VUL With GMDB: A High-Return Life Insurance Option

 

Life insurance is not only a way to protect your loved ones from financial hardship in case of your death, but also a way to grow your wealth and achieve your long-term goals. However, not all life insurance policies are created equal. Some offer more flexibility, security, and returns than others.

One type of life insurance policy that can offer these advantages is variable universal life insurance (VUL). VUL is a type of permanent life insurance policy that allows you to invest the cash value of your policy in various subaccounts, such as stocks, bonds, or mutual funds. This way, you can benefit from the market growth and potentially increase your cash value and death benefit over time.

However, investing in the market also comes with risks. What if the market crashes and your cash value drops significantly? What if you end up with less money than you paid in premiums? What if your beneficiaries receive less than what you expected?

This is where a guaranteed minimum death benefit (GMDB) option comes in handy. A GMDB option is a feature that guarantees a minimum amount of death benefit to your beneficiaries regardless of how your cash value performs. This way, you can protect your legacy from market volatility and ensure that your loved ones receive at least a certain amount of money when you die.

In this article, we will explain what VUL with GMDB is and how it works. We will also discuss how it can offer higher returns than other types of life insurance policies and what factors to consider when choosing a VUL with GMDB policy.

How VUL Works

VUL is a type of permanent life insurance policy that combines a savings component with a death benefit. The savings component, also known as the cash value, is the part of your policy that accumulates interest over time and can be accessed by you during your lifetime. The death benefit is the amount of money that is paid to your beneficiaries when you die.

Unlike other types of permanent life insurance policies, such as whole life or universal life, VUL gives you more control over how your cash value is invested. You can choose among various investment options offered by your insurer, such as equity and fixed-income mutual funds. These investment options are called subaccounts and they function like a family of mutual funds.

By investing in subaccounts, you can potentially increase your cash value and death benefit over time, depending on the performance of the market. However, you also assume the investment risk and bear the losses if the market declines. Therefore, VUL is suitable for people who have a higher risk tolerance and a longer time horizon.

Another feature of VUL is that it allows you to adjust your premium, cash value, and death benefit according to your changing needs and preferences. You can pay more or less premium within certain limits, as long as you have enough cash value to cover the cost of insurance and other fees. You can also increase or decrease your death benefit within certain limits, subject to underwriting requirements. However, increasing your death benefit may require a medical exam and increasing your premium may reduce your tax benefits.

For example, if you have a VUL policy with a face amount of $500,000 and a cash value of $100,000, you can choose to pay a higher premium and increase your death benefit to $600,000. Alternatively, you can choose to pay a lower premium and decrease your death benefit to $400,000. Or you can keep your premium and death benefit unchanged and let your cash value grow or shrink with the market.

Some common investment options for VUL subaccounts are:

• Equity funds: These funds invest in stocks or equity securities of companies in different sectors, sizes, or regions. They offer higher potential returns but also higher risks and volatility.
• Fixed-income funds: These funds invest in bonds or debt securities issued by governments or corporations with different credit ratings, maturities, or interest rates. They offer lower potential returns but also lower risks and volatility.
• Balanced funds: These funds invest in a mix of stocks and bonds with different proportions and strategies. They offer moderate potential returns and risks.
• Money market funds: These funds invest in short-term debt instruments with high liquidity and low risk. They offer low potential returns but also low risks and volatility.

How GMDB Works

GMDB is a feature that guarantees a minimum amount of death benefit to your beneficiaries regardless of how your cash value performs. It is also known as a no-lapse guarantee or a secondary guarantee.

GMDB is calculated as a percentage of the face amount of your policy or the premiums paid, whichever is higher. For example, if you have a VUL policy with a face amount of $500,000 and a GMDB of 100%, your beneficiaries will receive at least $500,000 when you die, even if your cash value is zero. If you have paid $600,000 in premiums and your GMDB is 100%, your beneficiaries will receive at least $600,000 when you die, even if your cash value is zero.

GMDB is paid when you die or when your policy matures, whichever comes first. The policy maturity date is usually set at age 95 or 100. If you die before the maturity date, your beneficiaries will receive the higher of the GMDB or the cash value plus the face amount. If you live until the maturity date, you will receive the higher of the GMDB or the cash value.

GMDB can protect you from market downturns and provide a legacy for your beneficiaries. It can also prevent your policy from lapsing if your cash value becomes insufficient to pay the cost of insurance and other fees. However, GMDB also comes with a cost. You may have to pay an extra fee or charge for the GMDB feature, which will reduce your cash value and returns. You may also have to meet certain requirements to keep the GMDB feature active, such as paying a minimum premium or maintaining a minimum cash value.

There are different types of GMDB options available, depending on the insurer and the policy. Some common types are:

• Level GMDB: This option guarantees a fixed amount of death benefit equal to the face amount of the policy or the premiums paid, whichever is higher.
• Return of premium GMDB: This option guarantees a death benefit equal to the total premiums paid plus interest.
• Roll-up GMDB: This option guarantees a death benefit that increases by a certain percentage each year until it reaches a maximum amount.
• Ratchet GMDB: This option guarantees a death benefit that increases whenever the cash value reaches a new high.

How VUL With GMDB Offers Higher Returns

VUL with GMDB can offer higher returns than other types of permanent life insurance policies because it allows you to participate in the market growth and benefit from tax advantages, estate planning benefits, and retirement income options.

