Is universal life insurance right for you?
January 5th, 2012
Gina Roberts-Grey
Term life insurance is affordable, but it expires after a certain time. Whole life insurance often is more expensive because it never expires. Looking for something in between? Universal life insurance might be for you.
First introduced in 1979 by E.F. Hutton Life Insurance Co., universal life insurance is one of the most flexible life insurance options.
“It’s a sound option to consider if you want the option of variable premiums or to adjust your coverage as your needs change,” says Edward Graves, associate professor of insurance at The American College in Bryn Mawr, Pa.
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| Many people prefer to buy a universal life insurance policy with a large death benefit when their kids are young. |
Here’s what you need to know to decide whether universal is the best coverage for you.
Sizing up your options
The first step in deciding on a type of life insurance is understanding your options. There are three basic types of life insurance policies:
• Term life. The least expensive life insurance option, term life is the most basic and inflexible. Coverage begins the year you apply and ends at a set time, usually 20 or 30 years down the road. You pay set annual premiums and don’t receive dividends.
• Whole life. These policies last the rest of your life, rather than for a predetermined number of years. They have a set premium that you must pay on time, and a guaranteed cash value because a portion of your premiums goes into a savings account. That savings account grows, as your insurer also pays dividends.
The most expensive of life insurance options, whole life policies typically cost about eight times more than term policies, largely because of the dividends that policyholders receive based on the insurer’s earnings, says Alan N. Canton, owner of A.N. Canton Insurance Services in Fair Oaks, Calif.
• Universal life. With universal life (a variation of whole life insurance), you have the option of varying the premium amount (or even skipping premium payments), changing the coverage amount and adjusting the number of years you pay. Canton says this coverage costs about four times as much as term life insurance.
The pros of universal coverage
Unlike term and whole life policy premiums, which are set by the insurance company, you set your premium if you have a universal life insurance policy.
Every time you pay your premium, the insurance company deducts a fee to cover the company’s expenses. The remainder of your premium is added to the policy’s cash account and is invested on your behalf by the insurer. That cash account grows over time, and the cash value can increase.
“The first year’s premium is the only fixed premium,” Graves says. “After the first year, the policy owner can choose the premium amount, as long as it is enough to keep the policy in effect.”
All that’s required to keep the policy in effect is enough cash value to cover two months’ worth of charges for the insurance company to manage the policy. “If the cash value drops below that required minimum, the policy may terminate,” Graves says.
If your policy has a cash surplus, on the other hand, you’ll earn interest — generally at a money-market rate, according to the Insurance Information Institute.
The flexibility of universal life means that the policy can be funded minimally and work much like a term life insurance policy, Graves says. If you opt to pay more in premiums, it will develop cash value like a whole life policy.
With universal life, “if there is enough money in your fund, you can skip a premium or a year of premiums and make them up later,” Canton says. “You can’t do that with whole life or term life.”
Another benefit of universal life is that you can lower the amount of the policy (the amount it pays when you die) to reduce your premiums or trim the number of years you pay into it. For instance, Canton says, many people prefer to buy a policy with a large death benefit while their kids are young. Once their kids are grown and not as much financial protection is needed, the benefit amount — and the premium — can be decreased.
Shawn Hilario, a senior product consultant for life insurance at The Hartford, says it’s possible to add a chronic care rider to a term life policy. Should the insured become chronically ill, he or she will be able to get the death benefit early. Hilario says this rider costs an average of 10 percent of the policy’s death benefit. There’s no limit on how the money is used, and it’s tax-free.
“You can pay a family member or friend to care for you at your home, remodel your home to accommodate your health needs or pay bills,” Hilario says. “The money is yours to use as you see fit.”
The cons of universal coverage
Receiving interest from a universal life insurance policy and maintaining a comfortable cash cushion are not guaranteed.
“The policy’s value can go up or down depending on how the life insurance company invests your money,” Canton says.
Also, the amount required to keep the policy in effect can fluctuate. If the life insurance company takes a financial hit — as many have amid the rocky economy — you may be forced to fork over more money each year to keep the policy going.
Linda Melone
If you have a health issue associated with reduced life expectancy, you may have trouble finding a company willing to sell life insurance to you.
Don’t give up, says Jack Dewald, past chairman of the nonprofit Life and Health Insurance Foundation for Education (LIFE).
