Among the various types of permanent life insurance, the type that is most like a term life (temporary) policy is known as “guaranteed universal life insurance” or “GUL”. This type of universal life insurance focuses LESS than other types of permanent life insurance on cash value accumulation and MORE on securing a permanent death benefit. Whereas a term life policy offers a death benefit for a specific number of years (such as 10, 15 or 20 year term), guaranteed universal life offers death benefit coverage up to a certain age such as 90, 100 or even 121.
This article will discuss the PROS and CONS of this unique type of life insurance when compared to term life (temporary) life insurance AND other kinds of permanent life insurance.
The Pros and Cons of Guaranteed Universal Life Insurance
Term Life vs. Guaranteed Universal Life Insurance
PROS and CONS [vs. Term Life Insurance]
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Cost of Premiums
As we’ve often noted, term life insurance is the cheapest way to purchase a death benefit for set period of time. In this way, purchasing term life insurance is like “renting a death benefit”. Although the cost of term life is relatively low, you’re not actually purchasing anything (at least permanently) with term life insurance. Although term life insurance does provide a guaranteed death benefit for a period of time, the nerds (actuaries) at the home offices of the major insurance companies know very well you will likely never cash in on the death benefit of a term life policy. The odds in a term life policy always favor the term expiring vs. the death of the insured. All this to say, term life insurance is cheap for a reason.
We recommend that at a minimum, folks considering term life insurance should consider convertible term life insurance because this at least secures the right to convert the term into permanent life insurance.
The greatest CON (vs. PRO) when comparing guaranteed universal life insurance and term life insurance is that the former is more expensive than the latter. Another related CON is that the “timeliness” of the premium payments is important to maintain the level premium payments.
Permanent Death Benefit
Because all term life policies either expire in say, 10, 15 or 20 years (or otherwise will gradually increase premiums), the greatest PRO when comparing term life is that the there is no expiration of the guarantee period on a guaranteed universal life policy, and the premiums can stay level. However, the catch is that timely payment of premiums is required to maintain the level premium payments. Guaranteed universal life policies do not have an expiration date, and this makes for attractive estate planning tool . . . more about this later.
Cash Value Accumulation
Another possible PRO when comparing term life insurance is the fact that some policies can be designed to accumulate some cash value. However, cash value accumulation isn’t the usual emphasis of guaranteed universal life insurance, policies do allow for the accumulation of some cash value and allow you to access it. This option compliments other strategies that may be used for personal financing as often discussed concerning the infinite banking concept®. That said, other types of permanent life insurance may be more effective for infinite banking.
Guaranteed Universal Life vs. Other Types of Permanent Life Insurance
Universal Life Comparisons [Guaranteed vs. Non-Guaranteed Universal Life]
Among the genre of life insurance known as universal life, are the other types known as indexed universal life insurance and variable universal life insurance. Another lesser known type that is primarily reserved for the wealthiest individuals is private placement life insurance. In general, these 3 other types of universal life insurance can be defined as NON-GUARANTEED because they are based upon financial performance leaving the cash value vulnerable. While these other types do offer a death benefit that can be guaranteed by a rider in many cases, they primarily FOCUS on cash value accumulation within the policy that varies as follows:
The 3 TYPES of NON-GUARANTEED UNIVERSAL LIFE are focused on ways to maximize cash value accumulation as follows:
Indexed universal life (IUL) policies offer a permanent death benefit with more emphasis on cash value accumulation. IUL policies tie the accumulation of cash value within the policy to one of any number of market indexes such as the S&P 500 index. Most indexed universal life policies offer a maximum market return during booming years AND a floor (such as 0% or 1%) to limit losses during down market years. These policies generally offer flexible premiums along with the opportunity to participate in market gains. However, similar to guaranteed universal life, IUL policies perform best when the insured is disciplined about making premium payments.
Variable universal life (VUL) policies offer a similar opportunity in terms of death benefit and the accumulation of cash value. The difference with VUL policies is they allow the policy holder to invest more directly in the financial markets. The cash value in VUL policies is generally invested in any number of market based investments such as mutual funds. VUL policies are generally viewed as riskier than IUL policies and may only be sold by professionals with a securities license.
