What is Guaranteed Universal Life Insurance?
In this article you’ll find out the raison d’être of the GUL Guy – everything you need to know about Guaranteed Universal Life insurance!
While Guaranteed Life Insurance policies (otherwise known as GULs) aren’t for everyone, we find that the lack of information on the internet about GUL policies makes it hard to even make an informed choice. Here are all the key factors you need to know about Guaranteed Universal Life before knowing if it is right for you:
A natural extension of a more traditional universal life policy, a Guaranteed UL is the answer to the question, “What happens if I want the protection of a whole life policy, but I want to do it as cheaply as possible and I don’t care about putting cash inside the policy?”
There’s a lot of actuarial math under the hood of a GUL policy that makes this happen, but the key takeaway is as simple as this:
You pay a fixed premium, your family gets a death benefit for as long as you pay that premium.
Traditionally, that fixed premium has been guaranteed until age 121, giving anybody who has ever held purchased GUL policy a monthly payment that has not gone up. It should also be noted that if you make it to age 121, (congratulations…. And what’s your secret?) the policy simply matures and you get the death benefit anyway. This is not true of the types of policies mentioned next.
Insurance companies sensitive to the wants of consumers have recently come up with newer products: For a lower price, the insurance company will will drop the guarantee down until age 110, age 100, or even lower.
It is Important to Note There is No Free Lunch Here!
Yes, the insurance company will charge you less, but what happens if you make it past the guarantee?
If you are in good health and don’t start adding more money or use a nonforteiture option (remember it’s a flexible premium and you are just paying the scheduled minimum) as you approach the end of the guarantee, you could potentially get yourself into trouble.
Assuming you have made no changes, after the guarantee ends, the next year’s premium will be exorbitant and the policy will collapse on itself, leaving you with no benefits – even though you’ve been paying in for years!
We Don’t Want That to Happen!
Be careful before turning your lifetime benefit into a potentially temporary one! It is important to work with an agent that will check in with you from time to time and make sure the policy is being funded at an appropriate level.
It Usually Has No Cash Value
The guarantee in Guaranteed Universal Life comes from something called a No Lapse Guarantee rider that is applied to a Universal Life policy. This forces the company to let you pay a fixed price to have the face value of benefit guaranteed. Even if interest rates change or the insurance company loses money on your policy, you get the same rate. Because you are generally only putting in the minimum amount (more on how Universal life policies work here) you are just paying for pure insurance, and not adding any cash value to the policy.
This makes it the cheapest form of permanent insurance, but also the least forgiving!
A whole life policy allows you to pay missed premiums from the cash account (assuming you’ve built up some) through an Automatic Policy Loan. However, in a guaranteed universal life policy, there is no excess cash to borrow from, because you are already paying the minimum amount to keep the policy in place. You must make regular payments or the policy will lapse, and you’ve spent a whole lot of money for not much value!
The GUL guy hates to see a blown up policy! That’s why he offers multiple different types of life insurance and only places Guaranteed Universal Life policies for people for who it is the best option.
GULs: You Must Have the Ability to Pay Premiums
Therefore, if you foresee issues on making regular payments (if you are a business owner for example) you may be better off with a whole life policy or simply a cheaper term policy [link to quote landing page] put the coverage in place you need.
It’s Both More Expensive and Cheaper Than Term
Let’s take a quick look at some of the following pricing options that are current as of this post for $500,000 of life insurance coverage:
|Male, Pref||Age 45||Benefit Ends||Age 55||Benefit ends|
|30 year Term||$101.63/mo||Age 75||$289.6/mo||Age 85|
|A100 GUL||$302/mo||Age 100||$483.75/mo||Age 100|
|Male, Std||Age 45||Benefit Ends||Age 55||Benefit Ends|
|30 year Term||$162.78/mo||Age 75||$389.82/mo||Age 85|
|A100 GUL||$372.08/mo||Age 100||$591.66/mo||Age 100|
You can clearly see that at the same age, GUL is clearly much more expensive!
Everyone in the world should just buy term, right!? However, a funny thing happens when you start comparing the different life insurance policies at different ages – the 30 year term policy you got at 45 seemed like a good idea , but now at 55 (the new thirty!) you’ve still got years of mortgage payments and college tuition for the kids coming up and a couple of health issues. Your 401k isn’t is big as you thought it would be.
What If You Still Need the Insurance Coverage?
Suddenly getting a cheap term policy may no longer be possible. If your health deteriorates, you may not be able to get any coverage at all.
Falling out of the preferred risk class increases your premium by almost 50%, and Standard is still a pretty healthy rating! (I myself just barely managed to get standard rated myself). Locking into a healthier rating in a GUL when you are young is a great way to ensure affordable lifetime protection.
GUL is Important for People Who are Living Longer but Not Healthier Lives
Somewhere Around the Later Half of the Twentieth Century, We Got Really Good at Prolonging Lives.
We all know someone who is on their 2nd or 3rd heart attack, or who has been battling cancer or a progressive neurodegenerative disease. What has happened, though, is that we aren’t curing these diseases so much as we are now engaging in trench warfare with them, in multi year long battles.
We all eventually lose one of these battles, but these days we are running the risk of living long enough to rack up hundreds of thousands in medical bills AND outrun our life insurance coverage that could help cover the cost of care with accelerated benefits.
The insurance companies know this, and consider it in their calculations.
The term policy you want is priced and designed to end before you are statistically likely to die from any of these diseases. That’s not a bad thing at all (We love term when it’s used correctly) but don’t expect your $30/mo term to pay for your health care costs. You are going to need to figure out how to pay for that another way!
GULs Can Be Blended!
You know what life insurance companies like more than a customer purchasing one policy? A customer who purchases multiple policies! However, this is also great news for you.
Purchasing multiple policies allow you to more finely control how much coverage you want and how long you want it to cover you for.
The GUL Guy generally doesn’t like making specific recommendations without knowing the needs and wants of each individual – but some of my clients often find that a combination of term and GUL meets their needs the best, as they don’t require maximum coverage at every point in their lives.
The level of coverage you need generally changes over the course of your lifetime, and purchasing different combinations of GUL and term can more finely match your needs. You might need $2 million or more of coverage when you are the young breadwinner of your family and have twenty five years of wealth building ahead of you, but only $250,000 or $500,000 when you are 65 to shore up your spouse’s cashflow in retirement.
It Can be Used in an Irrevocable Life Insurance Trust
For those of you who need the legal structure of an irrevocable life insurance trust, the GUL policy is an excellent choice. The details and reasons for setting up the actual trust are beyond the scope of this article, but for those who are thinking about what policy to put inside of it, here are three reasons to consider the GUL:
- It’s permanent – the need to keep life insurance proceeds out of your estate is generally going to last your entire life, regardless of how old you are.
- It’s got the most face value per dollar – in situations where you are limited by the annual gift tax exemption (currently $15,000) you can get the highest amount of coverage available.
- There’s not much point in a cash value – the policy has been passed into an irrevocable trust you don’t control and is designed to benefit the recipients after you’re gone.
That’s Only An Introduction!
The world of Guaranteed Universal Life is all about manipulating the policy to meet your specific needs – and unfortunately I can’t write a blog post for every specific situation out there.
What I can do however, is help you with a free in depth consultation! Just schedule some time here, or get a quick quote to the right.