Tag Archive for: Universal Life

The Acumen Team

Permanent Life Insurance: What Options Are Available to You?

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When it comes to life insurance, there are two main categories: Term life insurance and permanent life insurance. Today, David Jacobs, J.D., Principal at Acumen Insurance Solutions will be discussing permanent life insurance; more specifically, what options are available to you?

Let’s dive in.

What is Life Insurance?

First things first, what is life insurance?

Life insurance is a contract between a policy owner and a life insurance company. In this contract, the life insurance company promises to pay a designated beneficiary a death benefit upon the passing of the insured.

As we mentioned, when it comes to life insurance, there are two main categories: term life insurance and permanent life insurance. Remember that, no matter which type you own, the death benefit is generally paid income tax-free to the beneficiaries. 

Now, let’s focus on the different types of permanent life insurance options available.

Permanent Life Insurance: The Basics

Permanent life insurance, sometimes also referred to as whole life insurance, is designed to last for your lifetime, not just for a period of years. Since it’s designed to last for your entire lifetime, permanent life insurance is more expensive than term.

Permanent life insurance has the benefit of lasting longer than term, with premium flexibility and a cash value. The cash value is tax-advantaged and serves as a living benefit that the policy owner can access for any reason before the insured has died.

Three components make up permanent life insurance:

  • Premiums
  • Cash value, and
  • Death benefit

When you make a premium payment, what happens? Well, part of that premium goes to pay for the cost of insurance, or rather the cost to insure your life for the death benefit amount, as well as for policy fees, state premium taxes, and commissions.

The remainder of their premium goes into your cash value account, which can grow for you to use for any purpose at a later time.

Some of the main differences between the types of permanent policies have to do with what mechanism grows that cash value account.

Let’s discuss.

Types of Permanent Life Insurance

There are a few different types of permanent life insurance contracts to note. Again, the main difference between them is how the cash value (the living benefit account) grows.

Remember that, no matter which type of permanent insurance you own, the cash value grows tax-deferred and can be accessed tax-free using policy loans and withdrawals.  

Whole Life Insurance

A whole life policy cash value grows based on a guaranteed interest rate plus a non guaranteed dividend that the insurance carrier declares every year. Dividends are positively-correlated to interest rates and move slowly over time.

Universal Life Insurance

With a universal life insurance policy, the cash value grows based on a crediting interest rate that the insurance company declares annually, and is also positively-correlated to interest rates. 

Index Life Insurance

With an index universal life policy, the cash value grows based on the performance of a specific stock or bond index; typically it’s the S&P 500, however, other index accounts are available.

Index life policies are not directly invested in the market but instead track the movement of the chosen index.

Typically, index policies have a floor and a cap mechanism. For example, if the index declines over a policy year, the cash value is credited at a 0% gross rate to protect against downside risk; but, if the index increases, the cash value is credited at that rate, up to the cap. It’s like investing with guardrails. Caps can vary among carriers and usually float on an annual basis.

Variable Universal Life Insurance

The last type of policy is called a variable universal life policy. Variable life policyholders use mutual-fund-like sub-accounts to grow the cash value. Policy owners are accepting market volatility in exchange for the opportunity to potentially earn higher returns.

These types of policies are considered securities by the Securities and Exchange Commission (SEC), whereas whole, universal, and index are considered general account policies.

Infographic of Permanent Life Insurance What Options Are Available to You

Learn About Term Life Insurance Next!

We hope this discussion delineated the differences between term life insurance and permanent life insurance, and that you learned more about the types of permanent life insurance that are available on the market today.

Interested in learning more about the second category of life insurance, term life insurance? Read on in our article “Insurance 101: Term Life Insurance vs. Permanent Life Insurance.”

Important Notes: Please refer to 26 U.S. Code §101(a) regarding tax-fee death benefit and 26 U.S. Code § 7702 (a) (g) regarding tax treatment of cash value. Policy performance is based on current rates as charges, and some values are not guaranteed. Medical and financial underwriting is required. Withdrawals and loans from life insurance policies classified as Modified Endowment Contracts (MEC) may be subject to income tax and a federal tax penalty, if taken prior to age 59½. Excessive policy withdrawals and loans may cause the policy to lapse, which will result in the loss of death benefit and adverse tax consequences. Life insurance is backed by the claims-paying ability of the carrier and is not FDIC insured. See policy illustration for details. Acumen Insurance Solutions, LLC does not provide tax, legal, or investment advice, and is not FINRA registered.

The Acumen Team

Term Life Insurance vs. Permanent Life Insurance

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An Insurance 101 Series

Welcome to Life Insurance 101. We’re here to make things simple for you. Today, we’ve got ​​David A. Jacobs, J.D., Principal at Acumen Insurance Solutions on camera to discuss the difference between term life insurance and permanent life insurance in a way you can understand.

Let’s dive in.

What is Life Insurance?

