While universal life insurance is a permanent form of insurance, it has some of the features of term and whole life. Although universal life premiums are fixed after purchase, the cost of buying life insurance increases as you age because rates are primarily based on your age (mortality), health and medical history.
Universal life is not as cheap as term but not as expensive as whole, and offers an investment component. Most universal life insurance policies have a flexible premium with a minimum and maximum payment. The more money you pay, the greater the amount that is diverted into the cash value.
Overall, when you compare the pros and cons, universal life insurance can be a good investment option and source of life insurance for families with specific financial needs.
Cash Value and Death Benefit
Similar to premiums, the death benefit with universal life insurance is fixed, but the insured has the option to increase or decrease the insurance portion of the policy anytime, resulting in a proportionate adjustment in premiums.
However, the amount of the death benefit can be affected by the cash value, such that loans taken out against the policy and not repaid before a death benefit payout, will result in a payout lower than the face value of the policy.
The cash value can also be used to pay premiums, and as the insured person ages and the premiums increase, the cash value can be greatly diminished as it is used to pay premiums.
Universal life insurance is permanent and cannot be cancelled by the company as long as the premiums are paid. If a policyholder ever decides that he/she no longer wants the coverage, termination of the contract is very easy – just don’t pay the monthly premiums and opt to terminate your contract. If you do not notify your company to pay out the cash value, the carrier will continue coverage and use the existing cash value to pay the premiums due.
Flexible Payments and Benefits
Unlike whole life insurance which has a fixed premium and death benefit, universal can be modified to meet changing financial circumstances. Payments can be made monthly, quarterly, semi-annually or annually at the policyholder’s choice.
Universal policies have a minimum and maximum payment and the more the policyholder pays, the greater the amount diverted to the cash value. Most universal coverages do not guarantee a rate of return on cash value like whole life insurance.
Returns on Investment
Unlike whole insurance where the cash value is in a secure account, universal protection offers an investment account. The money in the universal life policy is invested in financial instruments and the returns are usually linked to a market index.
Some universal protection, called GULs, may guarantee a minimum rate of return on investment, but rates for these are slightly higher. If investments fail, the cash value reaches zero, and the insured person is unable to make payments, the policy may lapse.
No Lapse Guarantee
Whole life guarantees payment of the death benefit, but universal life can lapse if the cash value reaches zero and the policyholder is unable to pay the full amount of the premiums.
Universal life insurance with a no lapse guarantee can keep the policy in force if minimum premium payments are made over a specified time period. The no lapse guarantee is available as a rider and there is an additional cost for adding the option.
If cash value accumulates in a universal policy, the returns are tax deferred until they are withdrawn. A policyholder can use up to 90% of the cash value as security for a low interest loan with no repayment schedule. When the cash value is used to secure a loan, no taxes are due on the amount since a loan is not considered income or a capital gain. The tax deferments on investment returns make universal life insurance an attractive alternative to other investments.
Disability Waiver of Premium Rider
A disability waiver can be added to a universal policy to keep the contract in effect if the insured becomes disabled and cannot make the minimum payments. There is a waiting period of between 90 and 180 days before the rider will begin making the premium payments.
If the disability lasts longer than the waiting period, the rider will make premium payments to keep the policy from lapsing. The waiver of premium rider is an excellent addition to standard coverage.
In most cases, universal life insurance can be converted to whole or variable universal life insurance as long as the death benefit remains the same or is reduced. Most insurers will not require evidence of insurability for the conversion.
Whole life protection is more expensive for young consumers than universal life insurance, but it offers fixed lifetime premiums and greater security in the cash value. Variable universal protection gives the policyholder greater control over the investment of the cash value.
How Much To Buy
The amount of coverage needed depends on a number of factors including the age of the insured person and the reason for buying life insurance. Older individuals with few financial obligations may choose a low limit policy to cover final expenses, such as medical bills and funeral costs, while young, single individuals may need a higher limit to cover outstanding debts like student debt or car loans as well as any final expenses. Wage earners with dependents and families need more coverage to guarantee their family’s lifestyle can continue even if they die prematurely.
Factors To Consider
In addition to monthly expenses for the family, secondary life insurance, like mortgage protection, should be factored in when deciding on an appropriate death benefit.
Other sources of income, like Social Security survivor’s benefits, pensions, retirement funds such as IRAs and 401Ks, savings and investment accounts, may provide some income for surviving family members. Young children will need financial support for more years than older children and the cost of college tuition is another consideration when calculating the right amount.
The amount of life insurance you need depends on various factors, including your current budget and lifestyle, existing assets and liabilities, and potential future income, but to give you an idea, these are the figures experts generally recommend:
- in your 30s: 15 times your annual gross income
- in your 40s: 12 times your annual gross income
- in your 50s: 8 times your annual gross income
- in your 60s: 5 times or enough to cover final expenses
For Stay At Home Parents
Although not all parents are wage earners, parents who work in the home still make an important contribution. When buying life insurance for a parent who works in the home, the cost of the services they provide must be considered. These include child care, housekeeping, shopping and food preparation, and transportation for children who are not old enough to drive. When deciding on the right death benefit, the cost of replacing these services should be included.
The Right Kind of Protection
When choosing a life policy, consumers should compare the features and costs of different types of life insurance. Universal life insurance offers the security of a permanent policy with an initial cost that is about the same as inexpensive term life.
For young families, the lower cost may make universal life a good alternative to a more expensive whole life policy. Each person must consider their options to decide if this coverage will meet their financial needs and goals.
It is vital to keep life insurance in force even during periods of financial difficulty so survivors are not left with a financial burden and families have the resources they need to continue living.
Getting Affordable Rates
Consumers can find the best coverage and the most affordable rates by comparing the premiums of different policies and companies online. Comparison sites offer free quotes online from multiple providers so individuals can easily compare the rates and options provided by different companies for the same coverage.
By comparing features and premiums, anyone can find the life insurance they need at a price that fits comfortably in their budget.
Universal life insurance may not be the right choice for every individual, but it provides the best features of both whole and term life insurance. Over the course of a lifetime, the cost of universal insurance may be higher than the cost of whole life, but features like flexible premiums and no lapse riders make it the best choice for many people.