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What You Need To Know About Non-Guaranteed and Guaranteed Universal Life
This is a topic I have been explaining a lot lately. In fact, it is usually from a life agent not doing their job correctly. For instance, they are selling a permanent policy without explaining the risks down the road. Nothing is worse than a senior having a million dollar policy thinking everything is taken care then they find out rates go up!
All in all, when shopping for a policy such as a universal life you may come across the terms “non-guaranteed” and “guaranteed”. Consequently, this is when it can become confusing for a client. In fact, this is what separates the real agents from the fly by night agent that wont be around when the doo doo hits the fan.
It is important to realize the difference when speaking to a client. Furthermore, Non-Guaranteed and Guaranteed are nothing alike. In reality, they are very different and can be financially painful down the road if you do not know the difference.
For this reason, we will breakdown the difference in the rest of this article. Therefore, you will better understand why we are very big believers in the Guaranteed Universal Life (GUL).
For Fast Navigation
- What Is Non-Guaranteed Universal Life
- WHAT DOES CASH ACCUMULATION MEAN
- WHAT IS GUARANTEED UNIVERSAL LIFE (GUL)
- WHAT ARE THE BENEFITS OF GUARANTEED UNIVERSAL LIFE
- Comparing Non-Guaranteed vs Guaranteed UL
- Comparing Rates of GUL Vs Term Vs Whole Life
- Is Applying For a GUL policy Different than other life insurance
What Is Non-Guaranteed Universal Life
To clarify, Non-Guaranteed universal life is in the family of the permanent types of life insurance. In other words, it covers you for life. In theory that is true, but will you be able to pay for it?
First thing to remember, a non-Guaranteed policy carries a death benefit life any permanent life insurance policy but with a investment component that your premiums will be invested in. For one thing, these policies would be a fantastic product in a high interest rate environment.
However, in this day and age with the rates being off its historic lows, the client is usually unaware of the risks involved. Because of the rates being low the policy winds up being underfunded while the cost of insuring you increases. Unfortunately, the typical agent will be trying to sell a high commission product while leaving out the possible risks involved.
In fact, I have seen this happen way to often without the client understanding the risks involved. Consequently, down the road when they need the coverage the most, your premium payment usually increases in some cases over 100%. As a result, you are on a fixed income and unable to pay the premiums. Surprisingly, I receive calls like this all the time. Usually from a client that is over 75 that just wants to leave their spouse a little bit extra.
With this in mind, we are not a big fan of this kind of product especially if you are counting on it for final expenses.
WHAT DOES CASH ACCUMULATION MEAN
The biggest misconception is confusing cash value with the meaning of cash accumulation. When it comes to a non-guaranteed universal life policy, cash value is not a death benefit! The insurance company will keep that money if you do not withdraw it before you die. The cash value can be used for a no lapse guarantee or to borrow from the policy.
However, if you pass away, they will take the money borrowed off the face amount to repay the loan. So in essence, you are getting charged for borrowing via a surrender charge on money that was never yours in the first place as the life insurance company will keep that money.
WHAT IS GUARANTEED UNIVERSAL LIFE (GUL)
If a term life insurance and a whole life policy had a baby, it would be a Guaranteed Universal Life GUL. With this type of policy the life insurance coverage is guaranteed and the insured bears no risk.
Furthermore, its not like a whole life as it does not build a guaranteed cash value. In fact, it is much like a term. For instance, instead of looking at a 10,20, 30 year term, you can pick it to age 90, 95, 100, 105, 110 and 121. The premiums are level and the death benefit guaranteed to the age.
Unlike other permanent insurance products, there is no rate of return. This is the biggest difference from a non-guaranteed UL because you are without the cash value that results in expensive management fees.
Overall, the guaranteed Universal Life is more affordable than whole life and is one of the most favorable policy when considering pension and estate planning.
