Understanding Universal Life








Life insurance is a unique financial instrument that can be used to support a variety of needs.  Since there are many types of life insurance policies, it is important to understand their particular benefits and limitations. 


Universal life “UL” is one of the most versatile types of life insurance.  Its high degree of flexibility and “unbundled” nature – separating the expense, protection and cash value elements – make it a popular choice among insurance consumers.


Understanding Universal Life – was created to help you understand a universal life insurance policy.



Features of Permanent Insurance


Permanent life insurance provides many features that when combined, create a unique financial instrument.  Some of its features include:


*  Non-Taxable Death Benefits

Death proceeds are generally free from income tax, making it possible to ultimately provide more benefits to your beneficiaries. 


*  Proceeds Direct to Beneficiaries

You can designate that death proceeds be paid directly to your beneficiaries, making it possible to avoid probate taxes.  Many states have enacted laws that make life insurance safe from creditors, also.


*  Tax-Deferred Growth

A portion of each premium payment goes into the “policy value” which is the part of the policy that earns interest.  This interest accumulates on a tax-deferred basis. 


*  Tax-Advantaged Liquidity

Cash surrender value can provide a source of funds for the policy owner and is available through a policy loan (which may be available at a low interest rate or with zero net cost) and/or a partial surrender.  Both of these types of distributions will reduce the death benefit.  Under our interpretation of current tax laws, policy loans and partial surrenders that do not exceed the total premiums paid are not taxable.  While policy loans are generally considered tax free, there is some risk that the IRS would characterize policy loans in excess of premium paid as taxable income.  Withdrawals (partial surrenders, cash surrenders and/or policy loans) in excess of total premiums paid would be considered income taxable to you upon lapse, surrender or maturity of the policy. 



Features of Universal Life Insurance



Universal life insurance is designed to offer many of the same benefits as traditional permanent insurance plans, and more…


*   Flexible Premiums

Instead of being locked into a fixed premium schedule for life, UL gives you a great amount of premium flexibility.  You can potentially pay any amount between the required plan “minimum” to an IRS-imposed “maximum”, depending upon your cash flow needs and accumulation goals.  Premiums may be increased, decreased, or even skipped, depending on such factors as past premiums, policy surrender values, loans and interest rates.  Please see “Common Questions about Universal Life” below.


*   Adjustable Death Benefit

The death benefit amount may be adjusted, within the plan limits, without having to buy a new, separate policy.  This can reduce costs and simplify the process of changing your coverage.  Please see “Common Questions about Universal Life” below.


*   Current Interest Credits

Unloaned policy values are credited with a current rate of interest that can be changed periodically by the Company.  While this rate will never fail below the contractually guaranteed minimum, it is designed to make universal life a competitive insurance value.  Please see “Common Questions about Universal Life” below.


*   Death Benefit Options

UL features two distinct death benefit options, or patterns.  Under the Level Death Benefit option, the death benefit is the face amount only.  Since the Company’s net amount at risk is the difference between the policy face amount and the policy value, the net amount at risk usually decreases as policy value increases.  This decrease in the net amount at risk, over time, may mean lower “cost of insurance” charges in the future.  Under the Increasing Death Benefit option, the death benefit is the face amount plus the policy value.  Although its long-term cost is higher due to the higher “cost of insurance charge”, there is a relatively larger death benefit.


*   Current Cost of Insurance

This is the charge for the insurance death benefit based on the amount at risk and is deducted each month from the policy value.  The cost of insurance rate is based on the insured’s age, sex, and rate class.  The current rate scale will never exceed the guaranteed rate scale in the policy contract.  Please see “Common Questions about Universal Life” below.


*   Annual Report to Policy Owner

Since UL is “unbundled”, all monthly deductions, interest credits, death benefit amounts and premiums received are documented in an annual report we send to the policy owner each year.  This report includes important information about the continuation of the policy into the future.  The annual report should be reviewed each year to make sure the policy continues to meet the policy owner’s needs.  Adjustments may be appropriate based on changed conditions, interest credits or monthly deductions. 



Uses of Universal Life


The following uses make universal life a versatile and flexible tool for solving needs.  Consider:


*   Income Replacement

One of the most common uses of universal life is to replace lost income due to the death of the breadwinner.  The death benefits can continue providing income to the family through attractive settlement options, or as a lump sum. 


*   Pay off the Mortgage ***

Another common use is to satisfy certain debts, such as paying off the mortgage.  You can even access the tax deferred cash value accumulations (through policy loans or partial surrenders) to help satisfy such debts while living. 


