feel free to reach out to us.