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Guaranteed vs. Non-Guaranteed Permanent Life Insurance Policies
Fifty years ago, most life insurance policies sold were guaranteed
and offered by mutual fund companies. Choices were limited to term, endowment
or whole life policies. It was simple, you paid a high, set premium and the
insurance company guaranteed the death benefit. All of that changed in the
1980s. Interest rates soared, and policy owners surrendered their coverage to
invest the cash value in higher interest paying non-insurance products. To
compete, insurers began offering interest-sensitive non-guaranteed policies.
Guaranteed versus Non-Guaranteed Policies
Today, companies offer a broad range of guaranteed and
non-guaranteed life insurance policies. A guaranteed policy is one in which the
insurer assumes all the risk and contractually guarantees the death benefit in
exchange for a set premium payment. If investments underperform or expenses go
up, the insurer has to absorb the loss. With a non-guaranteed policy the owner,
in exchange for a lower premium and possibly better return, is assuming much of
the investment risk as well as giving the insurer the right to increase policy
fees. If things don’t work out as planned, the policy owner has to absorb the
cost and pay a higher premium.
Term Policies
Term life insurance is guaranteed. The premium is set at issue and
clearly stated right in the policy. An annual renewable term policy has a
premium that goes up every year. A level term policy has an initially higher
premium that does not change for a set period, usually 10, 20 or 30 years, and
then becomes annual renewable term with a premium based on your attained age.
Permanent Policies
Permanent coverage: whole, universal and variable life is more
confusing since the same policy, depending on how it is issued, can often be
either guaranteed or non-guaranteed. All permanent life insurance policy
illustrations are hypothetical and include ledgers that show how the policy
could perform under both guaranteed and non-guaranteed assumptions.The rates of
return and policy fees are usually shown at the top of each ledger column and
some policies, such as variable or index life, are sometimes illustrated
assuming very optimistic 7-8% annual returns.
Non-guaranteed policies are typically illustrated with a premium
that is calculated based on a favorable assumed rate of return and policy fees
that could change. The lower premium payment is great as long as the
performance of the policy meets or exceeds the assumptions in the illustration.
Click Here However, if the policy does not meet expectations then the owner
would have to pay a higher premium and/or reduce the death benefit, or the
coverage may lapse prematurely.
Some permanent policies offer a rider, for an additional cost,
that is part of the contract and guarantees the policy will not lapse. The
policy is guaranteed, even if the cash value drops to zero, as long as the
planned premium is paid as scheduled. Depending on how the policy and the
premium are calculated, the no lapse guarantee can range from a few years out
to age 121. However, in exchange for transferring the risk back to the insurer
these policies typically have a higher premium and build little cash value.
How to Decide
Whether you should buy guaranteed or non-guaranteed life insurance
coverage depends on many factors. Here are some factors to consider:
If necessary, will you be able to pay higher premiums? Most people
who bought universal life policies 10-20 years ago, when 5-7% fixed interest
rates were the norm, never envisioned the financial collapse in 2008 or the
extended low-interest rates that we are currently experiencing. Those policies
are now only earning 2-3% and the owners, often retirees, are faced with paying
significantly higher premiums or losing the coverage.
