Universal life insurance options and the drawbacks

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PostPosted: Tue Feb 09, 2010 10:11 am   Post subject: Universal life insurance options and the drawbacks  

I've often read about the death benefit and the investment options offered under Universal life insurance. But I'm not too sure of the drawbacks of such policies.


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Purpleheaded08
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PostPosted: Tue Feb 09, 2010 1:49 pm   Post subject:   

Universal life is not an investment. It may accumulate some cash value, but you shouldn't touch it. If you want cash value, buy whole life. If you want the lowest possible premium and the highest possible death benefit guaranteed for life, buy universal life with a no-lapse guarantee.



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PostPosted: Wed Feb 10, 2010 2:23 am   Post subject:   

If this person is looking at Variable universal life it's an investment.



I'd be careful about VUL though, and as dgoldenz has suggested touching the money inside a regular UL can be tricky if you want to ensure the death benefit remains in place. Universal Life with a Secondary Guarantee is an option to create a term like product that will remain in force for life so long as you pay the premium.

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PostPosted: Wed Feb 10, 2010 5:38 am   Post subject:   

The premiums which you'd pay towards such coverage wouldn't be guaranteed. Otherwise UL is good in terms of being your permanent protection. You should always consult with an agent who can tell you more about the risks associated with the particular product which you've chosen.


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PostPosted: Wed Feb 10, 2010 5:52 am   Post subject:   

Quote:
Universal Life with a Secondary Guarantee is an option to create a term like product that will remain in force for life so long as you pay the premium.


I do understand a term like product, but I don't have knowledge on this Secondary Guarantee. See, if you could explain it a bit for me!

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PostPosted: Wed Feb 10, 2010 11:06 am   Post subject:   

A secondary guarantee is a promise by the insurance company that as long as the owner pays $X of premium and never misses a payment, or removes money, the policy will remain in force even if there otherwise wouldn't be enough money in the policy to keep it in force.



Ex. Joe is paying $200/month into his $300,000 policy with a secondary guarantee. In the future, the cost of insurance (and all other expenses) is $300/month and there is no cash value in the policy. Without a secondary guarantee, he would have to pay $300 or his policy would lapse. A secondary guarantee is a promise by the insurance company that $200/month will keep the policy in force.

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PostPosted: Thu Feb 11, 2010 3:47 am   Post subject:   

Yup, as insurance expert has said, ignore the cash, just worry about paying the premium, and they'll guarantee a death benefit.

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PostPosted: Thu Feb 11, 2010 6:06 am   Post subject:   

Quote:
If you want the lowest possible premium and the highest possible death benefit guaranteed for life, buy universal life with a no-lapse guarantee.




Quote:
as long as the owner pays $X of premium and never misses a payment, or removes money




Quote:
just worry about paying the premium, and they'll guarantee a death benefit.




People are not supposed to "worry about paying the premium" and most expect that if they pay their premiums and die their beneficiary will get a check.



Banking on a (secondary) GDB rider is foolhardy unless someone has a (secondary) guarantee that they will NEVER miss/forget/have an automatic bank draft fail to go through. It only takes one such missed/forgotten/dishonored payment to lose tens of thousands of dollars or more in a UL policy.



If a person wants to buy a UL policy, it should be properly (i.e., fully) funded from the first day and no loans ever taken against the cash value. Failure to heed this advice = a guaranteed policy lapse if the insured lives long enough.



Policyowners need to read the basic illustration before their free look period is gone and learn how to understand their annual statements. End of discussion.


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PostPosted: Thu Feb 11, 2010 10:45 am   Post subject:   

Yes, I'd agree to the fact that if the interest rate drops, you'd need to pay more in terms of premiums to keep the policy in force. In case you'd fail to increase your premium, your policy may lapse. On the other hand, you may request to get the insurance amount lowered in order to retain the policy. Roddick

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PostPosted: Thu Feb 11, 2010 12:30 pm   Post subject:   

Quote:
People are not supposed to "worry about paying the premium" and most expect that if they pay their premiums and die their beneficiary will get a check.



Banking on a (secondary) GDB rider is foolhardy unless someone has a (secondary) guarantee that they will NEVER miss/forget/have an automatic bank draft fail to go through. It only takes one such missed/forgotten/dishonored payment to lose tens of thousands of dollars or more in a UL policy.



If a person wants to buy a UL policy, it should be properly (i.e., fully) funded from the first day and no loans ever taken against the cash value. Failure to heed this advice = a guaranteed policy lapse if the insured lives long enough.



Policyowners need to read the basic illustration before their free look period is gone and learn how to understand their annual statements. End of discussion.




How is this any different than term insurance?


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PostPosted: Thu Feb 11, 2010 2:58 pm   Post subject:   

Great post, Dgoldenz.



UL with a secondary guarantee is identical to a level term policy with the owner deciding how long the policy will remain in force.



Ex. a $5000 premium will guarantee the policy to age 80

a $6300 premium will guarantee the policy to age 95

a $6400 premium will guarantee the policy to age 96



Pay the premium, keep the insurance.

Don't pay the premium, don't keep the insurance.



Max, I'm not sure why you've been having trouble with this concept. For older people, this is often the best way to buy permanent coverage. They receive virtually no benefit to paying more than the minimum amount. At death, all that paying more accomplishes is that they paid more!

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PostPosted: Fri Feb 12, 2010 9:29 am   Post subject:   

Quote:
Ex. a $5000 premium will guarantee the policy to age 80

a $6300 premium will guarantee the policy to age 95

a $6400 premium will guarantee the policy to age 96




I'd really wonder till what age would people look for a guaranty! Do they really pay more than $5000 to get their policies guaranteed beyond 80 years?
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PostPosted: Fri Feb 12, 2010 11:58 am   Post subject:   

It's not being guaranteed for 80 years. It's being guaranteed to age 80. As for the $5,000, that is either a lot or a little depending upon how much insurance we are talking about. I was just using made up numbers to give an example.



A healthy 70 year old who has the goal of leaving money behind at death whenever death occurs doesn't want to pay a premium that will is only guaranteed to age 80. What he doesn't want to happen is to pay $5,000 a year and then still be alive at age 80 and have to pay $12,000 to keep the policy in force that year and then pay $13,000 the following year, etc.



Simply think of these things as lifetime term policies.

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PostPosted: Fri Feb 12, 2010 12:00 pm   Post subject:   

...alternatively, these are basically what a whole life policy would look like with no dividends and no non-forfeiture options.

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PostPosted: Fri Feb 12, 2010 2:22 pm   Post subject:   

Hahah, take whole life insurance, remove all the guarantees, drop the dividend, and you now have universal life insurance!



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