Universal Life and Variable Universal Life (more detail)

When applying for a Universal (UL)L or Universal Variable Life (VUL) contract you have to decide between death benefit option A and death benefit option B. With option A, the death benefit will remain level over the life of the contract. In the rare event that your cash value became larger than the face amount, the death benefit might be increased. If you died with option A, your cash value becomes part of the death benefit, and is not added to the death benefit. Option A should be considered if you have a level need for insurance.

With option B, the death benefit is added to the cash value. If you had a $100,000 option B policy and cash value of $10,000, the policy would pay $110,000 at death. The death benefit is equal to face amount, plus the cash value. While many consumers feel they should buy option B, doing so will require considerably more long term premium. For this reason, option B should only be considered if you have an increasing need for insurance.

Many UL and VUL policies allow partial withdrawals. After several years, these policies may allow the policy owner to withdraw up to the amount of total premiums paid (the basis) into the contract. Taking a withdrawal up to basis can usually be done without recognizing the taxable gain which would exist if the cash surrender value exceeds total premiums paid.

Many UL and VUL policies offer preferred loans to make it more attractive for you to borrow against your cash value. With a preferred loan, you are charged interest to borrow money from your policy. However, the insurance company may credit most of the interest you pay, back to your own account! The result of this may be a loan with a very low net cost of borrowing (sometimes less than 1%). This low net cost of borrowing is important because preferred loans and partial withdrawals are a way of accessing money inside your life insurance policy, without recognizing a potentially considerable taxable gain. If you ever borrow far in excess of your basis, be careful to keep that policy in force, or you might have to recognize a huge taxable gain.

UL and VUL contracts have an accumulated value and a surrender value. The difference between the two amounts is the surrender charge. The cash surrender value is the amount your contract is worth if you actually surrender the policy. Surrender charges can last 10, 15, or 20 years.. Some UL and VUL contracts do not differentiate between an accumulated value and a surrender value. On these types of contracts, the values that you are quoted are the surrender values.

Re-entry Premiums
Preferred Underwriting
Retaining Tax Benefits of Life Insurance
Graded Premium Whole Life
Problems with Underfunding a Universal Life Contract
Net Interest/Net Rate of Return

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