Life insurance is about providing financial protection for your family or business. In this article, we will focus on financial protection for personal needs. We will compare two types of life insurance: Term life and Guaranteed Universal Life. This is not your typical “term versus permanent insurance” article since we are comparing term to a unique permanent life insurance product.
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Generally speaking, life insurance is divided up into two main categories.
- Term Life Insurance
- Permanent Life Insurance
The problem (and point of confusion) is that most people think permanent life insurance is synonymous with cash-value life insurance. That’s really not the case.
Under the umbrella of permanent life insurance, there are two main types of insurance:
- Whole Life
- Universal Life
To break things down further, there are several types of Universal Life insurance:
- Traditional Universal Life
- Indexed Universal Life
- Variable Universal Life
- Guaranteed Universal Life
The reason why Guaranteed Universal Life (GUL) is a different color is because it is quite different than the other types of universal life insurance. The main point of distinction is the cash-value component. All types of permanent insurance, with the exception of GUL, are designed to build cash value. In other words, most permanent life policies are part life insurance and part investment vehicle. This is not the case with GUL. We give a thorough review of Guaranteed Universal Life and compare it to other types of universal life insurance in an article here.
Again, Guaranteed Universal Life is not designed to build cash value. GUL is commonly referred to as Term for Life or Term to 100. It has a simple plan design with a fully guaranteed level premium and death benefit.
After doing some research, you may have decided you do not want to mix your life insurance with your investments. If that’s the case, then your decision to purchase life insurance is much simpler. You have two options now:
- Level Term Insurance with term durations from 5 to 35 years.
- Guaranteed Universal Life (Term for Life)
How Term and GUL Compare
These two life insurance products share many characteristics:
- Premium guaranteed level
- Face amount (death benefit) guaranteed
- Not designed to build cash value
- No moving parts – Simple policy design
Some Key Differences Between Term and GUL
Term Insurance: The most common term periods are 15, 20, and 30 years.
Guaranteed Universal Life: You can “dial in” your guarantee period, ranging from ages 90 to 121.
Just like a 30-year term policy is more expensive than a 20-year policy, a GUL guaranteed to age 100 will be more expensive than a 30-year term.
Even though GUL is more expensive, your beneficiaries will receive a tax-free death benefit. With term, the death benefit is paid if you die within the term period.
However, for someone in their 50s or 60s looking for a 20 or 30 year term, it can make sense to also look at GUL. The difference in premium is usually not that significant. Using our quote engine, select “lifetime” in the drop down menu to see term to age 100 rates.
Not either/or, but sometimes both
Most young parents will choose term insurance and that’s a smart move. As stated at the outset, life insurance is about protecting your loved ones. The greatest need for coverage is when your family members are dependent on your income. It’s better to get the maximum amount needed to protect your family at the lowest possible rate. We guarantee the lowest possible term rate using our 3 quote engines that compare over 90 companies.
Some of our clients choose the laddering approach. Most of their life insurance is in 20 or 30 year term, but some coverage is permanent. Please refer to this article to read more about laddering term with guaranteed universal life insurance.
Life Insurance – An Investment?
In a sense, all life insurance is an investment. With GUL, it’s guaranteed that your beneficiaries will receive the life insurance proceeds. However, there is no market risk.
Let’s take an example of a 65 year-old male in average health. Perhaps there isn’t a great need for life insurance, but there is a desire to leave money to children or grandchildren. Sometimes, people in their 60’s run into a large sum of money due to an inheritance, a CD maturing, or myriad other reasons.
If this 65 year-old put $200,000 into a GUL with a guarantee age to 100, then the death benefit would be $508,809. That’s not a bad return. In fact, it would take 24 years for that same $200,000 to exceed $508,000 based on 4% interest compounding monthly.
So, if this 65 year-old dies at age 70, 80, or 95, the $508,809 would be paid tax-free to his beneficiaries. Regardless of the age of death, the benefit would remain the same – guaranteed. Some carriers allow a return of premium option (at no extra cost).
This example is with Protective Life. They are one of a handful of carriers that offer very competitive rates for single premium (lump sum) with a GUL.
Another nice benefit in this example is access to a chronic illness benefit. A portion of the death benefit would be available to pay for a chronic illness or terminal illness if needed.
Need Vs. Want – Is Permanent Insurance Really Needed?
Some people are content with a car that rates high in certain categories: fuel economy, performance, reliability, etc. Others pay close attention to a vehicle’s safety rating and how it performs in crash tests. Although you will most likely never get in a serious car accident, it is comforting to know that you or a loved one stands a better chance of surviving a crash in a vehicle with very good crash test ratings. You might be willing to pay more for a car that has excellent crash test ratings.
The same logic applies to insurance. In most cases, your investments and retirement accounts will provide sufficient income even if you live past age 90. However, things don’t always go as planned. A serious illness or financial setback could derail financial plans. Unexpected life events can sometimes cause the best plans to crash.
So, guaranteed universal life insurance can make sense as a safety net. The hope is that the need for life insurance will diminish to the point where coverage is no longer needed. However, insurance is about planning to protect you and your loved ones against the unexpected.
Term Life Compared to Guaranteed Universal Life Insurance – Conclusion
Standard level term life insurance is relatively inexpensive. Actuaries know that most people will outlive their policies, so the premiums are low. The more expensive option is GUL. Guaranteed universal life insurance is permanent, so beneficiaries will receive a tax-free death benefit – as long as premiums are paid.
We continually talk to people in their 50s, 60s and 70s who still need life insurance, but their term policies lapsed. Sometimes, due to health issues, purchasing additional life insurance is cost prohibitive. GUL is one way to protect against this risk. This product is certainly not for everyone, but it does meet certain protection needs and can help you accomplish the goal of leaving a legacy.
If you have questions about what life insurance products are most appropriate for your situation, please let us know. Complete the quote request form or call us at 678-236-1600 and we’ll be glad to help.