Four Things You Probably Didn’t Know About Guaranteed Universal Life Insurance
At Apsis Life, it’s no secret that we are fans of guaranteed universal life insurance. It is relatively simple to understand, and it provides exactly what many consumers want in a life insurance policy: a death benefit for the lowest possible price. And, it can provide this benefit for your entire lifetime if desired. In this article we’ll cover a few of the product features that you might not have known about.
1. You don’t have to pay premiums for the rest of your life
You can pay premiums for the remainder of your life, but it’s generally not the best way to pay for a guaranteed universal life insurance policy. And, if you have other (better) options, why would you?
The easiest way to explain some of these concepts is with an example, which we’ll also use in other sections. We’ll use a 50-year-old male in great health who wants $250,000 of coverage for his entire life.
The table below shows the following (all values except for percentages are rounded to the nearest dollar):
- The monthly premiums that would be required for a given number of years of premium payments (all the way to 50 years, or age 100).
- The total premiums that would be paid over the life of the policy (assuming that the insured lives past the premium paying period).
- The monthly difference between the given premium and the lowest premium (the one that would be paid for 50 years).
- The age 90 internal rate of return (IRR). This age is somewhat arbitrary, but I purposefully chose something far out in the future. The short-term IRRs for life insurance are obviously large, so they are not very interesting to compare. Check out Guaranteed Universal Life Insurance Internal Rate of Return if you’d like a more in depth look at this topic.
It’s going to be a big table, but there will be a few graphs after it to make it easier on the eyes.
|Years of Premium Payments||Pay Through Age||Monthly Premium||Total Premiums||Monthly Savings if Paid for 50 Years||Age 90 IRR|
And here are a few graphs to summarize:
From the table and graphs, it’s clear in this case that you don’t want to pay for the policy over a very short period of time:
- First, the premiums are prohibitively expensive.
- Second, you’d actually pay more in cumulative premium than you would if you chose a longer payment period.
- Third (a consequence of the previous point), the IRR is lower for the very short payment periods.
- Finally, the very short premium payment periods (roughly three years and less in this case) are modified endowment contracts, which is not what we’re going for here.
Another thing to note is that the premiums drop off relatively quickly and then flatten out. For a 20-year payment period, it’s only about $60 more per month than a 50-year payment period, a reduction of 30 years. (And who wants to keep paying life insurance premiums for 50 more years?).
Of course it comes down to budget, but you should be able to choose a shorter payment period for a very modest cost.
And if your future budget is very uncertain, then a guaranteed universal life insurance policy could be a poor fit, because it is a long-term commitment that you won’t benefit from if you can’t pay the premiums.
What happens if you chose a long payment period, such as 40 years, but became unable to make the payments? Essentially, you would be out of luck and the policy most likely would eventually lapse, as there is very little wiggle room to reduce the premium.
There is the argument that a lower premium/longer payment period would have a higher IRR if you die soon. This is true, but if you die soon after the policy is issued the IRR is going to be high regardless of if you were making high or low premium payments.
And just as a final note on IRRs, the reason that the graph spikes up at the end is because the payment period is longer than age 90, so the premiums paid up to that point are lower than the to-age-90 cumulative premiums.
You might also say that if you choose a shorter payment period (with a higher premium), you might be unable to afford the premium eventually. This is true, but unlike the case where you began with a low premium, this one has a solution, which we will cover in the next section.
2. You don’t have to make level premium payments
Like all universal life insurance policies, guaranteed universal life insurance has flexible premiums (as long as certain minimum premiums are paid to keep the policy from lapsing).
So, how does this benefit a person who chose a shorter premium payment period, but can no longer afford it? Well, that person can reduce the premium payment, but still guarantee the policy won’t ever lapse. From the example above, assume that the insured decided he wanted to pay for the policy over 15 years, for a premium of $328 per month.
Five years in, his income has dropped and he wants to pay it over 15 more years (so a total of 20 from issue). Well, he can reduce his payment to $250 per month and it will guarantee the policy will last forever. Also note that this is less than paying the initial 20-year premium, which is $277, since the first five years he paid more.
For 20 more years the premium would be $214, and for 25 more years $195. The other thing to keep in mind is that if his income ever rose again, he could increase the premium.
I’ve mentioned policies lapsing if sufficient premiums are not paid. If you’ve paid more than the minimum and have to reduce it at some point, there are a couple things that can happen. One, you reduce it by too much and the policy will eventually lapse in the future. Or two, you reduce it, but by an amount that you can still keep the policy from ever lapsing.
There are an infinite number of ways to fund a guaranteed universal life insurance policy, so I can’t cover them all here. But some possibilities are: increase the payment by a specified dollar amount each year, increase the payment by the same percentage each year, or pay more up front and less later on.
If you do plan to pay less up front (but still above the minimum required by the policy) to reduce cost, be aware that the future premiums could jump significantly.
3. Guaranteed universal life insurance can be a solution for people too old to qualify for term insurance
I’ve mentioned minimum premiums a few times in this article, but how does that relate to term insurance?
Well, throughout this article we’ve assumed that the insured here wants the policy to last for his entire lifetime, and often that’s the reason that people buy guaranteed universal life insurance, especially people who are not of an advanced age.
But you can also specify that the policy will guarantee the death benefit to a younger age, such as age 85 or 90.
For people who don’t want to the policy to last forever, but may be too old to purchase term insurance, this is an option. For example, a healthy 75-year-old man needs $100,000 of coverage for 15 years, but he’s probably too old to qualify for a 15-year term policy at this age.
In this case, he could pay roughly $245 per month for five years and $223 after that for a guaranteed universal life insurance policy, and he would be guaranteed coverage for 15 years. (If this seems expensive, coverage that would last his entire lifetime would be about $370 per month for 15 years).
The reason that the first five years has a higher premium is due to the minimum premium on the policy, which will vary by company (both the duration and the amount).
4. Some policies have so-called living benefits
Many guaranteed universal life insurance policies these days have benefits that you can use while you are living. These include benefits for critical, chronic, and terminal illness. The amount of the benefits varies by company and your age — companies make an estimate of your life expectancy when you elect these benefits, so the benefits are not the full face amount since they are “accelerated.”
These benefits aren’t substitutes for long term care and other types of insurance, but they can help out. Before electing them, you should check to see if it makes sense for you. And of course, electing any of these will reduce the amount of death benefits payable to your beneficiaries.