Life insurance ownership is at a 50-year low—yet half ofAmericans recognize that they have a need for insurance, accordingto a LIMRA report. 

So what is stopping most Americans from buying life insurance?One reason cited in the report is the difficulty of deciding whattype of insurance to buy—term insurance only provides cheapcoverage at a level price for a stated term of years, and wholelife insurance provides expensive coverage with an inflexiblepremium payment regime.  Today, consumers want controlover their assets and life insurance with the ability to makechanges as their family needs and circumstanceschange. 

Universal life insurance can help provide the needed flexibilityfor many life insurance purchasers. UL has the features consumerswant from life insurance—an income tax-free death benefit, coupledwith the ability to access policy values on a generally tax-freebasis when they need them for expenses such as education funding,down payments on homes or cars, or for retirement income. Throughriders, UL also offers additional features such as the ability toaccelerate part of the death benefit for certain medical conditionsor nursing home expenses.   

So how does it work? There is no set premium for a UL policy fora specified death benefit; rather, there is a range from theminimum premium necessary to keep the policy in force until thenext payment up to the maximum amount that will qualify the policyas life insurance. Payments in excess of the minimum accumulate inthe policy and are available for future expenses or to offsetfuture premiums. This means that if circumstances change and thepolicy values are sufficient to carry the policy, premium paymentscan be reduced or suspended for a period of time, or the deathbenefit can be reduced. 

How does a consumer decide on the premium amount? Policy ownerstypically choose to “over” fund their policies if they are planningto take withdrawals in the future for retirement income. Unlikequalified plans, there are no contribution limits for UL and, forhigh-income earners, overfunded UL policies can provide attractiveincome tax-free payments for retirement when structuredproperly.  Policies also are overfunded when the plan isto withdraw funds for future needs such as education funding,paying for weddings and down payments on homes. Withdrawals andloans may result in a reduced death benefit. Less well-fundedpolicies often are used for wealth transfer, whether providingincome for a surviving spouse or a grandparent wanting to provide alegacy. 

UL policies also offer flexibility in long-term growthpotential. Most policies sold offer traditional creditingstrategies, meaning the policy values are credited with an interestrate based on the return earned by the insurance company, subjectto minimum guarantee (usually 3 percent). Crediting rates are about5 percent to 6 percent and change from time to time with interestrate changes. 

For policy owners who are looking for potential higher returns,indexed and variable UL policies are available. Indexed UL policiesoffer the potential of a share of upside market increases whileprotecting from market downturns. They credit interest based on theperformance of one or more indices over a period of time. TheS&P is the most popular reference index for this purpose.Calculation of the crediting rate can be complicated but, ingeneral, if the index goes up, the policy is credited with interestbased on the rate of increase. If the index goes down, then eithera minimum interest rate (maybe 1 percent) or nothing iscredited. 

The values for these policies are invested in separate accountsselected by the policy owner that are managed by, and typicallymirror, well-known mutual funds. The policy value will increase anddecrease in the same way as the mirror mutual funds. If theseparate accounts perform well, there is the opportunity forsignificantly higher returns on this type of policy.

For those concerned they'll live longer than expected and mighthave to pay more premium late in life, consider a no-lapseguarantee. This type of policy guarantees to pay the death benefitas long as the specified premiums have been paid. These productstypically offer a higher guaranteed death benefit in relation topremiums paid compared with a traditional UL policy, so they arevery attractive to clients who are using the policy for wealthtransfer.

Take advantage of this flexibility to provide peace of mind toyour clients, with the knowledge that the clients are protectingtheir loved ones with a death benefit and providing benefits tothemselves with the policy values. 

Hugh Smart is the director of advanced markets for Columbus LifeInsurance. He can be reached at [email protected]or (513) 361-6715.