5 Alternatives to Universal Life Insurance

Insurers and policyowners can configure a UL policy’s premium payments and death benefits to resemble virtually any type of life insurance policy, from annually-renewable term to single premium whole life. Consequently, any other type of policy that meets a policyowner’s needs is a suitable and, perhaps, preferable alternative if the policyowner does not need the UL’s flexibility. However, a number of other types of policies or strategies offer some of the features of UL and not others, if policyowners desire only certain features.

  1. Current-Assumption Whole Life (CAWL) – ­Sometimes called interest-sensitive whole life, CAWL is essentially UL without the adjustability features. CAWL, similar to UL, uses current interest rates in determining additions to cash values. However, similar to traditional ordinary whole life and in contrast with UL, CAWL generally offers the policyowner little flexibility with respect to changing premium payments or death benefits.
  2. Adjustable Life (AL) – AL combines elements of traditional, fixed premium ordinary life insurance and the ability, within limits, to alter the policy plan, premium payments, and the face amount. Essentially, one can view AL as UL without the current-assumption feature.
  3. Variable Life (VL) and Variable Universal Life (VUL) – If a VL policyowner selects a portfolio of investments within the policy that is similar to the general investment portfolio of the insurance company (mostly long-term bonds and mortgages), they can expect investment performance and cash value accumulations to be similar to those with UL.
  4. Flexible Premium Deferred Annuity (FPDA) combined with term insurance – A combination of a FPDA with level term can generate cash value accumulations and death benefit levels similar to UL under option B or C. A FPDA combined with a decreasing term policy is similar to UL under option A. The FPDA, however, has less favorable tax treatment for withdrawals and loans than a UL policy.
  5. Section 1035 exchanges – The exchange provisions under Internal Revenue Code section 1035 allow certain types of exchanges from one policy type to another without adverse tax consequences. Clearly, these exchange provisions provide nowhere near the flexibility or convenience that a UL policy does to change premium levels or death benefits. However, the existence of these exchange provisions means that other types of policies are not quite as inflexible as they might otherwise seem.
Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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