No Load Life Insurance

Universal life is a type of whole life or permanent insurance. The policy centres on a cash account which can vary over time along with the amount and frequency of premiums and the face value.

How does it work?

• Intended to last for life regardless of age or health as long as the cost of insurance is paid.
• The policy includes a cash account.
• You can increase your premiums to increase the cash value of the policy. Anything paid above the cost of insurance (COI) is credited to the cash value.
• The premiums are invested into a single investment vehicle. The insurer credits interest to the cash account each month. The interest rate is usually attached to a financial index.
• If the owner doesn’t pay the premium for a certain month, the insurer will debit (reduce) the cash account with the COI and any other policy fees and charges.
• You may borrow against the cash value of the policy. Interest is charged on these loans since the insurer can no longer invest those funds. If you don’t pay the interest, the insurer will deduct this amount from the cash value. The principal does not need to be repaid. It simply reduces the policy amount and if left unpaid, the death benefit.
• Many universal life policies give you the ability to withdraw cash values as opposed to taking out a loan. These withdrawals permanently reduce the death benefit and bring additional fees and charges such as deferred sales charges. The withdrawals are usually tax free, unless the policy effectively becomes a MEC.
• There are several types of Universal Life Insurance: single premium, fixed premium, flexible premium, interest sensitive (traditional fixed), variable and equity indexed.
• If you surrender the policy, you will receive the balance cash value amount less any surrender charges.

Death Benefit Options

Insurers generally allow two options when setting up the death benefit:

1. One way is to set a schedule so the face value (death benefit) equals the cash value at maturity (typically age 95 or 100). As the cash amount increases and gets closer to the face value, premiums decrease until the two amounts are equal.
2. Alternatively, you can have the sum of both the face value and the cash value paid out at maturity. The death benefit therefore increases each year and so do premiums.

Benefits of Universal Life

• Premium flexibility: enabling you to increase or decrease your premium payments any time within the minimum and maximum limits set by the policy. If the cash value sufficiently covers costs, no premium payments are needed.
• Flexible face value: the policy owner can increase or decrease the death benefit. Any increase is however subject to insurability.
• Borrowing: loans from the policy are not repayable, since it is essentially your money, and are not linked to any credit reporting rules.
• Internal rate of return is potentially higher: the interest credited to your cash account is based on prevailing interest rates or equity indexes. However, rates are not guaranteed.
• Transparency: clearly defined mortality costs and administrative charges.

Criticism of Universal Life

• Loans and withdrawals from the cash value derail the investment plan. By borrowing or withdrawing moneys, not only will you miss out on any interest gains and other benefits, you will have to pay interest on the amount you’ve loaned. Loans result in higher premiums and interest payments and reduce the death benefit and the life of the policy.
• Unlike whole life, this policy will lapse if there is not enough cash value to cover the COI (cost of insurance) and administrative fees and charges. However, this can be overcome with a rider, called a “no lapse guarantee”. The rider provides a guarantee period whereby the policy will remain in force if there is no cash value as long as the owner continues to pay the minimum premiums. These amended policies are referred to as “Guaranteed Universal Life” or GUL.
• Higher premiums are needed if cash accumulation falls as a result of declining interest rates.
• Changing the death benefit or premiums will affect the intended course of the policy, usually requiring increased premiums later.
• If you purchase a universal life policy with the intention of building up to your preferred death benefit, then you will be underinsured in the event of a premature death.