Life insurance is a great way to ensure that your loved ones are looked after when you are gone and that they aren’t burdened by unexpected expenses in your absence.
Deciding exactly how much life insurance you need can be challenging, but it is only half of the puzzle. When you start to shop for coverage, you will realize that each individual insurance provider offers hundreds of different types of policies. How do you decide which is right for you?
Universal life insurance is one of the many options on the table for you to consider.
You will probably be pointed towards this policy if you have an unstable or variable income that fluctuates throughout the year or from one year to the next. This is because a universal life insurance policy will allow you to accumulate cash in your policy, which means that you can skip premium payments when money is tight.
You may also be pointed towards a universal policy if you suggest that you are interested in saving money to spend later in life. This is because you can withdraw cash accumulated in your policy before you die.
While a universal life insurance policy may be a sensible option for those with variable income, it is probably not the best idea if you are looking for a liquid asset later in life, as described above. Read on as we explain exactly what universal life insurance is and how it works, the benefits and disadvantages of this type of coverage, , and the main factors to consider when deciding if a universal life insurance policy is right for you.
If you are looking for life insurance providers, read: Best Life Insurance Companies for more information.
What Is Universal Life Insurance?
Universal life insurance, also known as adjustable life insurance, is paid into over the span of a lifetime, rather than simply over a fixed term, This policy type pays out when the policyholder dies.
You can read more about the differences between whole and term life insurance policies here.
However, unlike a standard whole life insurance policy, you can access funds from your universal life insurance policy before you die.
Your monthly premium is broken into two parts. The first part is known as your cost of insurance (COI), and this is the equivalent of your basic whole life insurance. It covers the cost of administering your life insurance policy and of paying out your agreed benefit in the case of your death.
But anything that you pay above and beyond your COI goes into a different account, which is known as the cash value of your policy.
The cash value of your policy is invested, so you can expect your cash value to grow, depending on the type of plan that you choose. The three most popular types of plans are:
The cash value of your plan is linked to the performance of the key stock market indexes, such as the S&P 500 and the Dow Jones. This means that you can accumulate funds in your cash value much faster if the market is doing well, but you can also lose funds when the market does poorly.
These policies protect you from the volatility of the market by offering you a stable interest rate from the outset of your policy. While this offers security, interest rates will generally be low, so you should not expect to accumulate much cash above and beyond what you deposit.
In this case, the cash value of your policy will be invested into a mutual fund, which is a pool of money managed by an investment agent. Your cash value gets pooled together with that of other individuals and invested in a variety of different companies. This means you can benefit from the market at a lower risk, as it is assumed that the insurance agents will take steps to mitigate those risks. However, these accounts generally charge higher overhead fees to manage your investment.
The cash value that your universal life insurance policy accumulates doesn’t go towards your death benefit, but is rather something that you can use during your lifetime. You can withdraw or borrow against your cash value without affecting your death benefit.
However, bear in mind that you will need to pay tax on any withdrawals that you make from the cash value.
You can also use the cash value of your policy as collateral for a loan. But any interest on the loan that is unpaid at the time of your death is taken out of your death benefit.
If you die without making use of your cash value, it is retained by the insurance company. It is not passed onto your beneficiaries as part of your death benefit.
What Are The Benefits Of A Universal Life Insurance Policy?
The main benefit of a universal life insurance policy is that you can build up cash value in your policy when the times are good, and then use that cash value to pay your COI insurance premiums when times are tough.
This means that Universal life insurance can be a good choice for individuals with unstable incomes that vary throughout the year, or that vary significantly from year to year, depending on the availability of work.
You must monitor your policy carefully, especially if you are not actively and consistently paying premium costs. If the cash value of your policy falls to zero, your policy lapses and you will lose it.
What Are The Disadvantages Of Universal Life Insurance?
The main drawback of universal life insurance is that, while it is marketed as an opportunity to build up your nest egg for a rainy day, it is not necessarily the best way to invest your money in case of the unexpected.
This is because the overheads linked with investing your universal insurance cash value are very high. If you choose a variable universal policy that invests in mutual funds, you can expect to receive significantly less return on investment on that money than if you invested the same amount in the same companies using a standard mutual fund.
In addition, you will often find that policies come with caps. For example, the insurer can cap the amount that they pay out to you, for example at ten percent per year, even if investments are performing better, for example, 12 percent. The insurer can also cap your participation, which means that they only invest a portion of your cash value, rather than the full amount you’ve contributed.
If you are considering a universal life insurance policy as a means of saving and investing, you should look at the policy overheads and compare the potential return on investment to investment opportunities outside the world of insurance. You will almost certainly find a more lucrative investment opportunity elsewhere.
In addition, don’t forget that any cash value remaining in your policy when you die will be lost. These funds don’t go to your loved ones. You can pass other investments on to loved ones as an inheritance, but the cash value of your universal life insurance policy will not be available to your next of kin.
Is Universal Life Insurance A Good Idea?
Whether or not a universal life insurance policy is a good choice for you depends on many factors.
If you have an unstable income that fluctuates, and you are worried about being able to pay your premiums some months, a universal policy can be a wise choice. This policy type’s flexibility means you can invest in your cash value when times are good, and use those funds to cover your premiums when times are tough.
However, if you are looking at a universal policy as an opportunity to save and invest, it is probably not the best option for return on investment. Your overheads are high and there are lots of hidden caps.
Also, and perhaps most importantly, remember that anything that you have saved in your cash value that isn’t spent during your lifetime goes to the insurance company. You cannot pass it onto your loved ones. And isn’t that why you are looking at life insurance in the first place?
What Is Universal Life Insurance And How Does It Work?
Universal life insurance is a whole life insurance package that has a saving/investment account attached to it.
This account can be used to save money to cover premiums when you are unable to pay them. You can also withdraw funds from the cash value, and borrow against it.
Any money that remains in your cash value when you die reverts to the insurance company and does not go to your beneficiaries with your death benefit.
What Are The Disadvantages Of Universal Life Insurance?
There are two main disadvantages to universal life insurance. The first is that any money that remains in your cash value when you die reverts to the insurance company and does not go to your beneficiaries.
The second disadvantage is that the administrative overhead for investing the cash value of a universal life insurance policy is much higher than for a mutual fund or other type of savings and investment account or mutual fund.
When you are considering life insurance, you are considering a strategy for looking after what is important to you once you are gone. Life insurance is one of the tools for doing so, but it is not the only option that you have. Remember this when considering universal life insurance.
For individuals with income that is hard to predict, universal life insurance can strike a healthy balance between flexibility of payment and the knowledge that your loved ones will receive a benefit in the event of your death.