Just Try to Understand Universal Life...

NoFault

Expert
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Currently am looking into Universal Life, and so far it seems to be pretty impressive. From what I understand so far, Universal Life offer the following benefit, correct me if I'm wrong.

1. Decrease or increase in DB, according to your life situation for the years to come. E.g. Now I have a $100K DB, but in five years I lost my job and cannot afford the premium of $100/month, I can reduced my DB to $75K. But within another 5 years I'm back to my normal earning, I can changed my DB back to $100K or higher.

2. Option to choose cash accumulation in addition to DB. This mean if I have a DB of $100K and when I passed away, my subaccount is $50K, my beneficiary will get $150K?

3. Withdrawn from the subaccount, with interest, similar to a WL policy, yet my DB is still the same? So let's say in 20 years my subaccount accumulate $20K, I can take out those $20K for personal need, yet when I passed away my beneficiary still get the $100K DB, if I do not pay the whole $20K back to the insurance company.

4. Flexible premium, Min, Target and Max.

But what is No Lapse and Lapse? Does lapse mean you can skip payment(s), yet still have the policy in force and when you passed away the DB is still the same? And No lapse when you cannot skip a single payment to keep the policy in force?

Still many questions but this is all I have for now. I read over and over again the numerous book I have on UL, WL, TL, and VUL yet none of them actually explain what I am seeking for. Maybe they do, but no in plain language.
 
1. Not quite. While you can generally reduce the DB of any type of policy, generally you have to prove insurability to raise the DB. Thus in your example, you can easily reduce the DB, but increasing it back to 100k will probably have to go to underwriting again. Some companies may be an exception, but this is the general rule, particularly when it comes to raising the DB.

2. Yes, that is usually offered as an option. It does mean higher fees and expenses, as cash value never reduces the amount of "insurance". Usually its only a big deal later in life when the cost of insurance can be quite high. You can also usually change between DB types, whether the cash value adds to the DB or not. However, it can trigger MEC status depending on the cash value amount.

3. I'm not aware of any type of policy where a withdrawal, loan, surrender, etc. will not have some effect on the DB.

4. All ULs are flexible premium, unless you are utilizing the guarantees. Minimum is the minimum you have to put into the policy to fund it. Generally it won't make it to maturity at minimum. Target is the ideal premium, assuming no changes in the illustrated assumptions, it will make it to maturity at target. Maximum is the most you can put into the policy without it gaining MEC status.

No-lapse means that the policy has certain guarantees, and as long as the guaranteed premium is paid on time, the policy is guaranteed not to lapse before a specified age. Cash value is irrelevant in such a policy, unless someone taps into it, in which case the guarantees are no longer valid. While no one refers to it as such, lapse just means it does not have those guarantees. If the cash value is not enough to carry the policy forward, then it will lapse.
 
To expand on what VolAgent said:

1. Dead on, but remember that proving insurability can be as simple as answering a few medical questions - you don't necessarily have to go through another paramed. The amount of evidence you've got to provide is directly related to the increase in DB.

2. You're referring to the difference between Option 1 and Option 2 UL.

Option 1: Pays the face amount
Option 2: Pays face plus CV

Remember that the CV acts as a reserve of sorts against the DB, so with Option 2 UL there is no "in-policy" reserve to draw Cost of Insurance deductions from (COI). That means fees are higher and accumulation is much, much slower.

3. Policy loans and partial surrenders do effect the final DB. Also remember that the CV is where COI deductions come from, so taking too many loans will risk lapsing the policy in addition to the other factors.

We're planning a "Universal Life - In Depth" webinar at the ILIAA next week. PM me and I can send you an invitation to it. It might clear up some of your questions.
 
I'm confused about the answer to my second question.

This is the product that I'm going to market to my community, since they are young, and does not invest.

Pertaining to my question #2, if I were to pay my target premium every single month, will I received the illustrated subaccount CV while I'm still alive, and if I passed away without taking any subacct out, will my beneficiary received the DB and CV?
 
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The way I understand it, if you choose option 2 and get the DB AND CV (ie. $100K + $20K) and have taken a $20,000 loan, you will just get the death benefit. Is that not right? So where it would be the 100 plus the 20, ($120K total) it would first pay back the loan of $20 which would leave 100?

Is that right?
 
You can do a loan.
However, many times you would better off doing a partial surrender for the $20,000 and not have the loan interest to deal with. (Which wasn't as big a deal way back at the begining of time when interest rates on ULs was 8,9 gasp 10,11 percent. And zero interest loans.)
This where in force illustrations from the issuing company help.



The way I understand it, if you choose option 2 and get the DB AND CV (ie. $100K + $20K) and have taken a $20,000 loan, you will just get the death benefit. Is that not right? So where it would be the 100 plus the 20, ($120K total) it would first pay back the loan of $20 which would leave 100?

Is that right?
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You are correct.

The way I understand it, if you choose option 2 and get the DB AND CV (ie. $100K + $20K) and have taken a $20,000 loan, you will just get the death benefit. Is that not right? So where it would be the 100 plus the 20, ($120K total) it would first pay back the loan of $20 which would leave 100?

Is that right?
 
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The best way to think of UL is you have a bank account within the policy in which the cost of insurance is deducted out each month. The cost of insurance increases along with your age each year. If the bank account within the policy runs out, so does your coverage.

If you chose an Option 2 death benefit, you get more coverage if you die with it inforce, however, the cost of insurance coming out of your account value increases as well, leading to a higher lapse risk unless you over fund the policy (ie pay higher premiums, sorry, no free lunch except in a mouse trap).

My progression coming into the business was this:

1. Coming in, big believer in buy term, invest the difference.

2. I then realized the down falls of the strategy and liked UL for the flexibility and perceived lower cost (which turned out to be incorrect and the flexability is often times the products down fall).

3. After really learning how all the different types of insurance work, WL is virtually the only type of permanent coverage I sell except for minimum funded NLG UL policies when its the right fit for the situation.
 
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The best way to think of UL is you have a bank account within the policy in which the cost of insurance is deducted out each month. The cost of insurance increases along with your age each year. If the bank account within the policy runs out, so does your coverage.

If you chose an Option 2 death benefit, you get more coverage if you die with it inforce, however, the cost of insurance coming out of your account value increases as well, leading to a higher lapse risk unless you pull more out.

My progression coming into the business was this:

1. Coming in, big believer in buy term, invest the difference.

2. I then realized the down falls of the strategy and liked UL for the flexibility and perceived lower cost (which turned out to be incorrect and the flexability is often times the products down fall).

3. After really learning how all the different types of insurance work, WL is virtually the only type of permanent coverage I sell except for minimum funded NLG UL policies when its the right fit for the situation.

Well done, Grasshopper.

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Also. You may not find a lot of no-lapse Ul that offers opt2. Or a significant Cash Value build up. An exception maybe Protective Life.


Midland National and probably it's sister company North American also has no lapse products that can be sold with Option 2 and have cash values. I know Midland has two fixed and at least one indexed based product like this.
 
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