Private placement life insurance is in its own world although it is defined as a type of variable life insurance. Again, a death benefit is secured as with the other types. However, private placement policies are privately negotiated with sophisticated strategists, accountants and attorneys. Like VUL policies, the cash value may be invested in the financial markets, but private placement policies allow much greater discretion to invest in assets such as hedge funds. Generally, only those with significant wealth who qualify as “accredited investors” may consider this option”.
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PROS and CONS of Guaranteed (vs. Non-Guaranteed) Universal Life
Insurance Premium Costs
Guaranteed universal life insurance can be obtained with much lower up front costs because only the insurance (and not the investment) is being paid for up front. Also, GUL policies are so conservative, verses the other types of IUL policies, that the premiums are guaranteed to stay fixed and level, provided they are paid in a timely fashion. Because the other types of universal life are subject to market risks, premium adjustments may be needed in order to maintain the policies.
Market Risk Exposure
Mirroring the concern about changing premiums stated above, GUL policies are NOT subject to market risks and are thus more reliable when it comes to securing a permanent death benefit. Of course, the CON related to this is that they insured is losing the opportunity to participate in market gains available with other types of IUL policies.
Whole Life Comparisons
When comparing guaranteed universal life to traditional whole life insurance, the discussion shifts away from guaranteed vs. non-guaranteed because whole life insurance offers a guaranteed death benefit WITH guaranteed cash value accumulation. In actuality, the major benefits of guaranteed universal life, that of securing a permanent death benefit with little risk, can be similarly realized through purchasing traditional dividend paying whole life insurance. The important difference then becomes the costs associated with traditional whole life as well as the desire to accumulate usable cash value within the policy.
Above, we noted the advantage that any cash that DOES accumulate within a guaranteed universal life insurance policy, may be taken in the form of a loan and used for concepts such as infinite banking. The difference with traditional whole life insurance is that strategies can be adopted to maximize cash value growth in order to facilitate using life insurance as your personal bank. Whereas, guaranteed universal life facilitates only nominal cash value growth due to the relatively low costs.
PROS and CONS of Guaranteed Universal Life Insurance (vs. Whole Life Insurance)
Insurance Premium Costs
Guaranteed universal life insurance can be obtained with much lower up front costs because only the insurance (and not the investment) is being paid for up front.
Market Risk Exposure
GUL policies are NOT subject to market risks and are reliable when it comes to securing a permanent death benefit. However, permanent whole life insurance can offer the same thing along with a guaranteed, tax favorable return on the cash value. As stated above, the GUL loses the opportunity to participate in gains available (guaranteed and potentially non-guaranteed).
So, if you need to secure a permanent death benefit AND like the stability of guaranteed universal life, a key question is whether you’re inclined to take the extra step to fund a traditional whole life policy.
Overview of Guaranteed Universal Life [Is it Right for You]
When making a final decision about whether guaranteed universal life insurance is the best type of life insurance for you, consider the following questions?
- Are you seeking to secure a permanent death benefit?
- How important is the cost of insurance in your situation?
- Is a permanent death benefit that cannot be impacted by life changes important to your estate planning?
- Are you facing likely increases in the cost of life insurance in the near future due to health decline or aging?
In reality, most people who are seriously considering a guaranteed universal life policy for securing a permanent death benefit should probably forget about the other types of universal life insurance and focus on a comparison with traditional whole life insurance. Although I can hear the critics and entertainers like Dave Ramsey shriek, a side by side comparison with traditional whole life insurance is a better route for this situation, due to fact that the reliability of traditional whole life policies and the risk inherent in other IUL products, makes for a better comparison.
Both guaranteed universal life AND traditional whole life offer a permanent death benefit that may be required for estate planning concerns such as business continuity succession planning or family business succession planning). Business owners who are looking at the long game may also benefit from both when considering needs such as key person (key man) life insurance.
The key difference comes down to COST and the importance of CASH VALUE ACCUMULATION. Guaranteed universal life insurance simply costs much less but does NOT offer the same long term benefits for cash value accumulation and use. This difference may be a factor if simply securing a death benefit for purposes such as life insurance for SBA loans OR otherwise planning to use policy cash value for business purposes such as executive bonus plans or split dollar plans.
If you’re interested in finding out more about guaranteed universal life or any other insurance and estates strategy, reach out and connect with us today.
