Universal Life Insurance

Universal Life Insurance last week I got an email asking me if there was a life insurance policy that you could continue to pay the premium in full long time and still have the policy lapse that individual was talking a few universal life contracts.

Those are the ones you have to be very careful with they're not a bad product they could fit an absolutely great need but you have to look at them on a regular basis, you have to work with your advisory team to make sure they're still performing up to par so we're going to jump right into it Universal Life insurance.

Cost of insurance is extremely important with Universal life assurance the value of insurance is that the actual cost the insurance firm imposes to make sure your life for that benefit so when it comes to a term the policy you're really only paying the amount that it cost in order to ensure you right.

If you could think of the same thing here it's kind of like buying a term policy is the cost of insurance that is the amount that it actually, the cost for that death benefit then we have this other thing called the side account.


We're going to get to what is in minute funds collected above the cost of insurance. For example, you think that if you have a diagram and our premium in dollars and then we have the years of the policy so the first thing we're going to look at is the cost of insurance when you look at this imaginary diagram you're going to see that the cost of insurance is going to rise over time.

 As you know Term life insurance there are two different types there's a level term and then there's yearly renewable term or annual renewable term it functions very similarly to that because the cost of insurance is going to rise slightly every single year because you are closer to your death every year you get older.

So that's why the cost of insurance goes up so this cost of insurance is going to rise gradually over time and then towards the end so let's  say for instance this person was 40 years old when they purchased the policy they're 45 it may have climbed a little bit when they're 50 it starts climbing a little bit higher when they're 15 55 it starts you know even the incline is going even steeper and then when you go out here to 65 and 70 this is going dramatically higher right so each year the cost of insurance is getting higher.

Now a universal life contract is also called a flexible premium product and the reason for that is you have the flexibility of paying your the premium has anybody ever heard their parents or even you might have a pop one of these policies yourself.

And you say oh I don't have to pay this year because of the policy is performing so well that it pays my premium for me it may be one of these products it might be a whole life product it's possible but more likely then not it's one of these products because it has a flexible premium attribute to it.

So normally what happens is your advisor we'll do an illustration at paying this premium-level and then that person pays either monthly quarterly semi-annually or annually every year that amount so what happens is you have this little gap here right this gap is the amount of money that you're paying over the cost of insurance.

That money here is going to go into the side account and it's going to build up so if this is our side account it's going to grow over the years that you're paying additional over the cost of insurance.
Now, this is an unbundled product which means when you get your statement you're going to see the cost of insurance rising you're going to see your side account you're going to see the policy performance.

It may take an adviser a professional to review that policy and help you out with it but everything is in there the information is there.

The issue becomes is when you get to here so let's say this is year 18 and again it's going to be different depending on like I should say these side accounts normally follow an index.

So they're there principally protected but they follow an index so when the advisor does the illustration way back here when you first buy it they do an illustration of what they believe is going to happen well.

We've been in a very low-interest-rate environment for a very long time so almost 10 years of this has been the lowest rate environment so these may not have performed as well over the last couple of years.

 you want to take a look at these if you have a universal life contract so this additional money is going into here and the money is rising you get to here and now you are paying the exact amount of cost of insurance.

So nothing is going into the side account that year now what's going to happen in additional years is you have you're paying less than the cost of insurance. MORE ABOUT INSURANCE


So what's going to happen is your insurance company is not going to call you and say hey you need to put more money in this policy what they're going to do on your behalf is they're going to make money and supplement out of the side account whatever the difference is so let's say this is four hundred dollars a month and here the cost of insurance is now five hundred dollars a month what your policy is going to do is going to supplement that additional hundred dollars the problem is the cost of insurance going to keep on going up.

So here it might be one hundred two hundred three hundred four hundred five and now what's going to happen.

Now come to a point where you have zero in this side account well when you have zero in the side account and your cost of insurance is higher than the premium that you're paying well that could be an issue.

What's going to happen is the insurance company's going to call you or send you a letter more likely say mister or missus Jones you need to send us X amount of dollars to keep your policy in force this scares the bejesus out of people,

because they're like well but I've been paying this entire the time I had no idea I haven't looked at I hadn't reviewed my agent didn't call me my financial adviser didn't call me you should have told me earlier now I have to pay eighteen hundred dollars this month this is ridiculous and the policy lapses and they lose the coverage.

So with this sort of policy nearly added than any extra type of policy, you need to evaluation it at least on an annual basis because what you can do is you can run and as is an illustration so, for instance, let's say you have one of these policies and you're in year ten well in year ten you've had the policy for ten years right near ten you order and as is an illustration and what that's doing and the carrier is going to send you this illustration it's going to say okay.

If the things continue to go the way they've been going this the policy may lapse in year twenty one well there's a couple solution to that one you can make any money that's still up in that policy and you can 10:35 it over into a new policy right a different type of policy you can do that.

Or it may be just as simple as raising the premium to here this may make a world of difference so now you could turn around you can say okay carrier whether that's guardian or MassMutual or MetLife or New York Life or whoever it is your turn around them.

And say hey listen what if I gave you just a little bit more what would my as this illustration look then what would the future of this policy look then and then from there you can make an educated decision for you on whether or not you're going to keep the policy you're not going to keep the policy the issue here is a lot of people call this a permanent policy.

Even in my book, this is classified as a permanent policy there's no term where it's just going to end however it's not as permanent as some other policies when you look at a GL or a whole life policy those are pretty permanent you pay for a certain period of time boom you have that death the benefit here you have to monitor a little bit more.

If you have one of these policies go to your advisor. I just don't want to see people getting hurt because now they're either getting a huge bill that they're not expecting and what's even worse is they've now lost this protection here.

And what's a real shame is when they lose that protection that's normally around the age that's very important to them that they have the protection to either give their children their grandchildren their charitable causes that they care and are endearing.

sS that's just a quick one universal life insurance if you have one definitely review it if you have questions you can always send us an email continue to follow us on Facebook Twitter.

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