You may like the idea of the low premiums on a Term Life Policy but don’t like the fact that it’s good for only a set period of time. On the other hand, you may like the permanent nature of a Whole Life Plan and the fact that it accumulates cash value but dislike the higher premiums. What can you do? Are there any alternatives? Yes. The option is UNIVERSAL LIFE. You may have heard much discussion of this relatively new policy. However it is shrouded in many misconceptions. Let’s take a look at Universal Life in hopes of clarifying this option. This is an important concept in that it offers a viable option for your Business Succession Plan.
In the late 1970’s interests rates started to rise rapidly. Actually when I started my business, interest rates were 12% – 14%. This presented a dilemma for Life Insurance. People started moving out of Life Insurance policies because of the comparatively low interest rates on Whole Life. Universal Life was born from this situation. Essentially what came was the best of Term Insurance and Whole Life Insurance. Companies said we will give you lower premiums than the Whole Life, help you accumulate cash at interest rates comparable to Money market and CD accounts and make it a permanent investment. The rates will be higher than the Term. However, the larger portion of this increase in premiums will be accredited to your cash value account.
Today while interest rates on Money market accounts run at a very low 1%, the average return on Universal Life policies run 4.5%. However, this is BEFORE the cost of insurance is withdrawn. So the first concept to keep in mind is that this is a long term-investment. Specifically, it takes several years before your cash value accumulates so that you get a good portion of the current interest rate.
In addition, the Universal Life plan offers FLEXIBILITY. After several years and the cash value has accumulated, the policy owner can decrease or even skip premiums. Furthermore, you can add lump sums of money to these policies. They are subject to limitations set forth by the IRS (7 Pay Test). This flexibility is non-existent in Term and for the most part not available with a Whole Life option.
There are many added benefits one can add to Universal Life. There are also several forms of Universal Life that one can apply for. We will be discussing the most important options in the next several articles.