The Life Insurance Choice Dilemma
Today’s tumultuous economy and changing consumer attitudes make the life insurance purchase decision challenging. Both term (temporary) coverage and permanent coverage have their relative advantages and disadvantages. Here, in brief are the choices:
Term Life? This provides an affordable entry point, but coverage is temporary. The cost of insurance increases over time as the insured’s life expectancy decreases, eventually making coverage less affordable.
Permanent Life? Permanent policy options can be complex and confusing:
- Whole Life provides protection to at least age 100, but tends to be more expensive, difficult to understand, and inflexible.
- Variable Life allows for improved cash value potential, but exposes the buyer to market risk.
- Universal Life is interest sensitive, and policies purchased during high interest rate periods suffered adverse performance as rates declined.
What Consumers Want: Control, Clarity and Value
Given all these choices, how can consumers decide which product is best suited to their own needs, circumstances and priorities?
A recent study by LIMRA and LIFE Foundation can help shed some light on consumer priorities. While individual circumstances will vary, the study shows that general consumer insurance buying patterns and priorities have changed over the past 15 years.
The study’s findings strongly suggest that life insurance shoppers, influenced largely by the internet, tend to seek these 3 things:
- 26% say they prefer to purchase life insurance by internet, mail or phone.
- 64% still prefer to buy from an insurance or financial professional face to face (although this is down from 80% in 1996.)
When asked what factors matter most to them in buying insurance, consumers cited:
- #1: Understanding what they’re buying (36%.)
- #2: Obtaining the proper coverage amount (22%.)
Although the cost of basic term life has fallen by about 50% over the past 10 years, consumers are still concerned about the price of coverage:
- Cost is the top reason people give for not owning enough life insurance.
- Men place value getting the best price more than women: 17% vs 11%.
And in the wake of the 2008 recession and the weak recovery, there is also increased sensitivity to risk and volatility, making the stability of guarantees more important.
How Guaranteed Universal Life Fits In
Responsive life insurance companies are addressing consumer demand for control, simplicity and value with a new generation of guaranteed Universal Life policies. These new products are designed to meet consumers’ needs while overcoming the challenges that the older generation of Universal Life policies encountered. Here’s how:
1. Clarity/Simplicity: Universal Life (UL) is based on a comparatively simple and transparent design (as illustrated below). It provides a clever way to combining term life insurance with a saving plan:
- a portion of your premium pays for the cost of insurance.
- a portion is reserved as cash value that can be used in the future to reduce the cost of insurance and provide cash when you need it.
When times are hard, the cash accumulation fund provides a cushion that can allow you to skip premium payments, and when times are good, there is flexibility to increase your premium payments to enhance that savings element. You can decide how much of your premium dollars go to savings to generate more significant cash values that accrue tax deferred and can be used for contingencies such as:
- Unpaid medical bills – Few people anticipate the need for additional money during a prolonged illness. Cash value in the policy can be withdrawn, or borrowed, to pay medical bills.
- Higher education – College funds are built over a sustained period of disciplined saving. While funds are not accessible in the early years of the policy, cash values are available when children are ready for college.
- Retirement supplement – Additional income during the retirement years can be helpful when other sources are not available.
It is possible to arrange to pay a premium for a certain number of years only – such as 10 or 15 years while still guaranteeing lifetime coverage. UL policies also allow for a choice among death benefit options: a Level Death Benefit, in which premiums and interest primarily increase the cash value, or Increasing Death Benefit, in which they are also used to increase the death benefit over time.
3. Affordability/Value: UL provides cost control and value in the following ways:
- Affordability: While more expensive than term life insurance, UL is less expensive than whole life insurance.
- Value: Guaranteed Universal Life (GUL) provides the value of guarantees, so that both the coverage and premium level will last to a certain age regardless of current interest or economic conditions. In response to increased life expectancy, some policies provide coverage up to age 121. Policies also provide a guaranteed minimum cash value.
Buying Life Insurance is About More than Price
Under the right circumstances, Universal Life Insurance can provide permanent coverage that stays in force as long as the premiums are paid or beyond. Proper management of the savings component enables the funds to grow tax deferred at a steady rate until the money is needed. Additional standard or optional benefit features provide additional value and flexibility, including:
- Self Completion: an optional Waiver of Premium benefit will waive the premium payments in the event of disability, allowing the policy to stay in force.
- Accelerated Death Benefit: This standard benefit enables the policy holder to receive cash advances against the death benefit if diagnosed with a terminal illness.
- Partial Surrender Benefit: This standard feature lets you take a portion of your cash value out of the policy instead of surrendering the entire policy for the full value, lowering the death benefit by the amount you withdraw.
In today’s volatile economic environment, changing consumer attitudes and priorities have created a need for simple, transparent, affordable, flexible products that provide solid guarantees. Unlike the older Universal Life products that were sold when interest rates were high and lost value as rates declined, today’s Guaranteed Universal Life products have been designed to provide sound guarantees during a time of low interest crediting rates. And with interest rates at their current historic lows, there’s room for future growth over time.
For consumers who are seeking affordable, customizable permanent coverage, it may be time to take a fresh look at Universal Life.