You probably know the story about Goldilocks and the three bears very well. Papa Bear’s bed was too big, but Baby Bear’s bed was too small. Mama Bear’s bed, however, was a perfect fit for Goldilocks — not too big and not too small.
For some people, guaranteed universal life insurance is the life insurance equivalent of Mama Bear’s bed. Here’s what we mean.
HOW GUARANTEED UNIVERSAL LIFE INSURANCE STRIKES A MIDDLE GROUND
When you need a large death benefit for a certain time period, the low cost of a term life insurance policy can be appealing. It’s a no-frills, low-cost option that provides a death benefit for a set number of years. It often serves as a great first step if you’re looking to temporarily secure the financial future for the people who depend on you. In many cases, the need for such a large death benefit will decrease over time as you pay off the mortgage, your retirement accounts grow and your kids go through college. But sometimes, the need for a large death benefit can last right until the end of a very long life.
In that case, you could go with whole life insurance, which covers you for life and accrues cash value that can serve as a flexible asset in a long-term, comprehensive financial plan. Many people use a mix of whole life insurance and term life insurance to get a large death benefit and additional benefits that whole life insurance provides. But if you need a large death benefit that lasts your entire life, the cost of whole life alone may be too high.
Guaranteed universal life insurance strikes a middle ground between term and whole life. It differs from a term policy, because rather than covering you for a certain timeframe, a guaranteed universal life policy stays in force until your life ends.1 But a guaranteed universal life insurance policy isn’t a whole life policy either. While many guaranteed universal life insurance policies feature a cash value component, it won’t match the guaranteed cash value growth rate in a whole life policy. That’s because a guaranteed universal life insurance is designed to be a lower cost option to provide a lifetime death benefit rather than cash value growth.
Because it lasts a lifetime, premiums will be higher than a term policy, but lower than a whole life policy. Like we said, striking the middle ground.
Additionally, universal guaranteed life policies usually feature an option to decrease your death benefit if your needs change over time. Some might also feature a return of premium option, allowing you to “surrender” your policy to get premiums you’ve paid back. These features vary by provider, but most require you hold the policy for many years before then.
WHO WOULD CONSIDER GUARANTEED UNIVERSAL LIFE INSURANCE?
Guaranteed universal life insurance is a great fit if you want lifelong protection and a premium that’s lower than whole life. Some common uses include when you expect to owe a large estate tax bill, or if you have a child with special needs who will need money for support after you’re gone. If you’d like to talk more about your needs and how life insurance fits into your overall financial plan, a financial advisor can help.
1 Technically, your policy will have a “guarantee period” to a certain age — typically from age 90 to 121. A policy with a shorter guarantee period — age 90 as opposed to 121, for example — will usually have lower rates.