Why Are The Guarantees On Universal Life Insurance So Low?

People frequently observe that universal life insurance appears to offer significantly smaller guarantees when comparing it to other life insurance products, such as whole life insurance, and especially when considering its ability to accumulate cash value. Indeed, the following passage from a proposal for indexed universal life insurance emphasises its low guarantee:

This 45-year-old male policy is an indexed universal life insurance policy. The death benefit is $815,241 for this one. This policy was designed using the planned premium amount to compute a necessary death benefit, which is why the death benefit is such an unusual number rather than a nice round sum like $850,000 (for example) (I’ll go into more detail on that later). This policy has an annual premium of $50,000, which may seem like a lot if you’ve always considered life insurance to be a cost, but in this instance, there’s more we’re aiming for.

This policy design conforms with the Guideline Premium Test and employs a minimum Non-Modified Endowment Contract death benefit, therefore the $50,000 premium is the most that may be paid without materially negatively impacting the policy’s tax position.

However, as stated in the quoted paragraph (which was taken straight from the company-issued proposal), the would-be insurance owner would have to pay a whooping $150,535.39. if he wanted to ensure that his initial $815,241 death benefit would continue to be payable until his 121st birthday. This sounds really bad.

The Goals of Various Life Insurance Policies Vary

There are numerous options for life insurance coverage. And although this may surprise you, a variety of goals are addressed by various policies along with this abundance of possibilities.

It is understandable that many people believe life insurance is the same everywhere: you pay a premium and it provides a death benefit when you pass away. However, this is not the case. Certain insurance aim to provide an affordable death benefit. Some strategies aim to provide a substantial cash value accumulation. These two goals are typically at different ends of a benefits range.

There are plans that will guarantee a $815,241 death benefit to an individual in this position until the age of 121 for significantly less than $50,000 annually—let alone the $150,535.39.

However, this product is undoubtedly the best on the market right now if he wants to develop wealth that enjoys several tax benefits and obtain the highest rate of return on a $50,000 yearly payment into a life insurance policy.

Guarantees for Life Insurance Are Expensive

Financial resources are used to ensure life insurance. Both the insurance provider and the policyholder may attest to this. In order to demonstrate that it can fulfil the promise, the insurance company must assume the risk attached to the death guarantee and have sufficient reserves, or cash on hand with relatively few investment possibilities. The policy owner often realises this cost in the form of a lower policy cash value accumulation.

Because it also has a very high potential to earn non-guaranteed financial value, the product in question in our example above has such a low guarantee about the death benefit. To make it possible to create such higher cash-accumulating features, the insurance firm removed the product’s high death benefit guarantees.

Other universal life insurance options are available from the same provider. Their guarantees are higher. For the same premium, they will very likely accrue far less cash value than our 45-year-old male insured.