Universal life insuranceÂ is a type ofÂ permanent life insurance, offering both aÂ cash valueÂ and aÂ death benefit. It offers numerous tax benefits and is often considered to be a combination of a life insurance policy and an investment; it can pay dividends, be cashed out, and offers a guaranteed death benefit at the same time.
How Does Universal Life Insurance Work?
Universal life insuranceÂ is split into two different components: theÂ cost of insurance, known as the COI, and theÂ cash value; and unlikeÂ whole life insuranceÂ andÂ term life insurance, it can be adjusted over time. TheÂ cost of insuranceÂ is simply the price needed to keep the policy alive and it includes elements such as administration charges and mortality costs.
As for theÂ cash value, this includes all accumulated premiums that exceed the necessaryÂ cost of insurance. This sum will increase as it earns interest in line with the market rate. Â TheÂ policyholderÂ can choose to increase or decreaseÂ premium payments, as well as the rate at which they are paid, which is why this type of insurance is also known as adjustable life insurance.Â
TheÂ cash valueÂ can cover the cost of theÂ universal life policy, but if there is not enough money to cover the premiums then the policy can lapse.
AÂ universalÂ life insuranceÂ policyÂ offers two types ofÂ death benefit. One is a fixed sum that doesn’t change and guarantees yourÂ loved onesÂ will get a specific amount when you pass away; the other is an increasing lump sum, in line with theÂ policy’sÂ cash value. This sum isÂ tax-free but will not be paid if theÂ cash valueÂ is withdrawn before theÂ policyholderÂ dies or if theÂ premium paymentsÂ stop. In such cases, the policy will lapse.
Whole life PolicyÂ vsÂ Universal Life PolicyÂ vsÂ Term InsuranceÂ Policy
There are pros and cons to allÂ lifeÂ insurance products. Some offerÂ cash values, others don’t; some are easy to understand, others are a little more complicated. If you’re not sure which policy is right for you, speak with anÂ insurance agentÂ and they’ll discuss your options and help you decide.
AÂ termÂ life insuranceÂ policyÂ is the better option for many applicants and covers them for a specificÂ periodÂ of time, often from 10 to 30 years. There is noÂ cash valueÂ or additional benefits, and the entire purpose is to provide aÂ death benefitÂ in exchange for monthlyÂ life insurance premiums.
AÂ termÂ life insuranceÂ policyÂ is generally a cheaper and more widely available option as it provides some more assurances to theÂ insurance company, as all policies are based on the probability of the individual dying during the term.Â
By carefully weighing up these odds, using information such as their age, health, and family medical history, the insurer can almost guarantee a profit while still giving theÂ policyholdersÂ what they need.
The younger you are, the less you will pay and the greater theÂ death benefitÂ will be.Â Whole life insuranceÂ andÂ universal life insurance, however, have aÂ cash valueÂ attached and this can be surrendered (surrender chargesÂ may apply) for theÂ cash value.Â
If theÂ surrender valueÂ is not taken, and the policy premiums are paid, aÂ guaranteedÂ death benefitÂ will be paid to the beneficiaries regardless of the age of theÂ policyholder.
In this way, a fixedÂ wholeÂ life insuranceÂ policyÂ and aÂ variableÂ universalÂ life insuranceÂ policyÂ remain for theÂ entire lifeÂ of theÂ policyholder, while giving theirÂ loved onesÂ some assurances. These policies are often said to combine the benefits of aÂ death benefitÂ with aÂ savings account, one that can boost yourÂ retirement incomeÂ and provide an additional option when everything turns sour and you’re in dire need of a cash injection.
As a result of these extra benefits,Â wholeÂ life insuranceÂ policiesÂ typically charge higher premiums. For instance, a healthy 30-year old man can expect to pay between $200 and $300 a year for aÂ termÂ life insuranceÂ policyÂ that lasts for 30 years and offers a $250,000 payout. This covers them until the age of 60, and statistically, there is a high chance they will outlive this policy, thus affording the life insurance company more leeway and allowing them to offer lower rates.
However, if a 30-year old man were to apply for aÂ wholeÂ life insuranceÂ policyÂ offering the sameÂ death benefit, they would likely be charged in excess of $2,000 a year.
IsÂ Universal Life InsuranceÂ Right For You?
Whether aÂ universal life insuranceÂ planÂ is right for you or not will depend on your age, health, budget, and goals. If you’re looking for aÂ death benefitÂ to protect your family and you don’t have a lot of money to spare, it’s probably not the best option and you should look for a term life insurance policy instead.
However, if you have a large estate to protect or a dependent who will rely on you for theÂ life of the policyÂ (such as a disabled child) aÂ permanentÂ life insuranceÂ policyÂ is probably the better option. It’s also worth noting thatÂ insurance coverageÂ can be switched and tweaked.Â
AÂ universalÂ life insuranceÂ policyÂ can be adapted to suit your growing needs, with aÂ flexible premiumÂ andÂ death benefit. AÂ termÂ life insuranceÂ policy, on the other hand, can be switched to aÂ permanentÂ life insuranceÂ policyÂ if you find that you have more money and more options further down the line.Â
This isn’t always the case, however, so if there is a chance you will want to switch make sure you use aÂ lifeÂ insurance companyÂ that will let you do this.
Bottom Line: A Safe Investment
AÂ universal life insuranceÂ offers several benefits and combines an investment with aÂ death benefit. If you need both of these and have the money to pay the premiums, it’s a good option.Â
However, if you’re mainly looking for aÂ death benefitÂ or an investment, look into a term life insurance policy or a stock market investment, because neither of these options are strong enough on their own. It’s only when they are combined that universal life insurance begins to look worthwhile.
A Guide to Universal Life Insurance is a post from Pocket Your Dollars.