Just Try to Understand Universal Life...

[Full Throttle]

Well done, Grasshopper.

Thanks. I personally think UL can be a great fit for the right situation, but in general, it looks better in a lab environment than in real life. In real life, clients under fund the program and can get hit with a big tax liability later on, clients take out loans on the policy at "0% interest", but don't realize they are destroying the policy when they don't pay them back or at a minimum, lose the compounding growth on the loan while before it was paid back.

WL isn't a perfect product, but for someone younger, buying a quality product with a PUA rider can lead to a nice growing death benefit that will give them a lot more financial options in the future. If they quit funding the policy, there won't be any suprises later. They can forfeit the policy or take a reduced paid up policy.

 

[Franz Kafka]

Thanks. I personally think UL can be a great fit for the right situation, but in general, it looks better in a lab environment than in real life. In real life, clients under fund the program and can get hit with a big tax liability later on, clients take out loans on the policy at "0% interest", but don't realize they are destroying the policy when they don't pay them back or at a minimum, lose the compounding growth on the loan while before it was paid back.

WL isn't a perfect product, but for someone younger, buying a quality product with a PUA rider can lead to a nice growing death benefit that will give them a lot more financial options in the future. If they quit funding the policy, there won't be any suprises later. They can forfeit the policy or take a reduced paid up policy.

Very nicely put. In my opinion, the ONLY time UL should be used is when the policy absolutely requires premium "flexibility" - e.g. employee bonus plans, deferred compensation etc. NLG UL is just another name for lifetime term. People always think they can have the cake and eat it too - i.e. having both the flexibility and the guarantees. One can't have both. One has to pick.

 

[dgoldenz]

We sell a lot of UL with NLG. Most people that only want term really want permanent coverage, but think it is cost-prohibitive for the amount they need. So, here's the question for your average 40-year-old person:

A: Do you want $1 million of term insurance guaranteed for 30 years?
B: Do you want $250k of no-lapse UL guaranteed for life?
C: Do you want $100k of whole life?


Most people want the $1 million guaranteed for life, but the cost forces them to choose A instead of B with a higher benefit. A mix of term and permanent is suitable for most people with the no-lapse UL acting as a safety net in case they outlive the term. Your average 40-year-old would not write the check for $250k of whole life, let alone $1 million.

 

[Full Throttle]

dgoldenz,

In the right situation, I really like UL with a NLG. If looked at in a vacuum, the client only wants the highest permanent death benefit, isn't concerned about forfeiture values, and wants to lowest premium, the UL with a NLG rider is a great fit.

In general, when discussing life insurance, it is most useful when it meshes with their other financial objectives/resources. Here is what I mean by that, let's say you meet a 40 year old that has $1200 per month to accomplish their financial goals. Hypothetically, let's say their objectives are:

1. Have a $6000/month stream of income at retirement.
2. Pay a portion of the kids college costs.
3. If they get sick or hurt, be able to still accomplish those goals.
4. If they pass away prematurely, they still want their loved ones to accomplish #1 and #2.
5. If they make it to retirement, would like to leave a modest amount of money behind, not have the funeral home check bounce.

Knowing nothing else about them, we know they need some sort of disability coverage, life coverage, and savings vehicles for retirement/college costs. Now, let's look at the life insurance options:

1. Term insurance: If they didn't care about #5, neither UL with a NLG or WL would matter, term would likely fit by accomplishing #4. The only exception may be a small $15,000 final expense policy to pay funeral costs.

2. NLG UL: This accomplishes #4 and #5 effectively. For the same premium a NLG policy will purchase a higher death benefit than the same WL policy. No arguement there. However, it does have a limitation which may or may not be an issue, what if the insured changes his or her mind about leaving an inheritence or times get tight. They over payed for life time term.

3. WL: Two reasons I like it here:

Reason #1: Even though it would be a lower death benefit up front for the same UL NLG premium, the gap can be made up for cheap with a term policy. The death benefit on the WL will grow with PUAs and eventually lap the UL policy.

If the insured died before the death benefit caught up to the UL NLG policy, the family gets the same death benefit in both circumstances (with the term gap policy in place). The WL policy also has a cash forfeiture option if the situation changes. If they can no longer afford the premiums, a reduced paid-up WL policy would make sure they got something for their premiums unlike the UL policy. If their kids end up in jail and they no longer want to leave an inheritance, they can surrender the policy.

Reason #2: I believe people should have at least 10% to 20% of their annual savings contribution in a a safe savings vehicle guaranteed to increase each year. For this purpose, if there is a desire for life coverage and to leave an inheritance, then WL can accomplish this effectively. If I didn't believe this, I would recommend UL with a NLG rider much more often.

A couple caveots:

1. The amount of coverage is more important than the type. If term is all that is affordable, term it is going to be.

2. To sell more than a small final expense policy, the Roth IRAs (if eligible) need to be max funded and if a match is availble at work, the match needs to be utilized before recommending whole life.

