Universal Life Insurance

Universal life insurance is permanent coverage with flexible premiums and an adjustable death benefit. Within the limits the contract sets, you can pay more or less in a given year, and raise or lower the death benefit as your needs change. The cash value is credited with interest at a rate the insurer declares, subject to a contractual minimum. The policy stays in force only as long as that cash value covers the monthly cost of insurance and charges. The flexibility is the point of the product, and it is also the way the product fails.

Schneiderman Insurance Agency places universal life for families and business owners across the Los Angeles area. This page covers what we review with each of them, including the California notice rules that exist because universal life policies lapse.

How can a universal life policy lapse when I have been paying?

Because the premium you pay and the cost of keeping the policy in force are two different numbers. Each month the insurer deducts the cost of insurance and policy charges from the cash value, and credits interest to what remains. If you pay the minimum premium the illustration showed, and credited interest runs below what that illustration assumed, the cash value grows more slowly than planned while the cost of insurance rises with your age. Years later the cash value can reach zero, and at that point the policy lapses unless you pay a much larger premium. The original illustration was not wrong; it was a projection built on an assumption that did not hold. Funding to a target rather than to the minimum, and checking the policy every year or two, is how you stay ahead of that.

Which version of universal life am I looking at?

Two designs share the name and behave very differently. Guaranteed universal life is priced to hold the death benefit to a stated age, such as 90, 95, or 100, with little or no cash value. In exchange, the premium is guaranteed as long as it is paid on schedule. It is closer to a lifelong term policy than to a cash-value contract. Accumulation-focused universal life is priced to build cash value and depends on credited interest and on how much you pay in. A brochure can make them look alike. Say which job the policy has to do before you compare illustrations, because a guaranteed universal life illustration and an accumulation illustration are answering different questions.

What does California law require before a universal life policy can lapse?

Notice, in writing, to more than one person. Under Insurance Code section 10113.71, every life policy issued or delivered in California carries a grace period of at least 60 days. A lapse for nonpayment is not effective unless the insurer has mailed notice at least 30 days beforehand. Under section 10113.72, the insurer must give you the right, before the policy is issued, to designate at least one other person to receive that lapse notice. The insurer must remind you annually that you can change the designation, and cannot let the policy lapse without notifying the designee as well. For a product whose central risk is lapse decades after issue, that designee is the single most useful line on the application. Name someone who will still be paying attention when you might not be.

The same protections that cover every individual life policy also apply. Incontestability after no more than two years in force under section 10113.5, and a free-look period of 10 to 30 days, 30 days for buyers 60 and older, under sections 10127.9 and 10127.10.

The Insurance Code sections here reflect the statute as published by the Legislative Counsel at the time of writing. They are amended from time to time, and that office publishes the current text.

What can I do with the cash value, and what does it cost?

You can take loans or partial withdrawals. A loan accrues interest and, if unpaid, is deducted from the death benefit. A withdrawal reduces the cash value and usually the death benefit directly. Either one reduces the amount available to cover monthly charges, which brings the lapse question forward. The cash value is a feature of the contract, not an investment, and we do not project its growth. Whether a policy loan or withdrawal has tax consequences depends on the contract’s tax status and on how much has been paid in. That question goes to a CPA, and we say so rather than guessing.

Who buys universal life insurance?

People who want permanent coverage and expect their income or needs to change, so they value the ability to adjust premiums. Business owners who want a permanent death benefit behind a buy-sell agreement with some premium flexibility. Households that want a guaranteed death benefit to a stated age at the lowest permanent premium, which is what guaranteed universal life is for. Couples funding an estate tax liability at the second death, where a second-to-die policy is usually built on a universal life chassis. Anyone comfortable reviewing the policy regularly, because it needs that.

What is an in-force illustration, and how often should I ask for one?

An in-force illustration is the insurer’s fresh projection of your existing policy from its current values and current credited rate. It shows whether the policy is on track to last, and at what premium. Ask for one every year or two, and always before reducing a premium, taking a loan, or changing the death benefit. If it shows the policy lapsing before the age you need it to reach, the fix costs less the earlier it is made.

How do we help with universal life insurance?

We start by settling which version fits the job: a guaranteed death benefit, or an accumulating cash value. We set a funding target rather than a minimum, fill in the lapse-notice designee, and diarize the in-force illustration. Indexed universal life, which credits interest by reference to a market index instead of a declared rate, has its own page. Whole life and term sit alongside on the types compared page, and the wider picture is on our life insurance page.

Every household is different, and this page does not replace a review of your own situation. To start, request a quote below or call 818-322-4744.