Types of Universal Life
Several variations of universal life have emerged to meet different needs. Each type offers unique features related to how cash value grows and how guarantees are structured.
Traditional Universal Life
Traditional UL (also called fixed UL or current assumption UL) is the original form of universal life insurance.
Features
| Feature | Traditional UL |
|---|---|
| Interest crediting | Fixed rate declared by insurer |
| Rate guarantee | Minimum guaranteed rate (2-4%) |
| Cash value growth | Depends on current rates |
| Premium flexibility | Full flexibility |
How Interest Works
- Insurer declares a current interest rate periodically
- Rate can change based on market conditions
- Never falls below the guaranteed minimum rate
- Cash value grows based on whatever rate is in effect
Considerations
- Performance depends on interest rate environment
- When rates are low, cash value growth may be disappointing
- Illustrations may show optimistic rates that don't materialize
- Requires monitoring to ensure adequate funding
Indexed Universal Life (IUL)
Indexed universal life (IUL) credits interest based on the performance of a stock market index, such as the S&P 500.
How IUL Works
| Component | Description |
|---|---|
| Index linking | Cash value growth tied to index performance |
| Floor | Minimum interest rate (often 0%) |
| Cap | Maximum interest rate (often 10-12%) |
| Participation rate | Percentage of index gain credited (e.g., 100%) |
The Floor and Cap
| Feature | Purpose |
|---|---|
| Floor (0%) | Protects against market losses—worst case is 0% |
| Cap (10-12%) | Limits upside—you don't get full index gains |
Example:
-
S&P 500 returns 15% for the year
-
Cap is 10%
-
Policyholder receives 10% (capped)
-
S&P 500 returns -20% for the year
-
Floor is 0%
-
Policyholder receives 0% (protected from loss)
Participation Rate
The participation rate determines what percentage of the index gain (up to the cap) is credited:
| Index Gain | Cap | Participation Rate | Interest Credited |
|---|---|---|---|
| 8% | 10% | 100% | 8% |
| 15% | 10% | 100% | 10% (capped) |
| 8% | 12% | 80% | 6.4% (8% × 80%) |
IUL Considerations
Advantages:
- Potential for higher returns than traditional UL
- Protection from market losses (0% floor)
- Cash value never decreases due to index performance
Disadvantages:
- Caps limit upside potential
- More complex to understand
- Caps and participation rates can change
- Does not include dividends from the index
Exam Tip: IUL does NOT directly invest in the stock market. Interest is "linked" to index performance, but actual investments remain in the insurer's general account.
Guaranteed Universal Life (GUL)
Guaranteed universal life (GUL) prioritizes the death benefit guarantee over cash value accumulation.
Key Features
| Feature | GUL |
|---|---|
| Death benefit | Guaranteed to a specified age (often 90-121) |
| No-lapse guarantee | Policy stays in force if premiums paid as scheduled |
| Cash value | Minimal or none |
| Premium | Fixed (must be paid as scheduled) |
How GUL Works
- Pay the scheduled premium, and the death benefit is guaranteed
- No-lapse guarantee keeps the policy in force regardless of cash value
- If premium is missed, guarantee may be lost
- Little or no cash value accumulation
GUL vs. Traditional UL
| Feature | Traditional UL | GUL |
|---|---|---|
| Premium flexibility | High | Low (must pay scheduled) |
| Cash value | Accumulates | Minimal or none |
| Death benefit guarantee | Depends on funding | Guaranteed to specified age |
| Premium cost | Variable | Generally lower for same death benefit |
Who It's For
- Those who want guaranteed permanent death benefit
- Clients who don't need cash value
- Estate planning purposes
- Budget-conscious buyers wanting permanent coverage
No-Lapse Guarantee UL
No-lapse guarantee UL is often used interchangeably with GUL, but specifically refers to the guarantee feature:
The No-Lapse Guarantee
| Feature | Description |
|---|---|
| Guarantee | Policy won't lapse as long as minimum premium is paid |
| Duration | Often to age 90, 95, 100, 105, 110, 115, or 121 |
| Requirement | Must pay premiums on time and as scheduled |
What Happens If Guarantee Is Lost
If scheduled premiums are not paid:
- The no-lapse guarantee may be voided
- Policy reverts to standard UL (cash value must support COI)
- Policy could lapse if insufficient cash value
Catch-Up Provisions
Some policies allow you to restore the guarantee by:
- Paying missed premiums with interest
- Making additional payments to bring the policy current
- Following specific procedures within a time limit
Comparison of UL Types
| Type | Interest Crediting | Guarantees | Cash Value | Best For |
|---|---|---|---|---|
| Traditional UL | Fixed rate (current + guaranteed) | Minimum rate | Moderate | Flexibility seekers |
| IUL | Index-linked (floor and cap) | 0% floor | Potentially higher | Growth potential with protection |
| GUL | Not emphasized | Death benefit guarantee | Minimal | Guaranteed death benefit |
Key Takeaways
- Traditional UL credits a fixed interest rate with a guaranteed minimum
- IUL links interest to a market index with a floor (0%) and cap (10-12%)
- GUL prioritizes guaranteed death benefit over cash value accumulation
- No-lapse guarantees keep the policy in force if premiums are paid as scheduled
- IUL offers upside potential with downside protection, but caps limit gains
- GUL is ideal for those who want permanent death benefit at lower cost without needing cash value
- Choose the type based on goals: flexibility, growth potential, or guaranteed coverage
Indexed universal life (IUL) credits interest based on:
In an IUL policy, if the linked index returns -15% for the year and the floor is 0%, the interest credited to cash value will be:
Guaranteed universal life (GUL) differs from traditional UL primarily in that:
The no-lapse guarantee in a GUL policy:
7.4 Death Benefit Options
Continue learning