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July 20, 2003 at 08:00 PM
If theres one word that aptly describes the driver of todays insurance market, that word is “guarantees.”
Today, clients and their financial advisors are both looking for the sure thing when it comes to providing life insurance protection for families and businesses.
The insurance industry makes these lifetime guarantees available through two different products: the old standby, traditional whole life insurance; and the relative market newcomer, universal life insurance with a secondary guarantee component. While each can provide a guaranteed death benefit to at least age 100, not all guarantees are created equal.
WL and UL have specific rules to maintaining death benefit guarantees, each targeted to meet specific financial needs. Therefore, understanding the difference between the guarantees will help advisors make the right recommendation to clients who are seeking the right product for their situation.
What about the WL guarantee, then? Maintaining the death benefit guarantee in the WL product is virtually mistake-proof. If the policy is in-force, the guarantees are in-force. These guarantees include a level premium, a minimum cash value and a death benefit that will equal at least the face amount outlined in the policy contract.
To keep the WL and its guarantees in-force, the policyowner must pay the base policy premium every year to the age specified in the contract (usually age 95 to 100). If the annual premium is not paid, the policy will lapse.
But, to keep the policy going, policyowners do not have to pay the premiums out of their own pockets every year. This is because WL contracts typically feature an opportunity to earn an annual dividend. Over time, these dividends (or the paid-up additions with cash value they can purchase) may be sufficient to cover the cost of the WLs scheduled premium in any given year.
The bottom line? From the day the WL is issued until the day it is surrendered, lapsed or pays a claim, the guaranteed death benefit is in place.
How does the UL guarantee stack up? Here, the opportunity to lock in a guaranteed death benefit is different. Typically, modern ULs offer a “secondary guarantee” provision that secures the ULs death benefit beyond what is guaranteed based on maximum costs and the minimum interest-crediting rate.
The typical provision states that, as long as a minimum no-lapse premium is paid every year and all other requirements are met, the UL will not lapse, even if its account value drops to zero.
The guaranteed no-lapse period offered by a UL can range from as little as five years up to age 100. And some ULs extend those benefits beyond age 100a boon to consumers concerned with outliving life insurance benefits.
The important thing to know about UL secondary guarantee provisions is this: There are conditions–beyond paying the minimum annual premiums–that limit policy flexibility. Failing to meet any of these conditions can negate the death benefit guarantee. While policy features differ from company to company, some conditions that may cancel or reduce the UL death benefit guarantee period are:
–Skipped or late premium payments;
–Failure to pay sufficient cumulative premiums;
