You may have heard about universal life from an agent, advisor or a buddy of yours who just got a job with a big life insurance company. And now you are wondering what all the noise is about and is it a good product or even a right one for you. Well, that depends on your situation and what is of importance to you. A universal life insurance is a permanent type of life insurance policy that offers flexibility along with cash value accumulation. Like most cash value life insurance plans it is important to look at both pros and cons. So if you want to have a clear idea of what universal life insurance is all about keep reading.
Universal life was created by life insurance companies when whole life was not offering competitive returns in comparison to other investment products. Of course, these days people may buy a universal life insurance policy for many different reasons such as permanent coverage, business agreement funding or as an addition to their retirement portfolio. Let’s take a moment to look at all the positives of this policy.
PROS
Permanent Protection
One of the biggest things that you get with a universal life insurance policy is a lifetime coverage. Most universal life plans can stay in force up until the age of 100 or even longer depending on the policy set up. So if you feel like your need for life insurance will be longer than what a term life insurance plan can offer, then this is may be an option to consider.
Transparency
Unlike other types of permanent life insurance you can see a lot of details with a universal life policy. The company will provide you with annual reports showing the mortality charges, policy expenses, interest earnings and cash value accumulation in great detail. This is beneficial since you can see a full breakdown of how your life insurance premiums are being utilized and make any necessary adjustments.
Flexibility
Unlike a whole life policy a universal life policy offers flexibility when it comes to the death benefit and the premium payments. You can reduce the amount of coverage at any time or even increase it as long as you are willing to show the company that you are still insurable. So as you go through different life stages or changes it is good to have that flexibility.
Adjust or Skip Payment
In addition to that a universal life policy may allow you to skip your monthly premiums or even pay a lower premium for quite some time by utilizing cash value accumulation. When it comes to flexibility it is hard to find anything that matches a universal life policy.
Dual Death Benefit Options
As you may already know universal life insurance policy does accumulate cash value while also providing you with life insurance protection. The thing to keep in mind is that most life insurance policies will only pay out the death benefit in the event of death and not the cash value. But when it comes to universal life insurance you can have the cake and eat it too. Typically a universal life policy will have two options for the death benefit payout which are option A and option B. Option A is your normal fixed death benefit payout without any cash value, usually this is the amount of coverage you got when you first bought the policy. Option B however is really what I think makes the policy special since you can leave your loved ones the original death benefit and any cash value accumulation as well. If you pick an option B it may cost more, but your total death benefit will grow all the time.
Tax Deferred Earnings
Another great thing about universal life insurance policies is that the cash value returns accumulate tax free. Now this will depend on how the gains will be received, but typically if you make a withdrawal via a loan or the payout is made to your beneficiary due to sudden death then no taxes will be charged on any interest gains.
Cash Value Accumulation
Since the portion of the policy’s monthly premium goes into the cash value account where it earns interest from the investments the company partakes in. The policy over time can accumulate a substantial amount of cash value which can be used for whatever you desire down the line. You can use it to pay for your child’s college, emergency situations, skip premiums or keep it for retirement. Just be sure to withdraw it as a loan because otherwise you will have to pay taxes on investment returns.
CONS
Fees
A huge negative for the universal life policy is the fees associated with it that will be coming out from your premium. This is usually fees that the company will charge for managing your cash value, administration fees, agent commissions and mortality cost. All of these charges can be bad since they increase the overall cost and also reduce the amount you your cash value uses to invest. If you decide to get rid of the policy early you may also run into surrender charges so be careful before you make any sudden moves.
Cost
What most people don’t realize is that a universal life policy is a lot more expensive than your typical pure protection product such as term life or GUL. It can be a horrible idea to buy a universal life insurance policy at the cost of getting inadequate coverage for your family. So for people that want just life insurance there are many other better alternatives at a fraction of the price.
Investment
For some people that have maximized their 401k and Roth IRA’s who are looking for an additional tax sheltered investment a universal life insurance policy may not be a bad idea. However, for us regular folks who get pitched on a universal life insurance policy as an ultimate investment, beware. First of all, as we discussed previously the fees alone that eat into the money that could otherwise be invested which make it not such a great investment tool already. Another thing is that you lack control of the actual investments, although some may argue that point, but it is a fact that there are limited options to choose from.
For someone who invested that money into stocks, mutual funds, bonds and index funds would enjoy more diversification and even get higher returns. Also the returns tend to be overly exaggerated on the policy illustrations when in reality you should expect much more conservative returns. Lastly unlike other investments it is not as simple to get your funds out since you have to take the cash value out as a loan to avoid taxation which the loans may have caps plus there is also interest on the loans. To keep it simple, if you are looking for a universal life policy as a way to get rich or retire you may want to reconsider.
There are quite a few pros to buying a universal life insurance policy, but this is only so for those that bought at a very young age, overfunded the policy, use it as a financial planning tool or simply had it for way too long where it does not make sense to surrender it. For the majority of people it is simply too costly and an overrated investment tool. Personally here at InsureChance we believe that life insurance and investments should be separate. Now if you do need to buy a permanent life insurance protection there is only one type of a universal life insurance policy we recommend, known as a no lapse universal life. Now that is a product that is not built for investment, but does offer a lifetime protection at a locked in and affordable monthly premiums. That is why we call it a lifetime term. Hope you enjoyed the article and please drop a comment below if we missed anything.