Life insurance is a contract between a policy owner and a life insurance company. In this contract, the life insurance company promises to pay a designated beneficiary a death benefit upon the passing of the insured.

Most of the time, that death benefit is paid income tax-free to the beneficiary.

Term Life Insurance vs. Permanent Life Insurance

Interestingly enough, life insurance comes in a couple of different flavors. There are two main categories of life insurance: the first is called “term” life insurance, and the second is known as “permanent” life insurance.

The main difference between permanent and term insurance is that permanent insurance is designed to last for the insured’s lifetime and permanent insurance has a tax-advantaged cash value component.

But more on this later! Let’s discuss each individually.

Term Life Insurance

Term life insurance is exactly what it sounds like. It is life insurance that’s for a period of years; typically 10, 15, 20, or 30 years.

When it comes to term life insurance, there are only two components:

  1. The premium that’s due either every year, quarter, or month, and
  2. The death benefit, which is paid when the insurer dies within that term

Generally, premiums are level and the death benefit is guaranteed for that period. At the end of the term, the insurance policy stops, and the benefit is gone.

Lastly, some term life insurance policies have a special benefit that allows you to “convert” the term insurance to a permanent insurance policy without medical underwriting.

This can be a tremendously beneficial feature if the insured experiences a health issue that would prevent them from being able to qualify for new insurance after the term policy ends. These convertible term policies tend to cost more and require more effort to find than traditional term policies, but can be worth it depending on your unique circumstances and desires.

Permanent Life Insurance

The second type of insurance category is permanent insurance. The terms “permanent” and “whole life” insurance are sometimes used interchangeably.

Just as the name implies, permanent life insurance is designed to last for the insured’s lifetime, not just for a period of years. Since it’s designed to last longer, permanent life insurance is more expensive than term.

Permanent life insurance, however, has the benefit of a) lasting longer and b) having a cash value component. The cash value can be accessed for a variety of reasons and grows without tax.*

A Permanent Life Insurance Policy’s Cash Value Component

Let’s discuss more about the cash value component that is unique to permanent life insurance.

The cash value component of a permanent life insurance policy is available to the policy owner while the insured is alive, and grows tax-deferred. This cash value component can be accessed tax-free using either policy loans or a withdrawal of the principal.

This cash value component allows the policy to last as long as the policyholder wants it to. Permanent insurance is similar to a car; the more gas you put in, the longer it will drive. The same thing goes for permanent life insurance: the more premium you put into the policy, the longer the policy will last and the more cash value it will build.

Now, let’s briefly discuss the different types of permanent life insurance.

Types of Permanent Life Insurance

There are a couple of different types of permanent life insurance contracts to note, including:

  • Universal life
  • Index life
  • Whole life
  • Variable universal life

The difference between them all is how the cash value (the living benefit account) grows. For example:

  • Does it grow based on a dividend? That’s a whole life policy.
  • Does it grow based on an interest rate calculation or declaration? That would be a universal life policy.
  • Does it follow an index, for example, the S&P 500, but with a “floor” and a “cap” mechanism? That would be an index policy.
  • Or, does it involve the market (i.e. mutual fund-like accounts)? That would be a variable universal life policy.

Regardless, all of these policies have the same feature; as long as you continue to pay premiums and cash value remains in the policy, it will last until the death of the insured.

In the meantime, however, the policy owner can reach in and use the cash value for a variety of purposes. For example, it can be used to help pay premiums in certain years, fund education needs, supplement retirement, and/or support healthcare costs, all without triggering tax.

These are all things that the policy owner can use the cash value for while the insured is still alive.

Read on to learn more about the specific permanent life insurance policies available to you.

Infographic for Term Life Insurance vs. Permanent Life Insurance

A Recap on Term Life Insurance vs. Permanent Life Insurance

To review, the differences between term and permanent are:

  • Term life insurance lasts for a period of years and has two components: a premium and a death benefit.
  • Permanent life insurance lasts as long as you want it to (typically a lifetime) and has three components: a premium, a death benefit, and a cash value.

No matter what type of life insurance you own, however, it is an asset. Moreover, it is an asset class that needs to be reviewed, monitored, and serviced regularly. Why? To make sure that the policy is keeping up with your goals as well as to make sure that the industry and the policy are still performing as anticipated.

Read on to learn about the question, “Can I Change My Life Insurance?”


Important Notes: Please refer to 26 U.S. Code §101(a) regarding tax-fee death benefit and 26 U.S. Code § 7702 (a) (g) regarding tax treatment of cash value. Policy performance is based on current rates as charges, and some values are not guaranteed. Medical and financial underwriting is required. Withdrawals and loans from life insurance policies classified as Modified Endowment Contracts (MEC) may be subject to income tax and a federal tax penalty, if taken prior to age 59½. Excessive policy withdrawals and loans may cause the policy to lapse, which will result in the loss of death benefit and adverse tax consequences. Life insurance is backed by the claims-paying ability of the carrier and is not FDIC insured. See policy illustration for details. Acumen Insurance Solutions, LLC does not provide tax, legal, or investment advice, and is not FINRA registered.

