Permanent life insurance, especially universal life insurance, is more complicated than term life insurance, largely because of the cash value component in the policy. It is unfortunate that most people often associate permanent life insurance with whole life insurance. Whole life insurance is an old, inflexible, and unnecessarily expensive product and it is often unsuitable in most cases. The bad reputation of whole life insurance often spills over for all permanent insurance products.
In fact, universal life insurance products such as guaranteed, indexed, or variable universal life insurance, can be great options in many cases. We provide the following cases to illustrate the usefulness and effectiveness of universal life insurance policies.
- Guaranteed Universal Policy to Provide Guaranteed and Permanent Death Benefit at a Reasonable Price
- Using Indexed Universal Life Insurance Policy to Supplement Retirement Income
- Replacing Whole Life Insurance Policy with Indexed Universal Policy to Supplement Retirement Income
- Replacing Whole Life Insurance Policy with A Variable Universal Policy to Stop Paying Premium and Have More Death Benefit
Guaranteed Universal Policy to Provide Guaranteed and Permanent Death Benefit at a Reasonable Price
Chris, 36 years old, an engineer, in good health, lives in Dallas, TX with his wife, Hanah, 31 years old, a teacher, and their two kids, David and Tess, aged 6 or 4. Chris makes $120K a year. He wants to have a permanent life insurance policy of $500K to provide permanent protection for his family when he passes away. He wants to pay premiums for 25 years only, until he reaches 60 years old.
– If he passes away early, the policy’s payout needs to be able to pay off their mortgage ($300K) and their children’s college tuition ($100K each).
– If he passes away after the mortgage has been paid off, the policy’s payout will be for Hanah’s retirement expenses and helping with their children’s first homes.
Like everyone else, he is concerned that a whole life policy is just so expensive that he can’t afford it, which is true:
- Penn Mutual whole life policy, the cheapest whole life policy that we could find, offering guaranteed death benefit of $500K, costs $7,470 a year in premiums or $622.5 a month. (pay premiums for 25 years only)
After shopping with 30+ carriers with their 90+ permanent life products, we were able to find a policy that meets Chris’ needs and is at a price that he can afford. Prudential’s PruLife Universal Protector, a guaranteed universal life insurance policy, offers guaranteed and permanent death benefit of $500K and it costs $3,371 a year in premiums, or $281 a month. (pay premiums for 25 years only)
The premiums are just $3,371 a year, which is 55% cheaper than the cheapest whole life policy for similar coverage.
Using Indexed Universal Life Insurance Policy to Supplement Retirement Income
Emma, 40 years old, a product marketing manager living in San Francisco, has an income of $165K a year and good health. She wants to invest in a permanent life insurance policy with the purpose to withdraw cash from it to supplement her retirement income when she reaches 65 years old.
She plans to pay $500 a month in premium until she reaches 60 years old (20 years in total) and wants to withdraw the maximum cash distribution from the policy when she is 66 to 90 years old (25 years). She also wants to have access to cash income if she becomes terminally or chronically ill or requires long term care.
After shopping with 30+ carriers and their 90+ permanent products, we find and recommend Life Pro+ Advantage policy, an indexed universal life insurance product from Allianz.
Based on Allianz Life Pro+ Advantage policy’s illustration, she can withdraw up to $32,605 a year, income tax free, from 66 to 90 years old (25 years). In total, she will be able to withdraw $815,125 in 25 years to supplement her retirement income.
In addition, if she passes away when she is 91 years old, her beneficiary can receive up to $75,500 death benefit as well. This is also based on the illustration of the policy.
Replacing Whole Life Insurance Policy with Indexed Universal Policy to Supplement Retirement Income
Moon, 37 years old, female, a nail salon manicurist, has an income of $40-50K a year and excellent health.
– She wants to invest in a permanent life insurance policy from which she can withdraw money to supplement her retirement income when she retires at 60. She has owned a whole life policy for 4 years.
– Her whole life policy is by MassMutual. It offers $200K guaranteed coverage and she pays $220 a month for 27 years. Currently, there is only $3,500 in the cash value account of the policy. This is a wrong policy for supplemental retirement income purposes. If she withdraws money from the cash value account of the policy when she retires, the maximum amount that she can withdraw is $5,300 a year for 30 years, from 61 to 90 years old.
– After shopping with 30+ carriers and their 90+ permanent products, we advised her to switch to an Indexed Universal Life Insurance policy of Allianz Life (Life Pro+ Advantage product). She will still pays $220 a month. However, she only pays premiums for 23 years.
– She will be able to withdraw up to $13,500 a year, income-tax free, for 30 years, from 61 to 90 years old, based on the illustration of the policy. Total, she will be able to withdraw $405,000 to supplement her retirement income for 30 years.
-If she passes away at 91 years old, her beneficiary can still receive $37K death benefit, tax free.
Replacing Whole Life Insurance Policy with A Variable Universal Policy to Stop Paying Premium and Have More Death Benefit
Bob is 73 years old, retired and living in Florida. He has had a whole life insurance policy for 40 years with a face value of $250,000. He pays $2,200 a year in premiums. If he wants to keep the policy, he has to pay premiums until he passes away or reaches 100 years old. At age 73, the cash value account in his policy is $172,000.
Now he is retired and on a fixed income, he realizes that he might not be able to keep up with premiums payment. He wants to explore what options he has if he doesn’t want to pay premiums anymore. Ideally, he wants to replace this with another policy that provides similar guaranteed and permanent coverage and doesn’t require him to pay premiums anymore.
After shopping with 30+ carriers and comparing quotes of their 90+ permanent products, we have a much better product for him. We recommended Lincoln VULOne product from Lincoln Financial, a variable universal life insurance product, which will provide him with $309,000 guaranteed death benefit up to 100 years old, regardless how the cash value account performs. And he doesn’t need to pay premiums anymore.
Since this is a variable universal life insurance product, he will also have access to the cash value account. Based on the illustration of the policy, the cash value account is worth $199K when he is at 80 years old; $249K at 85 years old; $325K at 90 years old; and $552K at 100 years old. However, if he withdraws from or loans against the cash value account to supplement his retirement income or for an emergency, the death benefit will be reduced accordingly.
With the four cases above, it is obvious that different universal life insurance policies are great options providing guaranteed and permanent death benefits at reasonable prices and/or supplementing retirement income. Universal life insurance policies are great at providing supplemental retirement income thanks to the free income tax advantage when withdrawing money from the cash value account of the policy.