what do Guaranteed universal life policies invest in?

Jun 29, 2019

  1. sam816
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    sam816 Super Genius

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    Bonds, indexed funds or stocks? how can they guarantee it if they invest in bonds only and the interest rates are so low?
     
    sam816, Jun 29, 2019
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  2. walthamny
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    walthamny Guru

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    Mostly government bonds and High grade corporate. They may invest about 1% in some dividend paying stocks and another few percentages in real estate. They hedge the portfolio against interest rate risk. Also the earnings from underwriting flow into the mix. UL is basically term for life so if they do better than expected from underwriting, excessive profits will go into the earnings pool. You dont see UL policies guaranteeing 8% a year, if they did I would mortgage my house now and invest in them. However, the illustration presentation may leave you the feeling 8% a year is almost guaranteed or normal. UL should perform about 0.3 to 0.5% a year better than a portfolio that only invests in government bonds. So if we assume 4% is expected rate of return from government bonds in the next 30 years, you would most likely earn about 4.4% a year in a properly funded UL policy. You earn a higher rate because life insurance is more tax efficient in the long run.
     
  3. DHK
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    DHK "YOU CAN'T HANDLE THE TRUTH!"

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    GUL is not designed to have a cash value - although it may in the early years.

    It's just a contractual guarantee based on current interest rates - just like term.
     
    DHK, Jul 1, 2019
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  4. Robert Barney
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    Robert Barney Guru

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    Cash values in UL products are based upon money that has accumulated in an account, from excess premiums that are NOT used to purchase the COI (cost of insurance). Generally the cash value will equal the account value less any surrender charges.

    Not quite. There are two components in a UL contract that can change - the COI and the return on investment. The "no lapse guarantee" which makes a GUL guaranteed, is a guarantee that impacts both components but neither specifically. The guarantee says that if you pay a certain premium, for as long as you are required to pay at least that premium, then your insurance coverage cannot be impacted by negative changes to either of those variables. In fact, if the account value goes to zero or into a negative position, the company warranties that if you keep paying the premium, they will pay the death benefit.

    Did I mention you better not miss even one payment.
     
    Last edited: Jul 1, 2019
  5. Robert Barney
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    Robert Barney Guru

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    I should also mention that life companies offer these products fully expecting a significant number of these policies will lapse, either intentionally or unintentionally. That is why if anyone is buying these as permanent coverage, they need to have a VERY serious strategy in place to make sure the product is funded. The best strategy is to go with a limited payment option, that has the product paid up before you become elderly, and prone to making mistakes - or worse - be incapacitated when the premium comes due.

    I have a couple of VERY old Canadian Term to 100 policies (same thing only different) which require a premium to be paid until I am dead. I have the payments coming from a bank account that contains more money than premiums left to be paid, even if I live a VERY long time, and that account is for that purpose ONLY. And I still worry about a screw up. I wish I could have had a limited pay version, but those did not exist in the day.
     
  6. DHK
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    DHK "YOU CAN'T HANDLE THE TRUTH!"

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    You can set up a secondary addressee for the statements. This can help ensure that someone else (perhaps your executor?) can make sure that the payments are made.
     
    DHK, Jul 1, 2019
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