What is Universal Life Insurance?
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UPDATED: Aug 13, 2020
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As you look for life insurance, you may consider universal life insurance, which is a type of permanent life insurance with multiple uses as it invests a portion of your premium payment. Before you purchase a universal life policy you need to know what the policy will do for you, and what pros and cons you need to evaluate.
TIP: Take your time, understand what a universal policy is, get a number of quotes, and speak with an insurance agent to make sure that a universal life policy is the right fit for you.
What is Universal Life Insurance?
Universal Life Insurance is a type permanent insurance that has an insurance component and an investment component which allow a person to have permanent death benefit and a savings option all in one. The insurance is permanent insurance that is for the rest of your life. The investment portfolio is usually a savings account that grows tax deferred and accrues cash value. When you pay your premiums for your universal life policy, it is divided into three separate buckets—premiums to build the death benefit account, fees for the policy, and investment capital to build the savings portfolio
TIP: A universal life policy is flexible, and allows one to pay a premium monthly to contribute to the death benefit value, an amount greater than your premium to build the cash account quicker, or no premium at all with the cost to be deducted from the cash account.
Benefits of a Universal Life Insurance Policy
A universal life policy can provide you with a safety net in times of need. That is because you are allowed to take a policy loan or withdrawal from your cash value account. Whether you take a loan or withdraw depends on how the policy was set up, how much money you have in your cash account and any stipulations on withdraws. If you have received a quote on universal life insurance, talk to the agent about any stipulation around borrowing or withdrawing from your cash accumulation. Understand this completely before you sign.
How Premiums are Calculated
There are two possible ways that universal life premiums are calculated: Level Cost of Insurance (LOI) or on Yearly Renewable Term (YRT).
- LOI premium means that the premium for the death benefit will stay level at all times. If you took the policy out at 25 years old, the insurance premium for the policy would be the same when you are 65 years old.
- YRT premium means that the premium for the death benefit will adjust annual. Therefore, it will increase as your age increases. This means at a certain time, your premium could out pace what you are paying monthly. At this point, the difference would be deducted from your cash accumulation account. Provided you have money!
TIP: This is important! Of course level cost of insurance is best. But if your policy premiums are calculated on yearly renewable term, make sure you are funding your cash account enough that in the event your premiums raise dramatically as you get older, your cash account will be able to make up the different, preventing lost of coverage.
Ask an experienced agent how your universal life premium will be calculated, and what the minimum premium cost will be. Because of the fluctuation in the market, you may not be able to rely on your investment cash build up to cover your premium rates. That is why anyone purchasing universal life should know the risk and talk with a reputable agent that understands these policies.
Universal Life Insurance Pros and Cons
Like any investment vehicle, there are pros and cons. A universal life polices is not different.
Some of it benefits are clear:
- You have permanent life insurance as long as you pay the premiums or there is enough cash value in your investment account to pay the premiums.
- You have a savings investment vehicle attached that grows tax deferred. Usually these accounts can be a saving account that earns a minimum interest rate (say 4%) or a guarantee term deposit or an investment account.
- You have flexibility to pay your premium or have any fees deducted from your cash value account as long as it is enough on hand to cover the expense.
- You can make withdrawals or borrow from your cash value account.
And the cons to consider:
- You could be under funded in years to come if the cost of the insurance out paces your premium contribution or your cash account value.
- Poor performance in your account could mean that you could have purchased term insurance for a cheaper premium, and done better investing the difference in savings by opening a separate investment or savings account.
While universal life policies have some benefits, you should always talk to an insurance agent that has experience with these policies to see if one is right for you.
TIP: When considering a universal life policy, do not just compare prices across companies. Know your life insurance needs and compare a universal plan to a term life plan before you make a purchase.
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