3. The insured has to want to leave money behind, not spend every last dollar. Otherwise, they could forget the WL or UL NLG coverage, put most of their retirement savings in a SPIA at retirement for max income and forget everything else.

This is why I like WL in many situations. If they wanted to accomplish all five objectives, but didn't have the budget for WL right now, I would sell convertable term into a solid WL carrier so that as their situation changes, they can get convert their coverage without having to prove insurability.

 

[dgoldenz]

It's easy for us as agents to go back and forth about what people should do. Unfortunately, most people don't do what they should. There's a lot of people out there who should have a disability policy, but think the premiums are insane, so they don't buy it and take the risk.

When you die, the beneficiary gets the death benefit. If you have a $250k death benefit on a UL policy, the beneficiary gets $250k. If you have a $250k death benefit on a whole life policy, the beneficiary gets $250k. If you have $100,000 cash value in a $250k whole life policy when you die, the beneficiary gets $250k. If you have $0 cash value in a no-lapse UL when you die, the beneficiary still gets $250k. If you took the difference in premium between the no-lapse UL and whole life and invested it, then died, the beneficiary would have $250k and whatever is left of the investment on top of that. Which would the beneficiary rather have?

 

[Full Throttle]

It's easy for us as agents to go back and forth about what people should do. Unfortunately, most people don't do what they should. There's a lot of people out there who should have a disability policy, but think the premiums are insane, so they don't buy it and take the risk.

That's why we owe it to our clients/prospects to be good salesman.

When you die, the beneficiary gets the death benefit. If you have a $250k death benefit on a UL policy, the beneficiary gets $250k. If you have a $250k death benefit on a whole life policy, the beneficiary gets $250k. If you have $100,000 cash value in a $250k whole life policy when you die, the beneficiary gets $250k. If you have $0 cash value in a no-lapse UL when you die, the beneficiary still gets $250k. If you took the difference in premium between the no-lapse UL and whole life and invested it, then died, the beneficiary would have $250k and whatever is left of the investment on top of that. Which would the beneficiary rather have?

You're still missing the point of my previous post. First, do you believe people should put around 10% to 20% of their savings in a conservative savings vehicle guaranteed to increase in value each year?

Second, if you tell me when someone is going to die, I can design the most cost efficient policy for them. If you can't, we don't know in advance what will be the best strategy.

If I die in a short time frame, term would have been the best. Any "invest the difference" would be very minimal, the client's family is just happy to have the $250,000 death benefit.

As far as "invest the difference" in the long term, where am I going to invest it? My Roth IRAs have my agressive money (no room there for my safe money), should I put it in my 401(k)? Maybe. Remember, RMDs and a lack of a tax free transfer at death (remember goal #5 in the previous post) can be issues. Plus, in the long term, my WL death benefit will likely far exceed the UL w/ NLG rider as the PUAs compound.

That's why I still like my safe money growing in a WL for options if I change my mind about permanent coverage, a growing DB that will likely far exceed the minimum funded UL NLG policy in the long run, and a tax free transfer at death.

*I can run illustrations, life expectancy lengths, and market scenerios that can make any of the three options look the best: term, UL, or WL. The reality is hedging our bets and going with the option(s) that give us the best odds for the least risk to accomplish the client's financial objectives. No one size fits all.

I like WL in the above scenerio.

 

[NoFault]

What if you choose a "level" premium with Option 2, this will not raise the premium right?

I got Assurity, Aviva, Forester and WCL and just really want to understand this UL product, before introducing them to clients.

 

[Full Throttle]

What if you choose a "level" premium with Option 2, this will not raise the premium right?

Correct. But it may cause the policy to lapse, lot of unknowns. The cost of insurance goes up each year within a UL policy, the higher the amount of life insurance (Option 2 has more life insurance than Option 1), the higher the cost deducted out each month. There in no free lunch except in mouse traps, you pay for the insurance one way or another.

That being said, when you are younger, the cost of insurance is not going to be nearly as high with an Option 2 than someone further along in years. You could potentially do an Option 2 the first few years of the policy and go back to Option 1 without a big dip in the account value. Just be careful and make sure you know what you're doing if you feel this is in the client's best interest.

 

[VolAgent]

You could potentially do an Option 2 the first few years of the policy and go back to Option 1 without a big dip in the account value. Just be careful and make sure you know what you're doing if you feel this is in the client's best interest.

Be careful in doing this. If the client was aggressive in overfunding the policy, the change in DB could give it MEC status.

 

[Full Throttle]

Be careful in doing this. If the client was aggressive in overfunding the policy, the change in DB could give it MEC status.

I personally wouldn't do it at all. If the client is worried about the difference in a $20,000 death benefit, sell the correct sized policy to begin with. If they can't afford the correct sized policy, they shouldn't own this type of coverage anyway.