With a product name of “Universal Life Insurance,” consumers might be mistaken that Universal Life Insurance is the perfect insurance solution for everyone. Quite frankly, it’s not.
There are advantages and disadvantages for every type of life insurance and that includes Universal Life. So, what are the pros and cons of Universal Life Insurance?
What is Universal Life?
In simple terms, universal life insurance is like term insurance with a bank account attached to it. To be more specific about its workings, let’s use some information provided by the Insurance Information Institute (III). The III explains Universal life insurance as:
This type of policy offers you more flexibility than whole life insurance. You may be able to increase the death benefit, if you pass a medical examination. The savings vehicle (called a cash value account) generally earns a money market rate of interest. After money has accumulated in your account, you will also have the option of altering your premium payments – providing there is enough money in your account to cover the costs. This can be a useful feature if your economic situation has suddenly changed. However, you would need to keep in mind that if you stop or reduce your premiums and the saving accumulation gets used up, the policy might lapse and your life insurance coverage will end. You should check with your agent before deciding not to make premium payments for extended periods because you might not have enough cash value to pay the monthly charges to prevent a policy lapse.
Although this explanation provides a lot of information concerning the intricate workings of universal life, it really doesn’t shine much light on who should purchase it and why. For that information, let’s first discuss the pros and cons of the product.
What are the Pros of Universal Life Insurance?
Actually, there are several great things about universal life that the consumer should consider, and then see if they line up for your needs and circumstances.
The word “cash” carries a lot of weight with consumers so this will always be at the top of the list. The primary difference between universal life and term insurance is the cash value account. When a policyholder pays their periodic premium, they are paying more than just the cost of life insurance. The additional amount is diverted to a cash value account where it will earn interest based on the successful investments made by the insurance company. The good news is there will always be a minimum amount of interest credited so you can rest assured that your account will grow over time.
The cash that accumulates in your policy can be used for several things. You can use it to pay the insurance premium, you can borrow it for any reason, and you can surrender all or part of the policy to get the case that has accrued over time. To get the most out of this benefit, it makes sense to pay higher premiums than required so that your cash account will accumulate as much interest as possible.
The death benefit is from a life insurance is typically not taxable to the beneficiary. The cash that accumulates in the policy is called “tax-deferred” because the only time it becomes taxable is when you withdraw money from the policy that is more than the amount you paid in. Also, loans taken from your policy are never taxable for the policyholder. Here is the difference between a loan and a withdrawal:
- A loan taken from the policy is charged interest and is expected to be paid back but it is not mandatory.
- A withdrawal is an amount taken from the cash value account and is subject to taxes and fees if it is more than your basis (the sum of the premiums paid in). A withdrawal is not repaid and no interest is charged.
The flexibility of a universal life policy should not be understated. This flexibility allows the policyholder to adjust their periodic premiums during the policy, reduce the amount of the death benefit, and even stop paying premiums when the cash value will keep the policy in force for a period of time you require.
Permanent Insurance Coverage
If properly funded, universal life insurance will be there no matter how long you live. This permanent coverage provides peace of mind when you consider how much longer many of us are living because on new medical technology and innovations.
What are the Cons of Universal Life Insurance?
As we mentioned earlier, the pros and cons of any insurance policy is the result of how you plan to use it. Here are a few reasons to consider passing on purchasing universal life.
Like whole life, universal life insurance costs significantly more than term insurance. Although this should be expected since the product provides permanent coverage, many consumers prefer to purchase term insurance which is much cheaper.
Loans Should be Repaid
Although it’s not mandatory to repay a loan from your policy’s cash value account, not repaying it could jeopardize your insurance coverage. And keep in mind that any outstanding loan amounts will be deducted from the death benefit if you should die before repaying your loan.
Unless you purchase a Guaranteed Universal Life policy, your coverage is not guaranteed to be permanent. Unlike Guaranteed Universal Life, Indexed Universal Life and Variable Universal Life policies are not guaranteed to remain in force for your lifetime.
Who should buy Universal Life Insurance?
Although Universal Life Insurance is an adequate form of life insurance for almost everybody, there are certain situations where another type of insurance will work better.
- If you want to insure your debts that will eventually be paid off, buy Term Insurance.
- If you want to provide financial protection for your loved ones and build a nest egg for retirement, buy Universal Life.
- If your need is for an insurance policy that is flexible and can be adjusted to accommodate life events, buy Universal Life.