Compared to whole life insurance, VUL with GMDB offers more flexibility and growth potential. Whole life insurance provides a fixed death benefit and a guaranteed cash value that grows at a predetermined rate. It also requires a fixed premium that cannot be changed. VUL with GMDB provides a variable death benefit and a variable cash value that grows at an uncertain rate. It also allows you to change your premium within certain limits. Therefore, VUL with GMDB can offer higher returns than whole life insurance if the market performs well and you manage your premium and death benefit wisely.

Compared to universal life insurance, VUL with GMDB offers more investment options and security. Universal life insurance provides a flexible death benefit and a flexible premium that can be adjusted by the policyholder. It also provides a cash value that grows at an interest rate set by the insurer, which may change over time. VUL with GMDB provides similar flexibility but also allows you to choose among various investment options for your cash value. It also provides a guaranteed minimum death benefit that protects you from market losses. Therefore, VUL with GMDB can offer higher returns than universal life insurance if you choose suitable investment options and maintain your guaranteed minimum death benefit.

Compared to variable life insurance, VUL with GMDB offers more flexibility and security. Variable life insurance provides a fixed premium and a variable death benefit that depends on the performance of the subaccounts chosen by the policyholder. It also provides a cash value that grows or shrinks with the subaccounts. VUL with GMDB provides similar investment options but also allows you to adjust your premium and death benefit within certain limits. It also provides a guaranteed minimum death benefit that protects you from market losses. Therefore, VUL with GMDB can offer higher returns than variable life insurance if you adjust your premium and death benefit appropriately and maintain your guaranteed minimum death benefit.

VUL with GMDB can also provide tax advantages, estate planning benefits, and retirement income options that can enhance your returns. Some of these benefits are:

• Estate planning benefits: The death benefit can help you pass on wealth to your heirs without probate or estate taxes, as long as you name them as beneficiaries and avoid incidents of ownership. You can also use trusts or other strategies to reduce your taxable estate and protect your assets from creditors or lawsuits.
• Retirement income options: You can use your cash value as a source of income during retirement, either by taking loans or withdrawals or by annuitizing your policy. However, you should be careful not to deplete your cash value or cause your policy to lapse, as this may result in taxes, penalties, or loss of coverage.

How to Choose a VUL With GMDB Policy

Choosing a VUL with GMDB policy is not a simple task. You need to consider many factors, such as your risk tolerance, insurance needs, investment goals, and time horizon. You also need to compare different policies and providers and understand their features, costs, and benefits.

Here are some factors to consider when choosing a VUL with GMDB policy:

• Risk tolerance: You need to assess how comfortable you are with taking risks and facing losses in your investments. VUL with GMDB is suitable for people who have a higher risk tolerance and a longer time horizon, as they can withstand market fluctuations and benefit from market growth over time. If you have a lower risk tolerance or a shorter time horizon, you may prefer a more conservative type of life insurance policy, such as whole life or universal life.
• Insurance needs: You need to determine how much insurance coverage you need and for how long. VUL with GMDB is suitable for people who have high insurance needs and want to provide a legacy for their beneficiaries. If you have low insurance needs or only need coverage for a specific period, you may prefer a cheaper type of life insurance policy, such as term life.
• Investment goals: You need to define your investment objectives and preferences. VUL with GMDB is suitable for people who want to diversify their portfolio and have access to various investment options. If you have specific investment goals or preferences, you may want to choose a policy that offers the subaccounts that match your criteria, such as growth, income, or value funds.
• Time horizon: You need to consider how long you plan to keep your policy and when you expect to use your cash value. VUL with GMDB is suitable for people who have a long-term perspective and want to use their cash value for retirement income or estate planning purposes. If you plan to keep your policy for a short period or use your cash value for other purposes, you may want to choose a policy that has low surrender charges or flexible withdrawal options.

Some tips on how to compare different VUL with GMDB policies and providers are:

• Compare the features: You should compare the features of different policies and providers, such as the types of subaccounts offered, the fees and charges involved, the minimum premium required, the maximum death benefit allowed, the types of GMDB options available, and the customer service quality.
• Compare the costs: You should compare the costs of different policies and providers, such as the mortality and expense risk charge (M&E), the administrative charge, the fund management charge, the GMDB charge, the surrender charge, and the loan interest rate.
• Compare the benefits: You should compare the benefits of different policies and providers, such as the historical performance of the subaccounts, the projected cash value and death benefit growth, the tax advantages, the estate planning benefits, and the retirement income options.

Some resources or professionals that can help you with the decision making process are:

• Online tools: You can use online tools such as calculators, simulators, or comparison websites to estimate your insurance needs, compare different policies and providers, and project your cash value and death benefit growth.
• Financial advisors: You can consult a financial advisor who specializes in life insurance and investments to help you assess your situation, recommend suitable policies and providers, and guide you through the application process.
• Insurance agents: You can contact an insurance agent who represents one or more insurers to help you understand their products, features, costs, and benefits.

Conclusion

VUL with GMDB is a type of permanent life insurance policy that allows you to invest your cash value in various subaccounts and guarantees a minimum amount of death benefit to your beneficiaries. It can offer higher returns than other types of life insurance policies by allowing you to participate in the market growth and benefit from tax advantages, estate planning benefits, and retirement income options. However, it also comes with higher risks and costs, as you assume the investment risk and bear the losses if the market declines. Therefore, you should carefully assess your risk tolerance, insurance needs, investment goals, and time horizon before choosing a VUL with GMDB policy. You should also compare different policies and providers and understand their features, costs, and benefits. You can use online tools, financial advisors, or insurance agents to help you with the decision making process.

If you are interested in learning more about VUL with GMDB or finding the best policy for your needs, please visit our website or contact us today. We are here to help you achieve your financial goals and protect your loved ones.