Do you need a term-universal life insurance policy?
A handful of life insurance companies have launched new products that combine the advantages of universal life insurance and term life insurance into one policy.
The new term-universal life hybrids offer the flexibility of universal life with the affordability of term life.
Six out of 10 Americans with incomes between $50,000 and $250,000 do not own individual life insurance and one-third of those with life insurance say they don't have enough coverage, according to a 2009 study by LIMRA, a global research and consulting firm..
Insurers are tapping that market with term-universal life insurance offerings and already are seeing results. Introduction of the products helped boost universal life policy sales last year at a time that term life sales dropped, LIMRA reported. Universal life premium sales rose 10 percent, and the policy count was up 21 percent in 2010 over 2009, while term life policy and premium sales fell 12 percent in the same period.
"Genworth felt for a long time a tremendous demand to serve ‘Main Street America,’ which has needs that are different from the high-end market," says Janet Deskins, senior vice president of life products for Genworth Financial Inc.
Currently there are only a few sellers of term-universal life insurance:
- Genworth introduced Colony Term UL in November 2009.
- West Coast Life Insurance Co., a part of Protective Life Insurance Co., launched Protective Secure-T and WCL Secure-T in June 2010.
- Lincoln Financial Group followed up two months later with DurationGuarantee UL.
Universal vs. term life insurance
Hybrid policies address needs that fall into a gap between traditional term and universal life, says Michael Parker, assistant vice president of individual life fixed product lines for Lincoln Financial Group.
Traditional term life insurance provides a death benefit if the policyholder dies within a certain period of time, such as 10, 15, 20 or 30 years. Because the death benefit is limited to that specific period and the policies feature no cash value accounts, term life is more affordable than permanent life insurance.
Universal life is a type of permanent insurance. Unlike other whole life policies, which require you to pay fixed premiums, universal life lets you pay any amount you want after an initial payment, as long as you meet a minimum level. You can make higher premium payments when you're flush with cash or lower ones when your budget is tight. A portion of your premium money accumulates in a tax-deferred cash account, which you can borrow against.
Term-universal life insurance policies generally share the following features:
• Emphasis on affordability versus building cash value.
These combination products are designed to be affordable, featuring low, term-like premiums for the initial term you select, such as 10, 20 or 30 years.
With Genworth’s Colony Term UL, much higher premiums kick in after the initial period if you want to continue coverage. When converting a traditional term policy to a permanent policy, premiums rise annually after the term, but with Genworth’s product the policy can be structured so higher premiums stay level up to age 105.
You can choose to pay premiums in different amounts and at different times, as long as you meet a minimum level to guarantee coverage. You could pay one larger premium or periodic, fixed premiums to maintain coverage for a certain period. You may have to pay a fee to decrease the face amount of a policy.
• Availability at later ages
The combination policies allow people in their 50s and 60s to get term-like coverage into their 90s, which would not be possible with traditional term life.
• Longer terms
Combination policies can be purchased with initial terms of 30 years. In the traditional term-life market, 30-year policies are becoming more rare, says Marvin Feldman, president and CEO of the Life and Health Insurance Foundation for Education. Most term life policies offered today are for 10, 15 or 20 years.
• Tax-free transfers
The term-universal life insurance products also let you do “1035 exchanges,” which aren't allowed with traditional term life, Parker notes. A 1035 exchange refers to a section of tax code that lets you transfer money tax-free from one life insurance policy or annuity to another.
These policies are popular among baby boomers, many of whom still have children in college and mortgages to pay off or are starting new businesses in late middle age.
"It's flying off the shelves," Deskins says. "We've exceeded every goal we've set." Genworth reported that sales of term life, combined with the new Colony Term UL product, grew 68 percent in third quarter of 2010 compared to the same period in 2009.
An old idea gets new life
The concept of combining term and universal life has been around for years.
"There have been a lot of products on the market that allow you to blend universal and term to get a lower premium," says Feldman says. "This is nothing new; it's a revamp."
Although some describe term-universal life as combining the best of both worlds, the policies aren't for everyone. Standard term life insurance might be the better option if you're young and know you will need life insurance only for a certain number of years. And traditional universal life and other types of permanent insurance would work better if you want to build up a sizable cash value account and you have the resources to pay higher premiums.
To find the right insurance product, Feldman says, consider how much insurance you need, how long you need it and your cash flow.
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