What Is an Unbundled Life Insurance Policy?
An unbundled life insurance policy is a type of financial protection plan that provides cash to beneficiaries upon a policyholder's death. An unbundled life insurance policy contains a savings and investment component that the policyholder can use during his or her lifetime.
Provisions of the policy do not have expiration dates and the policyholder can adjust the amount and timing of premium payments tied to the amount of the death benefit while the policy is in force.Unbundled life insurance is also called universal life insurance.
Key Takeaways
- Unbundled life insurance has a cash value component, in which a portion of each premium payment can be saved and invested on the policyholder's behalf.
- One of the most noteworthy features of an unbundled life insurance policy is its flexible premiums; the flexibility in premiums is tied to both the option for an adjustable death benefit and the cash value element.
- Unbundled life insurance policies include the option for a savings component; the savings component will usually have a stated interest-earning rate.
- Most unbundled life insurance policies come with a policy loan option; the borrowing amount is usually based on the cash value.
Understanding Unbundled Life Insurance Policy
Universal/unbundled life insurance is one of several types of permanent life insurance. Unbundled life insurance has a cash value component, in which a portion of each premium payment can be saved and invested on the policyholder's behalf. The other portion of the premium goes toward the death benefit and administrative expenses.
With universal/unbundled life insurance, the premiums and death benefit can be changed during the life of the policy. This can be a desirable feature if the policyholder's needs change. The universal/unbundled policy also clearly discloses the policy's administrative fees—also called underwriting and sales expense charges—to the policyholder, whereas other types of permanent life insurance policies may not.
Within the permanent life insurance category, individuals can choose from whole life, universal/unbundled life, variable life, and variable universal life options. Some of the key benefits of the unbundled life insurance policy include its flexibility and allowance for the policyholder to see exactly where his or her premium payments are going.
Elements of Unbundled Life Insurance
Every life insurance policy comes with its own provisions, which can vary by company and type. Some of the basic elements an individual can expect in an unbundled life insurance policy include the following.
Flexible Premiums
One of the most noteworthy features of an unbundled life insurance policy is its flexible premiums. The flexibility in premiums is tied to both the option for an adjustable death benefit and the cash value element.
Directly, the premiums are based on the coverage amount and policyholder risks. Unbundled life insurance policies often allow the policyholder to adjust their death benefit and corresponding premium. This allows the policy to be changed with the changing needs of the holder. Premiums can flexibly decrease or increase with decreases or increases in death benefit coverage.
Cash Value
Unbundled life insurance policies include the option for a savings component. The savings component will usually have a stated interest-earning rate. Individuals can usually contribute to the cash value at any time or with payments in excess of their stated premium. Payments of the premium can usually also come directly from the cash value for added premium payment flexibility.
Loan Option
Most unbundled life insurance policies come with a policy loan option. The borrowing amount is usually based on the cash value. This allows the policyholder to obtain tax-free payouts but requires regular payments at a specified interest rate. Interest rates are often lower than other traditional loan options. The loan can be considered a type of collateralized loan since the life insurance policy and its cash value usually serve as collateral for missed payments and defaults.
Surrender Options
A surrender option allows the policyholder to terminate the policy and withdraw their cash value. The cash value is usually subject to surrender charges which can vary depending on the year of termination. Cash values can usually be withdrawn directly by the policyholder. Other alternatives may also exist such as a paid in full life insurance policy death benefit for varying amounts.
FAQs
Understanding Unbundled Life Insurance Policy
What is an unbundled life insurance policy? ›
Unbundled insurance provides policyholders with the flexibility to choose separate policies for different types of coverage, such as home, auto, life, and health insurance, from various insurers, tailoring their insurance portfolio to meet their individual requirements.
What can the owner see in an unbundled life policy? ›
Unlike a whole life policy, the premium is "unbundled." Each year you receive a statement which shows you a month-by-month breakdown of the mortality charges, contract charges, the portion of your premium that goes into your accumulation account, and the amount of interest earned.
What does unbundling mean in insurance? ›
Unbundling refers to the practice of separating risk handling and risk funding services either from a multiline insurer or from themselves.
Why is a universal life policy sometimes referred to as an unbundled life policy? ›
A universal life policy is sometimes referred to as an unbundled life policy because the owner can see the interest earned, expense charges, and the cost of insurance. This type of policy provides more transparency and control to the policyholder.
What is the meaning of unbundled policy? ›
An unbundled life insurance policy is a type of financial protection plan that provides cash to beneficiaries upon a policyholder's death. An unbundled life insurance policy contains a savings and investment component that the policyholder can use during his or her lifetime.
What is an unbundled plan? ›
In addition, there are two primary service models: bundled and unbundled. In a bundled model the three primary service categories are consolidated with a single provider. With an unbundled model, the service categories are typically provided by three separate providers.
What is an unbundled deal? ›
Unbundling is the opposite of bundling: it's taking one offer and splitting it up into multiple offers. A good example of unbundling is selling MP3 downloads of a single album instead of the CD.
Who owns my life insurance policy? ›
The owner is the person who has control of the policy during the insured's lifetime. They have the power, if they want, to surrender the policy, to sell the policy, to gift the policy, to change the policy death benefit beneficiary. They have absolute control over the policy during the insured's lifetime.
What happens to a whole life policy when the owner dies? ›
A permanent or whole life policyholder may take out loans or withdrawals against the cash value of the policy while he or she is still alive. After the insured passes away the whole life insurance death benefit is distributed to beneficiaries, but any excess cash value may be retained by the insurance company.
Unbundling occurs when a company sells off lines of their business including assets, subsidiaries, etc. This process separates the income from each different branch, thereby allowing the business to focus on the core.
What is an example of unbundling? ›
For example, a company may offer package deals on products at a discounted rate, but finds not every consumer benefits from the package. The company will decide to unbundle these products to give its customer base a larger selection of items that meets the needs of the consumer.
What are the benefits of unbundling? ›
Unbundling contracts balances the savings from economies of scale versus the diversity that multiple contracts can provide. This practice can enhance competition, promote innovation, and support more segments of the economy.
How does a universal life policy work? ›
Universal life is a form of permanent life insurance that gives policyholders flexibility in paying premiums, a cash savings component, and a death benefit. Universal life insurance allows you to borrow against or cash in their savings portion, which grows tax-deferred over your lifetime.
Which is the name of the policy that combines a universal life policy with investment choices? ›
Variable universal life insurance combines a death benefit with investment options. Variable universal life insurance has tax-deferred growth potential. Variable universal life insurance is more complex than term & whole life policies.
What is an example of rebating? ›
An example of rebating is when the prospective insurance buyer receives a refund of all or part of the commission for the insurance sale. Rebates can be made in the form of cash, gifts, services, payment of premiums, employment, or almost any other thing of value.
What is the difference between bundled and unbundled? ›
Under a bundled approach, you'll typically choose one recordkeeper to handle all three services for you. If you go unbundled, you'll generally work with both a recordkeeper and a third-party administrator (TPA).
What does an unbundled claim mean? ›
Unbundling in medical billing is billing for procedures separately. Unbundling normally covered by single and comprehensive CPT code. Pairs of codes should not be billed together. This edit is published by The Centers for Medicare and Medicaid National Correct Coding Initiative.
What is the difference between inclusive and unbundled? ›
Therefore, the only difference between the inclusive and unbundled units of each fund is the charge. In all other respects the two units are identical.
What is the difference between bundled and unbundled codes? ›
Bundling occurs when procedures or services with unique CPT or HCPCS Level II codes are billed together under one code. Unbundling is when two or more codes that are normally part of a single procedure can be billed separately.
