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There are several other types of whole life policies. While they all have the same key characteristics, they may also offer unique features based on how the policyowner pays the premium or how the premium is invested. Flexible premium policies allow the policyowner to pay more or less than the planned premium.
Adjustable life was developed in an effort to provide the policyowner with the best of both worlds (term and permanent coverage). An adjustable life policy can assume the form of either term insurance or permanent insurance. The insured typically determines how much coverage is needed and the affordable amount of premium. The insurer will then determine the appropriate type of insurance to meet the insured's needs. As the insured's needs change, the policyowner can make adjustments in the policy. Typically, the policyowner has the following options:
The policyowner also has the option of converting from term to whole life or vice versa. However, increases in the death benefit or changing to a lower premium type of policy will usually require proof of insurability. In the case of converting from a whole life policy to a term policy, the insurer may adjust the death benefit. The policyowner may also pay additional premiums above and beyond what is required under the permanent form in order to accumulate greater cash value or to shorten the premium-paying period.
Although adjustable life policies contain most of the common features of other whole life policies, the cash value of an adjustable life policy only develops when the premiums paid are more than the cost of the policy.
Universal life insurance is also known by the generic name of flexible premium adjustable life. That implies that the policyowner has the flexibility to increase the amount of premium paid into the policy and to later decrease it again. In fact, the policyowner may even skip paying a premium and the policy will not lapse as long as there is sufficient cash value at the time to cover the monthly deductions for cost of insurance. If the cash value is too small, the policy will expire.
Since the premium can be adjusted, the insurance companies may give the policyowner a choice to pay either of the two types of premiums:
If an insured skips a premium payment on a universal life policy, the missing premium may be deducted from the policy's cash value. The policy will NOT lapse.
As well as being a flexible premium policy, universal life is also an interest-sensitive policy. Although the insurer guarantees a contract interest rate (usually 3 to 6%), there is also potential for the policyowner to get a current interest rate, which is not guaranteed in the contract but may be higher because of current market conditions.
A universal life policy has two components: an insurance component and a cash account. The insurance component of a universal life policy is always annually renewable term insurance.
Universal life policies allow the partial withdrawal (partial surrender) of the policy cash value. However, there may be a charge for each withdrawal and there are usually limits as to how much and how often a withdrawal may be made. During the withdrawal, the interest earned on the withdrawn cash value may be subject to taxation, depending upon the plan. The death benefit will be reduced by the amount of any partial surrender. Note, however, that a partial surrender from a universal life policy is not the same as a policy loan.
Universal life offers one of two death benefit options to the policyowner. Option A is the level death benefit option, and Option B is the increasing death benefit option.
Under Option A (Level Death Benefit option), the death benefit remains level while the cash value gradually increases, thereby lowering the pure insurance with the insurer in the later years. Notice that the pure insurance is actually decreasing as time passes, lowering the expenses, and allowing for greater cash value in the older years. The reason that the illustration shows an increase in the death benefit at a later point in time is so that the policy will comply with the "statutory definition of life insurance" that was established by the IRS and applies to all life insurance contracts issued after December 31, 1984. According to this definition, there must be a specified "corridor" or gap maintained between the cash value and the death benefit in a life insurance policy. The percentages that apply to the corridor have been associated with life insurance.
Under Option B (Increasing Death Benefit option), the death benefit includes the annual increase in cash value so that the death benefit gradually increases each year by the amount that the cash value increases. At any point in time, the total death benefit will always be equal to the face amount of the policy plus the current amount of cash value. Since the pure insurance with the insurer remains level for life, the expenses of this option are much greater than those for Option A, thereby causing the cash value to be lower in the older years (all else being equal).
Indexed universal life is a universal life policy with an equity index as its investment feature. It has many of the same characteristics as the variable universal life (flexible premiums, an adjustable death benefit, the policyowner decides where the cash value will be invested) with the primary difference being the investment feature. Under a variable universal life policy, the policy's cash value is dependent upon the performance of one or more investment funds. Under the equity index universal policy, the policy's cash value is dependent upon the performance of the equity index. Cash values and death benefit are not guaranteed. Sale of the equity indexed universal life product does not require a securities license (whereas the sale of variable universal life does require a securities and life license).
Unlike universal life insurance, which accumulates interest dependent on market indexes, guaranteed universal life insurance eliminates the reliance on market risk, and provides more affordable coverage. This policy does not accumulate cash value, which allows for lower monthly premiums as compared to universal life insurance. Because there is no cash value component, the death benefit remains level throughout the life of the policy. The policy has a no-lapse guarantee, which means that as long as the policyowner pays the premium, the coverage will remain in force.
Guaranteed universal life is similar to term life insurance in that it provides coverage up to a certain period; however, instead of the policy lasting for a specific number of years, a guarantee universal life police may be set for the rest of the insured's life, or up to a specific age (usually 90, 95, or 100).
Survivorship universal life (SUL) insurance, also called second-to-die life insurance, is a permanent life insurance policy that covers two people. SULs pay benefits after both insureds have passed away. Since SULs provide coverage on two people, it's considered more affordable than two individual permanent policies. SULs are a suitable option for insureds who intend to leave the policy proceeds to the beneficiaries, to fund a buy-sell agreement on a business, or to make charitable donations.
Insureds under survivorship universal life policies may choose to raise or lower premiums as needed during the policy period.
The cash value of SUL policies grows tax deferred. Death benefits paid to beneficiaries are typically income tax free.