WHAT ARE THE BENEFITS OF GUARANTEED UNIVERSAL LIFE
Above all, Guaranteed Universal Life is a great alternative to over priced whole life. Especially, if the consumer is looking for that guarantee over the cash value part of the policy. In fact, GUL’s are about 1/3-1/2 the cost of whole life.
With that said, lets get into the most important reasons why I recommend it to clients.
- Your Premiums WILL NOT CHANGE! – In regards to Non-Guaranteed policies, the consumers’ premiums will more times than not increase every few years. In fact, if you are older on a fixed income this will be a major issue. I receive calls like this all the time. Believe me, you do not want to shop for life insurance in your 70’s. A Guaranteed policy your premium is fixed. For instance, it’s like a term policy that you can pick an age instead of a period of time to protect. You can guarantee premium to age 90,95,100 or to 121.
- Coverage Is Locked and Not Linked To An Investment! – I can not stress this enough to consumers. The Non-Guaranteed policy has to have the investments outperform consistently or the premiums will go up. Bottom line, no investments go up in a straight line. If the interest rate goes down and the market is under-performing, the insured has to make up the difference. This usually happens either in a rate increase or a decrease in coverage, or both. In this low-interest rate environment, Non-Guaranteed policies put you at risk unless of course you are over-funding and the policy pays for itself. Again, Guaranteed policies you don’t have to worry about because the insurer TAKES ALL THE RISK!
- Most People Don’t Over-fund a Life Insurance Policy! – Buying a Non-Guaranteed policy usually means you need to pay more money into it to manufacture cash value. Overall that cash value will build to offset any investments going bad or under-performing. With that said, if you pass away, the beneficiaries will get the death benefit. However, all that cash value the insurer keeps. What I always suggest, is if you are looking to invest, buy GUL and invest the difference. This is the great philosophy of Suzy Orman and Dave Ramsey. The end result is your family will have the death benefit and the investments when you pass.
- Paying less upfront is a GREAT THING! – A Non-Guaranteed Universal Life Insurance policy has a much higher up-front cost versus a GUL. In some cases, 3 to 4 times the cost for the coverage.
- Can Be Used For A Deferred Compensation Plan – When you own a successful business then it would not be uncommon that your accountant has told you you make to much money. A great way to have a tax write off as a business is to offer employees a deferred compensation program via an flexible universal life or GUL.
Comparing Non-Guaranteed vs Guaranteed UL
Above all, putting these two polices side by side will put aside any confusion. If you want to have a level premium with a guaranteed death benefit, then GUL is the way to go. If you want to take a more of a risk and invest premiums, then a non-guaranteed policy is best for you.
Non-Guaranteed Vs. Guaranteed Universal Life Comparison
Does Coverage Increase?
How long does coverage last?
No, Rates Stay The Same until the age you pick
a little more than a term policy, but a lot less than a Whole Life
None, premium and coverage are guaranteed
Until the age that is picked, 90,95,100,105,110, and 121
Cost and coverage is not guaranteed and cost will increase as you age
Can cost 3-5 times more than traditional UL non-guaranteed polices
Yes, Coverage and premiums are at risk due to market fluctuations
A Majority of these polices are underfunded and can see a big increase in premiums near age 80
Comparing Rates of GUL Vs Term Vs Whole Life
Here is a comparison for a 55 year old female, healthy looking for a $500,000 in coverage.
Advantage Choice UL 100
Your Term 30
$500,000 Whole Life
Advantage Plus Whole Life
Is Applying For a GUL policy Different than other life insurance
Although a great questions, NO!!
In fact, applying for Guaranteed Universal Life Insurance is the same underwriting process as a typical term. For instance, you will have to take an exam. Furthermore, depending on age and if it is a multi million dollar policy there may have to be an inspection report. But all in all, its usually processed and approved within 30 days.
If you have any questions, feel free to call me at 855-380-3300x1. I have a very simplistic way of explaining this product with a common sense approach.
Here are my top 3 GUL carriers:
- Protective Life
- American National (Living Benefits)