*   Retirement Income ***

The tax-deferred cash surrender value and the non-taxable nature of policy loans (in most circumstances) make UL a supplemental retirement income option.  The immediate death benefits and optional disability benefit rider make UL even more flexible and attractive to consumers planning for retirement. 


*   Charitable Contributions

UL can create a “magnified gift” to a charity, and, if structured properly, create current income tax savings.


*   Equalize Inheritances

UL can be used to create estate value to certain beneficiaries whose inheritance may other wise be left to charity or to other family members.


Other needs that may be solved by UL include funding college education expenses, providing financial assistance to children and more.




*** Partial surrenders and Policy Loans will reduce the policy death benefit.  Under our interpretation of the current tax laws policy loans and partial surrenders that do not exceed the total premiums paid are not taxable.  While policy loans are generally considered tax free, there is some risk that the IRS would characterize policy loans in excess of premium paid as taxable income.  Withdrawals (partial surrenders, cash surrenders and/or policy loans) in excess of total premiums paid would be considered income taxable to you upon lapse, surrender or maturity of the policy. 


Common Questions about Universal Life 





                1)         How long has Protective Life been selling universal life insurance?

Protective Life designed its first UL plan in 1981, and was therefore on of the pioneers in UL development.


                2)         Does Protective Life offer only one universal life insurance plan?

No.  Protective Life offers a diverse portfolio of products to meet a variety of insurance needs.  Some products emphasize low premium cost, while others emphasize policy value accumulation.  We even have products designed for specialty insurance needs like the business buy-sell and estate planning markets.


                3)         Can premiums for my universal life insurance plan be tax deductible?

Premiums for personally owned life insurance are not tax deductible.  However, employers may be able to deduct premiums as part of a Section 162 Bonus Plan for certain employees.  For information regarding your personal situation, please contact your professional tax advisor. 


                4)         What if I want to change my death benefit?

This flexibility is one of the features of universal life.  The face amount can be increased or decreased within plan limits, but medical evidence of insurability may be required.  Consult the policy contract for details. 


                5)         Can I change my premiums at any time?

Not entirely.  All of our universal life products provide certain death benefit guarantees, which require a minimum premium.  However, premium flexibility is one of the main features of UL.  Your premiums can be increased up to certain IRS guidelines or reduced within the limits of the required minimum premium.  It is important to note that the reduction of your planned premiums may cause your policy to lapse.  Your universal life contract can stay in force only if there is policy value in excess of surrender charges and this may not occur if premiums are reduced. 


                6)         Can the current cost of insurance rates change?

Yes.  The company has the right to change the cost of insurance rates, but the rates for a particular plan may never exceed the guaranteed rates illustrated in the policy contract. 


                7)         Have the current cost of insurance rates ever increased?


No.  Since this product line was introduced in 1981, Protective Life has never increased the current cost of insurance rate scale for any existing universal life insurance policy.  Please note that the current cost of insurance rate scale provides for higher rates as the age of the insured increases and as the underwriting data becomes less current. 


                8)         Should I consider universal life insurance an investment?


No.  While UL certainly has an investment element, it is not an investment in the strict sense. 


                9)         Should I expect my current credited interest rate to change?


Yes.  The current interest rate credited to your policy value is not guaranteed.  Interest rates may change at anytime.  While the overall economic environment influences them, interest rates are not indexed to any national standard and are subject to change at the discretion of the management of Protective Life.  The policy owner will be advised of any interest rate changes in the previous year in the Annual Report to the Policy owner.  The current interest rate for a particular plan may never be less than the guaranteed interest rate shown in the policy contract. 


              10)       Why not buy term insurance instead of universal life? 

Universal life is designed to help solve a long-term need.  Term insurance is designed for a relatively short-term need (hence the name “term” insurance).  You should discuss these options with your agent and purchase the type of insurance that best meets your needs.


              11)       What is a “zero net cost policy loan”?

This feature allows for surrender values to be borrowed at a zero net cost after the 10th policy year.  Specifically, such policy loans will be charged the same rate of interest that is credited on loaned amounts to the policy value.  This feature is contractually guaranteed in most universal life plans offered by Protective Life (please refer to your policy contract to verify if it contains this feature). 





This supplement is meant to be the starting point for discussion and is valid only when used with an actual policy proposal.  Neither Protective Life nor its representatives offer legal or tax advice.  While this supplement represents Protective Life’s interpretation of current law as it relates to life insurance, you may wish to consult your legal or tax advisor before making any financial decision.  Not all policy benefits and riders are available in all states and evidence of medical insurability is required.  Ask your Protective Life representative for details.