 Personal Finance PowerPoint Presentation. Universal Life, U-L Insurance. Prepare to get financially fit by practicing personal finance. Insurance is part of our long-term risk mitigation strategy where we follow the adage of measure twice, cut once, put in a formal process in place, look in something like, set the goals, develop a plan to reach them, put the plan in action, review the results, and repeat the process periodically. Most of this information can be found at Investopedia. Universal Life, U-L Insurance, which you can find online. Take a look at the references, resources. Continue your research from there. This was by Julia Kagan, updated May 28, 2022. In prior presentations, we've been taking a look at insurance in general. We then moved on to the life insurance. Remembering that there's two categories of life insurance or main categories we want to be thinking of. One being the term or pure life insurance. The other being the permanent life insurance. We're now looking at universal life insurance, which is in the category of the permanent life insurance. I would always be comparing and contrasting whenever I'm veering away from the pure or just life insurance, the term insurance, and comparing and contrasting to it the term insurance as basically the baseline. So keep in that in mind. What is universal life, U-L Insurance? Universal life or U-L Insurance is permanent life insurance as opposed to the term life insurance, lasting the lifetime of the insured that has an investment savings element and low premiums similar to those of term life insurance. Most U-L universal life insurance policies contain a flexible premium option, but some require a single premium, single lump sum premium, or fixed premiums, scheduled fixed premiums. How universal life U-L Insurance works? The U-L universal life insurance option provides more flexibility than whole life insurance. There's another category on the side of the permanent insurance, the whole life and the universal life as opposed to the other side of things, the other major category being the pure insurance or the term insurance. Policy holders can adjust their premiums and the death benefit. So you have that flexibility, which is nice. U-L Insurance premiums consist of two components, a cost of insurance that's the COI amount and a saving component known as the cash value. So we got this cash value coming into play again, which is that savings component, which makes it a little bit more complex and kind of skews it or skews it a little bit to have this kind of saving option, which you always want to be comparing and contrasting to term insurance, pure insurance, noting the adage of investing in the term insurance, which possibly is cheaper or buying term insurance and then investing the difference into like stocks, bonds and IRA or something like that. So I would always be trying to say, why don't I do that? Why don't I buy just term insurance and invest the difference? Is there a more complex tax strategy that I have to lower my taxes or possibly estate planning or to have more security in my overall life insurance coverage to have a more complex insurance policy? So as the name implies, the COI is the minimum amount of a premium payment required to keep the policy active. It consists of several items rolled together into one payment. COI includes the charges for mortality, policy administration and other directly associated expenses to keeping the policy in force. COI will vary by policy based on policyholders age, insurability and insured risk amount. Obviously we talked about some of these risk factors in the past. The differences and the risk factors to the insurance company will increase or decrease their level of overall risk, which you would think then would be reflected in the premium amounts. Collected premiums in excess of the cost of the UL insurance accumulated within the cash value portion of the policy. Over time, the cost of insurance will increase as the insured ages. So as you get older to the insurance company, you're being more of a risk to the insurance company because you're more likely to die, which if there's flexibility in the premiums, you would think from the insurance's perspective to lower the risk, there would be increasing policy possibly of the premiums. However, if sufficient, the accumulated cash value will cover the increases in the COI. Ad advantages and disadvantages of universal life, UL insurance. Much like a savings account, a UL insurance policy can't accumulate cash value. So this is the question you have. So you've got this added component, this cash value. The question would be, well, why don't I invest in the term insurance and then put the money like into the stock market and invest it or into an IRA or into a savings account or CD versus basically putting it into the universal life policies. You want to have some rational, some of the comparisons that you might be thinking of. In a UL insurance policy, the cash value earns interest based on the current market or minimum interest rate, whichever is greater, as cash value accumulates, policyholders may access a portion of the cash value without affecting the guaranteed death benefit. However, the withdrawals will be taxed. So also depending on when the policy and premium payments are made, earnings will be available as either last in, first out, LIFO, or first in, first out funds. Upon the death of the insured, the insurance company will retain any remaining cash value with beneficiaries only receiving the policy's death benefit. So the cash value goes up and then that lowers the risk to the insurance company because if you were to die, then they would pay out the amount of the death benefit and they would be holding on likely to the cash values. The cash value lowers the risk in the event of death. Universal life policyholders may borrow against the accumulated cash value without tax implications. So you've got this capacity to use that cash value possibly as collateral so that if you really needed money and possibly if you couldn't pull all the money out maybe you could take basically a loan against it using it as collateral on it although of course then you would have to pay interest on the loan. However, if they do, interest will be calculated on the loan amount and there will be a cash surrender fee. Unpaid loans will reduce the death benefit by the outstanding amount with unpaid interest on the loan deducted from the remaining cash