Standard Term Insurance vs. Guaranteed Universal Life (GUL)
Life insurance is a valuable tool that allows individuals to financially protect their loved ones or business in the event of their demise. After all, there are two certainties in this world…. Death and Taxes.
In the simplest form, there are two categories of life insurance:
There are four types of Permanent life insurance:
The first 3 are typically designed to build cash value. GUL, also referred to as “Permanent Term” Life insurance, is not designed to build cash value, but rather to guarantee a tax-free death benefit to your beneficiaries, no matter how long you live.
Standard Term Life Insurance
Standard Term life insurance provides coverage for a specified period of time. If you pass away during the policy term, your beneficiaries are entitled to the death benefit payout on an income tax-free basis.
Term policies range in duration, but are commonly purchased in 10, 15, 20 or 30 year terms and always have a fixed death benefit. In addition to a fixed death benefit amount, premiums remain the same throughout the term of the policy.
In order for your beneficiaries to receive a death benefit, you must pass away during the term of the policy. If you purchase a 20-year term policy and pass away after 20 years and 1 day, your beneficiaries do not receive any death benefit. In other words, the policy has no value unless you pass away during the term period.
Term policies are the least expensive form of life insurance. This is because actuaries determine that most people will either outlive the policy term or will cancel the policy early, and therefore the carrier will not have to pay out the death benefit and retains all paid premiums.
Example: You have a 20-year term life policy with a $1M death benefit. If you die during the term, your policy will pay your beneficiaries $1M. On the other hand, if you pay premiums on your 20-year term policy and after 20 years you are still alive, those premiums are a sunk cost and your beneficiaries will receive no death benefit.
Guaranteed Universal Life (GUL) (“Permanent Term” Insurance)
A Guaranteed Universal Life (GUL) policy is a valuable financial tool that enables one to guarantee a transfer of wealth to beneficiaries no matter how long one lives.
Similar to Term life insurance, a GUL maintains a fixed premium amount and a fixed death benefit. Consider a GUL as a hybrid of Term insurance and Permanent insurance. Instead of selecting a specific term of coverage, a GUL policy is designed to provide a death benefit to your beneficiaries no matter how long you live. Typically, GUL policies are illustrated to maintain a death benefit up to age 121. That is why many refer to it as a “Permanent Term” policy.
GUL policies are also more flexible than Term policies. It is common to design a GUL policy in a way that the insured will make premium payments for only a fixed amount of time; for example 20 years, and still guarantee that beneficiaries will receive the death benefit whenever the insured passes away.
For individuals who did not earn the kind of money that they anticipated during their careers, or whose investments did not perform as well as expected, a GUL is a great solution for expanding wealth transfer to your beneficiaries upon your demise.
A GUL policy is more expensive than a Term policy. This is because your beneficiaries are guaranteed a death benefit no matter how long you live and the insurance carrier will be required to pay out the death benefit. It is guaranteed as long as you pay the premiums on a timely basis.
Example: You are 60-years old and purchase a GUL policy that is designed that you pay premiums for 20 years, or through age 80, and maintain a death benefit until age 121. At age 95, you pass away. Even though you stopped making premium payments at age 80, your beneficiaries will still receive the full death benefit amount on an income tax-free basis.