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While the demand to understand about a wide range of insurance products may not be there, we think its still worthwhile to try and cobble together something regarding the most popular life planning tool that the rich are using. (Universal Life Insurance, in case you are still wondering)
Universal Life: What the hell is it?
Basically the benefits of a Term Insurance, married with the benefits of a Whole Life Insurance, and extra features thrown in. Hence the name Universal Life. I just think: “The Universal Soldier of Insurance” – and the imagery of a kick-ass insurance plan is complete.
Its a plan where buyers can opt to increase or decrease their sum assured as required, get monthly reports about how their cash value is increasing or decreasing, and details about their mortality charges are always made known to them. Oh, did we mention? Its coverage is for life!
Thank a disgruntled insurance agent for this one. Arthur Williams Junior was an ex agent who turned into a billionaire, and had a lifelong dislike of Whole Life Insurance. Specifically, the lack of flexibility and lack of transparency. (We are not talking about the Government here, just insurance).
Williams Junior hated the fact that people were not about to change the death benefit amount for Whole Life plans according to their needs in life, and was also not too happy about the all the policy related costs not being revealed or made transparent to the owner.
So you put together an unhappy man with money and knowledge, you get Universal Life Insurance. (Interesting to note he made his fortune selling low cost insurance)
How it works
Buyers typically choose to pay for this in one lump sum (Single Premium) or elect to split up the payments over (and up to ) ten years.
Right from Day 1, there is an associated cash value with the plan that grows (or shrinks) according to the performance of the insurance company. Most Whole Life or Endowment plans only get cash value from end of year 2.
Lets sit in the shoes of Mr Tan, a buyer of Universal Life Insurance to get a better picture.
Mr Tan has a cool 1 million USD to spare, and elects to buy Universal Life Insurance for up to 4 million dollars of coverage. (Death, Total Permanent Disability and Terminal Illness)
On Day 1, his cash value in the policy is 700k USD (about 70% cash value right from Day 1 is the norm) and from here on the insurer does 2 things each month.
- A: Increase the cash value by a minimum percentage (usually 2%), credited monthly. This percentage could increase, but can never fall below the minimum specified amount.
- B: Decrease the cash value by deducting policy fees, Cost of Insurance, and other administrative charges, debited monthly.
You can see here that cash value can increase when the amount credited is more than the amount debited, and vice versa.
And this goes on and on until:
- The Cash Value decreases to 0, so Mr Tan has to top up the policy to keep it active
- Mr Tan dies, so his estate gets the sum assured
- Mr Tan surrenders the policy to claim the cash value in the plan
Cool Stuff about Universal Life
Flexibility is the key here. At any point in time, Mr Tan can opt to increase or decrease his coverage requirements (subject to insurer approval of course), which is quite unlike the other traditional plans.
Due to the large amounts associated with Universal Life, there are financing options that Mr Tan can take. IE the insurer lends you money to buy the plan.
Some Universal Life Plans even come with Guaranteed No Lapse Options, which means that even if the cash value is 0, the plan is still active and does not require the owner to top up more money at all.
Is Universal Life only for the Rich?
Yes and No. Most plans start at 250k USD, so it cannot be described as a mass market product. The rich tend to favor it due to its flexibility and transparency, plus they have untold millions to burn anyway.
Can the average man on the street benefit from this? Yes – because there are financing options available, so the actual outlay on a UL could be significantly less than expected.
One Final Surprise
If you were to compare a Term plan and Universal Life for the same coverage amount, and approximately the same tenure, then for most times the Universal Life is actually cheaper.
Yup, it costs less (on the whole)
There is where we end the quick and dirty guide. We hope that you have had enough of a teaser about Universal Life Insurance to find out more about it, or least aspire to be one of the those millionaires that buy UL. Till next time, stay safe and stay protected!
www.ClearlySurely.com aims to eradicate the knowledge gap between consumers and Life Insurance. Our Vision is that one day, every Man, Woman, and Child will be properly insured.