Universal Life Insurance - Similar Life Insurance Types

Similar Life Insurance Types

A similar type of policy that was developed from universal life insurance is the variable universal life insurance policy (VUL). VUL allows the cash value to be directed to a number of separate accounts that operate like mutual funds and can be invested in stock or bond investments with greater risk and potential growth. Additionally, there is the recent addition of index universal life contracts similar to equity-indexed annuities credit interest linked to the positive movement of an index, such as the S&P 500, Russell 2000, and the Dow Jones. Unlike VUL, the cash value of an Index UL policy generally has principal protection, less the costs of insurance and policy administrative fees. Index UL participation in the index may have a cap, margin, or other participation modifier, as well as a minimum guaranteed interest rate.

Universal life is similar in some ways to, and was developed from, whole life insurance, although the actual cost of insurance inside the UL policy is based on annually renewable term life insurance. The advantage of the universal life policy is its premium flexibility and adjustable death benefits. The death benefit can be increased (subject to insurability), or decreased at the policy owner's request.

The premiums are flexible, from a minimum amount specified in the policy, to the maximum amount allowed by the contract. The primary difference is that the universal life policy shifts some of the risk for maintaining the death benefit to the policy owner. In a whole life policy, as long as every premium payment is made, the death benefit is guaranteed to the maturity date in the policy, usually age 95, or to age 121. A UL policy will lapse when the cash values are no longer sufficient to cover the cost of insurance and policy administrative expense.

To make UL policies more attractive, insurers have added secondary guarantees, where if certain minimum premium payments are made for a given period, the policy will remain in force for the guarantee period even if the cash value drops to zero. These are commonly called "No Lapse Guarantee" riders, and the product is commonly called guaranteed universal life (GUL, not to be confused with group universal life insurance, which is also typically shortened to GUL).

The trend up until 2007–2008 was to reduce premiums on GUL to the point where there was virtually no cash surrender values at all, essentially creating a level term policy that could last to age 121. Since then, many companies have introduced either a second GUL policy that has a slightly higher premium, but in return the policy owner has cash surrender values that show a better internal rate of return on surrender than the additional premiums could earn in a risk-free investment outside of the policy.

With the requirement for all new policies to use the latest mortality table (CSO 2001) beginning January 1, 2009, many GUL policies have been repriced, and the general trend is toward slight premium increases compared to the policies from 2008.

Another major difference between universal life and whole life insurances: the administrative expenses and cost of insurance within a universal life contract are transparent to the policy owner, whereas the assumptions the insurance company uses to determine the premium for a whole life insurance policy are not transparent.