There’s a savings component. There’s a flexibility component. But these advantages also come with unique disadvantages, many of which are intentionally obscured by agents trying to sell you a policy.
All types of life insurance policies come with pros and cons, though. Though a universal policy might serve your friend and her family best, a term policy might serve you better. Unfortunately, there’s no easy way to figure out which is best. It is up to you do to the research and, if you can afford it, speak with an independent financial advisor who can give you professional and personalized advice.
If you have just started doing your research, it might also help you to get a sense of the price of various insurance plans. A convenient way to do this is by using an online insurance quote comparison site.
Insurify is a free and easy way to compare policies from different life insurance providers all in one place.
What Do You Get With a Universal Life Insurance Policy?
Universal life insurance is a form of permanent life insurance. Permanent life insurance policies are plans that do not expire after a set amount of time, such as with term life insurance. However, unlike whole life insurance policies, universal life insurance has an added cash value component with cheaper premiums more similar to term life policies.
Universal policies are also more flexible than whole life policies as you can adjust the premium and the death benefit over the course of your life. Given that circumstances and needs change, this flexibility is one of the main advantages of this type of policy. However, the flip-side is that the minimum premium (also known as the cost of insurance) will increase over time as you age.
How Does Universal Life Insurance Work?
Universal policy premiums include two components — the cost of insurance amount and the savings component amount (also known as the cash value).
The cost of insurance (COI) is the minimum amount you must pay to keep your policy active. This amount varies based on your age, health, and insured risk amount. As aforementioned, it does increase as you age. This differs from whole life policies, wherein the policyholder pays a fixed premium for their entire life. Anything you pay above this COI goes into the savings component, a.k.a. the policy’s cash value.
If your career or business is going well and you take that time to pay larger premiums and therefore build up your savings component, universal life insurance might be worth it to you. However, if you don’t, this savings component won’t be able to help cover the minimum cost of insurance as it increases throughout your life. This could then leave you and your loved ones underinsured, or at worst, with a lapsed policy. If your policy lapses, you will have to reapply for a new one that very well might be more expensive.
Pros and Cons of Universal Life Insurance
As with all types of life insurance policies, there are unique advantages and disadvantages to universal life insurance. Everyone’s situation is different, though, so though the disadvantages might be prohibitive for some, it does not mean they will necessarily be prohibitive for you, and vice versa.
Death benefit: As with all life insurance policies, if you die while the policy is active, the insurance company will pay out a tax-free, no-strings-attached death benefit to your beneficiaries. This means that your beneficiaries will not have to pay income tax on the money and they can use it in whatever way they see fit.
Flexible premiums: Though there is a minimum amount you have to pay (the cost of insurance), you have the option to pay more in times of financial success. This additional money goes into the cash value savings component.
Savings component: By contributing more money in premiums during times of wealth, you can grow your savings component, which accrues interest and provides collateral that you can borrow against. Some people use this as an alternative to a 401k or other forms of retirement accounts.
Tax-deferred growth: The interest your savings accrue does not get taxed as income until you withdraw it. This means that the account can theoretically grow faster than if you had to pay taxes on the interest.
Variable premiums: Unlike whole life insurance policies, which have fixed premium payments, universal life policies has variable premiums that increase as you age. In theory, if you have grown your savings component, the interest from this account can help with the increased premiums. However, the majority of people find this is not the case and end up being underinsured as they age. Given that most people rely on a fixed source of retirement income, the increasing premiums can end up causing lapses in coverage when they need it most.
Fees: Though the savings component is an attractive quality of universal life insurance policies, withdrawing money from that account usually comes with hefty fees.
Interest rates: Because the life insurance company wants to demotivate you from taking out loans against your policy, interest rates can be particularly high. Most universal life insurance providers charge rates of five to nine percent, in addition to the flat fees you’ll need to pay to take out a loan in the first place.
Savings component not included in death benefit: If you don’t withdraw all the money in your savings component before you die, it is not included with the death benefit payout to your beneficiaries. Any money in the savings portion of your policy is kept by the insurance company.
Comparing the Different Types of Life Insurance
Universal Life Insurance
Universal life insurance is a life-long type of insurance that offers flexible life insurance premiums and an investment component. Though there will be a monthly minimum premium you have to pay (this is the “Cost of Insurance”), you can pay larger premiums when you have the income to do so. Any money over the cost of insurance goes toward the policy’s cash value investment component, which can help with the COI as it increases throughout your life. However, the variable rate of return on the investment and hidden fees can make this type of insurance a bad deal for many.
Term Life Insurance
These policies are the cheapest and most straightforward. When you purchase a term life insurance policy, you agree to pay the premium for a set term length (e.g. 20 years). If you pass away during that period of time, the insurance company pays out the death benefit to your beneficiaries. Once the term length is up, if you’re still alive, the policy ends. If you want to continue life insurance coverage, you will have to reapply for a new policy.
Because you do not contribute to an investment account with this type of policy, you don’t get any money back once the term ends. This is what makes it so cheap. If you are considering buying term life insurance, Insurify has more in-depth information to help you with your research.
Whole Life Insurance
A whole life insurance policy is a permanent policy, like universal life insurance. It also has an investment component, so you can accrue a cash value while paying your premium. Unlike universal life insurance, though, when you purchase a whole life policy, your premiums are fixed, meaning they won’t go up as you age. Insurify has more information on the differences between whole and term life insurance policies if you are deciding between the two.
Starting Your Life Insurance Journey
Though purchasing a life insurance policy is no easy task, doing your research and taking the time to identify your long term needs and goals will ensure fewer struggles down the line.
Online life insurance quote comparison sites such as Insurify and informational articles can help in your life insurance journey. Insurify’s free life insurance quotes comparison platform can give you quotes from multiple life insurance providers in minutes.
After you’ve taken the time to do some quote comparison research of your own—and unlocked some discounts in the process—consider talking to an independent financial advisor, who will be able to provide the most personalized help. Life insurance products are inherently complicated, so there’s no shame in doing your research and asking questions. After all, life insurance is meant to protect your loved ones after your passing, so it’s best not to leave any stone unturned.
In times of stress and confusion during this process, remember that those feelings won’t last forever and that your loved ones will be forever grateful for your help in securing their financial futures.