Friday, April 12, 2024

LOUISE FAIRSAVE: Universal Life Insurance


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THIS ARTICLE looks at the more permanent type of life insurance like universal life insurance and whole life insurance.

These differ from term insurance in that they are both more of a permanent nature and they both accumulate cash value.

They are permanent in nature in that such policies generally only become payable as a death benefit on the passing of the insured life.

Term insurance can be described as pure insurance coverage for a fixed term. In the case of universal life insurance, there is pure insurance coverage plus the cash accumulation or value creation component.

So, the insurance premium for the same value of insurance coverage would be higher for a universal policy than for a term insurance policy. The premium has to fund the cost of the insurance coverage plus fund a “saving” component.

Each time you pay a premium, the saving component grows in value. Over time an interest is earned by the savings providing a cash value of the policy, on which a cash surrender value can then be computed.

In providing various products to meet the needs of the insurance consuming market, there is a broad range of hybrids of universal life insurance products and whole life insurance products.

The main difference between these two types of cash accumulating value products is the period of insurance.

Whole life insurance tends to cover a life expectancy of 100 years whereas, a universal life policy may be designed to cover a similar life expectancy but allow the policy to be fully paid up by say, the normal retirement age of 65 years.

Universal life policies are interest sensitive and the insurance company would tend to offer a guaranteed return on the savings component ranging between two and three per cent. The insurance company typically would invest the funds raised from such policies in equity investments (shares in companies).

From time to time, when investment returns to the insurance company are well above the guaranteed rate, the company may issue bonus interest payments on the saving component of these policies. In this way, the universal life policy tends to be very interest sensitive.

In the case of whole life insurance, the premium covers the cost of the pure insurance component and provides enough additional cash that even if you live to be 100 years, the premium would cover the cost of the accumulated cash value.

The cash put into the policy is accumulated with annual compound interest over time. In other words, if you live to the age of endowment – 100 years – the face value and cash value would be the same.

An alternate way of expressing this difference is that on the death of the insured life, the proceeds on a whole life policy will be the face value of the policy whereas the proceeds of the universal life policy will be the face value plus the value of the accumulated funds from any bonuses.

So, in purchasing the universal life policy, the purchaser is taking a more speculative position, expected additional benefits should the equity market perform better than averaged by the insurance company.

Typically, these policies are formidable tools for protecting a family if the breadwinner of the family is so covered and dies prematurely.

Furthermore, should the beneficiary of the policy be specified, then the proceeds of the policy would be paid to the beneficiary directly, avoiding what may be a long and possibly complex probate process.

Then, too, the proceeds of insurance policies are also tax-free. Thus such insurance coverage can be a formidable means of funding intergenerational wealth while providing insurance protection.




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