As adults, we realize that life is fleeting and can end without warning. No matter how cautious we are, we are all subject to the vagaries of life. That doesn’t mean we should throw caution to the wind. While a prudent lifestyle will likely increase our chances for a long life, it doesn’t guarantee it.
It is life’s very unpredictability that creates the need for life insurance. Once that need is quantified, it then must be determined which product is best suited to accomplish the objectives. Today I will review the products in light of the one element that life cannot provide: guarantees.
First is the premium, and most products offer a guaranteed premium. Term premiums are usually guaranteed for the term of the product (10, 15, or 20 years), but not always. There are indeed some 20 year term products whose premium is only guaranteed for 10 years. The projected premium is level for the full 20 year period, but if you read the fine print, it will reveal that the company, at its discretion, may increase premiums after the 10th year.
Universal life comes in two flavors, guaranteed (GUL) and current assumption (CAUL). The GUL premium is set at inception and cannot be changed by the company except for non-payment of premium. CAUL usually illustrates a level premium, but the footnotes to the illustration indicate that it is subject to change.
The premiums of a whole life (WL) policy are guaranteed to remain level for the duration of the policy, although there is a type of whole life policy called “modified WL” wherein a lower guaranteed premium exists for three to five years and is then replaced with a higher guaranteed premium.
The death benefit of term insurance is guaranteed for the initial term of the policy but is zero after that. The DB for WL is, appropriately, guaranteed for your whole (entire) life. GUL’s DB is also guaranteed. That leaves CAUL as the one product* whose DB is subject to the performance of the policy.
WL offers the strongest guarantee of cash value. Its cash value at maturity (originally age 100, but longer on some newer policies) is guaranteed to equal the initial face amount.
CAUL can offer impressive cash value on a current basis, but its guaranteed cash value is usually quite minimal. GUL offers minimal cash value on both a guaranteed and current basis, as it is not designed as a cash accumulation vehicle.
There you have it, a very short overview of the characteristics offered by the different types of life insurance. Knowing your objectives at the outset will make it more likely that you pick the policy best suited to you.
* Indexed universal life (IUL) attempts to combine GUL with CAUL to produce a policy that has a guaranteed DB with substantial cash values, but the extent to which it can do that is subject to the underlying index.