“Not all serious conditions automatically render you unable to get life insurance,” he says. “You just may have to pay more.”
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| Smoking is a bad habit that could cause you to pay a lot more for life insurance. |
Most insurance companies will charge a “table rate” in addition to a base rate, says Lisa Oleski, manager of life underwriting at CPS Insurance Services, in Irvine, Calif. This table rate is based on your control of the condition, your treatment of the condition, your date of diagnosis, and results of basic health tests (like blood and urine tests) that your insurer requires once you apply for coverage.
It’s impossible to attach an exact price tag to certain health conditions, as insurers take a variety of factors into account, including your gender and age. There are, however, some conditions and habits that are guaranteed to up your rate. Here are four of them:
1. Smoking.
While smoking isn’t an actual medical condition, smoking raises life insurance premiums across the board, regardless of your health status. If you have a health issue and also are a smoker, you’ll have to pay a surcharge in addition to a higher base rate, Dewald says.
Exactly how much more in premiums a smoking policyholder will pay differs from one company to the next and depends on the type of coverage the policyholder obtains. For example, the base annual rate for a 40-year-old man buying a 10-year term policy may be $ 200 for a $ 100,000 policy if he’s in relatively good health. If he smokes, however, the base rate may be $ 450 instead of $ 200, and any other health concerns would result in a surcharge.
2. Cancer.
If you have cancer, there are a few factors that will determine how much your premiums will be and whether you’ll even qualify for life insurance. These include the type of cancer, where it’s located and when it was detected, Dewald says.
According to Dewald, you’ll be unable to get coverage if you have an internal cancer (as opposed to an external cancer, such as skin cancer) or an aggressive cancer (like pancreatic cancer) for the first two years after the diagnosis or during active therapy.
“On the other hand,” Dewald says, “most skin cancers won’t affect your rates, unless it’s advanced melanoma.”
If you’re stabilized, haven’t had a relapse after two to five years and continue to have documented checkups, you should be able to get life insurance, although you’ll still pay a higher premium than you would otherwise.
Most importantly, insurance companies look at whether you’re following your doctor’s advice on lifestyle changes, Dewald says.
“If you had part of your lung removed and you’re still smoking, you won’t get insurance,” he says.
3. Diabetes.
Type 1 diabetes is normally more difficult to insure than Type 2 diabetes, especially if you developed the disease at a young age, according to Oleski. “Those individuals are more prone to complications down the road,” she says.
This varies, however, and each carrier has a different way of calculating table rates and surcharges. For example, a Type 1 diabetic who has excellent control of his or her disease and is in otherwise good health might pay about 125 percent to 150 percent extra on top of the standard rate.
4. Heart disease.
Several factors will determine whether someone with heart disease gets life insurance, Oleski says. For instance, insurance companies will look more favorably upon someone who’s had a heart attack, compared with someone who’s had surgery to implant a stent (a tube used in preventing heart blockages) or had heart bypass surgery. The person’s age and whether he or she has had multiple surgeries also will be weighed.
“If you’re at a healthy weight, you don’t smoke and you’ve been cleared by a stress test, you should be able to get insurance six to nine months post-surgery,” Dewald says.
Uninsurable at any cost
Certain health conditions mean you’ll automatically be declined for life insurance, Oleski says. These include:
• Current or recent treatment for alcoholism or drug addiction.
• Current cancer treatment.
• Kidney failure.
• Severe emphysema.
• Alzheimer’s disease or dementia.
• Severe mental disorders.
• Lou Gehrig’s disease.
• Cirrhosis of the liver.
• The need for continual use of oxygen.
• Heart disease before age 35.
Shop around for the best rates
If you have a serious health condition, shop around. Not every company disqualifies people for every health condition, Dewald says. Some companies offer more favorable terms to those with heart problems, while others may be more flexible with diabetic patients. An independent agent or broker who does business with several companies is best suited to recommend a life insurance company.
Dewald says that if you’re uninsurable, you may be able to acquire life insurance through your husband or wife if you’re married. This is common in estate planning.
The best thing to do to avoid health-related trip-ups with life insurance? Buy a life insurance policy when you’re healthy, says Jack Dolan, a spokesman for the American Council of Life Insurers, a trade group.
“No one will give you homeowner’s coverage when your house is on fire,” Dolan says. “You get the coverage when your house is in good shape. Apply the same thinking for life insurance.”
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