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Group Variable Universal Life Insurance Pros And Cons
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The Pros And Cons Of Universal Life Insurance
At I&E, we don't try to pretend to have a perfect life insurance policy or company. The "best" policy depends on your specific needs, goals and objectives. In some cases the "best" policy is Variable Universal Life or VUL.
In the next article on VUL insurance, we will cover the history of the product, the pros and cons associated with variable universal life and why choosing a VUL policy is a good idea.
Variable Universal Life (VUL) is defined as a permanent type of cash value life insurance policy, where the cash value can be invested in different accounts, for example, stocks, bonds and mutual funds.
Permanent life insurance is so called because it is effective forever (as long as you pay your premiums). This is in contrast to term life insurance, which is for a fixed period of years (usually 10, 20 or 30 years).
Life Insurance Guide
Due to the fact that these separate accounts are invested in securities such as stocks, these VUL policies are regulated under federal securities laws. And you must have a securities license to sell variable universal life policies. In other words, your average, run-of-the-mill, insurance agent is not allowed to sell VULs.
Variable life insurance has been around since the early 1980s. In the mid-20th century, term life insurance provided temporary coverage while whole life insurance provided coverage for those who needed it for life (or more than 20 years).
For more, see term life vs. whole life insurance, where we break down the differences between the two types of policies.
In the 1980s when interest rates began to rise, many dividend-paying whole life insurance policy owners saw interest increases that did not reflect lower policy dividends. (One reason is that life insurance dividends accrue at a slower rate than interest.)
Understanding The Different Types Of Life Insurance
Many people are starting to ask if there is a better alternative. Why not buy term insurance and invest in some type of money market account that pays double the dividends of a whole life policy?
Americans are starting to cash in their whole life policies. And insurance companies are scrambling to find a solution.
A universal life policy does not guarantee a whole life policy, but it offers flexibility and potential growth compared to money market accounts that appeal to customers.
A few years ago, in the mid-80s, whole life policies paid more than 13%, while their equivalent universal policies paid only 7%.
Permanent Life Insurance: Definition, Pros And Cons
Meanwhile, the stock market is always close to 15 percent. People want to buy tenure and invest differently, and who can blame them.
To prevent the exodus from their products, life insurance companies decided to add mutual funds to their cash value investment options - and thus the variable universal life policy was born.
VUL is another form of permanent insurance, but now it can take advantage of the healthy stock market.
VUL is still with us today, and the options for policyholders are greater than when it was introduced.
What Is Universal Life Insurance?
The following carriers represent our current picks for the best global variable life insurance companies in alphabetical order.
The following is a list of popular advantages and disadvantages of variable universal life insurance policies. We here at I&E hope this list helps provide a little insight into this unique insurance and investment product.
VUL is both an investment product and a life insurance product. Thus, it is important to note that one of the major advantages of investment-only products is that there is a death benefit payment that is tax-free on the income of the insured beneficiary.
Money can never replace the loss of a loved one, but it is important to avoid the double damage of a family death and great financial hardship.
Are Life Insurance Loans A Bad Idea?
All life insurance products have a death benefit, so it seems strange to mention it as a supporter, but in the end it is the main aspect of the purchase, so it should not be dismissed.
Also, remember that this is permanent life insurance. This life insurance does not expire until you pay the premium. This is different from the usual term insurance that expires after 20 or 30 years.
You can add some long-term care riders to your VUL policy to increase protection if you are disabled and unable to perform 2 out of 6 activities of daily living.
Finally, most VULs (the age at which the cash value equals the death benefit amount) have no endowment age, allowing the policy to continue for as long as you live.
Get More Flexibility When You Buy Universal Life Insurance
Anytime you see the word "universal" in the name of an insurance policy, you might think that your premium payments will be flexible. In this case it is true of VUL. Premiums can go up or down for a number of reasons.
Whole life insurance benefits include fixed premiums that can be increased through dividends, while variable universal life includes more policy flexibility.
Many people prefer fixed lifetime premiums because they know what they will pay and can budget accordingly.
With variable universal life, your premium can go up or down based on a variety of factors, including stock market performance. This can be a plus or minus depending on which side your policy falls into.
Does Life Insurance Belong In Retirement Portfolio?
In contrast, whole life insurance is an asset that is not related to the stock market. This means that the performance of the stock market does not directly affect the performance of your whole life policy. Instead, Whole Life acts as a safe haven, providing peace of mind from Wall St.
This is the third pro reason that the variable universal life policy is made. So the policy holders can enter the investment market with their cash value.
By entering the market, VUL offers a permanent life insurance product with no rate cap, compared to indexed universal life insurance that offers a cap and a floor.
If the amount of money invested in the mutual fund returns at a rate of more than 20%, the entire amount will be credited to the policyholder's account (minus the course fee).
How Variable Universal Life Insurance Works
As a fully embedded stock market product, cash value has the luxury of having a hedge against inflation. If the economy is strong and growing, inflation tends to increase, and so does the value of money in this account.
The ability to fully participate in the market and still receive the tax benefits of life insurance is one of the main reasons that variable universal life is used in private placement life insurance.
Comparing VUL vs. IUL policies can have a huge advantage without a rate cap. VUL insurance policies have the potential to offer higher returns. Among the higher returns is the potential to lose principal in a down market.
The maximum rate cap with an indexed universal life policy is around 12%. If the market goes above that, you will not participate in additional gains from the index linked to your policy. Some IUL insurance policies do not offer a cap but have a lower participation rate.
New York Life Review
On the other side of the coin is the IUL policy, there is a floor. The floor in your index universal life policy protects your policy from negative market returns. However, with a VUL policy, your losses may be unlimited depending on what the stock market does.
However, there is a bonus of making the product tax-free for life - with benefits.
Taxes are generally charged only on cash value withdrawals. And even then, your withdrawals are FIFO (First In - First Out), which means that the premiums you pay in cash value must be completely exhausted before your withdrawals are taxed.
To be clear, your withdrawal will be free of charge (premium paid). If you withdraw beyond your base, you will only be taxed on account growth.
Indexed Universal Life Insurance: Pros And Cons
But many people don't choose to withdraw their money because it lowers their cash value - and thus their earning potential. Instead they opt for life insurance policy loans - which we will discuss next.
In addition to these benefits, you have no early withdrawal penalties and required minimum distributions enforced by the IRS.
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