A Guide to Universal Life Insurance
Universal life insurance is a type of permanent life insurance, offering both a cash value and a 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.
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How Does Universal Life Insurance Work?
Universal life insurance is split into two different components: the cost of insurance, known as the COI, and the cash value; and unlike whole life insurance and term life insurance, it can be adjusted over time. The cost of insurance is simply the price needed to keep the policy alive and it includes elements such as administration charges and mortality costs.
As for the cash value, this includes all accumulated premiums that exceed the necessary cost of insurance. This sum will increase as it earns interest in line with the market rate. The policyholder can choose to increase or decrease 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.
The cash value can cover the cost of the universal life policy, but if there is not enough money to cover the premiums then the policy can lapse.
A universal life insurance policy offers two types of death benefit.
One is a fixed sum that doesn’t change and guarantees your loved ones will get a specific amount when you pass away; the other is an increasing lump sum, in line with the policy’s cash value. This sum is tax-free but will not be paid if the cash value is withdrawn before the policyholder dies or if the premium payments stop. In such cases, the policy will lapse.
Whole life Policy vs Universal Life Policy vs Term Insurance Policy
There are pros and cons to all life insurance products. Some offer 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 an insurance agent and they’ll discuss your options and help you decide.
A term life insurance policy is the better option for many applicants and covers them for a specific period of time, often from 10 to 30 years. There is no cash value or additional benefits, and the entire purpose is to provide a death benefit in exchange for monthly life insurance premiums.
A term life insurance policy is generally a cheaper and more widely available option as it provides some more assurances to the insurance company, as all policies are based on the probability of the individual dying during the term.
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 the policyholders what they need.
The younger you are, the less you will pay and the greater the death benefit will be. Whole life insurance and universal life insurance, however, have a cash value attached and this can be surrendered (surrender charges may apply) for the cash value.
If the surrender value is not taken, and the policy premiums are paid, a guaranteed death benefit will be paid to the beneficiaries regardless of the age of the policyholder.
In this way, a fixed whole life insurance policy and a variable universal life insurance policy remain for the entire life of the policyholder, while giving their loved ones some assurances. These policies are often said to combine the benefits of a death benefit with a savings account, one that can boost your retirement income 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, whole life insurance policies typically charge higher premiums. For instance, a healthy 30-year old man can expect to pay between $200 and $300 a year for a term life insurance policy 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 a whole life insurance policy offering the same death benefit, they would likely be charged in excess of $2,000 a year.
Is Universal Life Insurance Right For You?
Whether a universal life insurance plan is right for you or not will depend on your age, health, budget, and goals. If you’re looking for a death benefit 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 the life of the policy (such as a disabled child) a permanent life insurance policy is probably the better option. It’s also worth noting that insurance coverage can be switched and tweaked.
A universal life insurance policy can be adapted to suit your growing needs, with a flexible premium and death benefit. A term life insurance policy, on the other hand, can be switched to a permanent life insurance policy if you find that you have more money and more options further down the line.
This isn’t always the case, however, so if there is a chance you will want to switch make sure you use a life insurance company that will let you do this.
Bottom Line: A Safe Investment
A universal life insurance offers several benefits and combines an investment with a death benefit. If you need both of these and have the money to pay the premiums, it’s a good option.
However, if you’re mainly looking for a death benefit 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.