value. Unlike whole life insurance policies which have a fixed premiums for the life of the policy, a UL which is the universal life insurance policy can have flexible premiums. Policies holders can make payments that are more than the COL so you can make payments higher than the COL. The excess premium is added to the cash value and accumulates interest so you put more money into the interest side of things if that were to happen which would increase that cash value component hopefully increasing it more over time as interest accumulates although in the current years that interest rates probably fairly low but you can imagine possibly somewhat in the future not too far from here you might have higher interest rates which would mean that interest accumulation could be more and more significant in that time frame. So if there is enough cash value policy holders may skip payments without the threat of a policy lapse. That said, policy holders must be attentive to the rising cost of insurance as they age and you do have the downside of not locking in possibly the premium amount if the premium is going to be adjusting as you age then the insurance company is going to be saying hey there's more risk to us as you get older of dying prematurely and so on. So depending on the credit and on the credited interest there may not be enough cash value to keep the policy in force thus requiring to pay higher premiums. Missed payments must be paid within a specific time frame for the policy to remain in force. The pros and the cons the pros you may borrow from the cash value. So you got that cash value component if times are tough and you need the money then at the least you think you might be able to borrow against it which could be useful as a last resort at least. Last your lifetime so unlike the term insurance it will be there for life as opposed to calculating the term and then provides both a death benefit and cash value account. The cons we got the withdrawals of cash value component are taxed so you could have a taxable component when you take the cash value out when a policy holder dies the company keeps the accounts cash value so that's going to be obviously one of the issues as the cash value goes up then the death benefit is going to include in a sense kind of like the cash value. You must pay back a policy loan with interest obviously if you take out a loan against the cash value you can have interest that will be charged for it. Universal life insurance versus term life insurance versus whole life insurance. Universal life a form of permanent life insurance provides policy holders with flexibility on paying premiums a cash savings component and a death benefit. Premium costs may change with interest rates and as the policy holder grows older. Term life insurance allows you to borrow against or cash in their savings portion which grows tax deferred over your lifetime. Term life provides coverage often through an employer for a set number of years generally 20 or 30 and expires once the term is up. Term life is usually affordable with low premiums but there is no cash component to borrow from or cash and the death benefit is null and void if you die after the term is up. Obviously the term life insurance you can usually plan for it pretty well because you're buying straight life insurance for a term of time when people are dependent upon you which might be at the point in time when people are starting a family often because that's when you might have a mortgage you might have debt you might not have a lot of net assets saved up you might have a lot of liabilities at later in your life you got less people dependent upon you and so you could give with some assurity what the normal life structure or cycle will be to figure out the term insurance with pretty good odds. Whole life insurance is also a form of permanent life insurance with a cash value saving component another important difference between universal and whole life insurance is that universal life insurance has more flexibility and where you can invest your policies cash value account whole life insurance premiums are locked in for the life of the policy whereas universal premiums are flexible so what is universal life insurance and how does it work? UL universal life insurance policies are a form of permanent life insurance with flexible premiums unlike term life can accumulate interest bearing funds like a savings account also policy holders can adjust their premiums and death benefits and holders paying extra toward their premium receive interest on that access what is the disadvantage of universal life insurance a big disadvantage is that holders must keep their eyes on fees they will be taxed on cash withdrawals and interest is charged on any loans that you take against the cash value holders should also pay attention to rising premiums as they age because there is a chance enough cash may not be available to keep the policy active and the holder will be forced to pay higher premiums if that is the case which is better whole life or universal life this is a yes or no question I expect a yes or no here we go both whole life and universal life are forms of permanent life insurance and provide a cash value savings component that policy holders may borrow from or cash out the totally avoided we totally avoided the question it depends at least we could have said the standard it depends whole life offers fixed premiums universal premiums may start out lower but they are flexible and may increase as you age depending on the amount of coverage and flexibility you want in a permanent policy either form may be a good choice depending on your situation there it is it depends it depends okay what is the difference between universal life insurance and whole life insurance whole life insurance is more stable because the death benefit will never go down if you pay our premiums which are fixed monthly amounts universal life insurance offers more flexibility but your death benefit is not guaranteed if you borrow too much against the policy the benefit will decrease but you can design your coverage for many years or your lifetime you can increase or decrease your death benefit and the amount you spend on premiums can I cash out my universal life insurance policy you can sell your universal life insurance policy or you can liquidate the cash value component and cancel the policy but you will have to pay a surrender fee in the event that you were to do that