Types of Universal Life Insurance

  • Single Premium – A single premium Universal Life Insurance policy provides all of the advantages of regular Universal Life Insurance with just a single lump-sum amount paid at policy inception, creating an immediate guaranteed death benefit amount without having to make any future payments. The death benefit depends on the amount of the single premium payment at policy inception, along with the age, gender, and health condition of the insured, with younger, healthier individuals having a smaller initial single premium payment and a larger death benefit.

    Advantages of a single premium Universal Life Insurance policy include all the benefits of a typical Universal Life Insurance policy, such as being an asset, providing a cash account that can grow in value past the minimum death benefit, investment options that can more quickly grow the death benefit, and tax advantages that other financial products cannot provide. The single premium option assists individuals in growing returns quickly because the plan is fully funded and assures a guaranteed benefit in the future for a single lump-sum payment at present. In addition, such single premium insurance can ensure that dependents will be cared for properly and protect the estate of the deceased from liabilities placed against it, such as medical bills and long-term care costs. For example, a 50-year-old, non-tobacco using, healthy female who deposits her $25,000 bonus check into a single premium Universal Life Insurance policy could provide a $100,000 or more tax-free benefit to her dependents upon her death. This option is attractive to those individuals with available cash and the desire to find a low-risk way to protect and guarantee a healthy inheritance for their dependents. Because the policy is permanent insurance, it is an asset with value that can continue to grow, and when fully funded, can serve as an income source if desired, or be surrendered and sold for cash, depending on the specific terms of the issuing company. The insured also has the option of taking a low-interest loan against the cash value if needed, and many policies provide a guaranteed minimum cash value that equals the single premium so as to ensure the initial investment is protected.

    Disadvantages of this option include needing the large initial deposit rather than paying installments and the necessity of meeting the minimum initial investment requirement of the carrier. Single premium plans can also be rigid, with the potential for tax penalties, owed income taxes, and policy surrender charges for early withdrawal based on applicable tax rules.

  • Fixed Premium – A fixed premium Universal Life Insurance policy is paid for by periodic premium payments of equal amounts, with payments made at defined time frames, such as monthly, semi-annually, or annually. Typically there is a limit in the number of equal premium installment payments (for example, the number of payments due over a period of 120 or 180 months) until the policy is fully funded. Most of the time, the required premium installment payments will be paid for in full prior to the end of the policy period. Policyholders have the option of cashing out at the end of the premium installment payment period prior to the death of the policyholder, with the payout being based on a predicted death benefit. If at the end of the required fixed premium payment period the policy investment does not meet the predicted death benefit, the withdrawal provisions generally include allowing the policyholder to leave the policy as is, increase the contribution by making higher premium payments so as to meet the desired death benefit within a certain period of time, or accept the lower death benefit payout.

    Advantages of the fixed premium Universal Insurance policy include allowing the policyholder to make more affordable installment payments for a defined period of time with a specified benefit payable upon the death of the individual, the ability to cash out or liquidate the plan once all of the premium payments have been made for an amount equal to or less than the specified benefit if the policy investments perform as predicted, or alter the plan to assure it meets the needs of the policyholder once the premium payments have been collected fully. These benefits are in addition to the tax advantages, investment options, and growth opportunities offered by a typical Universal Life Insurance policy.

    Disadvantages of the fixed payment Universal Life Insurance policy can include needing to meet the periodic obligation of making premium payments for an extended period of time; more work on the part of the policyholder to watch for underperforming market conditions that could negatively impact the cash account and require additional premium to be paid at the end of the premium installment period, in order to obtain the desired payout; the possibility of a lower death benefit; and potential tax penalties, owed income taxes, and policy surrender charges for early withdrawal based on applicable tax rules.

  • Flexible Premium – The flexible premium Universal Life Insurance policy is often described as a hybrid of the single premium and fixed premium options. This is because, like the single premium plan, it typically includes a larger initial payment to get started, but then affords the flexibility to the policyholder to make periodic installment payments, similar to the fixed premium plan. Unlike the fixed premium plan, however, flexible premium Universal Life Insurance allows the insured to make installments in amounts he or she desires, and it offers flexibility regarding payment due dates within the guidelines allowed by the policy. This enables the plan to adjust to differing premium amounts and payment date changes. In the flexible premium option, the higher the premium installments paid into the plan, the greater the anticipated death benefit.

    The advantages of the flexible premium Universal Life Insurance policy are similar to those of the fixed premium plan: it allows the policyholder to make installment premium payments, without having to make a large cash outlay as compared to the single premium plan, and still receive a level death benefit.

    Policyholders can also change their installment amounts or due dates based on their current personal situation so as to receive an increasing or decreasing death benefit. The flexible benefit plan also allows the policyholder to choose one of two available death benefit options, a level benefit equal to the policy’s original face value or an increasing benefit equal to the original face value of the policy plus any existing policy account value. These are in addition to the tax advantages, investment options, and growth opportunities offered by a typical Universal Life Insurance policy. Disadvantages of the flexible premium Universal Life policy include less certainty of the final death benefit amount with fewer guarantees. Allowing for varying payment due dates and amounts could also result in policy funding problems, less liquidity and investment flexibility, and potential tax penalties, owed income taxes, and policy surrender charges for early withdrawal based on applicable tax rules. Further, making changes in the plan such as obtaining more guaranteed features can result in higher fees, making the plan less attractive.

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