Universal Life Insurance
Universal life insurance
Universal life insurance is another type of permanent life insurance designed to provide lifetime coverage. Unlike whole life insurance, universal life insurance policies are flexible and may allow you to raise or lower your premium or coverage amounts throughout your lifetime. Like whole life insurance, universal life also has a tax-deferred savings component, which may build wealth over time. Additionally, due to its lifetime coverage, universal life typically has higher premiums than term.
Needs it helps meet: Universal life insurance is most often used as a flexible estate planning strategy to help preserve wealth to be transferred to beneficiaries. Another common use is long term income replacement, where the need extends beyond working years. Some universal life insurance product designs focus on providing both death benefit coverage and building cash value while others focus on providing guaranteed death benefit coverage.
More On Universal Life Insurance
Universal life insurance is also know as ‘Permanent Insurance’ and is relatively similar to Whole Life Insurance, but with a difference. There are three main components of this type of policy.
The first aspect of the policy entails:
1. Death Benefits – You basically have 2 options to choose from when deciding how you want death benefits to be paid to your beneficiary. You can choose a level death benefit, that starts off as one amount and stays level for the life of the policy, regardless of cash value (known as “level death benefit” or “death benefit type A”. The other option is a combination of a specific death benefit plus the cash value which has accumulated over the life of the policy (“type B death benefit”).
The second component involves:
2. The Cash Accumulation Portion – However you make your premiums, a portion is allocated by the insurance company into a interest crediting strategy of your choosing. One popular strategy, called equity indexed universal life, allows you to participate in the gains of a major stock index, such as the S&P 500, with no risk of loss of principal.
You are guaranteed a specific rate of return in many of these strategies, regardless how well the market does. But, if the market performs better than the minimal guaranteed amount of investment, you reap the benefits as well, and usually participate in some percentage of the gains of the index, or are capped at a certain percentage.
3. Flexible Premiums – The big difference between Universal Life Insurance and a Whole Life policy, is that with universal life the premiums can be paid as the payer desires, as long as sufficient cash values are present to pay of the cost of insurance. With a Whole Life policy, you can’t change the premiums to suit the economic situation.
The Pros of Universal Life Insurance
This type of policy offers:
Flexibility – If your financial circumstances tend to fluctuate, you can opt to pay either higher or lower premiums. Even if your economic circumstances are rock solid, you can conveniently opt to pay a lower premium when the market is performing poorly and up the premium when the market is bullish and thriving to make more on your interest crediting strategy.
Interest Strategy Choices – You aren’t forced to accept where the cash accumulation portion goes into because the insurance company will give you several strategy options. This can be either an equity index strategy, a guaranteed one year term deposit, or a general interest account based on the interest rate market.
Permanent – You get coverage for the life of the policy for your entire life so long as you keep up with the premiums.
Cash Value Availability – As you increase the value of the policy over time, you might wonder what happens if you get jammed up financially – will you have to cancel the policy to get the cash value? No, you can keep the policy in force and your family protected at the same time because you can borrow or even withdraw the cash value you have built up to date. You will still not only have the unused portion of the cash value but the availability of the death benefits.
Tax Deferred – Both the cash value investment portion and the death benefits are tax deferred which means no IRS will bother you with their hand out when benefits or even when the cash value is paid out, if taken as a loan.
Premiums are Covered – If you find yourself in a financially strapped position and can’t make the premium, the insurance company will pay the amount of the premium from the accumulated cash value which can be very convenient.
Cons of Universal Life Insurance
More Expensive – This type of life insurance policy costs a lot more than other polices in terms of cost of insurance, premium fees, allocation fees, etc., especially when comparing universal versus Term Life Insurance, for example. Universal life is usually at least 3 to 4 times the cost of term. Also, a universal life insurance policy has higher fees and administration costs.
Mortality Cost – Be cautious when choosing your policy. With some policies, you have 2 choices. The first is LCOI (Level Cost of Insurance), which means the amount of mortality payment never changes.
The second option is Yearly Renewable Term which means the mortality portion of the premium will change over time. It’s relatively cheap if you buy the policy when you’re younger but gets progressively more expensive over time. If your mortality expenses increase annually, you’ll want to be sure to request illustrations frequently to be sure your policy benefits are in good standing. Alternatively, you may want to add a no lapse guarantee rider to your policy for whatever length you MUST have the policy in force, to ensure the premiums stay level and death benefit stays level for that period.
Must Repay Borrowed Cash Value – Although borrowing against the accumulated cash value is convenient, you have to pay it back. What’s even more inconvenient, the insurance company will also charge you interest. Also, borrowing money on some universal policies may also reduce your death benefit.
Have to Monitor your Cash Values – This is not a type of policy you want to just stick in the drawer and simply pay the premiums as they come due. You need to keep track of how your cash value account is doing, and frequently request in force illustrations. If you’re a person not too savvy with knowing how investments work, this may not be the best policy choice for you.
Interest Rates are Conservative – If you’re hoping to stuff premiums into your policy and treat universal life as an investment and make a lot of money, you may not get the yields you’re looking for, as interest rates are relatively conservative.
To determine if a Universal Life Insurance policy is right for you and to get the lowest life insurance quote, call us now, toll-free at 1-877-627-0138