September marks the observance of Life Insurance Awareness Month, coordinated by the nonprofit LIFE Foundation and supported by more than 100 of the nation's leading insurance companies and industry groups, to shine a spotlight on the growing crisis of too many Americans not having adequate life insurance protection. According to the industry research group LIMRA, 30% of U.S. households have no life insurance whatsoever. Today, there are 11 million fewer American households covered by life insurance compared with six years ago. The bottom line: A majority of families either have no life insurance or not enough, leaving them one accident or terminal illness away from a financial catastrophe for their loved ones. Help educate your employees this month on the value of this important benefit. Learn more at lifehappens.org/life-insurance-awareness-month.
What are the key differences between term and universal life insurance?
Under a group employee plan, the term life policy ends when an employee either dies or leaves an organization. Under a voluntary term life plan, a policy ends when the employee dies or the term of the policy expires. The plan may be extended, usually at greater premium cost. However, a new plan may not be possible for someone in poor health. Term life plans initially have lower premiums but grow far more expensive than universal life plans as the policyholder ages.
Universal life insurance was created to offer protection as long as an insured needs coverage. The policy is designed to last up to 100 years of age, under current assumptions, with no premium increase. As long as premiums are paid and the policy doesn't lapse from withdrawals or loans, the cash value grows, tax-deferred. The policyholder can use the built-up cash value to make a withdrawal or take a loan. Term life insurance, however, has no cash value and offers no ability for an insured to take a loan or make a withdrawal since no cash is available.
In our changing economic climate, universal life insurance offers insureds some control and flexibility to help meet their financial goals. For example, a universal life policyholder can change the frequency and amount of premium payments at any time. Term life plans' payments are fixed for a set period of time and can't be changed or skipped. As an insured person's protection needs increase or diminish over time, the death benefit of a universal life plan can be easily adjusted without need to write a new policy or change guarantees already in place.
What are living benefits? Why are they vital in today's market?
Some universal life plans, beside a death benefit and cash value, can carry living benefits. Yet another example of plan flexibility, living benefits apply during a person's lifetime in ways a term life plan doesn't. As an insured grows older, perhaps retires and needs less insurance, the death benefit may decrease while a long-term care benefit remains level or may increase due to guaranteed future purchase options. Such a long-term care living benefit, highly desirable in today's market, can cover the costs of home healthcare, assisted living, adult day care and nursing home care.
Some universal life plans waive premium if an insured becomes disabled or loses a job. Insureds with a terminal illness can receive a large percentage of the death benefit upfront to help cover expenses while they're still alive, something a term life plan may not offer.
How can purchasers compare apples to apples in costs and returns?
As mentioned, term life may initially be less expensive than universal life. Let's suppose a 35-year-old non-smoking man purchases a $100,000 life insurance policy. Typical term life premiums will be less for a man this age than universal life premiums. But as years pass, the term life premium increases while the universal life premium stays exactly the same as the plan's inception. By the time an insured reaches age 65, the term life premiums can be nearly twice that of the universal life premiums.
Even more striking is the cash value that can accumulate. At age 35, a term life insured's plan has no cash value. At age 75, the insured's same plan still has no cash value. But with a universal life plan, the 35-year-old insured starts earning cash value immediately. By age 75, the cash value may be worth nearly twice the amount in premium paid into the policy, which means the policy can return more value than the insured put in. A vast majority of people who carry term life insurance lose it when they leave the workplace or retire. Many others let a voluntary term life plan lapse when they feel they no longer need its coverage. In both instances, an insured can pay thousands of dollars over the years for no cash value and sometimes no chance of even claiming a death benefit.
Is universal life today's choice for employer groups?
Universal life premiums are paid through the convenience of payroll deduction at the workplace. The plan, however, is portable and stays with the insured for as long as he/she wants to keep it. Life insurance doesn't just mean the price tag of initial costs or death benefits. A universal life plan is one that's relevant throughout one's life, which can become ever more valuable in both cash value and living benefits.
Employers and brokers alike should be aware of the many issues to consider when buying or selling a life insurance plan for group employees. Although term life insurance can be an affordable option for the young, those with more ongoing needs may miss out on the flexibility, coverage, value and guarantees that are offered through a universal life plan.
Richard "RAE" Egleston is assistant vice president of sales operations at Trustmark Voluntary Benefit Solutions, headquartered in Lake Forest, Ill. Reach RAE at email@example.com.
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