Certificate of Deposit vs. SPUL
You’ve probably heard of a Certificate of Deposit (CD) before. Your grandma or dear Aunt Sally may have gotten you one when you were a kid. Chances are good you have no idea what a single premium universal life insurance policy (SPUL). Its also unlikely you know why an SPUL is a better place to park cash than a CD.
That’s what this article is here to do – shed some light on a little known life insurance product that works better for cash you’ve been saving and don’t have any plans for.
SPUL: What is it?
A Single Premium Universal Life insurance policy is a product offered by Grange Life Insurance Company. The policy has a couple of attractive features that make it a great alternative to a certificate of deposit for funds you don’t have immediate plans for.
- Guaranteed Cash Account: this amount is equal to your initial deposit premium. This means that you will not deteriorate your cash account with an emergency, early withdrawal. CDs generally have surrender charges that lower your initial balance if you withdraw your money early.
- Competitive Interest Rate: the current interest rate for the SPUL is 2.75%, which is 10 basis points higher than the most attractive Certificate of Deposit rate I could find online (March 21, 2018 – 2.65% APY Barclays 5 year term minimum deposit $5,000). The minimum GUARANTEED rate is 2.00%, which is still NOT bad in our current interest rate environment.
- Death Benefit: your deposit premium funds your guaranteed cash account, but an SPUL is a Life Insurance Policy, so there is a death benefit associated with the policy that is greater than the deposit premium. For example: A man, age 55 who applies for the minimum $15,000 premium creates a death benefit of about $36,000. A Certificate of Deposit will never pay more than the principal balance plus accrued interest.
- Tax Benefits: the cash value in the SPUL grows on a tax-deferred basis. In addition, when the death benefit passes to your heirs, the SPUL pays directly to the beneficiaries, not through your estate. Life insurance proceeds are generally tax free. Interest on a CD usually gets taxed at ordinary income tax rates, and will pass through your estate to your heirs.
- Living Benefits: The SPUL has an accelerated death feature that provides access to the full death benefit amount if you are diagnosed with a terminal illness and advised that you have less than 12 months to live. In addition, the SPUL will provide up to 25% of the death benefit per year if you are diagnosed with a permanent condition that prevents you from performing 2 activities of daily living. A certificate of deposit from a bank doesn’t feature any of these benefits because the most you can ever get from a CD is the principal balance plus accrued interest. In fact, if you face a medical emergency, and need to withdraw your funds, a certificate of deposit may charge you a fee to get the funds you need.
Benefit of a Certificate of Deposit
During my analysis of CDs versus the SPUL, I did come up with one area where the CD edged out the SPUL.
When we say the SPUL has a guaranteed cash value, Grange Life Insurance Company backs that guarantee. As long as Grange Life Insurance company can pay claims, that guarantee is good. Grange Mutual Casualty Insurance company, which owns Grange Life Insurance Company has an AM Best rating of A (Excellent). So its a pretty STRONG guarantee.
The FDIC guarantees deposit funds, and the full faith and credit of the United States Government backs the FDIC. There is no better guarantee than that.
How much does this matter? That is entirely up to you and your tolerance for risk. The US Government is never going out of business, but its theoretically possible that Grange Life Insurance Company could, no matter how unlikely its a remote possibility.