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The Acumen Team

Why CUOLI is the Best “Otherwise Impermissible Investment” for Your Credit Union

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There are three primary impermissible investments in the credit union space today: life insurance, securities, and annuities.

Credit union-owned life insurance (COLI/CUOLI), on the other hand, is considered an “otherwise impermissible investment” for your credit union.

This investment strategy is attractive for credit unions for many reasons. Credit union-owned life insurance is a capital asset that is both secure and liquid compared to traditional credit union investments. This investment also allows for greater portfolio diversification and gives credit unions access to investments that are typically impermissible.

By strategically using CUOLI, credit unions can solve major issues ranging from narrowing margins to employee retention.

Here’s more on why CUOLI is the best “otherwise impermissible investment” for your credit union.

Investment Options for Credit Unions

According to the National Credit Union Administration (NCUA), corporations “have the authority to purchase investments otherwise impermissible if those investments meet the direct relationship requirement and are intended to fund an employee benefit obligation.”

Generally, the types of assets that financial institutions consider otherwise impermissible investments include:

  • Life insurance
  • Securities (mutual funds, stocks, ETFs, bonds)
  • Annuities

Under the branch of life insurance, there is credit union-owned life insurance (COLI/CUOLI), which is arguably the best otherwise impermissible investment for your credit union.

What is Credit Union-Owned Life Insurance?

In general, life insurance is a contract between a policy owner and an insurer, whereby the insurer promises to pay a designated beneficiary a sum of money, called a “death benefit,” upon the passing of the insured person, in exchange for a premium, paid as a lump sum or over time.

Credit union-owned life insurance, in particular, is a life insurance strategy with various benefits. Credit unions can use COLI to balance the cost of employee benefit programs and potentially enjoy higher yields than the typical CU investments.

Similar policies have been used by commercial banks, called bank-owned life insurance (BOLI), for over 35 years.

Types of CUOLI

Life insurance is available in several different offerings, so understanding the options and selecting the right type of policy for your goals and budget is crucial.

Whole Life

Whole life provides lifelong coverage and includes a cash value component. The initial premium is designed so that the policy lasts as long as the insured lives, the death benefit is guaranteed, and the cash value account grows based on a dividend rate. 

Universal Life (UL)

Universal life insurance has a cash value account that grows at a guaranteed crediting rate as well as a current crediting rate, which is typically higher. Cash value projections are based on the current crediting rate, so if the rate goes up, the cash value would grow faster, and vice versa.

Index Universal Life (IUL)

With index universal life insurance, the cash value growth is tied to the performance of a market index, like the S&P 500. Unlike investing directly in an index fund, however, the policy won’t lose money when the market has a downturn. This is because a guarantee or “floor” applies to the rate, insuring it against losses, due to market declines.

One of its most attractive features is its ability to take advantage of stock market-like returns without the similar risk of loss while building up a death benefit.

Variable Universal Life (VUL)

Variable universal life insurance uses separately managed accounts, referred to as sub-accounts, to increase cash value. Subaccounts are structured like mutual funds with various stock and bond options. Cash value assets are held by the sub-account investment managers, rather than by the insurance company.

By separating the savings component from the death benefit component, the life insurer transfers all of the investment risks of the policy.

CUOLI/COLI Design Considerations

When it comes to the design of COLI plans, here are some factors and questions to consider that can affect plan performance:

  • The Pool of Insureds: How old are the insureds? What is their health like? How many are there?
  • Underwriting Alternatives: Are you dealing with a guaranteed issue group, individual medical underwriting, simplified underwriting (no physical), or some combination of the above?
  • Product Allocation Options: 15% of net worth carrier limitation 
  • Contemplated SERP Obligations

A Final Word

CUs can invest up to 25% of net worth in CUOLI policies and up to 15% of net worth with any one insurance carrier under the NCUA’s section 20. Credit union-owned life insurance can provide safety and liquidity with higher yields for your CU. Help your organization earn a higher current yield while acquiring life insurance protection for your key people.

Additional elements to consider:

  • Your credit union will enjoy an annual net yield typically ranging from 250 to 500 basis points higher than similar risk-adjusted assets it currently owns
  • As interest rates rise, so will the yields on CUOLI
  • Death benefits can be paid to your credit union and/or the insured’s heirs
  • Up to 25% of a credit union’s member equity can be utilized
  • Ideal for compliance with FASB ASU 2016-01.

With so many different policy options and carriers to choose from, it can be challenging to navigate the life insurance marketplace alone. Working with an independent life insurance professional like our team at Acumen Insurance Solutions is critical, and knowing the basics will help ensure you make the most informed decision.

Read on to learn more about how CUOLI helps your credit union earn safely.