If you’ve held a VUL policy for more than 5 years, it may be time to make sure your policy is still up to par.
Have you looked at your VUL lately? Variable universal life insurance can be a good investment – if you check up on it to monitor asset allocation and performance. Some people simply tuck their policy away in a file and forget about it. This is a mistake.
VUL gives you a whole life insurance policy plus an opportunity for tax-deferred cash accumulation. You can choose to direct a percentage of your premiums into investment sub-accounts within an insurance company's portfolio, and the gains in those investment accounts aren't taxed if they remain within the policy.1
You should review your VUL policy every two or three years to see that it still matches your needs. Here are three good reasons to take a second look at your policy today.
Insurance costs can drop. As the baby boomers have matured, insurance costs have been adjusted in response to increasing longevity. In 2006, the National Association of Insurance Commissioners adopted new life expectancy tables from the Society of Actuaries.2 That meant some big changes in life insurance.
New whole life policies are available that provide coverage until age 121, with lower premiums. Your current whole life policy may provide coverage only until age 85. So is the cost of your policy still competitive? Or are you paying too much for coverage? Take a look, because you might not be getting the best value for your money.
Inflation cat eat away at your benefit. Maybe you opted for $250,000 worth of coverage five or ten years ago. That may have been enough then ... but how about today? Inflation can definitely affect life insurance needs. What if your life insurance proceeds had to be used to pay for your children’s college tuition, or to pay off your mortgage? Would the proceeds be enough? You may have a VUL policy based on the income or lifestyle costs of 10 or 20 years ago. It may be time to reexamine it.
Are you funding the policy correctly? A VUL policy can lapse if it isn’t adequately funded. If you purchased your policy so you could have “cash rich” life insurance that would let you borrow against the cash value of the policy someday without paying tax on that money, you have to have enough cash value and continuing payments to keep up the basic insurance.
Insufficient funding means the policy collapses – and when that happens, the amount that you borrow tax-free from your policy becomes taxable income. (No policy in place also means no death benefit.)
The trouble occurs when you borrow too much against the cash value for too many years and the investment sub-accounts can’t make it back. So here is where asset allocation becomes important. If you don’t fund the policy correctly, you may end up essentially purchasing an expensive form of term insurance.
It’s worth taking a second look at your VUL. Many people never review or reexamine life insurance decisions, but it is wise to do so. Open up that file and take a look at your policy – the amount of coverage, the term of coverage, the premiums and the fine print. In fact, I urge you to review your policy today with a qualified insurance agent or financial advisor.
Citations.
1 investopedia.com/terms/v/variablelifeinsurancepolicy.asp
2 soa.org/research/individual-life/intl-2001-cso-preferred-class-structure-mortality-tables.aspx
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