Universal life insurance coverage often pops up when you are searching and shopping for life insurance coverage. But it's a complex product which can be hard to know when you try to unravel the expense and risks.
Universal life insurance is a type of permanent insurance that offers a death benefit along with a cash value ingredient that acts as a savings account and may grow within the lifetime of your policy. Universal life, like any other permanent life insurance policy, is made to provide lifetime coverage since the premiums can remain level provided you reside.
The cash value account feature of universal life insurance coverage, especially as it can potentially be employed to cover your premiums over time, may be appealing to those looking for insurance. However, for most of us, balance higher premium costs, fees, and risks make term life a better option. Indeed, those complexities have led to a large number of people losing their policies over the last few years, after paying premiums for decades.
It's smart to possess a deep understanding of a product like universal life insurance coverage before you purchase.
Here are several details you need to know.
How universal life insurance works
Universal life insurance coverage is a kind of permanent insurance. Which means, so long as your premiums are paid, you will have life insurance coverage. The insurance policy never expires.
But although life insurance coverage at any age is a draw, what makes permanent life insurance attractive is often the cash value that can grow over time. As you pay your premiums, a universal life insurance coverage can accumulate a cash value.
In a universal policy, that cash value earns interest in the greater of the current market rate or perhaps a minimum interest rate set by the policy. This means the cash value has less growth potential than in a flexible life insurance coverage, where cash value is committed to the market, but possibly greater security due to the policy's minimum rate of interest.
Unlike a whole life insurance coverage, which has fixed premiums within the life of the policy, universal life insurance coverage offers flexible premiums. When there is enough cash value, policyholders may use that value to pay for fully or partially their monthly premiums. They also have the option of paying more than their standard premium to bolster the money worth of their account.
If this flexibility seems attractive, keep in mind that flexibility inevitably goes for both.
Contractual premiums of universal life insurance typically stay the same over the lifetime of the insurance policy. However, if your customer uses the cash value to assist pay premiums and also the cash value is diminished, the difference between the cash value and the death benefit will be greater than anticipated and can eventually require customer to pay for higher premiums than planned. That may mean higher – sometimes higher – monthly payments to keep the insurance policy in effect. Before selecting universal life insurance, consider if the potential benefits offset these costs.
How does universal life insurance work?
Universal life insurance coverage has three key components: premiums, death benefit, and cash value.
The premium is that which you invest in your policy each month. Universal life insurance coverage premiums are split between the cost of coverage – the amount to maintain your life insurance coverage – and also the cash value. Every month you are able to determine how much you intend to pay as long as it is involving the policy's minimum and maximum payments.
You can use the money value to pay for premiums once you have developed enough. But if your cash value expires, or interest rates don't allow it to maintain the growing cost of insurance over time, you can wind up owing higher payments. Because the cash value is typically equal to the surrender value, not making those payments could result in a double loss – no more having insurance coverage and no surrender value for that lapsed policy, even after many years of payments.
The death benefit is the insurance coverage amount and is how much your beneficiary will receive when you pass. Universal life policyholders often have some ability to decrease or increase their coverage amounts according to their needs.
Regarding the cash value is the checking account, each time you create a premium payment, some is put towards your cost of insurance (the total amount to maintain your death benefit active and cover administrative fees) and it will be placed in your money value account.
With universal life insurance, the cash value is certain to grow at a minimum annual rate of interest, however it can increase faster based on market interest rates. If the cash value grows, you can use it as loan collateral in order to borrow out of your policy or used to cover premium payments.
If you choose you will no longer would like your universal life insurance policy, you are able to surrender it to the insurer and obtain the cash value in exchange.
Pros and cons of universal life insurance
Universal life insurance is a type of life insurance that combines permanent life insurance coverage having a cash value component plus some flexibility around premiums and coverage levels.
To some, the benefits seem attractive.
- Premiums and death benefits are flexible. If you want to contribute less to your policy inside a given month, you are able to, so long as your payment is above the minimum threshold. And when your requirements for insurance change over time, you can often adjust your death benefit.
- You get life insurance coverage for the entire life. Your heirs will receive a death benefit regardless of whenever you pass, so long as your premiums are mortgage free.
- Lower cost permanent insurance than very existence. Universal life insurance coverage guarantees the absolute minimum return with time, however the return is usually lower than the fixed whole life insurance cash value rate of interest. That means premiums for universal life insurance are generally less expensive than premiums for whole life. As well as in high-interest rate environments, your cash value may grow faster having a universal life insurance coverage than whole life.
Universal life insurance comes with a few downsides you should think about.
- Premiums are expensive. While universal life insurance coverage premiums are usually less expensive than whole life, they will always be much more expensive compared to premiums for a term life insurance policy during the policy term. A $500,000 universal life insurance coverage for any 40-year-old male in excellent health could be $249.50 a month, compared to less than $32.38 for any 20-year Haven Term policy.
- Your insurance cost isn't fixed. Universal life insurance coverage premiums are split between the cost of insurance policy and the cash value. But because you age, the price of insurance increases in most policies, up to a maximum amount set at the start of the insurance policy. If your cash value is diminished, substandard higher premium payments later or even the loss of your policy.
- Loans will come with interest. Interest is going to be charged on any amount borrowed. Unpaid loans and interest will reduce the policy's cash value and the death benefit.
Many people with a conservative risk tolerance will use universal life insurance coverage to amass funds on the tax-deferred basis, particularly if they have a lifetime insurance need. However, for those who need coverage for a defined period, they are able to buy affordable term life.
Term life insurance coverage as an alternative to universal life insurance
If your primary aim is protecting your loved ones with life insurance when you need it most – while your children or young or you continue to be at the start of your retirement funds – term life insurance is often a less expensive and much more efficient choice.
Get the coverage you'll need, when you need it as well as for a much less expensive with term life insurance. The premium savings may be put towards other goals and investments so that you can build the near future you would like.