You had a plan and you did the right thing: You purchased a life insurance policy to protect your family. But things have changed since you took out that universal life insurance policy, and it may be time for you to pull your policy out of your files and review where it stands.
Your universal life insurance policy (UL) is a form of permanent life insurance that also has an investment component. A portion of each premium you pay helps build a tax-deferred cash value and earns the current interest rate. When interest rates are low, your cash value may not grow and be available to fund the policy as originally described on the illustration your agent provided to you when you bought the policy. The Life Insurance Foundation for Education (LIFE) offers more information about permanent life insurance.
Your policy may be performing as illustrated or better. In that case, you can just stay the course. But if your policy is underperforming, there are actions you can take.
First, call your agent or the insurance company to request an illustration An in-force illustration is based on current interest rates and reflects the current and future performance of the policy. The information from an in-force illustration allows you to make an informed decision for your next plan of action.
You have three choices:
- Let the policy run its course until it lapses
- Pay the increased premium your insurance company requires to keep it in force until maturity
- Execute a 1035 exchange to move the proceeds into another policy
Options 1 and 2 are self-explanatory, so let’s review Option 3. A 1035 exchange is an income tax-free way to move the proceeds from one policy into another policy. Keep in mind that you are likely to be subject to health underwriting with any new contract, and you’d need to be approved before the exchange could be completed.
Two products that make a good home for a UL rescue are a guaranteed death benefit universal life policy (GUL) or a single-premium guaranteed whole life policy (SPGWL).
A GUL is a type of universal life policy that builds little to no cash value. Its claim to fame is that it offers a guaranteed death benefit (age limit varies by carrier). It’s more correctly described as a permanent term life insurance policy. With this product, you would use the 1035 exchange dollars to buy a reduced paid-up policy, meaning no additional premiums would be due to fund the death benefit. Or, you could purchase the same amount of life insurance and the 1035 exchange dollars would reduce any future premiums needed.
A SPGWL product would use the proceeds to purchase a guaranteed paid-up life insurance policy. Unlike the GUL, this product would have a cash value. You will find that the death benefit will be less if you purchase a SPGWL vs. a GUL, but the tradeoff on the whole life policy is much more cash value.
Pay attention to your old life insurance policies. Be informed, and don’t forget to look into your options. It’s in the best interest of those you love.