What is Universal Life Insurance?
Many life insurance policies feature cash value accounts, and these features can vary greatly from policy to policy. In this series, we’ll discuss what types of accounts life insurance policies may offer, how they work and how you might use them in your life insurance planning.
Today’s topic is universal life insurance. If you have questions or thoughts you’d like us to address in the future, please send them our way!
Whole life insurance vs. universal life insurance
Whole life insurance and universal life insurance are two types of life insurance policies. Whole life insurance provides coverage for your death, with the amount decreasing based on age, while universal life insurance has a level premium that remains constant throughout the policy’s duration.
Unlike whole life, universal life does not provide coverage for a person’s death because it invests the premiums you pay into stocks, bonds and other investments. However, if you live past the length of your policy term, then you will lose any money left in your investment account.
If this happens to you during retirement, then universal life insurance may be a better option than whole life. To determine which type of insurance would work best for you, contact an agent.
They can help you decide whether or not a fixed premium universal life insurance plan is right for you. The key difference between these two plans is how they cover death benefits.
With a whole life insurance policy, your coverage decreases as you get older but with a universal life insurance plan, your coverage stays the same through its lifetime.
However, as time goes by and inflation occurs which affects both products the value of the payout at the end becomes less valuable.
A whole life insurance payout becomes worth more each year due to inflation; whereas, a universal life payout becomes worth less each year due to inflation.
How does universal life insurance work?
Universal life insurance is a type of whole life insurance policy that can be purchased at any time, but it’s also one of the most complicated.
With universal life insurance, you purchase a policy and pay monthly premiums for a set amount of time. The premiums can be paid for a period of years or for the rest of your life.
As long as you continue to pay the premiums, your coverage will never lapse. If you stop paying the premium, then your coverage stops too. Premiums are based on a variety of factors including age and how much coverage you want.
If you’re older and want less coverage, then your premiums will be lower than someone who’s younger with more coverage in mind. Policies usually have three types of cash values:
These three values play an important role in determining what happens if you ever need to take out a loan. Here’s how they work together:
Accumulated cash value – this is the money that accumulates over time when you pay premiums. You don’t have access to this until you’ve held onto the policy for 10-15 years. Once 10-15 years has passed, some policies let you borrow from this fund and repay it later when your future earnings are higher.
Policy cash value – this is the total sum of all your premiums minus any claims paid during those periods.
Advantages and disadvantages of universal life insurance
Universal life insurance provides the best of both worlds. This type of life insurance offers the flexibility to change your premiums and death benefits, as well as providing a guaranteed return on investment.
It also can be converted into a whole life policy if you want to protect your family in the future. The downside is that universal life insurance has high premiums and can be difficult to understand at first glance.
A universal life insurance plan might not be for everyone; it’s important to consult with an experienced financial advisor before signing up for any new plans. Some people are uncomfortable when they’re told they have to sign a lengthy contract or may feel trapped by higher monthly payments.
If you think this kind of coverage would work best for your needs, it could be worth considering even with these drawbacks because of all the other advantages universal life insurance has to offer.
As always, it’s important to do your research before deciding which life insurance company you’ll choose. Talk to a trusted financial advisor about what suits your budget and lifestyle the most!
When does universal life insurance make sense?
Universal life insurance can make sense in a few situations. The first scenario where it makes sense is when a person has a guaranteed income stream that they expect to continue indefinitely.
Another scenario where universal life insurance can make sense is when someone has sufficient assets and/or investments that would be difficult for the beneficiaries to manage on their own.
In this situation, universal life insurance provides a lifetime guarantee of cash flow or annuity payments to replace the death benefits that could have been paid through traditional life insurance.
It is worth noting that there are no guarantees with these types of policies, as you may find out down the line if you have invested your premiums poorly and are unable to provide an adequate level of coverage from your investment portfolio alone.
For some people, even without the risk of a poor investment portfolio, savings and investments are not enough to provide them with adequate retirement funds.
A third scenario where universal life insurance can make sense is when someone wants to protect themselves against inflation.
If you put away $250,000 now and want it to last until 20 years from now, assuming a 3% annual rate of inflation over those 20 years that $250,000 will only buy about $150k in goods at today’s prices by then.